Education

 Question.

During the year 2022, a calendar-year taxpayer, Marvelous Munchies, a chain of specialty

food shops, purchased equipment as follows:

Date Asset ___ _ Cost___

March 3 5 Year Property $700,000

October 9 5 Year Property $2,200,000

For 2022, Marvelous Munchies has taxable income equal to $850,000 unless you are told

differently in a question below. Each scenario below is independent of the others unless

you are told otherwise in the question.

a. What is the maximum depreciation that may be deducted for the assets this year,

2022, assuming Sec. 179 expensing and bonus depreciation are not claimed?

$_____________________________

b. What is the maximum Sec. 179 deduction allowed for 2022 assuming that Sec. 179

is elected for the October 9 property?

$______________________________

c. If the taxpayer elects Section 179 for $1,080,000 of the October 9th equipment,

then how much Sec. 179 carryover will pass to the next tax year using the facts from b.

above?

$______________________________

d. What is the maximum depreciation that may be deducted for the assets this year,

2022, assuming both Sec. 179 expensing and bonus depreciation are claimed?

$_______________________________

Answer.

a. To calculate the maximum depreciation that may be deducted for the assets in 2022, assuming Sec. 179 expensing and bonus depreciation are not claimed, we need to use the regular Modified Accelerated Cost Recovery System (MACRS) depreciation.

March 3 Asset (5 Year Property):

Cost: $700,000

Depreciation Year: 2022

Recovery Period: 5 years

MACRS Percentage: 20% (from MACRS Table)

Depreciation = Cost × MACRS Percentage

Depreciation = $700,000 × 20% = $140,000

October 9 Asset (5 Year Property):

Cost: $2,200,000

Depreciation Year: 2022

Recovery Period: 5 years

MACRS Percentage: 20% (from MACRS Table)

Depreciation = Cost × MACRS Percentage

Depreciation = $2,200,000 × 20% = $440,000

Total Maximum Depreciation = Depreciation (March 3) + Depreciation (October 9)

Total Maximum Depreciation = $140,000 + $440,000 = $580,000

b. To calculate the maximum Sec. 179 deduction allowed for 2022, assuming Sec. 179 is elected for the October 9

property, we can directly use the cost of the October 9 asset as the Sec. 179 deduction limit.

Maximum Sec. 179 Deduction = Cost of October 9 Asset = $2,200,000

c. If the taxpayer elects Section 179 for $1,080,000 of the October 9 equipment, the remaining cost that is not expensed under Sec. 179 will be carried over as a Sec. 179 carryover.

Sec. 179 Carryover = Cost of October 9 Asset - Sec. 179 Deduction

Sec. 179 Carryover = $2,200,000 - $1,080,000 = $1,120,000

d. To calculate the maximum depreciation that may be deducted for the assets in 2022, assuming both Sec. 179 expensing and bonus depreciation are claimed, we need to use the adjusted basis after Sec. 179 deduction and then apply bonus depreciation.

Total Sec. 179 Deduction = Sec. 179 Deduction (March 3) + Sec. 179 Deduction (October 9)

Total Sec. 179 Deduction = $0 + $1,080,000 = $1,080,000

Adjusted Basis after Sec. 179 Deduction = Total Cost - Total Sec. 179 Deduction

Adjusted Basis = ($700,000 + $2,200,000) - $1,080,000 = $1,820,000

Bonus Depreciation Percentage (for 2022): 100% (under current law)

Bonus Depreciation = Adjusted Basis × Bonus Depreciation Percentage

Bonus Depreciation = $1,820,000 × 100% = $1,820,000

Total Maximum Depreciation = Total Sec. 179 Deduction + Bonus Depreciation

Total Maximum Depreciation = $1,080,000 + $1,820,000 = $2,900,000