Depreciation SG.pdf - SECTION XV DEPRECIATION SUGGESTED...

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SECTION XV DEPRECIATION SUGGESTED ANALYSIS 1. On January 30, 20X1 Jim, a calendar year taxpayer, purchased new depreciable equipment for $700,000 for his business. The equipment has a "class life" of 7 years but Jim hopes to use the machine for 10 years. At the end of the 10 years, Jim expects the salvage value to be $10,000. Jim’s aggregate amount of taxable income from his business is $550,000, before any deductions related to this purchase. Compute Jim's deduction for each year allowable assuming Jim elects for §§168(b)(5), 168(k) and 179 not to apply. As of this writing, Congress has not taken action to extend the depreciation limits under § 179 or to reinstate § 168(k) bonus depreciation for 2015. These problems will be analyzed two ways: first as if 20X1 was 2014 and again as if 20X1 was 2015. If 20X1 is 2014 Under these assumptions, the basic rules of § 168 will apply. Since this is tangible personal property, the double declining balance method applies. § 168(b)(1)(A). Since the class life is 7 years, it is five year property § 168(e)(1) which has a five year applicable recovery period. § 168(c). The applicable convention is the half-year convention. § 168(d) The depreciable basis is $700,000 since the salvage value is considered to be zero. § 168(b)(4). 20X1: He can claim first year regular depreciation of $140,000 ($700,000 ÷ 5 years x 200% x 1/2 year convention = $140,000). 20X2 depreciation is $224,000 (560,000 ÷ 5 years x 200% = $224,000) 20X3 depreciation is $134,400 (336,000 ÷ 5 years x 200% = 134,400) 20X4 depreciation is $80,640 (201,600 ÷ 5 years x 200% = $80,640). (Note that we do not switch to straight line here because straight line is exactly the same as DDB and we only switch when straight line is greater. Straight line would be computed by dividing the remaining basis ($201,600) by the remaining useful life (2.5).)
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20X5 we switch to straight line because the straight line depreciation (120,960÷ 1.5 years = $80,640) is greater than the DDB depreciation 20X5 depreciation is therefore $80,640. 20X6 depreciation is $40,320 If 20X1 is 2015 No change in the analysis. 2. How would your answer to Problem 1 change if Jim elected to additionally apply § 168(k)? If 20X1 is 2014 Section 168(k) provides for 50% bonus depreciation. Therefore $350,000 of the cost would be immediately deductible under § 168(k). The remaining $350,000 of basis would be depreciated using the normal rules resulting in an additional $70,000 of depreciation in 20X1 for a total 20X1 depreciation deduction of $420,000. The remaining depreciation would be: 20X2 $112,000 20X3 $67,200 20X4 $40,320 20X5 $40,320 20X6 $20,160 If 20X1 is 2015 The answer to Problem 1 would not change. Section 168(k) expired at the end of 2013 and has yet to be reinstated. 3. How would your answer to Problem 1 change if Jim elected to additionally apply §§ 179 and 168(k)? If 20X1 is 2014 Section 179 applies to § 179 property defined in § 179(d)(1). There is a maximum dollar amount that can be expensed under § 179(b)(1). The maximum for 2013 is $500,000. This maximum is reduced by § 179(b)(2) to the extent that the § 179 property put into service that year exceeds $2,000,000. This phase out does not come into play in our problem. Since Jim’s purchases exceed the maximum, his deduction is limited to $500,000 There is a further limitation in § 179(b)(3) – the amount deducted cannot exceed the taxpayer’s trade or business income. It initially appears that Jim would be entitled to a § 179 deduction of $500,000 since the business
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income is $550,000. However, before we can apply this limitation, we must
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