In July 2012, Tish acquires and places in service a business machine costing $15
ID: 2699551 • Letter: I
Question
In July 2012, Tish acquires and places in service a business machine costing $159,000 with a 7 year MACRS recovery period. Tish elects the maximum allowable Sec. 179 expense on the machine but elects out of the bonus depreciation. In Agust 2012, she also places in service, business equipment costing $431,000, with a 5 year MACRS recovery period. Tish's taxable income (before the Sec 179 expense and the 50% of SE tax deduction) is $69,000.
a. What is Tish's allowable 2012 Sec 179 expense on the machine? What amount can she carry over to 2013?
b. What is Tish's total 2012 depreciation deduction?
c. What are the limitations to Tish's ability to use the Sec 179 carryover in 2013?
d. How would your answer to Part a change if Tish's business taxable income (before the Sec 179 expense and 50% of SE tax deduction) were $145,000 in 2012 instead of $69,000?
Explanation / Answer
(a) Tish%u2019s Sec. 179 deduction is $69,000. The maximum Sec. 179 expense ($139,000 in 2012) is first reduced dollar-for-dollar when the total cost of eligible property placed in service exceeds $560,000 (in 2012). Tish%u2019s reduction is $30,000 ($590,000 - $560,000), so the maximum she could expense under Sec. 179 is $109,000 ($139,000 - $30,000). She cannot carry this $30,000 reduction over to other years. However, this amount remains as basis subject to MACRS depreciation. Next, Sec. 179 is limited to business taxable income before the Sec. 179 and 50% of SE deductions. In Tish%u2019s case, this limitation is $69,000. Thus, her unused Sec. 179 expense of $40,000 ($109,000 - $69,000) carries over to 2013.
b.Tish%u2019s total depreciation deduction in 2012 is $162,345, computed as follows:
Machine Equpt
Sec. 179 exp $69,000 $-0-
MACRS dep 7,145 (a) 86,200(b)
Total 2012 dep: $76,145 $86,200
(a) $50,000 x 0.1429 (MACRSTable 1, Year 1)
(b) $431,000 x 0.20 (MACRS Table 1, Year 1)
Note: The $50,000 MACRS basis in footnote a above is determined as follows: $159,000 - $109,000 = $50,000, where the $109,000 includes the $69,000 Sec. 179 expense allowed in 2012 and the $40,000 Sec. 179 carryover to 2013. For MACRS depreciation, the machine%u2019s basis must be reduced by the $40,000 disallowed because of the taxable income limitation as well as reduced by the $69,000 Sec. 179 expense allowed in 2012. This rule insures that taxpayers do not double-depreciate assets when they use the Sec. 179 carryover in subsequent years.
c.To use the $40,000 carryover in 2013, Tish must have sufficient business taxable income and also not have the dollar limitation next year be reduced below $40,000 because of the total cost limitation.
d.If Tish%u2019s business taxable income were $145,000, the taxable income limitation on Sec. 179 would not apply. Tish would be able to expense $109,000 of the machine%u2019s cost because the total cost limitation and resultant reduction still apply. The remaining $50,000 would be subject to MACRS depreciation. Thus, her total depreciation deduction in 2012 would be $202,345 computed as follows:
Machine Equpt
Sec. 179 expense $109,000 $ -0-
MACRS dep 7,145(a) 86,200(b)
Total 2012 dep: $116,145 $86,200
(a) $50,000 x 0.1429 (MACRS Table 1, Year 1)
(b) $431,000 x 0.20 (MACRS Table 1, Year 1)
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