Rograin Corporation purchases turning lathes costing $148,000 and a bus costing
ID: 2723855 • Letter: R
Question
Rograin Corporation purchases turning lathes costing $148,000 and a bus costing $67,000 in June of the current year. The lathes are 7-year MACRS property, and the bus is 5-year MACRS property.
A. What is Rograin's maximum Section 179 deduction?
B. Assuming that Rograin deducts the maximum Section 179 expense, what are the depreciable basis of the lathes and the bus?
C. If Rograin wants to maximize its cost recovery this year, how much first-year depreciation may it deduct in addition to the Section 179 deduction?
Explanation / Answer
a. What is Rograin's maximum Section 179 deduction?
The maximum Section 179 expense deduction is $25,000 for 2014. However, the deduction is reduced dollar for dollar when purchases exceed $200,000. In this case, Rograin has purchased $215,000 ($148,000 + $67,000) of qualifying property. Therefore, the maximum deduction is reduced by $15,000 ($215,000 - $200,000) to $10,000 ($25,000 - $15,000).
B. Assuming that Rograin deducts the maximum Section 179 expense, what are the depreciable basis of the lathes and the bus?
The basis of assets expensed under Section 179 are reduced to prevent capital recovery in excess of cost. Rograin must determine which of the two properties to expense. To get the maximum overall depreciation deduction, the Section 179 expense deduction should be allocated to the property with the longest recovery period. This results in a depreciable basis for the lathes of $138,000 ($148,000 - $10,000) and $67,000 for the bus
C. If Rograin wants to maximize its cost recovery this year, how much first-year depreciation may it deduct in addition to the Section 179 deduction?
The basis of the lathes and the bus are depreciated using Table A10-2. The lathes have a recovery period of 7 years and the bus has a recovery period of 5 years. The maximum total first-year depreciation is $43,120
Election to expense (from part a) $10,000
Lathes – First-year depreciation ($138,000 x 14.29%) 19,720
Bus – First-year depreciation ($67,000 x 20%) 13,400
Total cost recovery deduction $43,120
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