Mary purchased and placed into service a new five-year class asset on March 7, 2
ID: 2450652 • Letter: M
Question
Mary purchased and placed into service a new five-year class asset on March 7, 2015. The asset was listed property (not an automobile). It was used 55% for business, 5% for the production of income, and the rest of the time for personal use. The asset cost $900,000. Mary made the § 179 election. The income from the business before the § 179 deduction was $600,000. Mary does take additional first-year depreciation. Determine the total deductions with respect to the asset for 2015?
A. $72,000
B. $271,600
C. $524,000
D. $600,000
Explanation / Answer
When a listed property other than automobile is put to use and it is used by more than 50%, then that asset is eligible to claim Section 179, additional first-year depreciation and normal depreciation. To claim sec 179 and additional first-year depreciation, the asset should satisfy the required conditions like, purchased during the year, should be new asset, etc.,
Mary made the election for Section 179 deduction. There are two limitations to the amount of deduction that can be claimed under sec 179. First one is income limitation and the second one is monetary limitation.
Income limitation means the business entity should have adequate profit to claim total cost of the asset as deduction. In other words, after claiming sec 179 deduction it should not result in loss. Monetary limitation is the maximum amount that can be claimed during the year. Even if the company purchases assets during the year more than the maximum amount and has adequate profit, it cannot claim more than the monetary limitation. The monetary limit is $500,000
The cost of the asset is $900,000. The asset is not fully used for business purposes. 55% for business use and 5% for production of income (that can also be considered as business purpose). So the cost of the asset for business purpose is $900,000 * 60% = $540,000.
The income before section 179 deduction is $ 600,000 and the monetary limitation for the year is $500,000. Even though Mary has enough profit to cover the cost, because of the monetary limitation, sec 179 deduction is $500,000
Mary also took additional first- year depreciation. The additional first year depreciation is 50% of the cost or basis. The basis of the asset after section 179 deduction is $540,000 -$500,000 = $40,000. 50% of that will be $ 20,000. So additional first – year depreciation is $ 20,000.
The remaining value after Section 179 deduction and additional first year depreciation will be the depreciable basis. That depreciable basis will be depreciated using 5 years MACRS method. The depreciation rate in the first year for a 5 Years MACRS asset is 20%. So the normal depreciation will be
($540,000 - $500,000 - $20,000) * 20 % = $ 4,000
Hence total deductions for the asset for 2015 is
Section 179 deduction + Additional First – Year depreciation + normal depreciation
= $500,000 + $20,000 + $4,000 = $524,000
Answer is C. $524,000