Problem 7-12 Modified Accelerated Cost Recovery System (MACRS), Election to Expe
ID: 2541592 • Letter: P
Question
Problem 7-12
Modified Accelerated Cost Recovery System (MACRS), Election to Expense, Listed Property, Limitation on Depreciation of Luxury Automobiles
(LO 7.4, 7.5, 7.6, 7.7)
During 2016, William purchases the following capital assets for use in his catering business:
Assume that William decides to use the election to expense on the baking equipment (and has adequate taxable income to cover the deduction) but not on the automobile (which has a 5-year recovery period), and he also uses the MACRS accelerated method to calculate depreciation but elects out of bonus depreciation.
Click here to access the depreciation table and click here to access the annual automobile depreciation limitations.
Calculate William's maximum depreciation deduction for 2016, assuming he uses the automobile 100 percent in his business.
New passenger automobile (September 30) $21,500 Baking equipment (June 30) 6,500Explanation / Answer
Answer:
As per MARCS method, the tax deductions is calculated on account of depreciation for depreciable assets. It allows a larger deduction in early years and lower deduction in later years when compared to the straight line method.
William decides to use the election to expense on the baking equipment and he has adequate income to cover the deduction.
Therefore, depreciation on baking equipment purchased on June 30 is $ 6500.
Depreciation on passenger automobile purchased on September 16 is = $21500 * 20%
(assumed that William uses the automobile 100 percent in his business) = $4300