Cost Recovery on Property: Depreciation, Depletion, and Amortization Question: O
ID: 2592385 • Letter: C
Question
Cost Recovery on Property: Depreciation, Depletion, and Amortization Question:
On May 18, 2016, Joyce purchases a computer system for $2,700. She also buys a color printer/copier/fax machine for $450. All the equipment is used exclusively in her business.
On June 12, 2016, Joyce sells her old computer system for $300 and her printer for $75. She had acquired the computer system and printer on February 18, 2013, for $2,800 and $425, respectively. When the Schnappaufs prepared their 2013 tax return, they elected to expense the computer and printer using Section 179. The computer system and the printer were used exclusively in her business.
How should this be recorded on tax forms and which form?
Explanation / Answer
Joyace purchase a computer system and printers which is a tangible asset, so cost recovery will be treated as a depreciation. Two characterstics of tangible assets is that asset are used for a business or production of income purpose and have a determinable life.
As per section 179 Election (1/2) Taxpayer may elect to expense rather than capitalize qualifying property placed in service during the year.
As per section 179 election - promotes administrative convenience
- Treated as a depreciation deduction
Section 179 Election
Depreciation is deducting the cost over several years, depending on the class life of the property. If the acquisition or improvement cost of the item does not exceed $2500, or, in some cases, $5000, then the cost can be deducted as a current expense.
So in this case computer system's acquisition cost is $2800 which is >$2500 so it cannot trated as a current expense it should be treated as a capital expenditure while printer cost is $425 <$2500 can be treated as current expense in book keeping.
.Without the §179 deduction, capital expenses would have to be depreciated over a period that can range from 3 years for tools and devices to 7 years for office furniture and fixtures, cell phones, and fax machines, depending on the type of property.
For 2013: $2800 *33.33%= $933.24 depreciation (accordig to MACRS 3years= 33.33%) in the Form 4562, Depreciation and Amortization (Including Information on Listed Property).