Chapter 10 - Section 179 and Additional 1 Year Depreciation

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Nov 8, 2013 (3 years and 7 months ago)

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Chapter 10
-

Section 179 and Additional 1
st

Year Depreciation


The 2008 Economic Stimulus Act (ESA) increases the Section 179 Election to Expense
deduction and provides for additional 1
st

year depreciation for qualifying property placed
in service during
tax years that begin in 2008. Property placed in servi
ce in tax years
beginning after

2008 are not eligible for the increased deductions provided by the ESA.


The Section 179 Election to Expense is increased to $250,000 (from $128,000). In
addition, the ph
ase
-
out of the deduction
for excess investment
is increased from
$510,000 to $800,000. Thus, taxpayers who place less than $800,000 of qualifying
property in service during a tax year beginning in 2008 will be able to expense up to
$250,000 of the cost of
the property.


The remainder of this update consists of the changes to the Chapter 10 text necessa
ry
to implement the ESA changes and

problems desig
ned to illustrate these changes
.


Section 179 Election to Expense

Section 179 allows an annual current expe
nse deduction for the cost of qualifying depreciable

property purchased for use in a trade or business. The deduction for expensed assets

is treated
as a depreciation deduction. This election allows many small businesses to

expense assets as
they are purch
ased instead of depreciating them over several years. The

immediate deduction
promotes administrative convenience by eliminating the need for

extensive depreciation
schedules for small purchases.


Qualified Taxpayers

In 2008, individuals, corporations, S c
orporations, and partnerships may elect to deduct as

an
expense up to $
250
,000 in investment in qualified property to be used in an active trade

or
business. A husband and wife are considered one entity for purposes of the election to

expense. Although the

phrase ‘‘active trade or business’’ is not defined in the tax law, it

appears
to have the same meaning as the phrase ‘‘trade or business’’ (Chapter 5). The elements

of profit
motivation, regularity, and continuity of the taxpayer’s involvement in the

acti
vity and the
absence of hobby, amusement, and similar motivations are important factors

to consider when
determining whether an activity qualifies for the Section 179 election.

This interpretation is
supported by the fact that the deduction is not allowed
for

assets purchased for use in an
activity related to the production of income (an investment

activity). However, the portion of a
mixed
-
use asset that is used in a trade or business does

qualify for immediate deduction under
Section 179. Estates and trus
ts cannot use the Section

179 election to expense assets. The
election is not available to these entities because

they are formed to protect and conserve the
entity’s assets for the benefit of the beneficiaries

and not to operate an active trade or busines
s.


Qualified Property

The Section 179 expense deduction is allowed only on depreciable, tangible, personal

property
used in a trade or business. Examples of eligible property are trucks, machinery,

furniture,
computers, and store shelving. Real property,
such as buildings and their structural

components, does not qualify for the special election to expense. Also excluded from

the
deduction are land and improvements made directly to the land, such as a parking lot,

sidewalks, or a swimming pool. In addition
, qualifying property does not include intangible

assets such as patents, copyrights, and goodwill.




2


Example 3

Kelly purchases a new computer and a new telephone system and installs
a

new roof and an air
-
conditioning system in her office building. Whic
h of the
expenditures qualify

for the election to expense?


Discussion:

The computer and the telephone system are depreciable, tangible,
personal property

and therefore qualify under Section 179. The roof and the air
-
conditioning system are integral

parts
of the office building. Therefore, they are real
property and do not qualify for

immediate expensing.


Limitations on Deduction

The Section 179 election
-
to
-
expense deduction is subject to three limitations:



A taxpayer’s annual Section 179 deduction cannot exceed the maximum annual
limitation

($
250
,000 for 2008).



If the taxpayer’s investment in Section 179 property exceeds $
800
,000 for the tax year,

the annual deduction limit is reduced by one dollar for e
ach dollar of investment over

$
80
0,000 in 2008. For 2008, a taxpayer who purchases more than $
1,050
,000 of
qualifying

property may not take any election
-
to
-
expense deduction for any of the
purchases.




The Section 179 deduction allowed for a tax year cann
ot exceed the taxable income

from the active conduct of all the taxpayer’s trade or business activities.


Annual Deduction Limit

The annual deduction limit does not have to be prorated according to the length of time

an asset
is used during the year. The a
nnual deduction limit applies to all tax entities entitled

to use
Section 179. Thus, the annual limit applies separately to a partnership and to its

individual
partners. The annual limit also applies separately to an S corporation and to its

shareholders.5

Because the partnership and S corporation are conduit entities, a portion

of the entity’s total
deduction is allocated to each owner, who subtracts it as an expense on

the owner’s personal
tax return. However, the Section 179 deduction allocated to the ta
xpayer

from the conduit entity
plus the taxpayer’s Section 179 deduction from all other

sources cannot exceed the annual limit.
Any excess Section 179 election resulting from

allocations from several entities must be carried
forward to be used in subsequen
t years.



Example 4

Roberto is a 50% shareholder and full
-
time employee of an S corporation.

During 2008, the S corporation invests $324,000 in equipment qualifying for the
Section 179

deduction. Roberto also owns a sole proprietorship that constructs kit
chen
cabinets. The cabinet

business qualifies as an active business for Roberto. During
2008,
he purchases $200
,000

worth of equipment to use in his cabinet business. What
is the maximum amount that Roberto

can deduct as a Section 179 expense for 2008?


Di
scussion:

Roberto’s deductible Section 179 expenditures are limited to $
250
,000.
The S corporation

can elect to deduct $
250
,000 of its $324,000 in capital expenditures.
The remaining

$
74
,000 is subject to regular depreciation.

The S corporation allocates
$
125
,000 (50%
×

$250
,000) of its Section 179 deduction to Roberto. Thus, Roberto’s
qualified Section 179 expenditures

total $325,000 ($125,000

from the S corporation
+

$200
,000 from the cabinet business). However,

the $250
,000 annual deduction limit
applies

at the shareholder level as well as at the S

corporation level. Therefore,
Roberto

may elect to de
duct only $250
,000 as a Section 179 expense.




3

A taxpayer may choose to use all, part, or none of the annual deduction. By electing to

expense
less than the
limit for a tax year, the taxpayer can avoid a Section 179 deduction carryforward

resulting from either the annual limitation or the trade or business income limitation.



Example 5


Based on the information in example 4, how should Roberto allocate his
Se
ction

179 deduction in 2008?



Discussion:

Roberto should claim as a Section 179 deduction the $
125
,000 allocated
to him

from the S corporation plus $
125
,000 of the cost of the equipment purchased for
use in the cabinet

business. The remaining $
75
,000 cost

of the equipment used in his
cabinet business is depreciated

using regular depreciation methods.




If Roberto
expenses the $200
,000 worth of equipment he purchased for the
cabinet business,

he will lose $
75
,000 of the deduction allocated to him from the
S
corporation by exceeding

the $250
,000 annual limitation by $
75
,000 ($
200
,000
+

$5
0
,000
=

$250
,000) this year. The

$75
,000 carries forward to be used in subsequent
years. Any amounts that flow to a taxpayer

from a conduit entity should always be
expensed
under Section 179 before any amount is

elected from another trade or
business of the taxpayer.



After an asset’s basis is reduced by the amount expensed under Section 179, the

remaining
basis is subject to regular depreciation under any valid method.




E
xample 6

Devra Corporation purchases a machine costing $
300
,000 for use in its
business.

Devra wants to expense $250
,000 of the asset’s cost under Section 179. If
Devra makes

the Section 179 election to expense $
250
,000 of the asset’s cost, what is
its dep
reciable basis in

the machine?


Discussion:

Devra’s depreciable basis for regular depreci
ation is $50
,000. The
depreciable basis

of the machine is its $300,000 cost, less the $250
,000 it elects to
expense under Section 179.

The reduction of depreciable ba
sis by amounts expensed
under Section 179 is necessary to

ensure that the total capital recovery on the
machine
does not exceed the $300
,000 invested.



The Section 179 deduction can be allocated to reduce the basis of qualifying assets in

any
manner the t
axpayer chooses. This allows the deduction to be allocated equally to all

assets
acquired during the year or to specific assets. This option is important. Two general

rules apply
to choosing assets to expense. First, do not use the Section 179 election to

expense
automobiles. As discussed later, automobiles are subject to annual depreciation

deduction
limits. For purposes of this annual limitation, the Section 179 expense is treated

as a
depreciation deduction. Because MACRS depreciation on most automobiles

exceeds

the first
-
year annual limitation amount, using the election to expense on an automobile

does not result in
additional tax savings. Second, based on time value of money concepts,

taxpayers should take
the depreciation deduction as early as possible
. This is accomplished

by expensing the assets
with the longest life and using regular depreciation methods to

depreciate assets with the
shortest life.



Example 7

Gwendolyn
purchases equipment costing $250
,000 and a computer
system
that also

costs $
250
,0
00 for use in her business in 2008. Under MACRS, the
equipment is 7
-
year property,

and the computer

system

is 5
-
year property. How should
Gwendolyn allocate her $
250
,000 Section

179 expense deduction?


Discussion:

If Gwendolyn wants to deduct the $
250
,000
maximum election to expense,
she

should elect to expense the $
250
,000 cost of the equipment

(7
-
year property)
. The
$
250
,000 cost of the computer

system
will be deducted over its 5
-
year life, resulting in
greater deductions sooner than if she

elected to exp
ense the computer.


4


Gwendolyn could elect t
o deduct less than the full $250
,000 Section 179 limit.
Because

Section 179 is elective, Gwendolyn can decide how much to deduct and the
specific assets to

expense. This allows taxpayers who do not want or need th
e extra
deductions in the current

year to spread the deductions out through depreciation
charges.


Annual Investment Limit

The annual deduction limit is reduced dollar for dollar by the amount of the investment in

quali
fying property in excess of $800
,000.

As a result of this limitation, a taxpayer who
purchases

$1,
050
,000 or more of qualified property during 2008 cannot expense any amount

under
Section 179. Because of the $800
,000 annual investment limitation, only relatively

small
businesses can use the e
lection to expense.



Example 8

During 2008,

the Allen Partnership places $8
28,000 of Section 179
property

in service for use in its business. What is Allen’s maximum Section 179
deduction?



Discussion:

Allen’s election to expense i
s reduced to $22
2
,000 b
y the $80
0,000 annual
investment

limit. Bec
ause the partnership invested $28,000 more than the $80
0,000
annual investment

li
mitation ($8
28,000
-

$
80
0,000), it must reduce the annual
deduction limit dollar for

dollar by the excess ($250
,000
-

$
2
8,000
=

$
22
2
,000).
NOTE
:
The $
2
8,000 lost through the

annual investment limit is not carried forward to future
years. It is lost forever.


Additional First
-
Year Depreciation

Taxpayers are
allowed to claim an additional 5
0
-
percent depreciation deduction (bonus
deprecia
tion) on qualified property acquired
during tax years beginning in 2008
. Qualifying
property is new MACRS property with a recovery period of 20 years or less, MACRS water
utility property, computer software not acquired as an acquisition of all of the asse
ts of a
business, and qualified leasehold improvement property. The original use of the property must
be by the taxpayer and cannot be purchased from a related party. Property that must be
depreciated using the alternative depreciation system (ADS) does no
t qualify.


The original use requirement eliminates used property from qualifying for bonus depreciation.
Similarly, assets acquired as part of the acquisition of all the assets of a business will not meet
the original use requirement. However, any addit
ional capital expenditures incurred to
recondition or rebuild otherwise qualifying property does satisfy the original use requirement and
therefore, is eligible for additional first
-
year depreciation.


To ensure that the capital recovery concept is not vio
lated, the depreciable basis of the property
is reduced by the bonus depreciation for purposes of computing the regular MACRS
depreciation deduction.



E
xample

11

Omer Corporation purchases $6
00,000 of ne
w machinery on February
19, 2008
. The machinery is
5
-
year MACRS property. What is the depreciable basis in
the machinery?


Discussion:

MACRS property with a recovery period of 20 y
ears or less qualifies for
the 5
0
-
percent additional depreciation deductio
n. Accordingly, Omer deducts $300,000
($6
00,000


5
0
%) in bonus depreciation. Its depreciable basis in the machinery is
red
uced to $300,000 ($600,000
-

$30
0,000).



5

The additional first
-
year depreciation must be claimed on all eligible property unless a taxpayer
makes an election not to claim the deduction.

The election is made on a class
-
by
-
class basis.



E
xample

12

Assume that in Example 11, Omer Corporation does not want to claim
the additional first
-
year depreciation on the machinery. What is Omer’s depreciable
basis in the machinery?


Discussion:

Ome
r must make an election not to claim the additional first
-
year
depreciation deduction. The election applies to all 5
-
year MACRS pro
perty that Omer
acquires in 2008
. Omer’s deprecia
ble basis in the machinery is $6
00,000 if it elects not
claim bonus deprecia
tion on the machinery.


Any Section 179 expense election is claimed prior to calculation of the additional first
-
year
depreciation allowance. Therefore, the adjusted basis of the property is reduced by any Section
179 expense deduction for purposes of cal
culating the bonus depreciation.



E
xample

13

Bomhoff Inc. purchases office equipment
costing $400,000 on April 1,
2008
. What is Bomhoff’s depreciable basis in the office equipment?


Discussion:

To maximize the 2008

cost recovery deduction, Bomhoff shoul
d elect to
expense $25
0
,000 of the cost of the office equipment. This reduces the adjusted basis
(and depreciab
le basis) of the equipment to $1
5
0,000 ($40
0,000
-

$25
0
,000). Office
equipment is 7
-
year MACRS property and is eligible for the bonus depreciatio
n
deduction. Bomhoff deducts $75,000 ($150
,000


5
0%) in additional first
-
year
depreciation. The depre
ciable basis is reduced to $75,000 ($150
,000


$7
5,000


$75,0
00).


Important points to remember about additional first
-
year depreciation:



To qualify for bonus depreciation, the property must be acquired
during a tax year that
begins in 2008
.



The original use of the property must commence with the taxpayer. Used property does
not qualify.



The 20 year or less recovery period requirement
for qualifying property eliminates
residential rental property and nonresidential real property from receiving additional
first
-
year depreciation.



If a qualifying property is purchased, bonus depreciation must be claimed unless an
election not to claim t
he bonus depreciation is made. The election is made on a class
by class basis. Therefore, a taxpayer can claim the bonus depreciation on one or more
classes of property (eg, 10
-
year property) and
not
claim the bonus depreciation on
other classes of propert
y (eg, 3
-
year property) acquired during the applicable period.



The depreciable basis must be reduced by any allowable bonus depreciation.



Unlike the Section 179 election to expense, there is no purchases limit nor is there an
annual income limit. That is, additional first
-
year depreciation can be deducted even if
it
causes the business to have a net operating loss.


6

Basis Subject to Cost Recovery

Depreciable basis is the asset’s original basis for depreciation less any amounts deducted
under

the Section 179 election to expense assets. Therefore, the basis rules dis
cussed in
Chapter 9

provide the starting point for computing the capital recovery deduction. An asset’s
basis for

depreciation does not have to be reduced by its salvage value. The depreciable basis
of an asset

is the amount of basis that is subject to dep
reciation and is the amount used to
determine the

annual depreciation deduction.

The depreciable basis does not change during an
asset’s tax

life unless additional capital expenditures are made for the asset. The total capital
recovered as

a depreciation d
eduction over an asset’s useful life may never be more than its
depreciable

basis. Do not confuse the term depreciable basis with adjusted basis. Adjusted
basis refers to the

unrecovered capital of an asset at any point in time. An asset’s adjusted
basis d
ecreases as cost

recovery

deductions are taken. The capital recovery under MACRS
does not necessarily relate

to the true remaining useful life and salvage value of the asset. That
is, an asset’s depreciable

basis can be fully recovered, even though the ass
et remains in
service and salvage value exists.



E
xample 14

In 2008
, Estelle Corporation purchases office equipment costing
$
280
,000 for use in its repair business. Because equipment is eligible to be expensed
under Section 179, Estelle elects to expense

$
25
0,000 of the cost of the equipment.
What is Estelle Corporation’s depreciable basis in the equipment?


Discussion:

Estelle’s initial basis in the equipment is $
280
,000. The election to expense
reduces the depreciable basis to $
30
,000 ($
280
,000
-

$
25
0,
000). Unless Estelle elects not
to claim the additional first
-
year depreciation, it deducts $
15,0
00 ($
30
,000


5
0%) in
additional first
-
year depreciation. This reduces the depreciable basis to $
15,0
00 ($
30
,000
-

$
15,00
0). The corporation recovers its $
280
,
000 investment in the equipment through
expensing $
25
0,000 in the year of purchase, $
15,0
00 in additional first
-
year depreciation
deducted in the year of purchase, and $
15,0
00 in depreciation charges over the life of the
equipment.


If the office equipment

had cost only $100,000 and Estelle elected to expense the
entire

$100,000 cost under Section 179, the corporation would fully recover its capital
investment in

2008. The depreciable basis in the equipment then is zero, and the
corporation is allowed no

fu
rther capital recovery deductions on its initial $100,000
investment. However, the equipment

remains in service and may provide several years
of quality use.


Depreciation Method Alternatives

Under current tax law, taxpayers have three alternatives for cal
culating depreciation:



Regular MACRS



Straight
-
line over the MACRS recovery period



Straight
-
line over the Alternative Depreciation System (ADS) recovery period

Figure 10

2 illustrates these choices for depreciating personal property. A taxpayer

decides
which to use by first

choosing whether to maximize or minimize the depreciation

deduction in
the year of acquisition. The taxpayer would maximize by using the Section

179 election,

claiming the additional first
-
year depreciation,

and using regular MACRS for the remaining
depre
ciable basis. Regular

MACRS depreciates property in the 3
-
, 5
-
, 7
-
, and 10
-
year classes
using the 200
-
percent

declining balance method with an optimal, automatic switch to straight
-
line in the IRS percentage

tables. Assets in the 15
-

and 20
-
year classes ar
e depreciated using
the 150
-
percent

declining balance method. The taxpayer who needs a slower depreciation rate

7

can minimize

the deduction by using straight
-
line (S
-
L) MACRS or ADS. Because of the longer
recovery

period, ADS produces the smallest depreciat
ion deduction.

Taxpayers will need to
elect not to claim additional first
-
year depreciation to secure the smallest depreciation
deduction.


Example

22

On March 14, 2008, Lorange Mining company purchases a bus costing

$400
,000 to transport its employees fro
m the parking area to the mines. What should
Lorange

do

if it wants to recover its $400
,000 cost as quickly as possible (i.e.,
maximize the cost recovery)?


Discussion:

To maximize cost recovery, Lora
nge should elect to expense $250
,000 of
cost

under Secti
on 179

and claim the 50 percent additional first
-
year depreciation.

The
additional first
-
year depreciation is $75,000 [($400,000
-

$250,000) × 50%],
le
aving a
depreciable basis of $75
,000 ($15
0
,000


$
75
,000), which

would be recovered using
the regular MACRS 200% declining balance method over the 5
-
year

recovery period
for buses. The recovery period is found in Table A10

1 under the column labeled

General Depreciation System. The regular MACRS method

(using Table 10

4)
provides

the fastest depreciation write
-
off for the property’s depreciable basis:



Initial basis







$
400
,000



Section 179 election







(
250
,000
)



Adjusted basis






$ 150,000



Additional first
-
year depreciation





$150,000

× 50%





(75,000
)



Depreciable basis





$

75
,000



MACRS%

(Table 10

4)





×

20
%



2008
depreciation





$

15,000




Maximum cost recovery




$
340,000

($
250
,000
+

$75,000 +
$
15,0
00)



Example 23

Assume that in example 22, L
orange wa
nts to recover the $400
,000 cost
as

slowly as possible (i.e., minimize the cost recovery). Which options should Lorange
elect?


Discussion:

The slowest cost recovery is obtained by not using Section 179 and
electing to use

straight
-
line depreciation over t
he ADS life of the property. The ADS
recovery period is always

greater than or equal to the MACRS recovery period. Table
A10

1 shows that the ADS recovery

period is 9 years for buses. Remember that the
MACRS recovery period is 5 years. Thus, the use

of the

ADS life generally stretches
the depreciation deductions over a longer period, thereby

diminishing the deduction
amounts for each year in the recovery period:




Depreciable basis





$400,000



Full
-
year S
-
L deduction ($400
,000
÷
9)

$


44,444



Mid
-
year

convention






×


½



First
-
year depreciation




$

22,222


Limitation on Passenger Autos

Passenger autos are subject to a limitation on the annual amount of the deductible depreciation.

The annual depreciation deduction for a passenger automobil
e cannot exceed a

specified
amount, which is based on the year a car is placed in service. Any depreciation that

is
disallowed because of the annual limitations may be deducted when the auto’s recovery

period
ends. Table A10

10 lists the auto depreciation
tables and the annual auto limits that

are allowed

8

for 100
-
percent business use of an auto placed in service in
20007
. If an auto is

not used wholly
for a business purpose, the amount of the annual passenger automobile

limitation must be
reduced by multipl
ying it by the business use percentage.

The depreciation

subject to the first
-
year annual limitation includes any amount that is expensed using

Section 179. As mentioned
earlier, the annual limitation on the auto depreciation deduction

makes it impractical

to deduct
any of the cost of an auto under Section 179.



The maximum first
-
year depreciation deduction on a passenger automobile is
$2,960 for
automobiles ($3,1
60 for trucks and

vans) placed in service in 2008
.

The maximum first
-
year
depreciation deducti
on on new automobiles that qualify for additional first
-
yea
r depreciation
increases by $8,0
00 for automobiles placed in service in
tax years beginning in 2008
. To take
advantage of the increased cap, additional first
-
year depreciation must be claimed


the

increased maximum is not available if a taxpayer makes an election not to take the additional
first
-
year depreciation.


Example 29

On July 5, 2008
,
Oscar purchases a new car for $4
0,000. Based on his
mileage

records, Oscar uses the car 80% of the time for

a qualified business use. What
is his depreciation

deduction on the car for 2008
?


Discussion:

Automobiles are 5
-
yearMACRS property. Because he uses the automobile
more than

50% of the time for business, his allowable depreciation is the lesser of the
reg
ular MACRS
d
epreciation

or the passenger automobile limitation. Oscar’
s 2008

depreciation is limited to $
8
,
768
:

Regular MACRS Depreciation




Initial Basis










$
4
0,000



Business use percentage









80%



Business depreciable basis






$32,
000



Additional first
-
year depreciation percentage





5
0%



Additional first
-
year depreciation





$16,000




MACRS depreciable basis
-

$
32
,000
-

$
16,0
00


$
16
,0
00



MACRS table percentage









20%



MACRS depreciation








$
3
,
2
00




Total 200
8

MACRS depreciation ($
16,0
00


$
3
,
2
0
0)

$
19,2
00


Passenger Automobile Limitation




Annual depreciation limit for an automobile




placed in service in 200
8






$

2,9
60



Additio
nal first
-
year allowance in 2008






8,000



200
8

automobile depreciatio
n limit





$
10,960



Business use percentage









80%



Oscar’s maximum 2008

depreciation on auto


$

8,768


Two things should be noted regarding passenger automobiles. First, to qualify for the additional
first
-
year depreciation deduction, the autom
obile must be a new automobile


used property
does not qualify. Second, to qualify for MACRS depreciation, the automobile must be
predominantly used in a qualified business use (i.e., more than 50 percent trade or business
use). If the predominant use te
st is not met, the automobile must be depreciated using the
alternative depreciation system (ADS) and therefore, is not eligible for additional first year
depreciation.


9

Problems


25.

Firefly, Inc., acquires business equipment in July 2008 for $815,000.


a.

What is Firefly's maximum Section 179 deduction for 2008? Explain.



b.

What happens to any portion of the annual limit not deducted in 2008?
Explain.


c.

What is the depreciable basis of the equipment? Explain.


30.

Jennifer owns a 40% interest in the

Thomas Partnership. She also owns
and operates an architectural consulting business. During the current year,
the partnership purchases $
26
0,000
-
worth of property qualifying under
Section 179 and elects to expense
$250,000
. Jennifer purchases
$
180
,000
-
worth of qualifying Section 179 property for use in her
architectural consulting business. Write a letter to Jennifer explaining what
she should do to maximize her cost recovery.


40.

The Browser Company purchases a mainframe computer in
March

200
8

for
$1
20,000. This is the only depreciable personal property acquired during
the year. The company does not elect to expense the asset but wants to
claim the maximum depreciation. In May
2011
, the company sells the
computer. Calculate the adjusted basis of t
he computer at the date of sale.


43.

Dikembe purchases
4
,000 breeding hogs for $
32
0,000 in April
2008
.


a.

What is his maximum
2008

cost
-
recovery deduction for the hogs?



b.

Dikembe's farming operation incurs a net loss this year and probably will
next year before taking the cost recovery into consideration. What should
Dikembe do in regard to his cost
-
recovery deductions?



44.

Rograin Corporation purchases turning lathes
costing $
670
,000 and a bus
costing $
280
,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 Sec
tion 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?


45.

Baker, Inc., purchases o
ffice furniture (7
-
year MACRS property) costing
$280,000

and a computer system (5
-
year MACRS property) costing
$280,000

in
2008
. What is Baker's maximum cost
-
recovery deduction in
2008
? (Hint: Maximize the Section 179 election effect.)





10

48.

The Gladys

Corporation buys office equipment costing $
290
,000 on May
12,
2008
. In
2011
, new and improved models of the equipment make it
obsolete, and Gladys sells the old equipment for $34,000 on December 27,
2011
.


a.

What is Gladys Corporation's gain or loss on
the sale assuming that Gladys
takes the maximum cost
-
recovery deduction allowable on the equipment?


b.

What is Gladys Corporation's gain or loss on the equipment assuming that
Gladys takes the minimum cost
-
recovery deduction allowable on the
equipment?


5
5.

On June 1, 200
8
, Kirsten buys an automobile for $42,000. Her mileage log
for the year reveals the following: 20,000 miles for business purposes;
7,000 miles for personal reasons; and 3,000 miles commuting to and from
work. What is Kirsten's maximum co
st
-
recovery deduction for 200
8
?


49.

In June of
2008
, Copper Kettle, Inc., purchases duplicating equipment for
$
3
50,000.


a.

Compare cost recovery deductions using maximum, minimum, and
intermediate methods over the recovery period of the equipment.


b.

Explain why Copper Kettle, Inc., would elect to use each of these methods.