Question

Karane Enterprises, a calendar-year manufacturer based in College Station, Texas, began business in 2017. In the process of setting up the business, Karane has acquired various types of assets. Below is a list of assets acquired during 2017:

Asset	Cost		Date Placed in Service
Office furniture	$	150,000	02/03/2017
Machinery		1,560,000	07/22/2017
Used delivery truck*		40,000	08/17/2017

*Not considered a luxury automobile.

During 2017, Karane was very successful (and had no §179 limitations) and decided to acquire more assets this next year to increase its production capacity. These are the assets acquired during 2018:

Asset	Cost		Date Placed in Service
Computers & info. system	$	400,000	03/31/2018
Luxury auto†		80,000	05/26/2018
Assembly equipment		1,200,000	08/15/2018
Storage building		700,000	11/13/2018

†Used 100% for business purposes.

Karane generated taxable income in 2018 of $1,732,500 for purposes of computing the §179 expense. (Use MACRS Table 1, Table 2, Table 3, Table 4, Table 5, and Exhibit 10-10.) Assume the 2017 §179 limits are the same as those in 2018. (Leave no answer blank. Enter zero if applicable. Input all the values as positive numbers.)

Compute the maximum 2018 depreciation deductions including §179 expense, but now assume that Karane would like to take bonus depreciation.

Answer 1

A). Maximum 2017 depreciation deductions including section 179 expense:-

As per IRS, For tax years beginning in 2017, the maximum section 179 expense deduction is $500,000 ($545,000 for qualified enterprise zone property). This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $2,000,000. For 2018, As per IRS, Effective for tax years beginning January 1, 2018, businesses can immediately deduct up to $1 million for qualifying purchases of capital property, with a limit of $2.5 million.

Asset	Amount	Section 179 deduction	% Rate of depreciation	Depreciation	Total Expense
Office furniture	150,000	150,000	-	-	150,000
Machinery	1,560,000	810,000 (balance)	14.29% (7-year property)	107,175 (750,000 * 14.29%)	917,175
Used delivery truck	40,000	40,000	-	-	40,000
		1,000,000 (Assumed as per 2018)			1,107,175

B). As per IRS, Effective for tax years beginning January 1, 2018, businesses can immediately deduct up to $1 million for qualifying purchases of capital property, with a limit of $2.5 million.

For luxury autos, first year depreciation is fixed at $10,000.

Asset	Amount	Section 179	% Rate of depreciation	Depreciation	Total Expense
Computers	400,000	290,000 (balance)	20%	22,000 (110,000*20%)	312,000
Luxury Auto	80,000	10,000	-	-	10,000
Assembly Equipment	1,200,000	-	20%	240,000 (1,200,000 * 20%)	240,000
Storage Building	700,000	700,000	-	-	700,000
Total	2,380,000	1,000,000