Question

Help please! :)

Dain’s Diamond Bit Drilling purchased the following assets this year.

	Purchase	Original
Asset	Date	Basis
Drill bits (5-year)	January 25	$	128,500
Drill bits (5-year)	July 25		141,000
Commercial building	April 22		294,000

Assume its taxable income for the year was $56,500 for purposes of computing the §179 expense (assume no bonus depreciation). (Use MACRS Table 1, Table 2, Table 3, Table 4 and Table 5.)

a. What is the maximum amount of §179 expense Dain's may deduct for the year?

b. What is Dain’s maximum depreciation deduction for the year (including §179 expense)?

c. If the February drill bits’ original basis was $2,494,500, what is the maximum amount of §179 expense Dain's may deduct for the year?

d. If the February drill bits’ original basis was $21,834,500, what is the maximum amount of §179 expense Dain's may deduct for the year?

Answer 1

Section 179 deductions allow taxpayers to deduct the cost of specific properties as expenses when those properties are used as a service.

To qualify for a Section 179 deduction, your asset must be:

• Tangible. Physical property such as furniture, equipment, and most computer software qualify for Section 179. Intangible assets like patents or copyrights do not. Buildings and land also don’t qualify, although some equipment attached to the building does, including things like fire suppression systems, alarms, and air conditioning units.

• Purchased. Leased property doesn’t qualify.

• Used more than 50% in your business. An asset that is primarily for personal use but occasionally used for the business isn’t eligible.

• Not acquired from a related party. This includes siblings, spouses, parents, grandparents, descendants and businesses, trusts, and charitable organizations with which you have a relationship.

• Section 179 limits

• A few limits apply to the Section 179 deduction.

  1. The deduction starts to slip away after spending $2,500,000

  For 2019, you can expense up to $1,000,000 of eligible property. However, if you spend more than $2,500,000 on qualifying property, your deduction will be reduced on a dollar-for-dollar basis.

  For example, if your business purchases $2,600,000 of property, you’ll have gone over the cap by $100,000. So your maximum Section 179 expense will be $900,000 ($1,000,000 minus $100,000).

  2. Your net income is the ceiling

  Your Section 179 deduction is also limited to your business’ net income for the year—you can’t deduct more money than you made. For example, if you have net income of $50,000 before taking the Section 179 deduction into account, and you purchased $60,000 worth of eligible property, your deduction is limited to $50,000. At that point, you can opt to take regular depreciation on the remaining assets.

  In that scenario, you missed out on $10,000 worth of Section 179 deductions because you didn’t make enough money that year. But there’s hope! You can carry that $10,000 deduction forward to next year, as long as your net income allows it.

• The maximum amount of deduction will be limited to taxable income = $ 56,500