The only asset Bill purchased during 2014 was a new seven-year class asset. The asset, which was listed property, was acquired on June 17 at a cost of $50,000. The asset was used 40% for business, 30% for the production of income, and the rest of the time for personal use. Bill always elects to expense the maximum amount under § 179 whenever it is applicable. The net income from the business before the § 179 deduction is $100,000. Determine Bill's maximum deduction with respect to the property for 2014.

Question

Quizplus · Accepted Answer

First, we need to determine the depreciation method and basis for the property. Since it is a seven-year class asset, we will use the MACRS depreciation method. The basis for depreciation purposes is the lower of the cost or the property's adjusted basis, which in this case is $50,000.

The property's business use percentage is 40%, which means the business portion of the basis is $20,000 ($50,000 x 40%). The production of income use percentage is 30%, which means the production of income portion of the basis is $15,000 ($50,000 x 30%).

We will apply the § 179 deduction before calculating depreciation. The maximum § 179 deduction for 2014 was $25,000. However, since the net income from the business before the § 179 deduction is $100,000, we can deduct the full cost of the property up to a limit of $500,000 (the phase-out threshold). Therefore, Bill can elect to deduct the full $50,000 cost of the property under § 179.

The remaining basis after the § 179 deduction is $0 ($50,000 - $50,000). We will now calculate the depreciation for the property:

- Year 1: $0 (property placed in service on June 17)
- Year 2: $5,000 ($0 x 14.29%)
- Year 3: $7,143 ($5,000 x 14.29%)
- Year 4: $5,102 ($7,143 x 11.43%)
- Year 5: $3,070 ($5,102 x 10.00%)
- Year 6: $1,837 ($3,070 x 10.00%)
- Year 7: $1,838 ($1,837 x 10.00%)

Bill's maximum deduction with respect to the property for 2014 is the total of the § 179 deduction ($50,000) and the depreciation deduction for the property in 2014 ($0):

$50,000 + $0 = $50,000

Since the question asks for the maximum deduction, we do not need to consider any potential limitations or phase-outs. The correct answer is therefore B) $2,499.

The Only Asset Bill Purchased During 2014 Was a New