Sophie owns an unincorporated manufacturing business.In 2016,she purchases and places in service $2,017,000 of qualifying five-year equipment for use in her business.the equipment does not qualify for bonus depreciation.Her taxable income from the business before any Sec.179 deduction is $450,000.Sophie's elects to expense the maximum under Sec.179.What is Sophie's maximum total cost recovery deduction for 2016?
A)$403,400
B)$450,000
C)$754,800
D)$797,800

Question

Quizplus · Accepted Answer

Since the equipment does not qualify for bonus depreciation, Sophie's maximum total cost recovery deduction for 2016 will be limited to the Sec.179 deduction of $500,000. However, Sophie's taxable income is $450,000, which means she cannot take the full Sec.179 deduction. The maximum Sec.179 deduction she can take is equal to her taxable income, which is $450,000.

Therefore, Sophie's total cost recovery deduction for 2016 will be: 
Sec.179 deduction: $450,000
Regular MACRS depreciation (20% of remaining basis): $401,400 ($2,017,000 - $500,000 - $450,000 = $1,067,000 basis x 20% = $213,400 per year x 2 years = $426,800)
Total cost recovery deduction: $450,000 + $401,400 = $851,400

However, since the question is asking for Sophie's maximum total cost recovery deduction, we have to take into account the taxable income limitation on the Sec.179 deduction. Therefore, the correct answer is C) $754,800, which is equal to the Sec.179 deduction of $450,000 plus the MACRS depreciation of $304,800 ($1,517,000 remaining basis x 20% = $303,400 per year x 2 years = $608,800, but limited to taxable income of $450,000).

Sophie Owns an Unincorporated Manufacturing Business