Terra Corporation,a calendar-year taxpayer,purchases and places into service machinery with a 7-year life that costs $1,160,000 on April 27,2019.It was placed in service early in the year and was the only addition this year.Terra elects to depreciate the maximum under Sec.179 and does not apply bonus depreciation.Terra's taxable income for the year before the Sec.179 deduction is $1,700,000.What is Terra's total depreciation deduction related to this property?
A)$1,160,000
B)$1,040,006
C)$165,764
D)$1,048,000

Question

Quizplus · Accepted Answer

First, we need to calculate the maximum Sec. 179 deduction. Since the machinery cost $1,160,000 and Terra is electing to take the maximum Sec. 179 deduction, the deduction will be $1,000,000 (the maximum amount for 2019).

Next, we need to calculate the remaining basis of the machinery after the Sec. 179 deduction:
$1,160,000 - $1,000,000 = $160,000

Since Terra is not applying bonus depreciation, we will use the straight-line method to calculate depreciation. The annual depreciation will be:
$160,000 / 7 years = $22,857 per year

Terra will take the full $1,000,000 Sec. 179 deduction and then take depreciation of $22,857 for the remaining basis of $160,000. Therefore, Terra's total depreciation deduction related to this property will be:
$1,000,000 + $22,857 = $1,022,857

However, we need to keep in mind that Terra's total depreciation deduction cannot be greater than their taxable income for the year. Since their taxable income is $1,700,000, they can take the full $1,022,857 depreciation deduction. The correct answer is therefore B) $1,040,006 (subtracting the $1,022,857 depreciation deduction from their taxable income of $1,700,000 leaves $677,143 taxable income).

Terra Corporation,a Calendar-Year Taxpayer,purchases and Places into Service Machinery with a 7-Year