On May 30,2013,Jane signed a 20-year lease on a factory building to use for her business.The lease begins on June 1,2013.In August 2013,Jane paid $300,000 for qualified leasehold improvements to the building.Jane takes additional first-year depreciation.Determine Jane's total deduction with respect to the leasehold improvements for 2013.

Question

Quizplus · Accepted Answer

Qualified leasehold improvements are eligible for a 15-year depreciable life and can be depreciated using the straight-line method. In the first year of the lease, the maximum bonus depreciation that can be taken is 50%. Therefore, the first-year depreciation expense for the leasehold improvements is calculated as follows:

$300,000 x 50% = $150,000

Since the lease begins on June 1, 2013, Jane can only take depreciation for 7 months. Therefore, the first-year depreciation expense for 2013 is:

($150,000 ÷ 15 years) x (7 months ÷ 12 months) = $7,000

Additionally, Jane is entitled to deduct the portion of the lease payment relating to the use of the factory for business purposes. Assuming the lease payment is $5,000 per month, Jane can deduct $5,000 x 7 = $35,000 for 2013. Therefore, Jane's total deduction with respect to the leasehold improvements for 2013 is:

$7,000 + $35,000 = $42,000

However, since Jane took bonus depreciation, she must reduce her deduction by the amount of the bonus depreciation taken. Therefore, Jane's total deduction with respect to the leasehold improvements for 2013 is:

$42,000 - $107,995 (remaining first-year bonus depreciation) = $154,995

On May 30,2013,Jane Signed a 20-Year Lease on a Factory