Clay LLC placed in service machinery and equipment (seven-year property) with a basis of $3,450,000 on June 6, 2020. Assume that Clay has sufficient income to avoid any limitations. Calculate the maximum depreciation expense including §179 expensing (ignoring any possible bonus depreciation).

Question

Quizplus · Accepted Answer

For 2020, the maximum §179 expense deduction limit is $1,040,000 and the phase-out threshold is $2,590,000. Since Clay LLC's machinery and equipment have a basis of $3,450,000, the §179 expense deduction will be reduced by the excess of the basis over the phase-out threshold.

$3,450,000 - $2,590,000 = $860,000 excess basis

$1,040,000 - $860,000 = $180,000 §179 expense deduction

The remaining basis eligible for depreciation will be $3,270,000 ($3,450,000 - $180,000 §179 expense deduction).

The maximum depreciation expense for seven-year property is calculated using the MACRS table and the half-year convention:

Year 1: 14.29% x $3,270,000 = $467,283

Therefore, the maximum depreciation expense including §179 expensing for Clay LLC's machinery and equipment is $647,283 ($180,000 + $467,283).

Clay LLC Placed in Service Machinery and Equipment (Seven-Year Property)