Morgan Corporation, a calendar-year corporation, purchased a $2,800,000 factory building in February, $950,000 of new machinery in April, $80,000 of new office furniture in August, 900,000 of used machinery in October, and $130,000 of additional new office furniture in December.
a. What is the corporation's maximum cost recovery deduction for 2011 assuming the corporation expects at least $2,000,000 of income before depreciation deductions in 2011.
b. How would your answers change if the furniture and machinery will not be purchased until 2012?

Question

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The Answer is a. For 2011: $1,030,000/$2,060,000 = 50% personalty acquired in the last quarter of the tax year; Section 179 allows $500,000 to be expensed but qualifying assets exceed $2,000,000 by $60,000; thus the corporation can only expense $440,000 under Section 179. If the corporation expenses $440,000 of the used machines acquired in October, the half-year convention can be used for the remaining machines and office equipment ($590,000/$1,620,000 = 36%). It is important to maximize the Section 179 expense deduction on the used machines as they are not eligible for bonus depreciation.
Building: $2,800,000 x .02247 = $62,916 depreciation
New Machinery: $950,000 @ 100% bonus depreciation
New Office furniture 1: $80,000 @ 100% bonus depreciation
New Office furniture 2: $130,000 @ 100% bonus depreciation
Used Machinery: $440,000 expensed under Section 179 + ([$900,000 - $440,000] .1429) = $505,734
Total cost recovery in 2011 = $1,728,650 ($62,916 + $950,000 + $80,000 + $130,000 + 505,734)
b. Income exceeds $625,000 in 2012 so that no Section 179 expense deduction is allowed and bonus depreciation is reduced to 50%. The new machinery and the office furniture are eligible for the 50% bonus depreciation.
Building: $2,800,000 x .02247 = $62,916 depreciation
New Machinery: ($950,000 x .50) + ([$950,000 - $475,000].1429) = $542,877.50 bonus and MACRS depreciation
Office furniture 1: ($80,000 x .50) + ([$80,000 - $40,000] .1429) = $45,716 bonus and MACRS depreciation
Office furniture 2: ($130,000 x .50) + ([$130,000 - $65,000] .1429) = $74,288.50 bonus and MACRS depreciation
Used Machinery: $900,000 x .1429) = $128,610
Total cost recovery in 2012 = 854,408 ($62,916 + $542,877.50 + $45,716 + $74,288.50 + $128,610)

Morgan Corporation, a Calendar-Year Corporation, Purchased a $2,800,000 Factory Building