Clay LLC placed in service machinery and equipment (7-year property) with a basis of $2,450,000 on June 6,2013.Assume that Clay has sufficient income to avoid any limitations.Calculate the maximum depreciation expense including §179 expensing (ignoring any possible bonus expensing) ,rounded to a whole number:
A)$350,105
B)$392,960
C)$778,070
D)$864,395
E)None of these

Question

Quizplus · Accepted Answer

Since the property was placed in service in June 2013, Clay would only be able to take half-year depreciation for the first and last year of the MACRS schedule. Therefore, the 7-year property would have a depreciation schedule of 4.75, 9.5, 14.25, 12.25, 8.75, 8.75, and 4.375 years.

Using the half-year convention, the first-year depreciation expense would be (2,450,000 * 0.1425 * 0.5) = $174,937.50. However, we also need to factor in the §179 expensing. The maximum expense available for 2013 would be $500,000, but since Clay's basis is higher than $2,000,000, the available expense is limited to ($2,500,000 - basis) * 0.5. Therefore, the §179 expense for 2013 would be (2,500,000 - 2,450,000) * 0.5 = $25,000.

The total depreciation expense for the first year would be ($174,937.50 + $25,000) = $199,937.50.

The maximum depreciation expense (including §179 expensing) for the second through seventh years can be calculated using the MACRS percentages and the remaining basis. The total depreciation expense over the life of the property would be ($2,450,000 - $25,000) = $2,425,000.

Total Depreciation Expense:
Year 1: $199,938
Year 2: $410,625
Year 3: $618,750
Year 4: $534,375
Year 5: $382,969
Year 6: $382,969
Year 7: $191,484
Total: $2,721,100 (rounded to the nearest whole number)

However, since we need to calculate the maximum depreciation expense, we need to limit the total expense to Clay's taxable income for the year. If we assume that Clay has taxable income of at least $2,721,100, then the maximum depreciation expense would be $2,721,100. Otherwise, we would need to lower the total depreciation expense to match Clay's taxable income.

Therefore, the correct answer is B) $392,960.

Clay LLC Placed in Service Machinery and Equipment (7-Year Property)