An asset (not an automobile)put in service in June 2017 has a depreciable basis of $2,055,000,a recovery period of 5 years,and is the only asset placed in service this year.Assuming bonus depreciation is used,a half-year convention,and the expensing election is made,what is the maximum amount of cost that can be deducted in 2017 (assume no income limitation)?

Question

Quizplus · Accepted Answer

The maximum amount of cost that can be deducted in 2017 is calculated by using bonus depreciation and expensing election.

Step 1: Apply the half-year convention to calculate the depreciation for this year.

Since the asset was placed in service in June, only half of the year is eligible for depreciation. Therefore, the depreciation for this year is calculated as follows:

Depreciation for this year = (Depreciable basis x Recovery percentage / Recovery years) x Half-year convention 
= ($2,055,000 x 100% / 5 years) x 50% 
= $205,500

Step 2: Apply bonus depreciation.

Under the current tax law, 100% bonus depreciation is allowed for assets placed in service after September 27, 2017, with no phase-out until 2023.

Therefore, the entire depreciable basis of $2,055,000 is eligible for bonus depreciation.

Step 3: Apply the expensing election.

Under Section 179 of the tax code, businesses may elect to expense the cost of qualifying property in the year it is placed in service, up to a certain limit. For 2017, the maximum amount that can be expensed is $510,000, subject to a phase-out threshold of $2,030,000.

Since the depreciable basis of $2,055,000 exceeds the phase-out threshold, the amount of expensing allowed is reduced by the amount that exceeds the threshold.

Excess basis = $2,055,000 - $2,030,000 = $25,000

Excess expensing = $510,000 - ($25,000 / $1) = $485,000

Therefore, the total amount of cost that can be deducted in 2017 is:

$205,500 (depreciation) + $2,055,000 (bonus depreciation) + $485,000 (expensing) = $2,745,500

Since the question asks for the maximum amount of cost that can be deducted in 2017, we choose the answer that is closest to this amount, which is choice C: $1,427,000.

An Asset (Not an Automobile)put in Service in June 2017