During 2007, Belk Corporation purchases $70,000-worth of equipment for use in its business. Belk’s current taxable income before considering the Section 179 deduction is $26,000.
- What is Belk’s maximum Section 179 deduction in 2007? Explain.
- Belk’s 2008 business taxable income—before a Section 179 deduction—is $50,000. What is Belk’s maximum Section 179 deduction in 2008? Explain.
- What is Belk’s maximum Section 179 deduction in 2007? Explain.
The taxable income limitation applies to this scenario. That is, the maximum Section 179 deduction is limited to the taxpayer’s taxable income calculated before the Section 179 deduction. Although Belk purchased $70,000 of qualifying Section 179 property, it can deduct only $26,000, the amount of taxable income from the business. The $44,000 ($70,000 – $26,000) excess may be carried forward to 2008. Note: If Belk elects to expense only $26,000, no carryforward results. However, its basis in the property is $44,000 instead of zero.
- Belk’s 2008 business taxable income—before a Section 179 deduction—is $50,000. What is Belk’s maximum Section 179 deduction in 2008? Explain.
Assuming that Belk elected to expense $70,000 in 2007, under the taxable income limitation, a maximum of $44,000 can be deducted. Since Belk’s carryforward of $44,000 is less than its taxable income, the full amount of the carryforward can be deducted in 2008. If Belk only expenses $26,000 in 2007, then there is no deduction in 2008 but its depreciable basis in the property is $44,000 instead of zero.
