Kris starts a new business in 2007. She purchases 7-year MACRS property costing $12,000. Her business income before any cost-recovery deductions is $8,000.
- What is the maximum cost-recovery deduction allowable for 2007?
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- How does your answer change if Kris informs you that she plans to make significant investments in personal property over the next 3 years?
- What is the maximum cost-recovery deduction allowable for 2007?
The maximum cost-recovery deduction is obtained by electing to expense the maximum amount under Section 179 and using the regular MACRS method to compute depreciation. In this case, if the Section 179 election maximum amount is elected, only $8,000 of the $12,000 election is deductible in the current period due to the income limitation. The remaining $4,000 of the election is carried forward and used after any Section 179 election in the carry forward period. However, the depreciable basis in the property must be reduced by the full amount elected, even if it is not deducted in full in the election period.
- How does your answer change if Kris informs you that she plans to make significant investments in personal property over the next 3 years?
Because Kris anticipates future purchases of qualifying property that may be able to use the full Section 179 expense election amount, it would be better to only elect to expense the $8,000 taxable income limit in 2007. The $4,000 remaining basis is depreciated over the 7-year MACRS recovery period. This increases the current deduction with no reduction in future amounts. Kris’s maximum 2007 depreciation deduction is $8,572:
Election to expense $ 8,000
Depreciable basis ($12,000 – $8,000) $ 4,000
1st year depreciation (Table A10-2) x 14.29% 572
Total 2007 depreciation deduction $ 8,572
If Kris elected to expense the full $12,000 allowed, the maximum 2007 deduction is limited to the $8,000 election to expense:
Election to expense $8,000
Depreciable basis ($12,000 – $12,000) $ -0-
1st year depreciation (Table A10-2 ) x 14.29% -0-
Total 2006 depreciation deduction $8,000
Section 179 carryforward to 2008 = $4,000
