- What is the maximum deduction allowable?
To obtain the maximum deduction, Larry should elect to expense $112,000 of the cost of the purchases and use the regular MACRS depreciation system. To maximize the election to expense deduction, the $112,000 should be allocated to the property with the longest useful life, in this case the machinery. This will result in a 2007 cost-recovery deduction of $136,374:
Cost Recovery on Machinery
Election to expense $112,000
Depreciable basis ($165,000 – $112,000) $ 53,000
1st year depreciation (Table A10-2) x 14.29% 7,574
Cost-recovery on machinery $119,574
Cost Recovery on Equipment
Depreciable basis $ 84,000
1st year depreciation (Table A10-2) x 20% 16,800
Total 2007 cost recovery $136,374
- What is the minimum deduction allowable?
To minimize the deduction allowable, Larry should not elect to expense any of the cost and elect to use straight-line depreciation over the ADS life. Machinery has no assigned class life, so the ADS recovery period will be 12 years, the ADS recovery period for property without a class life. The first year ADS straight-line for 12-year property is 4.17% [(1 ¸ 12) x 50% mid-year convention]. For equipment, the ADS recovery period is 10 years, and the first year ADS straight-line for 10-year property is 5% [(1 ¸ 10) x 50% mid-year convention]. Therefore, the minimum allowable deduction would be $11,081:
Machinery depreciable basis ($165,000 x 4.17%) $ 6,881
Equipment depreciable basis ($ 84,000 x 5.00%) 4,200
Minimum depreciation deduction $11,081
