Tax 3-5 Analyze a situation to calculate the election or deduction amount under Section 179. Flashcards
Section 179
Section 179 expense election is an important part of the planning related to the acquisition of property. This election allows for a much _____ deduction than would otherwise be available in the year the property is acquired.
larger or smaller
(3-5, pg 39)
larger
Section 179
Under Section 179 of the Internal Revenue Code, taxpayers may elect to treat a limited portion of the cost of certain qualifying property as an immediate expense, rather than as a _____ expenditure, the first year it is placed in service.
(3-5, pg 39)
capital
Section 179
There are two distinct advantages to utilizing Section 179, if available. First, the taxpayer isn’t burdened by taking cost recovery deductions over a period of years for a qualifying asset. In addition, the use of Section 179 accelerates the deductions into the current year.
For example, assume a taxpayer purchased $200,000 of equipment in the current year. Normally, that equipment would be depreciated over a period of eight years, with a first year cost recovery deduction of $28,580 and an eighth year deduction of $8,920, using the MACRS table. Instead, if the taxpayer qualifies, he may deduct…
(3-5, pg 39)
the full $200,000 in the year of acquisition. Obviously, this yields a more significant deduction (and potential tax savings) for the current year, and keeps the taxpayer from having to track deductions over the eight-year depreciation period.
Section 179
Qualified _____ is depreciable tangible personalty purchased for use in the active conduct of a trade or business—examples would include equipment and machinery, computer software, and office furniture.
property
restaurant
leasehold improvement
retail improvement
(3-5, pg 39)
property
Beginning in 2016, air conditioning and heating units used in the active conduct of a trade or business may qualify for Section 179.
Section 179
Qualified _____ property is a building, or improvement to a building, if more than 50% of the building’s square footage is devoted to the preparation of, and seating for on-premises consumption of, prepared meals.
property
restaurant
leasehold improvement
retail improvement
(3-5, pg 39)
restaurant
Section 179
Qualified _____ _____ property refers to any improvement to an interior portion of a building, which is commercial realty that is under lease. The improvement may be made by the lessee or lessor, but the lessee must exclusively occupy that portion of the building.
property
restaurant
leasehold improvement
retail improvement
(3-5, pg 39)
leasehold improvement
Also, the improvement must be placed in service more than three years after the date the building was first placed in service.
Section 179
Qualified _____ _____ property is any improvement to an interior portion of commercial real property if the portion of the building is open to the general public and is used in the retail trade or business of selling tangible property to the general public, the improvement is placed in service more than three years after the date the building was first placed in service, and the expenses are not for the enlargement of the building, any elevator or escalator, any structural components benefiting a common area, or the internal structural framework of the building.
property
restaurant
leasehold improvement
retail improvement
(3-5, pg 39)
retail improvement
Section 179
Section 179 may be elected for used property. The deduction does not apply to property held merely for the production of income. Thus, Section 179 generally may not be used in a _____ activity.
(3-5, pg 39)
rental
A taxpayer might choose not to elect Section 179 expensing if the taxpayer is in a lower bracket during the current year than the expected tax bracket in future years.
Section 179
- Frank Jones owns and operates a business as a sole proprietor. On August 7, 2016, he purchased equipment (seven-year property) at a cost of $625,000 to use in his business. He qualifies for and elects the maximum Section 179 expense deduction. Frank elects out of the bonus depreciation provision.
What is the total amount of deductions that Frank can claim in 2016? Use the MACRS table found in the module.
- $17,863
- $500,000
- $517,863
- $625,000
(LO 3-5)
- $517,863
$625,000 Cost Basis - $500,000 Maximum Section 179 = $125,000 * 14.29% From MACRS table = $17,863 1st year deduction \+ $500,000 = $517,863
The maximum Section 179 expense is $500,000 for 2016. This leaves $125,000 of remaining basis that is subject to depreciation; $125,000 times 14.29% equals $17,863. The Section 179 expense of $500,000 combined with the $17,863 equals $517,863. (The MACRS table will be provided on the end-of-course exam.)
Section 179
- ABC Corporation purchased various items of depreciable tangible personal property, with a total cost of $2,410,000, for use in his business during 2016. Assume that ABC has taxable income (without regard to the Section 179 expense) of $290,500 this year.
What is the maximum Section 179 deduction that Wally may claim in the current year?
- $100,000
- $290,500
- $500,000
- $2,400,000
(LO 3-5)
- $100,000
$2,410,000
- $2,010,000 (limit)
= $400,000
$500,000 (limit)
- $400,000
= $100,000
The Section 179 election is reduced by the amount that property placed in service during the tax year exceeds $2,010,000. The $400,000 excess reduces the maximum election to $100,000 ($500,000 maximum Section 179, reduced by the $400,000 excess). The maximum deduction is limited to “earned income,” which in this case “covers” the $100,000.
Section 179
- A taxpayer who places $2,530,000 of qualifying property in service during the 2016 tax year may claim a $_______ Section 179 expense deduction.
$0
$30,000
$500,000
(LO 3-5)
$0
$2,530,000 Total Cost
- $2,010,000 Limit
= $520,000 Amount under the limit
$500,000 Maximum Section 179
- $520,000 Amount under the limit
= $(20,000) Maximum Deduction
The Section 179 expense election of $500,000 is reduced on a dollar-for-dollar basis to the extent that qualifying property placed in service exceeds $2,010,000. Therefore, $520,000 of excess completely eliminates the $500,000 expense election.
Section 179
During 2016, Jerry Tully, a sole proprietor, purchased new equipment (seven-year property) for his offices at a cost of $675,000. Assume he elects and qualifies for the maximum Section 179 deduction and uses MACRS. What is the maximum first-year deduction that Jerry may claim with respect to the equipment?
(LO 3-5)
$525,008
$675,000 cost basis - $500,000 = $175,000 * 14.29 (from MACRS table) = $25,008 1st year deduction \+ $500,000 = $525,008
The $675,000 is reduced by the $500,000 expensed under Section 179. The depreciation under MACRS is thus calculated on the remaining $175,000 times the MACRS percentage of 14.29. This yields a $25,008 first-year MACRS deduction, which, when added to the $500,000, totals $525,008.
Section 179 Limit
During 2016, Jake Wolf purchased several items of equipment, with a total cost of $2,110,000, for use in his sole proprietorship. Jake has taxable (earned) income from his business of $130,000 (without regard to the Section 179 expense). He also has wages from a part-time job of $40,000.
What is the maximum amount of Section 179 expense that Jake may deduct in the current year?
(LO 3-5, pg 36)
$170,000
Section 179 Deduction if more than $2,010,000
$2,110,000 Total Cost
$2,010,000 Limit
$100,000 Amount under the limit
$500,000 Maximum Section 179 $100,000 Amount under the limit $400,000 Maximum Deduction or $170,000 Income
$130,000
+ $40,000
= $170,000
Section 179 Limit
During 2016, Jake Wolf purchased several items of equipment, with a total cost of $2,110,000, for use in his sole proprietorship. Jake has taxable (earned) income from his business of $380,000 (without regard to the Section 179 expense). He also has wages from a part-time job of $30,000.
What is the maximum amount of Section 179 expense that Jake may deduct in the current year?
(LO 3-5, pg 36)
$400,000
$2,110,000 Total Cost
- $2,010,000 Limit
= $100,000 Amount under the limit
$500,000 Maximum Section 179
- $100,000 Amount under the limit
= $400,000 Maximum Deduction
Section 179 Limit
- During 2016, William Kilmer purchased office furniture for his real estate offices at total cost of $185,000. Due to a down real estate market, he only has taxable (earned) income from this sole proprietorship of $15,000 (without regard to the Section 179 expense). He took a part-time teaching job and has wages of $5,000.
What is the maximum amount of Section 179 expense that William may deduct in the current year?
(LO 3-5)
$20,000
$185,000 Total Cost
$500,000 Maximum Section 179
Lesser of
$20,000 Income
$500,000 Allowable Deduction
The Section 179 deduction is subject to a taxable (earned) income limitation. However, for this purpose, wages received (even from a completely unrelated source) are considered to be from the active conduct of a trade or business. With only $20,000 of earned income, only $20,000 may be used.
