Question

1. Hermione purchased and placed in service machine costing $2,500,000 in November of 2020. This is the only asset she placed in service during the year. Her net income for the year is $2,000,000.(7 Points)

a. What is her depreciation deduction for 2020 if she elects Section 179?

b. What is her depreciation deduction for 2020 if makes no elections and uses MACRS?

c. What is her depreciation deduction for 2020 if she elects Additional First Year (Bonus) depreciation?

d. Which method would you recommend for her?

Answer 1

a.The depreciation deduction for 2020 if she elects Section 179 -

1st year write-offs:
Section 179 Deduction:	$	1040000
Total Deduction in first year(Without 100% bonus Depreciation):	$	1040000

b.The depreciation deduction for 2020 if makes no elections and uses MACRS -

Depreciation for 2020 is 500000$

Year	Adjusted Basis	%	Depreciation	Cumulative	Book Value	Method
2020	$2500000	20%	5,00,000.00	5,00,000.00	$2000000	DB
2021	$2000000	32%	8,00,000.00	13,00,000.00	$1200000	DB
2022	$1200000	19.20%	4,80,000.00	17,80,000.00	$720000	DB
2023	$720000	11.52%	2,88,000.00	20,68,000.00	$432000	SL
2024	$432000	11.52%	2,88,000.00	23,56,000.00	$144000	SL
2025	$144000	5.76%	1,44,000.00	25,00,000.00	$0	SL

c.Depreciation deduction for 2020 if she elects Additional First Year (Bonus) depreciation -

Section 179 Deduction:	$	1040000
100% Bonus Depreciation:	$	1460000
Total Deduction in first year:	$	2500000

d. Decision making.

1)If option (a) is choosen-

Net taxable Income = 2000000 -1040000 = $960000

2)

If option (b) is choosen-

Net taxable Income for 2020 = 2000000 - 500000 = $1500000

3)

If option (c) is choosen-

Net taxable Income for 2020 = 2000000 - 2000000 = "Nil"

Conclusion - If we want to claim 100% depreciation then its better to go option (c) .If we do not want to claim 100% depreciation then we should us Macrs method as it will allows us to depreciate machinery for 5 years over its life