Question

Sally's Seashells, a calendar year company, purchased three assets during April of the current year: Asset A costing $20,000 with a 5-year recovery period; Asset B costing $20,000 with a 7-year recovery period; Asset C costing $20,000 with a 39-year recovery period that is made up of qualified real property (leasehold improvements). Her net income before the Section 179 expense is $20,000. So, she is only planning to expense one of the assets under Section 179, will elect out of bonus depreciation and will depreciate the other two under MACRS. Which asset should she choose if she wants to maximize her depreciation deduction, and she uses the half-year convention for tangible, personal property?

a. Asset A
b. Asset B
c. Asset C
d. The depreciation deduction is the same for all assets.

Answer 1

To maximize Sally's depreciation deduction under Section 179, she should choose either Asset A or B to apply the Section 179 expense, as both would allow a $20,000 deduction in the current year. Asset C has a 39-year recovery period, which makes it less advantageous for first-year depreciation.

Step-by-step explanation:

To determine which asset Sally should choose to maximize her depreciation deduction under Section 179, it is important to understand the respective recovery periods and how Section 179 works. Since Sally will elect out of bonus depreciation and use MACRS with the half-year convention for tangible, personal property, we need to look at how the first-year deduction would differ between the assets.

Asset A, with a 5-year recovery period and Asset B, with a 7-year recovery period, when expensed under Section 179 could both be deducted fully in the current year, resulting in a $20,000 deduction. However, Asset C, as qualified real property, is less advantageous for first-year depreciation when not elected under Section 179; it would have the least amount of deduction in the first year due to its 39-year recovery period.

For the maximum immediate deduction, Sally should choose either Asset A or B to apply the Section 179 expense to, since both would allow her to deduct the entire $20,000 in the current year. Thus, the depreciation deduction is not the same for all assets if we consider the first year's impact on Sally's tax position.