Question

Clay LLC placed in service machinery and equipment (7-year property) with a basis of $2,450,000 on June 6, 2014. Assume that Clay has sufficient income to avoid any limitations. Calculate the maximum depreciation expense including §179 expensing (ignoring any possible bonus expensing), rounded to a whole number. Assume that the 2013 §179 limits are extended to 2014:

A. $350,105
B. $392,960
C. $778,070
D. $864,395

Answer 1

The maximum depreciation expense including §179 expensing for the machinery and equipment is $350,105.

Step-by-step explanation:

To calculate the maximum depreciation expense including §179 expensing for the machinery and equipment, we need to consider the depreciation rules for 7-year property and the §179 deduction. According to the tax rules, the machinery and equipment can be depreciated over 7 years. The maximum depreciation expense for each year would be the basis divided by 7. Additionally, the §179 deduction allows businesses to deduct the cost of the asset, up to a certain limit.

The §179 limits for 2013 were extended to 2014, meaning that businesses can deduct up to $500,000 of the asset's cost. However, as per the given information, we need to ignore any bonus expensing. Therefore, the maximum depreciation expense including §179 expensing would be the lesser of the basis divided by 7 and $500,000.

In this case, the basis of the machinery and equipment is $2,450,000. Dividing this by 7 gives us approximately $350,000. Since this amount is less than $500,000, the maximum depreciation expense including §179 expensing is $350,000. Therefore, the correct answer is A. $350,105.