On February 4, 2015, Jackie purchased and placed in service a car she purchased for $21,200. The car was used exclusively for her business. Compute Jackie?s cost recovery deduction in 2015 assuming no 179 expense but the bonus was taken. (UseTable 6A-1andLuxury Automobile Depreciation)

Final PDF to printer Chapter 6 Self-Employed Business Income (Line 12 of Form 1040 and Schedule C) 6-17 EXAMPLE 6-16 Assume the same facts as in Example 6-15 but the business use was 70% in year 1 and 30% in year 2. The depreciation and recapture amounts would be calculated as follows: Year 1 Year 2 MACRS Straight-Line\tDifference $350 $175 $175 \t150 The depreciation deduction would be $150 (full-year at 1/5 straight-line) in year 2, and the excess depreciation taken in year 1 ($175) would be included (recaptured) in gross income. The straight-line method would be required for future years even if the business use percentage subsequently increased above 50%. Luxury Automobile Limitations In addition to the business use limitation, the amount of depreciation allowed for luxury automobiles is limited. Passenger autos are defined as four-wheeled vehicles made primarily for use on public streets, roads, and highways with a gross vehicle weight of less than 6,000 pounds.31 Light trucks or vans that are 6,000 pounds or less have a slightly higher limit.32 The depreciation expense limits for luxury autos and light trucks placed in service in tax year 2015 follow: For this section, the authors are assuming Congress will keep the 50% bonus 179 for 2015. All questions and problems assume the 50% is in place for 2015. Year 1 (2015) Year 2 (2016) Year 3 (2017) Year 4 (2018) and succeeding Auto Limit $11,160 5,100 3,050 1,875 Light Truck/Van Limit $11,460 5,600 3,350 1,975 These limits apply to both 179, the 50% bonus, and regular MACRS depreciation. They are reduced further if the business use of the auto is less than 100%. If for some reason the 50% bonus was not taken, the limit for regular depreciation would revert back to $3,160. In 2015, Allison purchased a Toyota Camry for $25,000 to be used exclusively for business. The 179 expense deduction would produce a deduction equal to $25,000. Because the maximum depreciation for 2015 is $11,160, the depreciation allowance is limited to $11,160. EXAMPLE 6-18 Copyright 2016 The McGraw-Hill Companies. All rights reserved. EXAMPLE 6-17 Jackson purchased a new car for $19,000 on July 7, 2015, and used it 75% for business during 2015. The maximum amount of expense for the car in the first year is $8,370 ($11,160 3 75%). Prior to 2005, many taxpayers circumvented the luxury auto rules by purchasing vehicles with a gross weight of more than 6,000 lbs. Thus if a taxpayer purchased a large SUV, the taxpayer could use 179 to expense the entire purchase amount up to the 179 limit. For purchases after October 22, 2004, the 179 deduction is limited to $25,000 on these large SUVs. However, the regular MACRS depreciation is still unaffected by the luxury ceiling amounts, thus keeping the purchase of these vehicles attractive in terms of depreciation. However, the bonus depreciation is not limited to $25,000. EXAMPLE 6-19 Javier purchased a new GMC Yukon for $46,000 on May 3, 2015, to be used 100% for business. During 2015, he could deduct a maximum of $25,000 in 179 expense and $4,200 in MACRS depreciation ([$46,000 2 $25,000] 3 20% 2 5-year/half-year convention). 31 32 cru34820_ch06_001-061.indd6-17\b IRC 280F(d)(5). Other information concerning the auto limitation can be found in Rev. Proc. 2014-21. 10/16/15 05:41 PM Final PDF to printer 6-44 Chapter 6 Self-Employed Business Income (Line 12 of Form 1040 and Schedule C) Appendix General Depreciation System TABLE 6A-1 General Depreciation System 200% or 150% Declining Balance Switching to Straight-Line* Half-Year Convention Recovery Year 3-Year 5-Year 7-Year 10-Year 15-Year 20-Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 33.33 44.45 14.81 7.41 20.00 32.00 19.20 11.52 11.52 5.76 14.29 24.49 17.49 12.49 8.93 8.92 8.93 4.46 10.00 18.00 14.40 11.52 9.22 7.37 6.55 6.55 6.56 6.55 3.28 5.00 9.50 8.55 7.70 6.93 6.23 5.90 5.90 5.91 5.90 5.91 5.90 5.91 5.90 5.91 2.95 3.750 7.219 6.677 6.177 5.713 5.285 4.888 4.522 4.462 4.461 4.462 4.461 4.462 4.461 4.462 4.461 4.462 4.461 4.462 4.461 2.231 * May not be used for farm business property generally placed in service after 1988. See Table 14, Rev. Proc. 87-57. Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. TABLE 6A-2 General Depreciation System 200% or 150% Declining Balance Switching to Straight-Line* Mid-Quarter Convention (Property Placed in Service in 1st Quarter) Recovery Year 3-Year 5-Year 7-Year 10-Year 15-Year 20-Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 58.33 27.78 12.35 1.54 35.00 26.00 15.60 11.01 11.01 1.38 25.00 21.43 15.31 10.93 8.75 8.74 8.75 1.09 19.50 16.50 13.20 10.56 8.45 6.76 6.55 6.55 6.56 6.55 0.82 8.75 9.13 8.21 7.39 6.65 5.99 5.90 5.91 5.90 5.91 5.90 5.91 5.90 5.91 5.90 0.74 6.563 7.000 6.482 5.996 5.546 5.130 4.746 4.459 4.459 4.459 4.459 4.460 4.459 4.460 4.459 4.460 4.459 4.460 4.459 4.460 0.557 * May not be used for farm business property generally placed in service after 1988. See Table 15, Rev. Proc. 87-57. cru34820_ch06_001-061.indd6-44\b 10/01/15 10:36 PM