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Research Problem 3. Andy has operated his moving company, MoveOn, as a sole proprietorship for several years. In the current tax year, MoveOn placed into service $700,000 of real property improvements eligible for immediate expensing under code 179 (but not eligible for bonus depreciation). Andy also joined with another local mover to form and operate a storage partnership, The Attic LLC. Andy holds a 90% capital and profits interest in The Attic.

This year, The Attic purchased and placed into service $2,900,000 of property eligible for expensing under 179 (and not eligible for bonus depreciation). Andy has $800,000 of taxable income from MoveOn and a $750,000 share of ordinary income from his 90% ownership of the Attic, both before considering any code 179 expense. Assuming that Andy wants to maximize his current deductions (without sacrificing future deductions), how much can he elect to deduct under code 179? How are any remaining expenditures treated?

Answer:

Rules for section 179 it is applicable to newly purchased qualified business use property that includes:

1. New / old tangible personal property

Generally it does not apply to real property but after TCJ Act, this section applies to qualified improvements to non-residential real property as mention in the questions.

The maximum limit for business is up to $1,000,000, reduce $ by $ for the amount placed in during the year exceeding $2,500,000.

Maximum asset value $3,500,000 to get the deductions.

Deductions not permitted if net loss or deductions creates net loss for the business.

Andy has two business, and two assets both assets are qualified business property.

Asset 1.

Taxable income from sole proprietorship $800,000.

As it satisfies both the conditions

1. Deductions less than $1,000,000
2. Asset value is less than $350,000

Section 179 deduction will be $700,000

Asset 2. Partnership share 90%

Income from partnership $750,000

Total value of assets $2,900,000

Eligible value of asset $2,900,000 X 90% = $2,610,000.

Total deduction allowable $2,610,000 + 700,000 = $3,310,000 which is eligible for deduction

Income earned = $800,000+750,000=$1,550,000

Cash saving on purchase assuming 35% tax bracket on

$2,900,000 X 35% = $1,015,000

$1,015,000 x 90% = $913,500

$700,000 X 35% = $245,000

Total cash saving = $913,500+245,000 = $1,158,500

Above asset also satisfies the both conditions, but as one see the deductions will result in net loss in that case, no section 179 can be applied. As mention in the question partnership asset is not subject to bonus depreceiation. Andy has to follow MACRS system that is modified accelerated cost recovery system.

In MACRS is based on different class of assets on the bases of classification like personal or real property. The same can be further classified into five (5) years 200% declining class.

Deduction available for section179 will be $700,000 without inflation as mention in the question.