[Anonymous]

Green Valley, Inc., purchased and placed in service a $130,000 piece of used equipment in a year with a maximum allowable Section 179 amount of $25,000 and a ceiling of $200,000 of qualifying property. No other property was placed into service during the year and the 50% bonus depreciation is not an option for 2014. The equipment is 7-year property. The first-year depreciation for 7-year property is 14.29%. Before consider­ing any depreciation deduction, Green Valley had $300,000 of taxable income. Rounding to the nearest dollar, what amount is the maximum allowable depreciation deduction?

A. $130,000

B. $25,000

C. $40,005

D. $500,000

According to the key, the answer is D, but how can we deduct more than the purchase amount? plus the question states that the max under 179 is $25,000 with a ceiling of qualifying property of $200000. Here is the key explanation:

“Under Section 179 of the Internal Revenue Code, the taxpayer may elect to expense up to $500,000 of tangible personal property placed in service during the year through 2014. Both new and used properties qualify. The basis of the asset must be reduced by the amount so expensed.

Two limits apply. First, the amount “expensed” cannot exceed the taxpayer’s aggregate taxable income from trade or business activities. Second, the ceiling amount of $500,000 for 2014 is reduced dollar-for-dollar for personal property acquisitions in excess of $2,000,000 (i.e., if more than $2,000,000 of property is placed in service during a tax year, no Section 179 deduction is allowed). In this case, the equipment purchased was less than the limit of $2,000,000 and is not reduced.

Section 179 expense is deducted first, and then the regular depreciation is calculated.

Section 179 expense $500,000

Regular depreciation (0.1429

x ($130,000 – $500,000) 0

Total $500,000

Could anyone please help me figure this out?