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REG Practice Questions: Determine Property Eligible for a Section 179 Deduction
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May 3, 2024
In this video, we walk through 5 REG CPA exam practice questions on determining property eligible for a Section 179 deduction. Important Links Link to the free study training webinar mentioned in the video: https://www.superfastcpa.com/strategic-study See the full post for this video: https://www.superfastcpa.com/reg-practice-questions-explained-determine-property-eligible-for-a-section-179-deduction/ See the other REG walkthrough videos here: https://www.superfastcpa.com/free-reg-cpa-practice-question-walkthroughs/ 0:00 Intro 00:55 Question 1: Learning the 179 deduction eligibility requirements 03:03 Question 2: Learning about the max 179 deduction and the phase-out limit 07:11 Question 3: Applying the 179 deduction to eligible property 09:21 Question 4: The 179 deduction being limited by business income 11:34 Question 5: Determining which properties are eligible for the 179 deduction 14:57 Pillar Topics
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Hi, I'm Logan, and in today's video, we're going to be going over how to determine whether
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property is eligible for a Section 179 deduction, but we're going to be doing it the Super Fast
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CPA way, which is going through questions to learn how to do this. If this is the first
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thing you're seeing from us, our study strategy mainly focuses on doing questions as your main
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learning tool, among other strategies. If you want to learn more about our strategies, and if you
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like this video, be sure to go to superfast CPA.com to watch our free one-hour
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webinar training where we go over the six key ingredients to passing the CPA exam. Again, it's only
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one hour long, it's free, and it will save you months and months of struggling with your process
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One more thing about this video, this video will only have me going over five questions
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but Super Fast CPA members will have access to the full video that goes over 10 questions
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All right, with that said, let's go straight into the questions. Here's the first question. Ginger's Gourmet Kitchenware, a business that operates as a sole proprietorship, has decided to expand
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its cooking utensils line. In June of the current tax year, Ginger purchases a high-quality industrial
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grade food processor for $5,000 and a used commercial oven from her sister's defunct bakery for $4,000
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Ginger plans to use both interactive business to increase product capacity. Which of the following
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statements is true regarding Ginger's ability to take a Section 179 deduction for the tax year
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in which the equipment was purchased. All right. So if you don't really know anything about
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the 179 deduction, that's okay. That's what this video is here. to teach you about. So take a second, pause the video if you need to, to make sure you understand
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maybe read through the different responses that are available. And when you're ready, we'll go straight
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into the answer to start learning more about the Section 179 deduction. All right. So the correct
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answer is C. And let's learn about why. So it looks like here it's explaining to us all of the
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requirements for the Section 179 deductions. First, it has to be an eligible property
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which means it must be a tangible, depreciable, personal property purchased for business use
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Property must be bought new or used from an unrelated party, and that's going to be why this one
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was not Y.C is correct because she purchased it from a related party, from her sister
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Property must be used more than 50% for business purposes. The property must be placed in service
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during the tax year in which the deduction is claimed. The deduction cannot exceed the business's
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taxable income for the year. There are annual deduction limits and purchase price phase-out
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thresholds and the taxpayer must elect the deduction and certain properties aren't eligible for it like
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land inventory and buildings and then obviously you have to keep adequate records of it. So we still don't
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know anything about the number of the 179 deduction, but here's the basic outline of some of the
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eligibility requirements. So again, it has to be for business use, personal property, has to be bought
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from an unrelated party, has to be more than 50% business use. Those are some of the main ones there
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All right, so that's just the start of the 179 deduction. So let's go to the next question to learn more about it
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Okay, here's the next question. This year, Henderson's IT solutions purchased several pieces of computer equipment and software
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to update their infrastructure. The total cost of the new equipment was $2,500,000, and the software was $700,000
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Both used exclusively for business purposes. Henderson's has enough business income to fully realize any potential deduction
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The tax code for the year allows a maximum Section 1,000 deduction of $1,150,000 for qualified equipment
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with a phaseout starting at $2,850,000 of total property placed in service during the year
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What is the maximum Section 179 deduction that Henderson's IT solutions can take this year for these purchases
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Now, one thing I want to say right away, if you know anything about taxes, you'll know that this $1,150,000 is not the current Section 179 deduction
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The reason for that is the AICPA is not going to test you on specific tax year numbers most of the time
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For reg and TCP, that will not be the case because the tax numbers change from year to year
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and they aren trying to test you to know if you have a number memorized most of the time They will just want to make sure you know how it works because again it going to keep changing every year So again this is not the current number but that okay We trying to learn how this works So they purchased you know a lot of stuff and here the phase out
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So make sure you read this. Make sure you understand what it's asking. And when you're ready
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we're going to go into the answer to learn more about what the maximum is and how that works and
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what the phase out is and how that works. All right. Let's go into the question. Or I mean the
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answer. So the answer is $800,000. That's how much what section 179 deduction can be taken. So let's
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learn a bit more. Henderson's IT solutions, total equipment and software purchases for the year amount to
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$3,000,000. So that's those two together. And we'll talk a bit more about software in a little bit
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by the way. You know, that could be something where you're like, well, that's not a tangible business
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asset necessarily, you know, that kind of seems maybe like an intangible or it's kind of like a
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little bit strange. For this question, we're going to assume it does qualify for Section 179
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but in a few questions in, we're going to read a bit more about that. So just wanted to throw that
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out there. So this $3,200,000 does exceed the $2,850,000 of the phaseout limit. Let's learn how
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that works. So they were over by $350,000. The maximum Section 179 deduction is $1,150,000
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but that is reduced dollar for dollar by the amount exceeding the phase out threshold
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So this $1,150,000 is reduced by that $350,000, meaning that $800,000 is the actual maximum
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deduction for this year. So let's read a bit more about this. I think this is going to expand on that
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There's a set maximum deduction amount for Section 179 each year, and in this instance it
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was $1,150,000, which a business can use to deduct the full purchase price of qualifying equipment
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Okay. There's also a specific purchase price threshold set each year. If the total cost of all Section 179 property placed in service during the year exceeds this threshold, the maximum deduction available begins to be reduced. And we saw that up here. It's dollar for dollar right here. The deduction is reduced dollar for dollar. This phaseout aims to limit the benefit for larger businesses and ensure that the Section 179 deduction primarily helps small to medium sized businesses. So that's why they do this phase out. So if purchases far exceed the phase out threshold
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it's possible for the section 179 deduction to be reduced to zero. So that's how that works
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I mean, that's right there. That's the gist of most things when it comes to 179 deduction
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There's the max. There's the phase out. And there's one more thing that we're going to learn about in a second here
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But there's really three parts to the 179 deduction besides all those things that we talked about when we were talking about what qualifies for 179
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But this is the number side. So there's going to be a max deduction
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There's going to be a phase-out. And then again, we're going to talk about the one other thing that affects how much Section 179 you can take
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So let's go to the next question. Okay, here's the next question. During the current tax year, Thompson Manufacturing Inc. made several purchases to enhance its production capabilities
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These purchases include $800,000 for manufacturing equipment, $100,000 for office furniture, $400,000 for land improvements, and $200,000 for residential rental
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property improvements. Assume the tax code for the current year allows a maximum Section 179
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deduction of $1,050,000 for qualifying equipment, with a phaseout starting at $2,600,000
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Okay. Manufacturing machinery and office furniture are eligible for the Section 179 deduction
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while land improvements and residential rental property improvements are not. So right there
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the question just right there just told us more rules for Section 179
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Thompson Manufacturing has sufficient business income to absorb the deduction. So what is the maximum Section 179 deduction that Thompson Manufacturing Inc. can take this year
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considering the purchase is made. So, you know, sometimes there will be questions like that where it teaches you even in the
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question before you even look at the answer. So we understand now that land improvements and residential rental property improvements
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are not. And that kind of makes sense because above we read, you know, buildings and land aren't a part
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of Section 179 All right so take a second pause the video if you need to You know we already learned a lot from just two questions So see if you can maybe figure how this one would work and then come
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back when you're ready. All right, let's look at the answer. 900,000. Thompson Manufacturing
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Inc's total purchases is total purchases eligible for section 179 are 900,000. So the manufacturing machinery
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and the $100,000 for office furniture. Yep. The land improvements and residential improvements aren't
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counted as the eligible purchases do not exceed the phase-out starting point at 2,600,000
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There is no phase-out reduction to consider. Therefore, they can take the full 900,000. So this is awesome
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This is one of those situations where it's pretty straightforward, but you kind of have to sift through it
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and actually read it to make sure you understand what it's asking. So, section one, by the way
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section 179 is pretty straightforward once you understand how it works. So let's go to the next question
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Here's the next question. Baker's Boutique LLC purchased new baking equipment and a delivery van for their expanding cake business. The equipment was purchased for $500,000 and the van cost $150,000. Additionally, the company invested $50,000 in land improvements and $25,000 in new dining area furniture for customer seating. For the current year, the tax code allows a maximum Section 179 deduction of $1 million with a phase-out starting at $2 million of total property placed in service. Baker's Boutique had a challenging year
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and their taxable business income was $400,000. What is the maximum Section 179 deduction Baker's Boutique LLC can take this tax year
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Okay, so this question, just letting you know, is going to add in that third part that I was talking about that affects how much of the 179 deduction you can take
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You might be able to guess. So take a second, read through the question, make sure you understand what's asking, and we'll go into the answer
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Okay, here's the answer. 400,000. You'll probably notice that's equal to the taxable business income
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Baker's Boutique LLC's total eligible purchases for Section 179 are $675,000. So the baking equipment, the delivery van, and the new dining area furniture
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The land improvements are not eligible for Section 179 and thus are calculated from the
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excluded from the calculation, excuse me. Even though the purchases are below the phase-up threshold and the business could
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potentially claim up to $675,000 as a Section 179 deduction, the actual deduction cannot
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exceed the business's taxable income for the year. since their taxable income is 400,000, this is the maximum amount they can claim for the Section 179 deduction
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So that's the third thing that can limit it or that can affect it. So there's the actual maximum deduction, and that will probably be given to you
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There's the phase out limit that if it's over the phase out limit, it'll start reducing the total deduction that could be taken dollar for dollar
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But above all that, if the taxable income for the business is below the maximum 179 deduction
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that becomes the new max because the 179 deduction cannot exceed business income
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And that makes sense because you can't go negative through deductions. You can just get to zero
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Okay, let's go to the next question. Okay. Lucy's Catering Services is reviewing its asset purchases for the current year to determine
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which items are eligible for the section 179 deduction. The business made the following asset purchases during the year
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Commercial refrigerators for storing ingredients at $120,000, new company car, 60% business use for $50,000
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Residential rental property for expansion of business operations at $300,000. Customized cooking software developed specifically for Lucy's business at $25,000
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office equipment from a going out of business sale at a company owned by Lucy's brother for $10,000
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and land adjacent to the business for future expansion at $150,000. The business has a taxable income of $200,000
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The maximum deduction limit for the year is $1,050,000, with a phase-out starting at $2,620,000 of total property placed in service
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Lucy's has not yet elected the deduction for this year, but plans to do so, which of the assets purchased are eligible for the Section 179 deduction
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So assuming that they do take the deduction like they actually elect to do it because again it hasn said they have which is that is a requirement but they planning on doing it So we going to assume that they are going to do it So which of these is eligible for the 179 deduction Five questions in
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You've learned a lot. See if you can figure out which ones are eligible for. I think there's
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going to be one curveball in there. So pause the video. And when you're ready, we'll come back and look at
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the answer. All right. So one and two only. So only the commercial refrigerators and the new company
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car. So let's learn why the rest are not eligible. So the commercial refrigerators
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their tangible personal property, used for business, super easy. The new company car, which is used
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for more than 50% use, qualifies for the section 179 deduction, but the deduction will be limited
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to the percentage of business use. So that's something new to learn. So it would technically be
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limited to 60% of this $50,000. So that's something to keep in mind there. So that'd be like
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$30,000. Residential rental property, we knew that one didn't qualify. This is the curveball
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that I think that I knew about. Custom software that is developed specifically for a taxpayer's business typically does not qualify
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for the Section 179 deduction. This type of software is usually excluded because it's not off the shelf and is instead
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tailored to the specific needs of a single business, which means it doesn't meet the criteria
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of being readily available for purchase by the general public. Such custom developed software usually has to be capitalized and amortized over its economic
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useful life according to the IRS guidelines. So you might have remembered me
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mentioning software up above. The software mentioned above, we were assuming that it was qualified
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software, but custom software typically is not. Like custom software that was built for the taxpayer
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typically does not qualify for 1759 deduction. So that was a little bit of a curveball
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but it's something that you can learn. So watch out for that. Office equipment would typically
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qualify, but because it was purchased from a related party, Lucy's brother, it does not meet the
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purchase source requirement. Land is explicitly excluded. from Section 179, so that makes sense
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Lucy's catering services can only take a Section 179 deduction up to the taxable income limit
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of $200,000, assuming the assets are placed in service during the year and adequate records
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are kept. However, the question is focused on the eligibility of the assets, not the limit based on income
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So we learned a ton from just those five questions. So before we go any further, let's do one more part of the process, which is Pillar Topics
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Now, if you don't know much about our strategies, Pillar Topics is another part of this
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questions first approach that we have. You go through the questions and you learn from the explanations
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and the answers and then once you've done a little bit, you can start making pillar topics
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which is basically you taking a second and thinking, okay, these are the things that are obviously
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important. These are the concepts that I'm supposed to learn based off of these questions that I'm doing
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So let's go ahead and make some pillar topics. So first pillar topic, there is a maximum deduction
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amount, a phase out amount, and an income limit for 179. For any amount over the phase out, this starts reducing the total $179 deduction, dollar, or dollar
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Not all property qualifies. It has to be business use, tangible assets, and has to be
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from an unrelated party. The deduction is limited by business income
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Okay, or to business income. All right. So those are the pillar topics
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Again, this is where you take what you've learned and write it out in your own words
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so that you know, okay, this is what I have learned. All right. That's the end of this video
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Again, I'm only doing five questions in this video, but SuperFad CPA members will have access to the full video where I go
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over five more questions. If you liked this video, make sure you like it
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leave a comment, and especially go to superfastcpa.com and join our free one hour webinar training
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We go over the six key ingredients to passing the CPA exam, and again, it's free
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it's one hour long, and it will save you months and months of struggling with the CPA exam
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Thanks for watching, and I'll see you in the next one
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