Question

Amad has opened a new business and purchased some new IT equipment (five-year property) for $250,000 and office furniture (seven-year property) for $350,000 on April 9, 2020. He would like to elect the Section 179 expensing in the amount of $500,000 and use MACRS for the balance. He does not want to take the bonus depreciation. He expects his income from the business to be $540,000 (before deducting for the Section 179 expense). He is not sure which asset should be fully expensed.

a. Calculate Amad's total cost recovery if the Section 179 is first taken on the IT equipment (both 179 and first year expense). Calculate the amount for both assets.

b.  Calculate Amad's total cost recovery if the Section 179 is first taken on the office furniture (both 179 and first year expense).   Calculate the amount for both assets.

c. What is your advice to Amad? Should he take the 179 on the IT equipment or the office furniture, and explain why?

Amad has opened a new business and purchased some new IT equipment (five-year property) for $250,000 and office furniture (seven-year property) for $350,000 on April 9, 2020. He would like to elect the Section 179 expensing in the amount of $500,000 and use MACRS for the balance. He does not want to take the bonus depreciation. He expects his income from the business to be $540,000 (before deducting for the Section 179 expense). He is not sure which asset should be fully expensed.

a. Calculate Amad's total cost recovery if the Section 179 is first taken on the IT equipment (both 179 and first year expense). Calculate the amount for both assets.

b.  Calculate Amad's total cost recovery if the Section 179 is first taken on the office furniture (both 179 and first year expense).   Calculate the amount for both assets.

c. What is your advice to Amad? Should he take the 179 on the IT equipment or the office furniture, and explain why?

Answer 1

a. Amad's Cost Recovery if Section 179 is first taken on the IT equipment (both 179 and first-year expense).

100 percent on IT Equipment - $250,000

Office Equipment  Section 179 Deduction - $250,000

Balance Cost - $100,000

MACRS Depreciation Rate - 14.29 per cent

MACRS Depreciation - $ 14,290

TOTAL COST RECOVERY - $ 250,000 + $ 250,000 + $ 14,290

$ 514,290

b. Amad's total cost recovery if the Section 179 is first taken on the office furniture (both 179 and first-year expense)

100 percent on Office Equipment - $350,000

IT Equipment 179 Deduction - $150,000

Balance Cost - $100,000

MACRS Depreciation Rate - 20 percent

MACRS Depreciation - $ 20,000

TOTAL COST RECOVERY - $ 250,000 + $ 250,000 + $ 20,000

$5,20,000

c. Amad should go for option b take section 179 deduction first on office equipment and then on IT Equipment. It will result in an increase in cost recovery by $5,710.