Question

Kemp Inc., a calendar year taxpayer, generated over $10 million taxable income in 2019. Kemp made one asset purchase: used manufacturing equipment costing $1,543,600. The equipment has a 7-year recovery period and was placed in service on June 14. Assuming that Kemp made the Section 179 election with respect to the equipment, compute Kemp's 2019 cost recovery deduction.

Answer 1

Section 179 is a benefit given to the business owners to claim the capital expense incurred during the year as deduction, instead of capitalising it and claiming depreciation thereon.

Conditions to avail the benefit of Section 179 :

1) The asset acquired must be a qualified property. The qualified shall include machinery and equipment purchased for use in the business, vehicles and cost of improvements for building.  

2) The qualified asset must be acquired and put into use in the year in which such benefit is availed.

3) The maximum deduction allowed under this section is $1,020,000 million.

In the given case, Kemp Inc has incurred $1,543,600. Since, the amount exceed $1 million. Kemp Inc's deduction under Section 179 shall be restricted to $1,020,000 million.

Bonus depreciation of 100% on the balance amount of the qualified asset can be availed in the first year of use.

Balance amount = $1,543,600 - $1,020,000 = $523,600

Bonus depreciation = $523,600 X 100% = $523,600

Therefore, the entire cost of the asset can be availed as a deduction in the first year itself.