Question

ABC Company forms in 2020. Prior to operations, ABC incurred $75,000 of startup costs. ABC began operations in February 2020.

ABC Company is in the construction business and has to make significant capital expenditures to begin operations. ABC purchased the following capital assets during the year:

Construction Equipment - $1,500,000

Furniture for its offices - $50,000

Computer Equipment - $250,000

ABC rents its office space from an unrelated third party. The rent is $20,000 per month.

If ABC elects to expense assets using § 179 and does not elect the additional first-year depreciation deduction, calculate its total § 179 deduction for the year and carryforward, if any. Compute amortization expense as well.

If ABC elects to take advantage of the additional first-year depreciation (bonus depreciation) calculate its total deduction, and carryforward if any, for depreciation and amortization purposes.

Answer 1

Deduction of start-up costs:

Company can deduct up to $ 5,000 of start up costs of election is made and the remaining can be amortized upto a period of 15 years.

Section 179 deduction:

Section 179 allows companies to deduct the cost of fixed assets upto $ 1,000,000 for assets placed upto $5,000,000 ( $ to $ limit ) if the election is made and the remaining can be depreciated over the useful life of the asset unless additional depreciation is taken on the same.

a. Calculation of section 179 deduction and carry foward if election is not made additonal depreciation:

Total cost of fixed assets : $ 1,500,000 + $ 50,000 + $ 250,000 = $ 1,800,000

Section 179 Deduction : $ 1,000,000

Carryfoward = $ 1,800,000 - $ 1,000,000 = $ 800,000

Amortization : $ 75,000 start-up costs can be carried forward up to a period of 15 years if election is not made for deduction is first year.

b. Calculation of section 179 deduction and carry foward if election is made for additional depreciation:

Total cost of fixed assets : $ 1,500,000 + $ 50,000 + $ 250,000 = $ 1,800,000

Section 179 Deduction : $ 1,000,000

Additional depreciation : 100% additional depreciation can be taken in the year in which election is made. Hence $ 800,000 can be depreciated.

Amortization: If the election is made then $ 5,000 can be deducted in the year in which business is started and the remaining can be carry forward.