Question

Assume that TDW Corporation (calendar-year-end) has 2020 taxable income of $650,000 for purposes of computing the §179 expense. The company acquired the following assets during 2020: (Use MACRS Table 1, Table 2, Table 3, Table 4 and Table 5.)

Placed in

Asset Service Basis

Machinery September 12 $ 2,270,000

Computer equipment February 10 263,000

Furniture April 2 880,000

Total $ 3,413,000

a. What is the maximum amount of §179 expense TDW may deduct for 2020?

Answer 1

Section 179 of the IRS Code was enacted to help small businesses by allowing them to take a depreciation deduction for certain assets (capital expenditures) in one year, rather than depreciating them over a longer period of time. Taking a deduction on an asset in its first year is called a "Section 179 deduction." You can see that there is a benefit to taking the full deduction for the cost of the item immediately, rather than being required to spread out the deduction over the item's useful life.

There are annual limits on the amount of Section 179 Deductions. The limits are:

• -$1 million maximum on individual items of new and used equipment and purchased (off-the-shelf) computer software.
• -Your business can spend up to a maximum of $2.5 million on Section 179 equipment. The deduction is reduced above this amount.

If you deduct only part of the cost of qualifying property as a section 179 deduction, you can generally depreciate the cost you do not deduct. This means that you can spread out the remaining amount over the life of the property.

Maximum amount of 179 expense TDW may deduct for-
			Basis	Max amount allowed
		Machinery	2,270,000.00	1,000,000.00
		Computer Equipment	263,000.00	263,000.00
		Furniture	880,000.00	880,000.00
		Total	3,413,000.00	2,143,000.00

Maximum total depreciation, including §179 expense-

Depreciation on remaining amount of machinery (taking recovery period 10 years) that is not allowed as Section 179 expense deduction		Amount
	=1270000*0.1*110/365	38,273.97
Sec 179 expense deduction as per calculation above		2,143,000.00
	2,181,273.97

Calculation of Maximum Depreciation for 2020:

Description	Amount	Explanation
(1) Property placed in service in 2020	3413000	Total qualified property
(2) Threshold for §179 phase-out	2500000	2020 amount [§179(b)(2)]
(3) Phase-out of maximum §179 expense	913000	(1) – (2) (permanently disallowed)
(4) Maximum 179 expense before phase-out	1000000	2020 amount [§179(b)(1)]
(5) Phase-out of maximum §179 expense	913000	From (3)
(6) Maximum §179 expense after phase-out	$87,000	(4) – (5)

Asset	Original Basis	§179Expense	Remaining Basis	Rate	Depreciation Expense
Machinery (7-year)	2270000	87000	2183000	10.71%	233799
Computer Equipment (5- year)	263000		266575	35.00%	92164
Furniture (7 year)	880000		884675	17.85%	157156
§179 Expense		86000
Total cost recovery	$569,119

Therefore,

Maximum depreciation expense for 2020 = $569,119