Ferelli Inc. is a calendar year taxpayer. On September 1, Ferelli signed a 24-month lease on 3,600 square feet of commercial office space and paid a $3,240 fee to the agent who located the space and negotiated the lease. Ferelli paid $5,900 to install new overhead lighting in the office space. The lighting is 7-year recovery property. Compute Ferelli's current-year cost recovery deduction with respect to the $9,140 costs associated with the office space. Use Table 7-2.

Question

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First, we need to determine the appropriate recovery period for the leasehold improvements (overhead lighting), which is 7 years.
Next, we need to multiply the total cost of $9,140 by the applicable percentage from Table 7-2 for 7-year property placed in service in the current year, which is 15.03%.

$9,140 x 15.03% = $1,372.32

Finally, we need to add the cost recovery deduction for the leasehold improvements to the deduction for the leasehold itself. Since the lease is a 24-month lease and was signed on September 1, only 4 months of the lease are considered placed in service in the current year (September-December). Therefore, the deduction for the leasehold is calculated as follows:

($3,240/24 months) x 4 months = $540

$540 + $1,372.32 = $1,912.32

However, since this is a calendar year taxpayer, we need to prorate this amount based on the number of months in the tax year that the leasehold improvements were in service (i.e. September-December).

$1,912.32 x (4/12) = $637.44

Therefore, the current-year cost recovery deduction for Ferelli Inc. is $637.44, which corresponds to answer choice D.