On March 3,2013,Craig bought a business-use vehicle for $20,000.He used the vehicle for three years and properly deducted a total of $12,000 as depreciation expense during this period.At the end of 2016,Craig sells the vehicle for $7,500.Why is Craig's deductible loss $500?
I.Craig has already recovered $12,000 of his investment through the depreciation deduction.
II.The adjusted basis of the vehicle was $12,000 at the date of sale.
III.$7,500 of the adjusted basis was recovered because of the sale.
IV.The realized loss is recognized because it was incurred with business-use property.

Question

On March 3,2013,Craig bought a business-use vehicle for $20,000.He used the vehicle for three years and properly deducted a total of $12,000 as depreciation expense during this period.At the end of 2016,Craig sells the vehicle for $7,500.Why is Craig's deductible loss $500?
I.Craig has already recovered $12,000 of his investment through the depreciation deduction.
II.The adjusted basis of the vehicle was $12,000 at the date of sale.
III.$7,500 of the adjusted basis was recovered because of the sale.
IV.The realized loss is recognized because it was incurred with business-use property.
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Quizplus · Accepted Answer

Statement I is correct because Craig has already deducted $12,000 as depreciation expense, which means he has recovered $12,000 of his investment in the vehicle.
Statement III is correct because the adjusted basis of the vehicle was $12,000 at the time of sale ($20,000 original cost - $12,000 in depreciation deductions).
Statement IV is correct because the loss is recognized because it was incurred with business-use property. 
Therefore, the deductible loss is $500, which is the difference between the adjusted basis of $12,000 and the sale price of $7,500. Statement II is not relevant to the calculation of the deductible loss.

On March 3,2013,Craig Bought a Business-Use Vehicle for $20,000