Hazel purchased a new business asset (five-year asset) on September 30, 2014, at a cost of $100,000. On October 4, 2014, Hazel placed the asset in service. This was the only asset Hazel placed in service in 2014. Hazel did not elect § 179 or additional firstyear depreciation if available. On August 20, 2015, Hazel sold the asset. Determine the cost recovery for 2015 for the asset.

Question

Hazel purchased a new business asset (five-year asset) on September 30, 2014, at a cost of $100,000. On October 4, 2014, Hazel placed the asset in service. This was the only asset Hazel placed in service in 2014. Hazel did not elect § 179 or additional first­year depreciation if available. On August 20, 2015, Hazel sold the asset. Determine the cost recovery for 2015 for the asset.

Quizplus · Accepted Answer

The asset is a five-year asset, so the MACRS recovery period is five years using the 200% declining balance method. The half-year convention is also used in the year of disposition. Since the asset was placed in service on October 4, 2014, it is assumed it was used for 3 months in 2014 (October, November, December). The depreciation for 2015 is calculated as follows:

- Cost basis: $100,000
- 2014 depreciation (3 months): ($100,000 x 20%) x 25% (half-year convention) = $5,000
- Remaining basis: $95,000
- 2015 depreciation: ($95,000 x 32%) = $30,400
- Recaptured depreciation: $100,000 - $95,000 = $5,000

Therefore, the total cost recovery for 2015 is $30,400 + $5,000 (recaptured depreciation) = $35,400. However, since Hazel sold the asset on August 20, 2015, only 8 months of depreciation are allowed in the year of disposition. Therefore, the cost recovery for 2015 is $35,400 x (8/12) = $23,750.

Hazel Purchased a New Business Asset (Five-Year Asset) on September