Barry purchased a used business asset (seven-year property) on September 30, 2014, at a cost of $200,000. This is the only asset he purchased during the year. Barry did not elect to expense any of the asset under
§ 179, did not take additional first-year depreciation (if available), and did not elect straight-line cost recovery. Barry sold the asset on July 17, 2015. Determine the cost recovery deduction for 2015.

Question

Quizplus · Accepted Answer

Under MACRS, seven-year property is generally depreciated using the double-declining balance method. Barry did not elect straight-line cost recovery, so the rate is 14.29% (200% / 7 years) for 2015. Since Barry purchased the asset on September 30, 2014, he is treated as having placed it in service on October 1, 2014, and he can take a half-year of depreciation in 2014. Therefore, the depreciation deduction for 2015 is calculated as follows:
Cost basis = $200,000
Depreciable basis = $200,000
Year 1 depreciation = $200,000 × 14.29% = $28,580
Depreciation allowed in 2015 = $28,580 × 9/12 = $21,435
Since Barry sold the asset before the end of the year, he must recapture any excess depreciation as ordinary income. The excess depreciation for 2015 is calculated as follows:
Depreciation claimed in 2015 = $21,435
Allowable depreciation for 2015 (half-year convention) = $14,290
Excess depreciation = $7,145
Therefore, the cost recovery deduction for 2015 is $21,435, and Barry must recapture $7,145 of excess depreciation as ordinary income. The total deduction for 2015 is $21,435 - $7,145 = $14,290.

Barry Purchased a Used Business Asset (Seven-Year Property) on September