On June 1, 2014, James places in service a new automobile that cost $40,000. The car is used 60% for business and 40% for personal use. (Assume this percentage is maintained for the life of the car.) James does not take additional first-year depreciation (if available). Determine the cost recovery deduction for 2014.

Question

Quizplus · Accepted Answer

The cost recovery deduction for 2014 can be calculated as follows:

Total cost = $40,000
Business use percentage = 60%
Business use cost = $40,000 x 60% = $24,000

The car is depreciated using the MACRS 5-year recovery period. The applicable percentage for the first year is 20%. However, since James did not take additional first-year depreciation, the applicable percentage for the first year is 0%.

Depreciation deduction for the first year = Business use cost x Applicable percentage = $24,000 x 0% = $0

Since no additional first-year depreciation is taken, the cost recovery deduction for 2014 is simply the regular depreciation deduction for the year, which is calculated by applying the applicable percentage to the remaining basis of the car.

Remaining basis = Total cost - Accumulated depreciation
Accumulated depreciation = $0 (since no depreciation was taken in 2014)
Remaining basis = $40,000 - $0 = $40,000

Depreciation deduction for the year = Remaining basis x Applicable percentage = $40,000 x 20% = $8,000

However, since only 60% of the car is used for business, the cost recovery deduction is only 60% of the depreciation deduction.

Cost recovery deduction for 2014 = Depreciation deduction x Business use percentage = $8,000 x 60% = $4,800

Therefore, the correct answer is B) $1,896.

On June 1, 2014, James Places in Service a New