On June 1,2013,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 take additional first-year depreciation.Determine the cost recovery deduction for 2013.
A)$1,776.
B)$1,836.
C)$6,696.
D)$11,160.
E)None of the above.

Question

Quizplus · Accepted Answer

The cost recovery deduction for 2013 is calculated as follows:

1. Determine the depreciable basis of the car:
$40,000 (original cost)

2. Determine the additional first-year depreciation:
Because the car was placed in service in 2013, James can take 50% bonus depreciation on the depreciable basis of the car. Therefore, the additional first-year depreciation is:
$40,000 x 50% = $20,000

3. Determine the adjusted basis of the car:
The adjusted basis of the car is the depreciable basis minus the additional first-year depreciation:
$40,000 - $20,000 = $20,000

4. Determine the business use percentage:
The business use percentage is 60%.

5. Determine the cost recovery deduction:
James will use the Modified Accelerated Cost Recovery System (MACRS) to depreciate the car. For 2013, the applicable MACRS depreciation method is the 5-year double declining balance method.
The cost recovery deduction is calculated as follows:

Year 1: Depreciation = ($20,000 x 60%) x 20% = $2,400
Year 2: Depreciation = ($20,000 - $2,400) x 60% x 32% = $3,155.20
Year 3: Depreciation = ($20,000 - $2,400 - $3,155.20) x 60% x 19.2% = $1,776.77
Year 4: Depreciation = ($20,000 - $2,400 - $3,155.20 - $1,776.77) x 60% x 11.52% = $1,066.07
Year 5: Depreciation = ($20,000 - $2,400 - $3,155.20 - $1,776.77 - $1,066.07) x 60% x 11.52% = $711.69

Therefore, the cost recovery deduction for 2013 is $1,776.77, which is closest to option C.

On June 1,2013,James Places in Service a New Automobile That