Hazel purchased a new business asset (five-year asset) on September 30, 2019, at a cost of $100,000.On October 4, 2019, she placed the asset in service.This was the only asset she placed in service in 2019.Hazel did not elect
§ 179 or additional first-year depreciation.On August 20, 2020, Hazel sold the asset.Determine the cost recovery for 2020 for the asset.
A)$14,250
B)$19,000
C)$23,750
D)$38,000

Question

Quizplus · Accepted Answer

Since Hazel did not elect § 179 or additional first-year depreciation, the asset is depreciated using the modified accelerated cost recovery system (MACRS) over a five-year recovery period. Since the asset was placed in service on October 4, 2019, it is considered to have been placed in service in the middle of the tax year, and therefore, the mid-month convention applies. The depreciation for the second year (2020) is calculated using the half-year convention, as the asset was owned for more than half of the year. Therefore, the depreciation for 2020 would be ($100,000 * 32%) / 2 = $16,000. However, since the asset was sold on August 20, 2020, Hazel would only be allowed to take depreciation up to the date of disposition, which is 233 days (from October 4, 2019, to August 20, 2020) out of a 365-day year. Hence, the cost recovery for 2020 would be ($16,000 * 233/365) = $10,250. Adding the depreciation from 2019, Hazel's total cost recovery for the asset is ($100,000 * 20%) + $10,250 = $23,750. Therefore, the correct answer is option (C).

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