Pat purchased a used five-year class asset on March 15, 2019, for $60,000.He did not elect § 179 expensing. Determine the cost recovery deduction for 2019 for earnings and profits purposes.
A)$2,000
B)$3,000
C)$6,000
D)$12,000

Question

Quizplus · Accepted Answer

The asset is a five-year class asset, which means the cost recovery method is MACRS (Modified Accelerated Cost Recovery System). The MACRS deduction percentage for the first year for a five-year class asset is 20%.

$60,000 (cost of asset) x 20% (MACRS deduction percentage) = $12,000 (2019 cost recovery deduction)

However, for earnings and profits purposes, the cost recovery deduction is based on the straight-line method, which means the deduction is the same amount each year. To find the straight-line method deduction, you divide the cost of the asset by the recovery period (in this case, five years):

$60,000 (cost of asset) / 5 (recovery period) = $12,000 (straight-line method deduction)

Therefore, the cost recovery deduction for 2019 for earnings and profits purposes is $6,000 (half of the straight-line method deduction, because the asset was purchased on March 15th).

Pat Purchased a Used Five-Year Class Asset on March 15