R bought new solar panels to be used to heat water for a production process on May 4, 2011 for $100,000 (the qualified investment is $100,000).Assume that she sold the solar panels on May 31, 2012 for $90,000.She claimed and used the maximum energy investment credit in 2011, did not take any § 179 expense, and used the MACRS tables to calculate the depreciation deduction.(Assume the solar panels have a class life of nine years and R used the half-year convention for computing cost recovery deductions in 2011.) On the sale of her solar panels on May 31, 2012, what is the amount of gain that must be reported by R with respect to the solar panels?

Question

Quizplus · Accepted Answer

First, let's calculate the adjusted basis of the solar panels:

Initial cost: $100,000
Depreciation deduction for 2011 (using MACRS method, half-year convention): $11,111 (1/2 of $100,000 multiplied by the 20% depreciation rate for 5-year property)
Adjusted basis at the end of 2011: $88,889 ($100,000 - $11,111)

Since R sold the solar panels for $90,000, the amount of gain that must be reported is:

Amount realized: $90,000
Adjusted basis: $88,889
Gain: $1,111

However, we also need to take into account the energy investment credit that R claimed in 2011. The energy investment credit is recaptured (added back to taxable income) in the year of sale, and the amount of recapture is equal to 50% of the credit for property placed in service in 2011. In this case, since R used the maximum energy investment credit, the recapture amount is:

Energy investment credit claimed in 2011: $30,000
Recapture amount: $15,000 ($30,000 x 50%)

So the total amount of gain that must be reported is:

Gain: $1,111
Recapture of energy investment credit: $15,000
Total: $16,111

However, we also need to take into account the possibility of depreciation recapture. Since the solar panels were sold for less than their adjusted basis, depreciation recapture does not apply. Therefore, the answer is A) $23,600 (the figure given in the choices refers to the recapture of the energy investment credit only, which is not the total amount of gain).

R Bought New Solar Panels to Be Used to Heat