Barry purchased a used business asset (seven-year property) on September 30, 2019, at a cost of $200,000. This is the only asset he purchased during the year. Barry did not elect to expense any of the asset under § 179, did not claim additional first-year depreciation, and did not elect straight-line cost recovery. Barry sold the asset on July 17,2020. Determine the cost recovery deduction for 2020.
A) $19,133
B) $24,490
C) $34,438
D) $55,100

Question

Quizplus · Accepted Answer

For the year 2020, the cost recovery deduction for seven-year property, using the Modified Accelerated Cost Recovery System (MACRS) and the half-year convention (since the asset was not in service for the entire year), is calculated based on the property's recovery period. In the first year (2019), Barry would have taken a deduction based on the half-year convention. For 2020, the second year in the recovery period, the MACRS table for seven-year property indicates a deduction rate of 24.49%. Since Barry did not elect § 179, additional first-year depreciation, or straight-line depreciation, the deduction is simply 24.49% of the asset's cost, $200,000, which equals $48,980. However, because Barry sold the asset in July, he must prorate the deduction for the portion of the year the asset was in use. From January to July is 6.5 months, which is approximately 54.17% of the year (6.5/12). Therefore, the deduction for 2020 is 54.17% of $48,980, which is approximately $26,537. This calculation does not directly match any of the provided options, indicating a need to reassess the calculation based on the provided options and the standard approach to MACRS depreciation for a partial year of disposition.Given the discrepancy in the calculation above and the provided options, the correct approach under MACRS for a partial year of disposition typically involves taking the full year's depreciation into account, as the half-year convention applies in both the year of acquisition and the year of disposition. However, without the exact MACRS percentage for the second year readily aligning with the calculation, and considering the options provided, the closest and most appropriate selection based on standard MACRS rules and the information given would be to select the option that aligns with typical MACRS depreciation percentages for the second year of a seven-year property's recovery period. Reevaluating the response based on the standard approach and the options provided:The correct answer is based on the standard MACRS depreciation schedule for seven-year property, which would typically be applied without specific adjustments for partial year disposition beyond the half-year convention already accounted for in the first and last year of service. Given the options and the typical approach to MACRS without additional adjustments for a mid-year sale beyond what's standard, the explanation aimed to align with expected MACRS calculations but may have overcomplicated the scenario based on the asset's sale. The focus should be on the standard MACRS deduction for the full second year under the assumption provided in the options, which suggests a straightforward application of the MACRS percentage for the second year of depreciation for seven-year property.

Barry Purchased a Used Business Asset (Seven-Year Property) on September