Colleen operates a business as a sole proprietorship. She purchased a computer for $10,000 last year. The computer is five-year recovery property for MACRS purposes and is depreciated under the regular MACRS rules. This year, Colleen incorporates the business and transfers the computer to the new corporation on July 20. The depreciation on the computer for this year allocable to the sole proprietorship is
A)$1,868.
B)$1,600.
C)$1,333.
D)$500.

Question

Quizplus · Accepted Answer

Since the transfer occurred on July 20, Colleen owned the computer for half of the year (July 20 - December 31). Using the MACRS depreciation table for 5-year property, the percentage for half a year is 20%. Therefore, the depreciation for this year allocable to the sole proprietorship is $10,000 x 20% = $2,000.

However, since the business was transferred to a corporation, Colleen cannot continue to claim the depreciation. The corporation must start its own depreciation schedule under MACRS rules. Therefore, Colleen must recognize a gain of $10,000 - $2,000 = $8,000 as a result of the transfer.

Colleen Operates a Business as a Sole Proprietorship