Nestor Nerd paid $4,000 to purchase various computer applications software for his sole proprietorship, Nerd01 on April 1, 2020. Nerd01 has a December 31 year end and has been operating for 3 years. What is the maximum tax deduction that Nerd01 can claim on the software for the current year?
A)$1,100
B)$1,500
C)$2,000
D)$4,000

Question

Quizplus · Accepted Answer

Since the software is considered an intangible asset, it must be amortized (spread out) over a period of time. The length of time over which you amortize an intangible asset depends on the asset itself. Generally, computer software is amortized over a 36-month period, using the straight-line method. Therefore, the maximum tax deduction that Nerd01 can claim on the software for the current year is $2,000, which is the amount of the purchase price ($4,000) divided by the remaining 33 months (April through December of the current year plus all of the next 3 years).

Nestor Nerd Paid $4,000 to Purchase Various Computer Applications Software