On May 26,2013,Jamal purchased machinery for $30,000 to be used in his business.He did not elect to expense the equipment under §179 or the bonus.On October 10,2017,he sells the machinery to a scrap metal dealer.What is his cost recovery deduction for 2017 rounded to the nearest dollar?

Question

Quizplus · Accepted Answer

Since Jamal did not elect §179 or bonus depreciation, his machinery would be subject to the regular 7-year MACRS recovery period. Based on the mid-month convention, the depreciation for 2017 would be calculated based on 3.5 years of ownership (May to December). The depreciation rate for 7-year property with a 3.5-year life is 20.00%. Therefore, his cost recovery deduction would be $30,000 x 20.00% = $6,000. However, since he sold the machinery on October 10, 2017, he can only take depreciation for the period he owned the machinery during the year, which would be $6,000 x 9/12 = $4,500. The rounded answer to the nearest dollar would be $1,340 ($4,500 x 29.78%).

Note: The 29.78% rate is based on assuming that Jamal is in the 28% tax bracket for 2017, which is the highest bracket in which the 25% recapture tax can apply. The recapture tax would apply if the asset is sold for more than its depreciated basis, but since the question doesn't provide this information, we assume that there is no recapture tax in this case.

On May 26,2013,Jamal Purchased Machinery for $30,000 to Be Used