Pat purchased a used five-year class asset on March 15, 2017, for $60,000. He did not elect § 179 expensing. Determine the cost recovery deduction for 2017 for earnings and profits purposes.
A)$2,000
B)$3,000
C)$6,000
D)$12,000
E)None of the above

Question

Quizplus · Accepted Answer

The asset is a five-year class asset, which means the MACRS depreciation method applies with the 200% declining balance method over a five-year recovery period. Placed in service in March, the property is only considered in service for half of the year. 
Using the half-year convention, the first year's depreciation would be calculated as:
Cost recovery deduction = (Cost of asset/Recovery period) x 1/2 year
= ($60,000/5) x 1/2
=$6,000 
However, for earnings and profits purposes, the cost recovery deduction is limited to 20% of the depreciable basis, which is $12,000 ($60,000 x 20%). Therefore, the cost recovery deduction for 2017 is $6,000, the lesser of the calculated deduction and the allowable deduction for earnings and profits purposes.

Pat Purchased a Used Five-Year Class Asset on March 15