Barry purchased a used business asset (seven-year property)on September 30,2011,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,nor did he elect straight-line cost recovery.Barry sold the asset on July 17,2012.Determine the cost recovery deduction for 2012.

Question

Quizplus · Accepted Answer

Since Barry did not elect a specific cost recovery method, the default method is MACRS (Modified Accelerated Cost Recovery System).

The asset is considered seven-year property, and we need to determine the MACRS depreciation rate for year 1 of the asset's life. Since the asset was purchased and placed in service in the second half of the year, the half-year convention applies, and the depreciation rate is 14.29%.

Thus, the cost recovery deduction for 2012 (the year of sale) is calculated as follows:

Adjusted basis (original cost - first year depreciation) = $200,000 - ($200,000 x 14.29%) = $171,420

MACRS depreciation for year 2 (the year of sale) = $171,420 x 24.49% = $41,938

Therefore, the cost recovery deduction for 2012 is $41,938.

Barry Purchased a Used Business Asset (Seven-Year Property)on September 30,2011,at