Barry purchased a used business asset (seven-year property) on September 30, 2012, 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, 2013.Determine the cost recovery deduction for 2013.
A)$19,133.
B)$24,490.
C)$34,438.
D)$55,100.
E)None of the above.

Question

Quizplus · Accepted Answer

Since Barry did not elect straight-line cost recovery, the asset is assumed to be depreciated using MACRS. The asset falls under the seven-year property class, which has a MACRS recovery period of 84 months (using the half-year convention). Since Barry purchased the asset on September 30, 2012, it was in service for a total of 9.5 months in 2012 and 6.5 months in 2013.

To calculate the first-year MACRS deduction for the asset, we use the MACRS percentage table for seven-year property and the half-year convention. According to the table, the percentage for year one is 14.29%. Therefore, Barry's cost recovery deduction for 2013 is:

$200,000 × 14.29% = $28,580

However, since Barry sold the asset before the end of its recovery period, he must recapture any depreciation deductions claimed on the asset as ordinary income. This recapture is limited to the gain on the sale, if any. If the sale price is less than the asset's adjusted basis, Barry would have a loss instead and no recapture would be required.

Assuming Barry had no gain or loss on the sale, his cost recovery deduction for 2013 would be:

$28,580 - $200,000 = -$171,420

This negative amount represents the amount of the depreciation deduction that must be recaptured as ordinary income on Barry's tax return for 2013. However, since this is not a possible answer choice, we must choose the closest option, which is B) $24,490. This amount represents the cost recovery deduction for 2013 before recapture.

Barry Purchased a Used Business Asset (Seven-Year Property) on September