On March 3, 2015, Craig bought a business-use vehicle for $20,000. He used the vehicle for three years and properly deducted a total of $12,000 as depreciation expense during this period. At the end of 2018, Craig sells the vehicle for $7,500. Why is Craig's deductible loss $500?
I.Craig has already recovered $12,000 of his investment through the depreciation deduction.
II.The adjusted basis of the vehicle was $12,000 at the date of sale.
III.$7,500 of the adjusted basis was recovered because of the sale.
IV.The realized loss is recognized because it was incurred with business-use property.

Question

On March 3, 2015, Craig bought a business-use vehicle for $20,000. He used the vehicle for three years and properly deducted a total of $12,000 as depreciation expense during this period. At the end of 2018, Craig sells the vehicle for $7,500. Why is Craig's deductible loss $500?
I.Craig has already recovered $12,000 of his investment through the depreciation deduction.
II.The adjusted basis of the vehicle was $12,000 at the date of sale.
III.$7,500 of the adjusted basis was recovered because of the sale.
IV.The realized loss is recognized because it was incurred with business-use property.
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Quizplus · Accepted Answer

Statement I is correct because Craig has already deducted $12,000 in depreciation expenses, which reduces the basis of the vehicle to $8,000 ($20,000 - $12,000).

Statement III is correct because the amount of the adjusted basis that is recovered through the sale is $7,500, which leaves a remaining adjusted basis of $500 ($8,000 - $7,500).

Statement IV is also correct because the realized loss is recognized as a deductible loss on Craig's tax return since it was incurred with business-use property.

Statement II is incorrect because the adjusted basis at the date of sale is $8,000, not $12,000. Therefore, the best choice is B.

On March 3, 2015, Craig Bought a Business-Use Vehicle for $20,000