Hans purchased a new passenger automobile on August 17,2010,for $40,000.During the year the car was used 40% for business and 60% for personal use.Determine his cost recovery deduction for the car for 2010.
A)$500.
B)$1,000.
C)$1,224.
D)$1,500.
E)None of the above.

Question

Quizplus · Accepted Answer

The cost recovery deduction for a new passenger automobile is determined using the Modified Accelerated Cost Recovery System (MACRS) depreciation method. The MACRS depreciation method has a recovery period of five years for passenger automobiles.

Hans can only deduct the portion of the car's cost that is related to its business use.

Step 1: Determine the portion of the cost related to business use
40,000 x 40% = 16,000

Step 2: Determine the depreciation deduction using MACRS
The MACRS depreciation deduction for a five-year recovery period is 20% in Year 1.

16,000 x 20% = $3,200

Step 3: Determine the portion of the depreciation deduction related to 2010
Hans purchased the car on August 17, 2010. Assuming he used the car for business purposes on that date, he can claim 143/365 (or 39%) of the full year depreciation deduction.

3,200 x 39% = $1,248

Therefore, Hans' cost recovery deduction for the car for 2010 is $1,224. The best choice is C.

Hans Purchased a New Passenger Automobile on August 17,2010,for $40,000