Pat purchased a used five-year class asset on March 15,2010,for $60,000.He did not elect § 179 expensing.Determine the cost recovery deduction for 2010 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

For earnings and profits purposes, the cost recovery deduction for a five-year class asset is determined using the 200% declining balance method, which means the depreciation rate is twice the straight-line rate of 20%, or 40%.

For 2010, Pat can claim half-year depreciation since he placed the asset in service in the middle of the year. Therefore, the deduction is calculated as follows:

($60,000 x 40% x 0.5) = $12,000

However, the maximum cost recovery deduction for earnings and profits purposes is limited to 20% of the property's adjusted basis. In this case, the adjusted basis is the same as the purchase price, so the maximum deduction is:

$60,000 x 20% = $12,000

Therefore, Pat can deduct up to $6,000 for cost recovery in 2010 for earnings and profits purposes.

Pat Purchased a Used Five-Year Class Asset on March 15,2010,for