Pat purchased a used five-year class asset on March 15, 2018, for $60,000. He did not elect § 179 expensing. Determine the cost recovery deduction for 2018 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 class life for a five-year class asset is six years, and the cost recovery method used is MACRS. 
Using the MACRS depreciation rates for a five-year class asset, the deduction for the first year (2018) is 20% of the cost, which is $12,000. However, since Pat did not elect § 179 expensing, the deduction must be reduced by the bonus depreciation percentage, which is 40% for property placed in service in 2018. 
So, the cost recovery deduction for 2018 for earnings and profits purposes is $12,000 x (1 - 40%) = $7,200. 
However, since Pat purchased the asset on March 15, 2018, the deduction is prorated based on the number of months the asset was in service. 
The asset was in service for 9.5 months in 2018 (March 15 to December 31), so the prorated deduction is $7,200 x 9.5/12 = $5,700. 
Therefore, the correct answer is C) $6,000.

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