Question

Weston acquires a new office machine (7-year class asset) on August 2, 2017, for $75,000. This is the only asset Weston acquired during the year. He does not elect immediate expensing under § 179. He claims the maximum additional first-year depreciation deduction. On September 15, 2018, Weston sells the machine. Determine Weston’s cost recovery for 2017. Determine Weston’s cost recovery for 2018.

Answer 1

In 2017, Weston's cost recovery includes 50% bonus depreciation on the new office machine and half-year depreciation, totaling $40,178.125. For 2018, he is entitled to half-year depreciation amounting to $9,183.75 before selling the asset.

Step-by-step explanation:

Weston's cost recovery for the office machine in 2017 can be determined based on the Modified Accelerated Cost Recovery System (MACRS). Since the machine is a 7-year class asset and was placed in service in 2017, it is eligible for the half-year convention for depreciation. Additionally, because Weston claims the maximum additional first-year depreciation deduction, also known as bonus depreciation, this needs to be factored in. The tax code allows for 50% bonus depreciation for assets placed in service in 2017. Therefore, for a $75,000 machine, the first year depreciation would be (50% of $75,000) $37,500 plus (14.29% of the remaining half, which is $18,750) $2,678.125, totaling $40,178.125 for 2017.

For 2018, since the machine was sold on September 15, it is eligible for the half-year convention again. Thus, only half of the standard annual depreciation should be claimed. The depreciation rate for the second year is 24.49% of the depreciable basis ($37,500, the remaining half after bonus depreciation). Therefore, Weston's recovery for 2018 before the sale would be (24.49% of $37,500) $9,183.75 for the part of the year he owned the asset.