Question

Modified Accelerated Cost Recovery System (MACRS), Listed Property, Limitation on Depreciation of Luxury Automobiles

(LO 8.2, 8.4, 8.5)
On September 14, 2020, Jay purchased a passenger automobile that is used 75 percent in his business. The automobile has a basis for depreciation purposes of $45,000, and Jay uses the accelerated method under MACRS. Jay does not elect to expense under section 179.
Click here to access the depreciation table and click here to access the annual automobile depreciation limitations.
Calculate Jay's depreciation deduction for 2020 assuming bonus depreciation.
$fill in the blank 1

Answer 1

Jay's depreciation deduction for the year 2020, assuming bonus depreciation and 75% business use of the automobile, would be $13,575.

Step-by-step explanation:

To calculate Jay's depreciation deduction for the year 2020 on a passenger automobile, we need to consider the Modified Accelerated Cost Recovery System (MACRS), the fact that the vehicle is listed property, the business use percentage, and the limitation on depreciation of luxury automobiles. Since Jay is using the vehicle 75% for business purposes, only 75% of the depreciation deduction will be considered for business use.

According to the IRS guidelines applicable for the year 2020, the first-year depreciation limit for a passenger automobile is $10,100 under the MACRS system, if bonus depreciation is claimed. With bonus depreciation, an additional amount is allowed, normally 100% for property placed in service after September 27, 2017, and before January 1, 2023. However, the luxury automobile depreciation limitations cap the maximum first-year depreciation deduction that can be taken.

Jay's maximum first-year depreciation, with 100% bonus depreciation for a luxury passenger automobile, would therefore be $18,100 ($10,100 maximum first-year depreciation plus $8,000 bonus depreciation). Since Jay's business use is only 75%, we multiply $18,100 by 75% to get his business-related depreciation deduction, which would be $13,575 ($18,100 × 75%).

Thus, Jay's depreciation deduction for the year 2020, assuming bonus depreciation, is $13,575.