Question

Vince purchased a used five-year class asset on March 15, 2015, for $60,000. He did not elect § 179 expensing. Determine the cost recovery deduction for 2015 for earnings and profits purposes.

1) $3,000
2) $12,000
3) $6,000
4) $2,000
5) None of these choices are correct.

Answer 1

Vince's cost recovery deduction for a five-year class asset that he purchased on March 15, 2015, for $60,000 and under MACRS, without electing § 179 expensing, would be $6,000 for the year 2015 due to the half-year convention.

Step-by-step explanation:

Assuming that the asset Vince purchased is for business use and falls under the Modified Accelerated Cost Recovery System (MACRS), which is a method of depreciation for tax purposes in the United States, we need to calculate the cost recovery deduction for 2015. Under the MACRS, a five-year class asset has a different percentage of cost that can be deducted each year. For the first year, this percentage is typically 20%. However, since Vince purchased the asset partway through the year, the deduction for the first year would be prorated based on the month of purchase.

For property placed in service in any month other than January, the half-year convention applies, which assumes the property was in service for half the year, regardless of when it was actually purchased during the year. This means that the deduction for the first year is halved, resulting in a 10% deduction for a five-year class asset. Therefore, Vince's cost recovery deduction for 2015 would be 10% of $60,000, which equals $6,000.