Question

If a used $35,000 automobile used 100% for business in the first year (2014) fails the 50% business usage test in the second year, no cost recovery will be recaptured.

a) True
b) False

Answer 1

The statement is false. If a vehicle's business usage drops below 50% in the second year, the IRS requires recapture of some of the tax benefits claimed in the first year.

Step-by-step explanation:

The question refers to the cost recovery system (depreciation) for business assets such as vehicles. If a $35,000 automobile is used 100% for business purposes in its first year, it would qualify for a specific depreciation deduction. However, the statement that no cost recovery will be recaptured if the vehicle fails the 50% business usage test in the subsequent year is false. Generally, if business usage drops below 50%, the IRS requires a portion of the deduction to be recaptured, or added back to income, so that the tax benefits previously claimed are adjusted. This recapture is based on the difference between the accelerated depreciation taken and the straight-line depreciation that would have applied.