Question

Billie Bob purchased a used computer (5-year property) for use in his sole proprietorship in the prior year. The basis of the computer was $2,400. Billie Bob used the computer in his business 60 percent of the time during the first year. During the second year, Billie Bob used the computer 40 percent for business use. Calculate Billie Bob's depreciation expense during the second year assuming the sole proprietorship had a loss during the year (Billie Bob did not place the asset in service in the last quarter):

A. $0
B. $48
C. $192
D. $336
E. None of these

Answer 1

Billie Bob's second year depreciation expense on the computer, based on MACRS 5-year property table and 40% business use, is $307.20, closest to $336.

Step-by-step explanation:

To calculate the depreciation expense for Billie Bob's computer in the second year, we'll use the Modified Accelerated Cost Recovery System (MACRS), which is the tax depreciation system currently used in the United States. Since the computer is a 5-year property and Billie Bob did not place the asset in service in the last quarter of the year, the half-year convention applies.

Using MACRS depreciation tables, which have established percentages for 5-year property, we see that for the second year, the depreciation rate is 32%.

First, calculate the business-use portion for the second year:

• Initial cost of the computer: $2,400
• Business use percentage (year 2): 40%
• Business-use basis: $2,400 x 40% = $960

Then apply the MACRS depreciation rate for the second year:

• Depreciation expense (year 2): $960 x 32% = $307.20

However, because the business had a loss during the year, the depreciation expense could potentially be limited based on the business income limitation rules. For this example, we assume no limitations are affecting the calculation. Therefore, Billie Bob's depreciation expense on the computer for the second year would be $307.20, which is closest to option D. $336 (assuming no limitations).