Question

Tom purchased a 7-year asset for his business in February, 2020 for $4,500 and used the half-year convention for MACRS. He did not deduct any bonus depreciation. He sold the asset in April, 2023. How much depreciation will Tom deduct in 2023?

Answer 1

In 2023, Tom will deduct $450 in depreciation for the 7-year asset using the MACRS half-year standard without bonus depreciation.

The following is a step-by-step explanation:

1. Calculate the relevant MACRS depreciation rate: 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, 8.92%, 8.93%, and 4.46% for a 7-year property using the half-year pattern.

2. Determine the relevant year of depreciation: Tom sold the asset in April 2023, thus it is in the fourth year of depreciation (2020, 2021, 2022, and 2023).

3. Determine the depreciation amount for 2023: Because the asset cost is $4,500 and the 4th-year depreciation rate is 12.49%, the depreciation amount for 2023 is $4,500 * 12.49% = $562.05.

4. Use the half-year standard: Because Tom employed the half-year convention, he may deduct only half of the depreciation for the year of sale (2023). Thus, in 2023, the deductible depreciation will be $562.05 * 0.5 = $450.