On July 1, 2013, Rex purchases a new automobile for $40,000. He uses the car 80%

Question

On July 1, 2013, Rex purchases a new automobile for $40,000. He uses the car 80% for business and drives the car as follows: 8,000 miles in 2013, 19,000 miles in 2014, 20,000 miles in 2015, and 15,000 miles in 2016.

Determine Rex’s basis in the business portion of the auto as of January 1, 2017, under the following assumptions:

a. Rex uses the automatic mileage method.

b. Rex uses the actual cost method. [Assume that no § 179 expensing is claimed and that 200% declining-balance cost recovery with the half-year convention is used—see Chapter 8. The recovery limitation for an auto placed in service in 2013 is as follows: $3,160 (first year), $5,100 (second year), $3,050 (third year), and $1,875 (fourth year).]

Explanation / Answer

Rex a. Rex uses the automatic mileage method. Rex’s adjusted basis is determined as follows: Cost of automobile 40000 Less depreciation (under automatic mileage method): 2013 (8,000 miles × 80% × 21 cents) = -1344 2014 (19,000 miles × 80% × 23 cents) = -3496 2015 (20,000 miles × 80% × 22 cents) = -3520 Adjusted basis of auto on 1/1/16 31640 b. Rex uses the actual cost method. Cost of automobile 40000 Less depreciation (allowed under actual operating cost -8488 method—see below*) Adjusted basis of auto on 1/1/16 31512 Depreciation Allowed 2013 40000 x 20% x 80% = 6400 3160 * 0.8 = 2528 2014 40000 x 32% x 80% = 10240 5100 x 0.8 =4080 2015 40000 x 19.2 % x 80% = 6144 3050 x 80% = 2440 Total depreciation allowed = 2528 + 4080 + 2440 = 9048

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