Sanjuro Corporation (a calendar-year corporation) purchased and placed in servic

Question

Sanjuro Corporation (a calendar-year corporation) purchased and placed in service the following assets during 2017: Date Acquired Asset Description Cost February 18 Warehouse Building $2,450,000 June 2 Used Automobile 30,000 August 18 New Computer Equipment 220,000 September 20 New Machinery 1,050,000 December 15 Used Office Equipment 885,000 All assets are used 100% for business use. The warehouse building does not include the cost of the land on which it is located which was an additional $1,000,000. The corporation has $3,000,000 income from operations before calculating depreciation deductions. Sanjuro Corporation made whatever elections were necessary to maximize its overall depreciation deduction for 2017. What is Sanjuro Corporation’s maximum deduction for cost recovery for the automobile for 2019? a. $1,875 b. $2,950 c. $3,050 d. $5,100

Explanation / Answer

Since the assets are eing used 100% for business purpose and vehicles are considered as five year property, we will used the MACRS tables from IRS to calculate depreciation. However there are certain annual limits on depreciation expense allowed as per IRS and the lower of the two will be considered for deprecation

Using MACRS rates as per half year convention, the following are the rates

The following will be the depreciation:

In 2022, Computed depreciation is lower than IRS Limit, hence computed depreciation is taken

From 2023, it can take up to the IRS limit of $1,875 per year until it has depreciated the full cost basis of $30,000. To allow for full depreciation of the cost basis, the recovery period is extended to 14 years

Hence the maximum deduction for 2019 is $3,050.

Answer c is correct

Year MACRS rates for five years IRS Limits in depreciation Remarks 1 20% 3160 Since it is used car bonus depreciation will not apply 2 32% 5100 3 19.20% 3050 4 11.52% 1875 After 4th year and thereafter the limits are same 5 11.52% 1875 6 5.76% 1875

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