Question

On June 1, 2018, Cork Oak Corporation purchased a passenger automobile for 100 percent use in its business. The auto, with a cost basis of $22,000, has a 5-year recovery period.. How much depreciation should be taken for 2018, assuming Cork Oak Corporation uses the accelerated depreciation method under MACRS but does not choose to make the election to expense or take bonus depreciation?

Answer 1

Calculation of depreciation under MACRS depreciation method

The formula for calculating MACRS Depreciation is as follows

(Cost of the assets * Depreciation rate )

To calculate depreciation using MACRS, we need the following info

1. The property classification of your asset
2. The cost basis of the asset
3. The convention
4. The depreciation rate as per the table

As per the IRS PUB 946 there is a table for calculating the depreciation (It is attached in this answer)

The property classification as per this method is described below

3 Year property - Tractor units and horses over 2 years old

5-year property - Cars, taxis, buses, trucks, computers, office equipment (computers, monitor, calculators, copiers), research equipment, cattle

7-year property - Office furniture and fixtures such as desks, files and safes

So the passenger auto mobile is under 5 - year property

Then next step is find out the cost . As per question cost is $ 22,000. Then next is convention. The convention establishes when the recovery period (useful life) of an asset begins and end. There are 3 types of conventions

• Mid-month – This convention applies to nonresidential real property, residential real property, and any railroad grading or tunnel bore. If your property does not fall into one of these categories, then the mid-month convention does not apply.The mid-month convention assumes that you placed the property in service or stopped using it for your business in the middle of the month.
• Mid-quarter – The mid-quarter convention assumes that you placed property into service or disposed of the property at the midpoint of that quarter.
• Half-year – Use this convention if neither the mid-month convention nor the mid-quarter convention apply. The half-year convention treats all property as if it were placed in service or disposed of at the midpoint of the year. This means that your tax deduction is limited to 6 months in the year that you placed the property in service and the year that it is disposed of.

As per this case the asset is purchased on June 01, 2018 and the automobile  is 5 year property that was placed into service in the second  quarter of the year (June). It does not qualify for the mid-month convention because it is not nonresidential real property, residential real property or a railroad grading or tunnel bore.

It does not qualify for the mid-quarter convention because there was no property purchased in the last quarter of the year. Therefore, we will use the half-year convention which means that depreciation expense for the first year and the year the automobile is disposed of will be calculated at 6 months regardless when the automobile was placed into service. Using the rates from Table A-1 for 5 year property gives us a depreciation rate of 20.00% for year 1 for the automobile. So the depreciation for the year 2018 is below.

$ 22,000 *20% = $4,400.00

Table as per IRS PUB 946