Sid purchased an automobile for personal
use on January 18, 2011 for $10,000. On January 1, 2015, Sid starts a small business and
begins to use the automobile exclusively in the business. The automobile’s FMV on this
date is $6,000. MACRS depreciation deductions are based on a 5-year recovery period.
. What is the automobile’s basis for depreciation when converted to business use in 2015?
. Assuming Sid does not elect Sec. 179 expensing, what is Sid’s depreciation deduction
in 2015?

Part A. $1200

Part B. $1200  

Explanation:

Part A.

Under MACRS rules, the depreciation rate for the 5 year recovery period asset would be:

Year 1    20%

Year 2   32%

Year 3   19.2%

Year 4   11.52%

Year 5   11.52%

Year 6   5.76%

This means that the first year MACRS depreciation deduction would be 20% which is $1200 ($6000 * 20%).

Part B.

If Sid does not elect Section 179 expensing then the depreciation would be calculated using straight line basis.

The depreciation would be:

Depreciaiton Expense = $6000 / 5 Years life   = $1200

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