Question

Assume that Ernesto purchased a digital camera on July 10 of year 1 for $3,000. In year 1, 80 percent of his camera usage was for his business and 20 percent was for personal photography activities. This was the only asset he placed in service during year 1. Ignoring any potential §179 expense and bonus depreciation, answer the questions for each of the following alternative scenarios

a. What is Ernesto’s depreciation deduction for the camera in year 1?

b. What would be Ernesto’s depreciation deduction for the camera in year 2 if his year 2 usage was 75 percent business and 25 percent for personal use?

c. What would be Ernesto’s depreciation deduction for the camera in year 2 if his year 2 usage was 45 percent business and 55 percent for personal use?

d. What would be Ernesto’s depreciation deduction for the camera in year 2 if his year 2 usage was 30 percent business and 70 percent for personal use?

Answer 1

ANSWER

a)

Determine the depreciation: Description Amount ($) Explanation (1) Original basis of the camera 3.000 (2) MACRS depreciation rate 20% 5 year recovery period, half-year convention (3) Full MACRS depreciation 600 (1)x(2) (4) % use in business 80% Depreciation for business 480 (3) (4) Thus, the depreciation on the camera for year 1 is $480

b)

Determine the depreciation for year 2: Amount Description Explanation (1) Original basis of the camera 3,000 (2) MACRS depreciation rate 32% 5 year recovery period, half-year convention for year2 (3) Full MACRS depreciation 960 (1)(2) (4) % use in business 75% Depreciation for business 720 (3)x(4) Thus, the depreciation on the camera for year 2 is $720

c)

Hear, Mr. E must use the straight-line method to determine depreciation, because he has used the camera in the business less than 50% Amount Description Explanation (1) Straight-line depreciation in current year 270 $3,000 x 45% business use 5 years (2) Prior year straight-line depreciation 240 $3,000 years x80% business use (3) Prior year accelerated depreciation 480 Calculated in part a (4) Excess accelerated depreciation 240 [ (3) - (2) Current year depreciation deduction 30 (1)-(4) Thus, the depreciation deduction for year 2 (45% business usage) is S30

d)

Hear, Mr. E must use the straight-line method to determine depreciation, because he has used the computer in the business less than 50%.

Amount Description Explanation (1) Straight-line depreciation in current year 180 $3,000 -x30% business use 5 years $3,000 1 (2) Prior year straight-line depreciation 240 x years x 80% business use 5 years 2 years X80% (3) Prior year accelerated depreciation 480 Calculated in part a (4) Excess accelerated depreciation Current year Income (60) (1)-(4). The excess accelerated depreciation is higher than the depreciation for the current year under straight-line method by $60. Thus, the negative value of $60 will be the income for the current year. Thus, in year 2 Mr. E will not get any depreciation deduction if he uses the camera less than 30%

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