Question

On November 18 of Year 1, Javier purchased a building, including the land it was on, to assemble his new equipment. The total cost of the purchase was $1,500,500; $363,000 was allocated to the basis of the land and the remaining $1,137,500 was allocated to the basis of the building. (Use MACRS Table 1, Table 2, Table 3, Table 4 and Table 5.) (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.)
a. Using MACRS, what is Javier's depreciation deduction on the building for Years 1 through 3?
b. What would be the Year 3 depreciation deduction if the building was sold on January 22 of Year 3?
c. Answer the question in part (a), except assume the building was purchased and placed in service on October 13 instead of November 18.
d. Answer the question in part (a), except assume that the building is residential property.
e. What would be the depreciation for 2018, 2019, and 2020 if the property were nonresidential property purchased and placed in service November 18, 2001 (assume the same original basis)?

Answer 1

Answer:

Check the explanation

Explanation:

Year 1 - 8.33%

Year 2 - 61.11%

Year 3 - 20.37%

Year 4 - 10.19%

Now according to the Mid quarter convention if the asset was service in the mid of the quarter then following percentage of the depreciation will be allowed as deduction:

Q-1 - 87.5%

Q-2 - 62.5%

Q-3 - 37.5%

Q-4 - 12.5%

Similarly if the asset is sold during the quarter following depreciation are allowed:

Q-1 - 12.5%

Q-2 - 37.5%

Q-3 - 62.5%

Q-4 - 87.5%

Part (a) Therefore since the asset was placed on Nov 18 the depreciation for the years are:

Year                    Depreciation allowed             Depreciation Amount ($)

1                    (8.33% of $ 1,137,500)*12.5%                   $ 11,844.22

2                          61.11% of $ 1,137,500                         $695,126.25

3                         20.37% of $ 1,137,500                        $231,708.75

                                             Total                                  $938,679.22

Part (b)

Depreciation for Year 3 if asset sold on Jan 22 = $ 1,137,500 * 20.37%*12.5% = $ 28,963.59

Part (c)

If the asset was placed on Oct 13 instead of Nov 18, there would have been no change in the answer because Oct and November both belong to Fourth Quarter, hence no change in the answer posted under