Question

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Harris Corp. is a technology start-up currently in its second year of operations. The company didn’t purchase any assets this year but purchased the following assets in the prior year:

	Placed in
Asset	Service		Basis
Office equipment	August 14	$	14,800
Manufacturing equipment	April 15		116,000
Computer system	June 1		64,000
Total		$	194,800

Harris did not know depreciation was tax deductible until it hired an accountant this year and didn’t claim any depreciation deduction in its first year of operation. (Use MACRS Table 1 and Table 2.)

a. What is the maximum amount of depreciation deduction Harris Corp. can deduct in its second year of operation? (Leave no answer blank. Enter zero if applicable.)

b. What is the basis of the office equipment at the end of the second year? (Leave no answer blank. Enter zero if applicable.)

Answer 1

(a) Harris is limited to the regular MACRS depreciation using the second year depreciation rates. Harris is no required to use the mid-quarter convention as it did not place more than 40 percent of its assets into service last year. Its depreciation for this year is $52,513, Calculated as follows:

Asset	Placed in Service	Original Basis (1)	Rate (2)	Depreciation (3)
Office Equipment (7 Years)	August 14	$14,800	24.49%	3625
Manufacturing equipment (7 year)	April 15	$116,000	24.49%	28408
Computer system (5 year)	June 1	$64,000	32.00%	20480
Total		194,800		52513

(b) The basis of the office equipment at the end of the second year is calculated by subtacting the depreciation allowable from the original basis.

In this case, Harris must reduce the basis by $2,605 for the first year's depreciation that was not taken but was allowable plus $3,625 for the second year's depreciation.

After reducing the original cost by these depreciation amounts, the remaining is $8,570.