In June 2011,Kelly purchased new equipment for $26000 to be used in her business.Assuming Kelly has net income from her business of $75000 prior to the deduction,what is the maximum amount of the cost recovery Kelly can deduct rounded to the nearest $,assuming she does NOT elect #179 expense or bonus depr?

Question

In June 2011,Kelly purchased new equipment for $26000 to be used in her business.Assuming Kelly has net income from her business of $75000 prior to the deduction,what is the maximum amount of the cost recovery Kelly can deduct rounded to the nearest $,assuming she does NOT elect #179 expense or bonus depr?

a) 3715
b) 13000
c) 14858
d) 26000
I can count that cost recovery for her equipment is 3715,but what's the point of 75000 income and words "maximum amount"? Can somebody help me to figure it out? I don't need just the answer but want to understand how to calculate it.Thank You!

Answer 1

To calculate the maximum amount of cost recovery that Kelly can deduct, we need to consider the concept of depreciation. Depreciation allows businesses to deduct the cost of assets used in their business over a period of time.

In this case, Kelly purchased new equipment for $26,000. The maximum amount of cost recovery is found by determining the depreciation expense for the equipment and taking the lesser of the depreciation expense or the net income.

There are different methods to calculate depreciation, but let's assume that Kelly uses the straight-line method, which evenly distributes the cost of the equipment over its useful life. To calculate the annual depreciation expense, we need to determine the useful life of the equipment.

Let's say the useful life of the equipment is determined to be 5 years. To calculate the annual depreciation expense, we divide the cost of the equipment ($26,000) by the useful life (5 years). Therefore, the annual depreciation expense would be $5,200 ($26,000 / 5).

Now, we know that Kelly has a net income from her business of $75,000 prior to the deduction. However, the maximum amount of the cost recovery deduction cannot exceed the depreciation expense.

So, in this case, the maximum amount of the cost recovery deduction would be $5,200, which is the annual depreciation expense for the equipment.

Since none of the given options match the annual depreciation expense, it seems that there might be a mistake in the options provided. However, based on the calculations explained above, the correct answer would be the closest option to the annual depreciation expense of $5,200, which is option a) $3,715.