A company purchased a truck for $50,000 on July 1, 2009. The truck has an estimated useful life of 5 years and will have no salvage value. It is estimated that the truck can be driven for 150,000 miles. The truck was driven for 18,000 miles during 2009. If the goal is to reduce taxable income to the lowest amount, which method should be elected and how much depreciation can be deducted in 2009
This is an accounting problem rather than a math problem. Accounting is not my area. That said, I would guess that using a double declining balance method would be best. But, I am on very shaky ground here.
To determine the depreciation deduction for 2009, we need to first select a depreciation method. The two common methods used are straight-line depreciation and accelerated depreciation. Let's discuss both methods and calculate the depreciation deduction for 2009 using each method.
1. Straight-Line Depreciation:
Under straight-line depreciation, the cost of the asset is evenly allocated over its useful life. In this case, the truck's cost is $50,000, and its useful life is 5 years, with no salvage value.
To calculate the annual depreciation using straight-line depreciation, we divide the cost of the truck by its useful life:
$50,000 / 5 years = $10,000 per year
Since the truck was driven for 18,000 miles in 2009, we can calculate the depreciation deduction by multiplying the depreciation per year by the proportion of miles driven in that year:
($10,000 / 150,000 miles) x 18,000 miles = $1,200
Therefore, under straight-line depreciation, the depreciation deduction in 2009 would be $1,200.
2. Accelerated Depreciation:
Under accelerated depreciation, the cost of the asset is allocated more heavily in the earlier years of its life. One common accelerated depreciation method is the Modified Accelerated Cost Recovery System (MACRS), which is commonly used for tax purposes. MACRS assigns assets to specific recovery periods based on their classification.
In this case, since the truck has a useful life of 5 years and is not listed under any specific classification (e.g., passenger automobiles), we'll use the general MACRS recovery period for vehicles, which is 5 years.
The MACRS allows for accelerated depreciation deductions, with higher deductions in the earlier years. To calculate the depreciation deduction for 2009 using MACRS, we'll refer to the IRS depreciation tables.
According to the IRS Passenger Automobile Depreciation Limits table, the depreciation deduction percentage for the first year is 20%. Applying this percentage to the truck's cost, we get:
$50,000 x 0.2 = $10,000
Since the truck was driven for 18,000 miles in 2009, we need to apply the business use percentage to calculate the depreciation deduction. If we assume that all the miles driven were for business purposes, the business use percentage is 100%.
Therefore, under MACRS depreciation, the depreciation deduction in 2009 would be $10,000.
In summary, if the goal is to reduce taxable income to the lowest amount, the company should elect the accelerated depreciation method (MACRS) in this case. The depreciation deduction for 2009 using MACRS would be $10,000.