On June 26, 2004, Elaine purchased and placed into service a new computer system costing $8,000. The computer system was used 80 percent for business and 20 percent for personal use in both 2004 and 2005. Elaine claimed only regular MACRS depreciation. In 2006, the computer system was used 45 percent for business and 55 percent for personal use.
Compute the depreciation deduction for the computer system in 2006 and the cost recovery recapture.
Assume that in 2004, Elaine had instead expensed under Section 179 the cost of the computer system. Compute the cost recovery recapture in 2006.
To calculate the depreciation deduction for the computer system in 2006, we need to determine the adjusted basis of the asset and apply the appropriate depreciation method.
First, let's calculate the adjusted basis of the computer system in 2006. The adjusted basis is the original cost of the asset minus any previous depreciation deductions. Since the computer system was expensed under Section 179 in 2004, the adjusted basis in 2006 would be $0.
Next, we need to determine the depreciation method. The regular MACRS depreciation method was used for the computer system in 2004 and 2005. However, starting in 2006, because the asset was used less than 50 percent for business, we need to use the alternate depreciation system (ADS) instead of MACRS.
The ADS method for computers has a recovery period of 5 years, and we need to use the straight-line depreciation method.
To calculate the depreciation deduction for 2006, we divide the adjusted basis ($0) by the recovery period (5 years) to get the annual depreciation deduction. Since the computer system was used 45 percent for business in 2006, we multiply the annual depreciation deduction by the business use percentage:
Depreciation deduction for 2006 = (Adjusted basis / Recovery period) * Business use percentage
= ($0 / 5) * 0.45
= $0
Therefore, the depreciation deduction for the computer system in 2006 is $0.
Now let's calculate the cost recovery recapture for 2006. Cost recovery recapture occurs when the business use of a depreciated asset decreases to 50 percent or less after it has been depreciated under MACRS.
Since the computer system was expensed under Section 179 in 2004, there is no unrecovered basis or depreciation subject to recapture in 2006. Therefore, the cost recovery recapture in 2006 is $0.
To summarize:
- The depreciation deduction for the computer system in 2006 is $0.
- The cost recovery recapture in 2006 is $0.
To compute the depreciation deduction for the computer system in 2006 and the cost recovery recapture, we need to follow these steps:
Step 1: Calculate the business use percentage for 2006:
Business use percentage for 2006 = 45%
Step 2: Calculate the adjusted basis of the computer system in 2006:
Adjusted basis in 2006 = Cost of computer system - Total depreciation claimed in prior years
= $8,000 - Total depreciation claimed in 2004 and 2005
Step 3: Calculate the depreciation deduction for 2006:
Depreciation deduction for 2006 = Adjusted basis in 2006 * Business use percentage for 2006
= Adjusted basis in 2006 * 45%
Step 4: Calculate the cost recovery recapture in 2006:
Cost recovery recapture in 2006 = (Depreciation claimed in prior years - Total depreciation actually allowed) * Business use percentage for 2006
= (Depreciation claimed in 2004 and 2005 - Total depreciation allowed for 2004 and 2005) * 45%
Now, let's calculate the depreciation deduction for the computer system in 2006 and the cost recovery recapture in both scenarios:
Scenario 1: Regular MACRS depreciation claimed in 2004 and 2005
- To calculate the adjusted basis in 2006, we need information on the total depreciation claimed in 2004 and 2005.
- Once we have that information, we can calculate the depreciation deduction for 2006 and the cost recovery recapture.
Scenario 2: Section 179 expensing in 2004
- Since Elaine expensed the cost of the computer system under Section 179 in 2004, there is no depreciation allowed for 2004 and 2005.
- Therefore, the cost recovery recapture in 2006 would be zero.
Please provide the information on the total depreciation claimed in 2004 and 2005 so that we can proceed with the calculations.