Question

A hair salon purchases a new computer for the checkout desk on October 21, 2018 for $1,500, which was the only property it purchased that year. The firm sells the equipment on October 3, 2020. Assume the firm always opts out of Sec. 179 and bonus if available and uses a calendar year tax period.

How much total depreciation does the firm have for the computer in 2020?

Answer 1

As per the Internal Revenue Code, since the firm doesnot opt for section 179, so depreciation will be calculated on the basis of recovery period. Computer has the recovery period of 5 years. Since it is the only service bought, so we will have to use mid quarter convention method as it is bought in the lat quarter of the calendar year 2018.

So, as per Table A-5

Depreciation for 2018 = 1500 * 5% = 75

Depreciation for 2019 = 1500 * 38% = 570

Now in year 2020, there is disposal of the computer,

So first we will compute depreciation for entire year 2020 = 1500 * 22.80% = 342

Now the equipment is disposed in last quarter, so you multiply 342 by 87.5% to get your depreciation deduction of 299.25 for 2020.