Question

Phil owns a ranch business and uses four-wheelers to do much of his work. Occasionally, though, he and his boys will go for a ride together as a family activity. During year 1, Phil put 1,119 miles on the four-wheeler that he bought on January 15 for $9,600. Of the miles driven, only 239 miles were for personal use. Assume four-wheelers qualify to be depreciated according to the five-year MACRS schedule and the four-wheeler was the only asset Phil purchased this year. (Use MACRS Table 1, Table 2, Table 3, Table 4 and Table 5.) (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.)

a. Calculate the allowable depreciation for year 1 (ignore the §179 expense and bonus depreciation).

b. Calculate the allowable depreciation for year 2 if total miles were 1,405 and personal use miles were 530 (ignore the §179 expense and bonus depreciation).

Answer 1

a) Total Depreciation Expense for year 1 = Original Basis*20%

= $9,600*20% = $1,920 (As MACRS depreciation rate for year 1 is 20%)

Total miles during year 1 = 1,119 miles

Miles for business purpose = Total miles - Miles for personal purposes

= 1,119 miles - 239 miles = 880 miles

Allowable depreciation expense will be only that amount of depreciation expense which relate to miles used for business purpose. Allowable depreciation expense is calculated as follows:-

Allowable depreciation expense = $1,920*(880 miles/1,119 miles) = $1,510

2) Total Depreciation Expense for year 2 = Original Basis*32%

= $9,600*32% = $3,072 (As MACRS depreciation rate for year 2 is 32%)

Total miles during year 2 = 1,405 miles

Miles for business purpose = Total miles - Miles for personal purposes

= 1,405 miles - 530 miles = 875 miles

Allowable depreciation expense = $3,072*(875 miles/1,405 miles) = $1,913