Question

Nick’s Lawn Service acquires and places in service a new lawnmower, a 7-year class asset, in September 2020 for $2,500. Nick disposes of the lawnmower in February 2022. What cost recovery deduction can Nick’s company take in 2022? Assume the company is a calendar year taxpayer and does not take Sec. 179 expense or bonus first-year depreciation.

Answer 1

Based on the information available in the question, we can answer as follows:-

Nick has placed a 7 year class asset in September 2020 at the cost of $2,500.

Per IRS, since the company has not placed more than 40% of the assets during the last quarter of the year, the asset is depreciated using the Half Yearly convention.

Under the Half Yearly convention, the cost recovery for the asset is calculated as:-

Depreciation expense for 2020 = $2,500 * 14.29% = $357.25

Depreciation expense for 2021 = $2,500 * 24.49% = $612.25

Depreciation expense for 2022 = $2,500 * 17.49% * 50% = $218.63(Rounded)

When an asset is depreciated using the Half Yearly convention, the year in which the asset is sold, the depreciation expense is limited to 50% of the actual depreciation expense.

Hence, the Cost recovery during the year of sale - 2022 is $218.63(Rounded).