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On June 5, 2018, Leo purchased and placed in service a new car that cost $75,000. The business use percentage for the car is always 100%. Leo does not claim any available additional first-year depreciation. Compute Leo’s cost recovery deduction for 2018 and 2019.

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Answer:

recovery cost 2018 = $10,000

recovery cost 2019 = $16,000

Explanation:

There are limits on how much you can deduct for luxury automobiles (a $75,000 car is considered by the IRS a luxury car). The limitation is $10,000 for 2018 and $16,000 for 2019 (second year of service).

In order to determine the total deduction we must choose the lower between:

  • 2018: $75,000 x 20% (MACRS depreciation) = $15,000 or $10,000 limit ⇒ we must choose $10,000
  • 2019: $75,000 x 32% (MACRS depreciation) = $24,000 or $16,000 limit ⇒ we must choose $16,000

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