[ihateregx3]

Need help understanding answers 3 and 4 to this sim question:

Your client, Lina Madhuri, travels locally as a self employed IT consultant. Lina bought a new vehicle at the beginning of year 1 at a cost of $20,000. Lina did not elect to expense the vehicle under Section 179 or take bonus depreciation. The vehicle is not subject to listed property limitations. The depreciable life of this vehicle is 5 years, and Lina uses MACRS to calculate the depreciation for income tax purposes. Lina sold the vehicle on December 31, year 2, for $18,000. There were no other vehicle or equipment purchases in year 1. The applicable IRS standard mileage rate for business use was 58.5 cents per mile for both year 1 and year 2.

Additional information:
Lina incurred the following travel expenses:
Expenses Year 1 Year 2
Gasoline 5000 7000
Insurance 4000 4000
Repairs 3000 2000
Parking tickets 500 400
Speeding tickets 550 650

Lina drove the following miles in the vehicle for years 1 and 2:
Mileage Year 1 Year 2
Personal 5000 8000
Business 15000 24000
Total 20000 32000

MACRS Half-Year Convention Table for 5-year recovery period
Year 1: 20%
Year 2: 32%

The following questions pertain to Year 2 amounts:
1. What is the vehicle expense deduction using the standard mileage rate?
2. What is the business vehicle expense using the actual expense method, ignoring depreciation?
3. What is the depreciation deduction?
4. What is the remaining basis before sale using the actual expense method since purchase?

Answers:
1. $14,040
2. $9,750
3. $2,400
4. $14,600

I understand the first 2 questions, however, the solution only provides the amounts and no explanation, so I am quite lost on how to calculate answers 3 and 4. Please help!

[Kodiak]

For the depreciation, you have the MACRS for the HY of 32% but I heard this somewhere, and I have yet to be able to find the source again, but in the first year of use because we are under the ‘half year' convention, half the year of depreciation is excluded. You have to also ‘half' the rate in the year you sell the item. So the 32% MACRS rate for year 2 should be applied at 16%.

Then there is the information that this is a personal and business use vehicle. Look at the year two information and see that the business use was 24,000 miles out of a 32,000 total miles = 75% business use.

(20,000 * 16%) * 75% = 2,400

For the basis, I know I've seen this question somewhere and this stumped me as well. I know I finally found the explanation but can't for the life of me remember it now. 🙂

[Tipofga80]

Bumping…..
I figured out all of the questions except for #4. How is the actual expense calculated in this situation?

REG - 77 (will lose in Jan 2016)

BEC - 67 74, 75

AUD - 56, 70, Will try again 🙁

FAR - ??

Save the beast for last.

[jenpen]

Ok, so I was having problems with the 3 and 4 answers as well, so I Google'd it and of course was brought back to the forum. Duh. So now that someone explained #3, I got this for #4 using depreciation, but I can't get it to work with actual expenses…

For year 1:
(20,000*.2)*.75=3,000
(20,000*.16)*.75=2,400

20,000-3,000-2,400=14,600

AUD - 56 - 68 - 61 - 9/8/16
REG - 75
FAR - 7/15/16
BEC - TBD

Wiley CPAexcel and NINJA 10 Point Combo

[Tipofga80]

Awesome! Can you tell me how you figured the .16 in the $2,400 answer?? And I honestly think depreciation is all thats being calculated. My exam is tomorrow so this is right on time. LOL

REG - 77 (will lose in Jan 2016)

BEC - 67 74, 75

AUD - 56, 70, Will try again 🙁

FAR - ??

Save the beast for last.

[jenpen]

You and me both!

I took the answer from @Kodiak above – so because it was sold in the second year, then half year convention was also used then. The problem states that 32% would be full year (for the half year convention relating to year 1), and taking that in half gets you 16%.

It has to be asking for the depreciation because I can't get it to work any other way!

AUD - 56 - 68 - 61 - 9/8/16
REG - 75
FAR - 7/15/16
BEC - TBD

Wiley CPAexcel and NINJA 10 Point Combo

[Tipofga80]

Nevermind I see it above.

REG - 77 (will lose in Jan 2016)

BEC - 67 74, 75

AUD - 56, 70, Will try again 🙁

FAR - ??

Save the beast for last.

[Tipofga80]

Also, I put the explanation for 3 in the Study Group if needed.

REG - 77 (will lose in Jan 2016)

BEC - 67 74, 75

AUD - 56, 70, Will try again 🙁

FAR - ??

Save the beast for last.

[jenpen]

Once I saw to separate the business/personal use, a lightbulb went off. It didn't even occur to me! Ugh. I hope I don't make silly mistakes like that tomorrow.

AUD - 56 - 68 - 61 - 9/8/16
REG - 75
FAR - 7/15/16
BEC - TBD

Wiley CPAexcel and NINJA 10 Point Combo

[Champhex]

4. What is the remaining basis before sale using the actual expense method since purchase?

Under the actual expense method you are going to use the percentage of business mileage of the total mileage. In this case 75% (24,000/32,000).

You also have to take into account, that under MACRS Depreciation, you apply half of the percentage of depreciation in the year of disposal. In this case 16% (32/2).

This is how you obtain the 2,400 in question 3: 20,000 x .16 x .75 = 2,400

For question 4, you have to take into account the depreciation for Year 1: 20,000 x .20 x .75 = 3,000 (Year 1 also = 75% (15,000/20,000))

3,000 + 2,400 = 5,400

20,000 – 5,400 = 14,600

FAR-PASS-10/26/15
AUD-PASS-05/21/16
REG
BEC

[Pye]

To everyone reading this about number 4 on AICPA sims, want has been presented this far is incorrect. This can't be correct because you have to talk a half year of MACRS in the year 1, so MACRS depreciation would actually be $1,500 for year one. I don't know what the actual way is yet to solve for this, I just know this isn't correct.

[Pye]

Disregard my previous note as it turns on the tables are already set to only include a half year in year 1, so the methodology provided is correct.

[James]

Sorry to bring up this old thread but can anyone explain to me how to get the answer for question 2.

Thanks!

[TIM819]

I am also working on this question, and now I figured it out.

MACRS is based on the Double Decline Balance method.

So for DDB method, a 5-year life asset should deduct 200% / 5 = 40% of the remaining balance.
in this question: 20,000 * 40% = 8,000 in year 1 ( disregard the business use or personal use)
(20,000 – 8,000) = 12,000 * 40% = 4,800 in year 2.

However, MACRS already calculated it for you, the 5-year life asset's first year is 20% in MACRS, not 40% in DDB method.
so you do not do a half-half-year convention to get 2,000 (1,500 in business use). $4,000 ($3,000 in business use) is already half year MACRS depreciation.

[Greg]

You guys are making this way too difficult. I can't watch ya'll butcher this without saying anything…

Here's how you logically get to the part 4 solution:

Year 1 Depreciation: 20,000*.2*.75 = 3,000
Year 2 Depreciation**: 20,000*.16*.75 = 2,400
A/D to date of sale = Y1+Y2=3,000+2,400 = 5,400
Basis = Cost Less A/D to date of sale = 20,000-5,400 = 14,600

** you use the 16% in Y2 b/c the half year convention is built into the tables in the year for the year of acquisition but not for the year of sale(eg.-DDB would be 40% for Y1, half of that is 20% which matches the tables). The IRS can't predict when you are going to sell your Fixed assets. So you have to divide the table rate in half for year of sale.

Hope this helps.

[Author]

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