6. Your client is a self-employed attorney who is considering the purchase of a $70,000 automobile that will be used 75% for business.

( to view Luxury Automobile Depreciation limits.)

Reference

Luxury Automobile Depreciation Limits

	Year Automobile is Placed in Service

	2018	2012-2017	2010-2011	2009
Year 1	$10,000 or $18,000*	$3,160	$3,060	$2,960
Year 2	16,000	5,100	4,900	4,800
Year 3	9,600	3,050	2,950	2,850
Year 4 and Each Suceeding Year	5,760	1,875	1,775	1,775

*If the taxpayer does not elect out of bonus depreciation in 2018.

TAX AUTHORITY UPDATE

At the time this edition went to print, the IRS had not yet released the 2020 ceiling limits. For this problem we assume the limits will be the same for 2020 as they were in 2019.

(view MACRS half-year convention rates.)

Reference

General Depreciation

System-MACRS

Personal Property Placed in Service After 12/31/86

Applicable Convention: Half-Year

Applicable Depreciation Method: 200 or 150 Percent Declining Balance Switching to Straight Line

Recovery period and Depreciation Rates

Recovery Year	3-Year	5-Year	7-Year	10-Year	15-Year	20-Year
Year 1	33.33	20.00	14.29	10.00	5.00	3.750
Year 2	44.45	32.00	24.49	18.00	9.50	7.219
Year 3	14.81	19.20	17.49	14.40	8.55	6.677
Year 4	7.41	11.52	12.49	11.52	7.70	6.177
Year 5		11.52	8.93	9.22	6.93	5.713
Year 6		5.76	8.92	7.37	6.23	5.285
Year 7			8.93	6.55	5.90	4.888
Year 8			4.46	6.55	5.90	4.522
Year 9				6.56	5.91	4.462
Year 10				6.55	5.90	4.461
Year 11				3.28	5.91	4.462
Year 12					5.90	4.461
Year 13					5.91	4.462
Year 14					5.90	4.461
Year 15					5.91	4.462
Year 16					2.95	4.461
Year 17						4.462
Year 18						4.461
Year 19						4.462
Year 20						4.461
Year 21						2.231

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Requirements

a.	What depreciation method and recovery period are used under MACRS for the automobile?
b.	How would your answer to Part a change if your client were an employee and the automobile was not required as a condition of employment?
c.	What tax consequences occur in Part a if the business use of the automobile decreases to 50% or less in a succeeding year? Explain.

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Part 1

Requirement a. What depreciation method and recovery period are used under MACRS for the automobile?

A. The taxpayer may use MACRS for the personal-use portion of the cost of the automobile. Thus, she generally is entitled to claim depreciation on $17,500 of the automobile's cost. The automobile has a recovery period of seven years. However, the maximum depreciation that may be deducted in 2020 on the automobile is limited to

$2,525 under the "luxury car rules".

B. The taxpayer may not use MACRS because she is self-employed. She must be considered an employee to claim depreciation under MACRS.

C. The automobile is 5-year property under MACRS, so the 200%-declining balance method and a 5-year recovery period are used. Because your client will use the automobile 75% of the time for business, only $52,500

of its cost is depreciable. However, your client's 2020 deduction for this vehicle is limited to $7,575 under the so-called luxury automobile rules, assuming she elects out of bonus depreciation.

D. The taxpayer may use MACRS for the full cost of the automobile. She could claim depreciation on

$70,000 of the automobile's. The automobile has a recovery period of five years. Since the taxpayer can use MACRS for the full cost of the automobile, she is not subject to the "luxury car rules".