How Much Depreciation Can Trevor Recognize on His Automobile for His Federal Income Tax Return in 2021?

Question:

What is the maximum amount of depreciation that Trevor can recognize on that automobile on his Federal Income Tax Return in 2021?

a) $50,000

b) $48,000

c) $31,200

d) $30,000

Answer:

The maximum amount of depreciation that Trevor can recognize on the automobile for his Federal Income Tax Return in 2021 is $8,000.

Explanation:

To determine the maximum amount of depreciation that Trevor can recognize on the automobile for his Federal Income Tax Return in 2021, we need to consider the relevant depreciation rules and methods.

Since the automobile was placed in service on 3/1/2021, we can assume it was used for the entire year. However, we need to determine the applicable depreciation method and recovery period for the automobile.

For tax purposes, automobiles are generally depreciated using the Modified Accelerated Cost Recovery System (MACRS) and belong to the "5-year property" class. This means that the recovery period for depreciation is 5 years.

To calculate the depreciation expense, we can use the MACRS depreciation tables provided by the IRS. According to the tables, the applicable depreciation percentage for the first year of 5-year property is 20%.

Now we can calculate the maximum amount of depreciation:

Depreciation Expense = Purchase Price x Depreciation Percentage

Depreciation Expense = $40,000 x 20%

Depreciation Expense = $8,000

Therefore, the maximum amount of depreciation that Trevor can recognize on the automobile on his Federal Income Tax Return in 2021 is $8,000.