A contractor has a commercial vehicle worth $85,000 that was purchased 3 years ago for $120,000. The vehicle has been depreciated using a 7-year MACRS schedule. What was the total depreciation taken over the 3 years if the MACRS percentages are 14.29%, 24.49%, and 17.49% for years 1, 2, and 3 respectively?
Correct Answer
B) $67,320
Year 1: $120,000 × 14.29% = $17,148; Year 2: $120,000 × 24.49% = $29,388; Year 3: $120,000 × 17.49% = $20,988. Total = $67,524, closest to option B.
Why This Is the Correct Answer
Option B is correct because MACRS depreciation is calculated by applying each year's percentage to the original purchase price, not the declining balance. The calculation uses the original $120,000 cost basis for all three years: Year 1 = $120,000 × 14.29% = $17,148, Year 2 = $120,000 × 24.49% = $29,388, Year 3 = $120,000 × 17.49% = $20,988. The total depreciation is $67,524, which rounds to option B ($67,320).
Why the Other Options Are Wrong
Option A: $56,280
$56,280 is too low and doesn't match the sum of the three years' depreciation calculations using the given MACRS percentages
Option C: $72,540
$72,540 is too high and exceeds the calculated total depreciation of $67,524
Option D: $85,000
$85,000 represents the current value of the vehicle, not the total depreciation taken over three years
Memory Technique
Remember 'MACRS = Original Cost' - unlike declining balance methods, MACRS always uses the original purchase price as the base for each year's percentage calculation
Reference Hint
Look up IRS Publication 946 or tax depreciation tables in construction business management chapters for MACRS schedules and calculations
More Business & Finance Questions
A contractor's license expires on March 31st. If they submit a renewal application on April 15th, what additional requirement must be met under Florida regulations?
A general contractor purchases equipment worth $45,000 with a useful life of 9 years and no salvage value. Using straight-line depreciation, what is the annual depreciation expense?
In Florida, what is the minimum workers' compensation insurance coverage required for construction companies with employees?
What is the typical recommended coverage amount for general liability insurance for a small to medium-sized general contracting business?
A contractor estimates startup costs of $75,000 for equipment, $25,000 for initial inventory, $15,000 for insurance premiums, and $10,000 for working capital. They can finance 70% of the total. How much cash do they need?