A construction company purchases a crane for $350,000. Using the Modified Accelerated Cost Recovery System (MACRS) with a 5-year recovery period, what is the depreciation deduction for the second year if the MACRS percentage for year 2 is 32%?
Correct Answer
A) $112,000
Year 2 MACRS depreciation = $350,000 × 32% = $112,000. MACRS allows accelerated depreciation in the early years of an asset's life, providing larger tax deductions upfront.
Why This Is the Correct Answer
The correct answer is B) $112,000 because MACRS depreciation is calculated by multiplying the original cost basis by the applicable percentage for that year. With a $350,000 crane and a 32% MACRS rate for year 2, the calculation is straightforward: $350,000 × 0.32 = $112,000. This represents the allowable depreciation deduction for tax purposes in the second year of the asset's recovery period.
Why the Other Options Are Wrong
Option B: $140,000
Option D ($140,000) is incorrect because it represents 40% of the original cost ($350,000 × 0.40 = $140,000), which is significantly higher than the given 32% MACRS rate for year 2.
Option D: $98,000
Option C ($126,000) is incorrect because it represents 36% of the original cost ($350,000 × 0.36 = $126,000), which exceeds the given 32% MACRS rate for year 2.
Memory Technique
Remember 'MACRS = Money × Rate' - always multiply the original purchase price by the given percentage rate, and the 5-year MACRS schedule typically starts high and decreases (20%, 32%, 19.2%, 11.52%, 11.52%, 5.76%).
Reference Hint
Look up IRS Publication 946 'How to Depreciate Property' or the MACRS depreciation tables in tax reference materials, typically found in the business law or tax sections of contractor exam prep books.
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