A general contractor purchases a new excavator for $185,000. Using the MACRS 5-year depreciation schedule, what is the depreciation amount for the first year if the first-year rate is 20%?
Correct Answer
B) $37,000
First-year MACRS depreciation = $185,000 × 20% = $37,000. Construction equipment typically follows the 5-year MACRS schedule for tax purposes.
Why This Is the Correct Answer
The correct answer is B ($37,000) because MACRS depreciation is calculated by multiplying the asset's cost basis by the applicable depreciation percentage for that year. In this case, $185,000 × 20% = $37,000. The 20% rate is the standard first-year MACRS percentage for 5-year property, which includes construction equipment like excavators. This is a straightforward percentage calculation that contractors must understand for tax planning and equipment cost analysis.
Why the Other Options Are Wrong
Option C: $31,000
Option A ($31,000) is incorrect because it represents approximately 16.8% of the purchase price, which is not the correct first-year MACRS rate for 5-year property.
Option D: $42,500
Option C ($42,500) is incorrect because it represents approximately 23% of the purchase price, which exceeds the actual first-year MACRS rate of 20%.
Memory Technique
Remember 'MACRS 5-year First = 20%' - Construction equipment like excavators, bulldozers, and trucks typically qualify for 5-year MACRS with a 20% first-year rate.
Reference Hint
Look up 'MACRS Depreciation Tables' or 'Modified Accelerated Cost Recovery System' in tax reference materials or IRS Publication 946
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