A general contractor purchases a new excavator for $85,000. Using the MACRS 5-year depreciation schedule with a first-year rate of 20%, what is the depreciation expense for the first year?
Correct Answer
C) $17,000
Using MACRS 5-year depreciation at 20% for the first year: $85,000 × 0.20 = $17,000. This is the standard depreciation method for construction equipment.
Why This Is the Correct Answer
Option B is correct because MACRS 5-year depreciation for construction equipment uses a 20% rate in the first year. The calculation is straightforward: $85,000 (cost basis) × 0.20 (first-year rate) = $17,000. This follows the standard MACRS depreciation method that contractors must use for tax purposes when depreciating construction equipment.
Why the Other Options Are Wrong
Option B: $14,167
This amount ($21,250) would result from using a 25% rate ($85,000 × 0.25), which is not the correct first-year MACRS rate for 5-year property.
Option D: $28,333
This amount ($28,333) would result from using straight-line depreciation over 3 years ($85,000 ÷ 3), which is neither MACRS nor the correct recovery period for construction equipment.
Memory Technique
Remember 'MACRS 5-year = 20% first year' - think '5 years, 1/5 = 20%' as a quick mental check for the first-year rate.
Reference Hint
Look up 'MACRS Depreciation Tables' or 'Equipment Depreciation' in the tax code reference section, specifically the 5-year property depreciation schedule.
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