Equipment purchased for $125,000 is being depreciated using the Modified Accelerated Cost Recovery System (MACRS) with a 5-year recovery period. What is the depreciation rate for the second year?
Correct Answer
D) 32.00%
Under MACRS 5-year recovery, the second year depreciation rate is 32.00%. The MACRS percentages for 5-year property are: Year 1: 20%, Year 2: 32%, Year 3: 19.2%, Year 4: 11.52%, Year 5: 11.52%, Year 6: 5.76%.
Why This Is the Correct Answer
Under the Modified Accelerated Cost Recovery System (MACRS), equipment with a 5-year recovery period follows predetermined depreciation percentages established by the IRS. The second year depreciation rate for 5-year MACRS property is specifically 32.00%. This is a fixed percentage that applies regardless of the equipment's purchase price, and contractors must use these standardized rates for tax depreciation purposes.
Why the Other Options Are Wrong
Option B: 20.00%
25.00% is not a standard MACRS depreciation rate for any year in the 5-year recovery schedule.
Option C: 19.20%
19.20% is the depreciation rate for the third year of 5-year MACRS property, not the second year.
Memory Technique
Remember '20-32-19' for the first three years of 5-year MACRS: Year 1 (20%), Year 2 (32%), Year 3 (19.2%). Think 'Twenty, Thirty-two, Nineteen' as a sequence.
Reference Hint
Look up 'MACRS Depreciation Tables' or 'Modified Accelerated Cost Recovery System' in the tax or accounting section of your reference materials.
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