Chapter 2 Property Acquisition and Cost Recovery

True or false: Personal property can be business property or personal-use property.

True

The cost recovery of the capital investment in natural resources is referred to as _____.

depletion

The method of deducting the cost of tangible personal and real property over its useful life is _____. The method of deducting the cost of intangible assets over a specific time is _____. The method of deducting the cost of natural resources over time is _____.

depreciation amortization depletion

Straight-line depreciation is mandatory and Section 179 expensing is NOT eligible for listed property when the business-use is ______ 50%.

equal to or less than

In years where many new assets are purchased, regular tax depreciation will be _____ (greater/less) than AMT depreciation, resulting in an _____ (addition/subtraction) of the difference to regular taxable income to arrive at the AMT tax base.

greater addition

The _____-_____ convention allows 50% of a full year's depreciation in the year the asset is placed in service, regardless of when it was actually placed in service.

half-year

Real property is classified in one of three ways: _____, which is NOT depreciable; _____ rental property, which is used as dwelling units by lessees; or _____ property.

land residential nonresidential

Business assets that are often used for both business and personal purposes are referred to as _____ property.

listed

If a business wants to maximize the depreciation deduction, it should choose to take Section 179 expense on assets with the _____ (lowest/highest) first year recovery percentage, _____ (including/excluding) bonus depreciation.

lowest including

Costs incurred prior to the starting of a business, or shortly thereafter that relate to creating the business entity, are referred to as:

organizational expenditures

Business assets that are often used for both _____ and _____ purposes are referred to as listed property.

personal business

Land and buildings are classified as _____ property, while items such as machinery, equipment, and furnishings are classified as tangible, personal property.

real

If an asset's business use drops to 50%, or below, the business must any excess _____ accelerated depreciation over the _____ _____ depreciation for all prior years.

recapture straight line

In order to compute MACRS depreciation, which of the following pieces of information is NOT required?

salvage or residual value for the asset

Similar assets purchased in the same year must be depreciated using the _____ (same/different) depreciation method, but similar assets purchased in different years can be depreciated using ______ (same/different) depreciation methods..

same different

When depreciating real property under MACRS, the recovery rates are based on the _____-_____ method.

straight-line

Pixie's Pizza House, a calendar year corporation, purchased a delivery truck in February for $15,000 (no other assets were purchased that year). How much depreciation will be taken on the truck in the current year if the taxpayer does NOT elect to use Section 179 and does NOT use bonus depreciation?

$3,000

Ethan's Eggroll House, a calendar year corporation, purchased a new computer and printer in January for $1,500. In February, the business purchased a new oven for $1,200. No other assets were purchased during the year. How much depreciation will be taken on these items in the current year if the taxpayer does NOT elect to use Section 179 and does NOT use bonus depreciation?

$300 computer: $171 oven Reason: The computer has a 5-year recovery period ($1,500 x 20%), and the oven has a 7-year recovery period ($1,200 x 14.29%).

Ethan's Eggroll House, a calendar year corporation, purchased a new computer and printer in January for $1,500. In February, the business purchased a new oven for $1,200. No other assets were purchased during the year. How much depreciation will be taken on these items in the second year of service if the taxpayer does NOT elect to use Section 179 and does NOT use bonus depreciation?

$480 computer; $294 oven

Choose the items included in the calculation of an asset's adjusted basis. (Check all that apply.)

-- Add costs necessary to prepare the asset for use in the business. -- Start with the asset's original basis. -- Subtract prior depreciation allowed or allowable on the asset.

Which of the following items are needed to calculate MACRS depreciation for an asset? (Check all that apply.)

-- Asset's depreciable basis -- Applicable depreciation method -- Applicable recovery period -- Applicable depreciation convention -- Date placed in service

Which of the following methods are acceptable for the tax treatment of research and experimentation expenditures? (Check all that apply.)

-- Capitalize the costs and amortize them over not less than 60 months beginning in the month benefits are first derived from the research. -- Expense the costs immediately. -- Capitalize the costs and amortize them over the determinable useful life.

Which of the following assets are generally referred to as listed property? (Check all that apply.)

-- Digital cameras -- Automobiles

Profitable businesses will likely use ______ depreciation while companies with lower marginal rates that are expected to rise over time will likely use ______ depreciation.

200% declining balance; straight-line

Paula's Pastries expanded its facilities by building an addition to make room for a larger kitchen. The original building was constructed 12 years earlier and is being depreciated using a 39-year recovery period. The cost of the new addition will be depreciated over _____ years.

39

The mid-quarter convention is used for all assets purchased during the year when more than _____% of the tangible _____ property purchased is placed in service during the fourth quarter of the year.

40 personal

The MACRS recovery period for computers and peripheral equipment, cars, and light general-purpose trucks is _____ years. The recovery period for office furniture, fixtures, machinery, and equipment is _____ years.

5 7

Section 179 expensing, bonus depreciation, and MACRS depreciation rates are available for listed property if its business-use percentage exceeds _____%.

50

In 2021, Bill purchased a new automobile for $78,000 that will be used 100% for business. If Bill did NOT have to consider the limitations for depreciation on automobiles, he would be able to deduct $_____ in regular MACRS depreciation and bonus depreciation the first year. However, he will only be able to deduct $_____ due to the luxury limitations.

78000 18100

In April of 2021, Bill purchased a new automobile for $90,000 that will be used 100% for business. If Bill did NOT have to consider the limitations for depreciation on automobiles, he would be able to deduct $_____ in regular MACRS depreciation and bonus depreciation the first year. However, he will only be able to deduct $_____ due to the luxury limitations (considering allowable bonus depreciation).

90,000 18,100

Which of the following methods is NOT acceptable for the tax treatment of research and experimentation expenditures?

Capitalize the costs and depreciate them using MACRS with a 3-year recovery period.

Personal Property

Choice, Tangible assets such as equipment and machinery Tangible assets such as equipment and machinery

Natural resources

Commodities such as oil, timber, and gold

Rex's Wrecks purchased $150,000 in new equipment during 2021. Rex's gross business income for the year is $1,200,000 and his business expenses (including regular and bonus depreciation) before Section 179 deduction total $1,150,000. Assuming Rex wants to take the maximum Section 179 deduction allowable, which of the following statements is correct?

He can expense the maximum $50,000 in the current year and carry forward $100,000 until next year.

When will a taxpayer need to recapture depreciation on listed property, and how is the amount of the recapture determined?

If the business use drops to 50% or below, then the excess of MACRS depreciation over straight-line for all prior years is recaptured.

Amortization

Intangible assets

Which depreciation method is most likely to be used by profitable businesses with high marginal tax rates?

MACRS 200% declining balance

When depreciating real property under MACRS, the recovery rates are based on which of the following methods?

Straight-line

Which of the following depreciation provisions are available to listed property that is used less than 50% for business purposes?

Straight-line depreciation on the business-use percentage of the cost

Depreciation

Tangible, personal, and real property (except land)

Andrew's Art Studio, a calender year company, purchased three assets during the year. A computer costing $1,500 was purchased in April; office furniture costing $1,800 was purchased in July; and a delivery truck costing $17,000 was purchased in October. Which of the following statements is correct regarding the depreciation of the assets (assuming no bonus deprecation is taken)?

The art studio can use the half-year convention for the computer and the office furniture if the delivery truck is expensed under Section 179.

A calendar year-end business purchased a new delivery truck at the end of March during the current year. The truck was the only asset purchased during the year. Which of the following statements is correct regarding the depreciation that can be taken on the truck?

The business will deduct one-half of a full year's depreciation on the truck in the current year.

If a business purchases $3,220,000 in equipment during 2021, what is the impact on the Section 179 election?

The ceiling amount will be reduced by $600,000 to a maximum eligible deduction of $450,000 for the current year.

Mark's Markers purchased a new machine to use in the manufacturing process for $2,500. The sales tax was an additional $150 and the shipping charges were $200. One month after using the machine, a small part broke and needed repair. The cost of the repair was $900. How will Mark's Markers treat the costs for tax purposes?

The cost of $2,850 will be capitalized and depreciated over the asset's life. Repairs of $900 will be expensed immediately.

Andrews Art Studio purchased its shop fifteen years ago. During the current year, the business installed a new roof and central air-conditioning system. Which of the following choices is correct regarding the substantial improvements made during the current year?

The cost of the assets will be classified as nonresidential property and recovered over 39 years.

Janet owns land that she uses in her business. Which of the following statements is correct regarding the land?

The land is classified as real property, but it can NOT be depreciated, even though it is a business asset.

Lucky started a new business last year. Since it was the first year of operation, the business purchased $10,000 in machinery and used the straight-line method for depreciation. Business is booming, so Lucky purchased $15,000 in equipment during the current year to help meet production demands. Which of the following statements is true regarding the depreciation choices available to Lucky?

The new machinery can be depreciated using the same method or a different method than the previously purchased machinery.

What is the recovery period for patents that have been purchased by a business (not as part of an acquisition of another entire business)?

The remaining legal life of the patent at the time of the purchase

Under Code Section _____, business may elect to immediately expense up to $_____ of tangible personal property placed in service during 2021.

179 1,050,000

When comparing depreciation rules for regular tax purposes to those for alternative minimum tax (AMT) purposes, which of the following statements are incorrect? (Check all that apply.)

-- For AMT purposes, businesses must depreciate tangible personal property using the 200 percent declining balance method. -- Depreciation of real property uses longer recovery periods for AMT purposes than for regular tax purposes. -- For AMT, the total AMT depreciation is always added to regular taxable income to calculate the AMT base. -- For AMT purposes, the difference between regular tax depreciation and AMT depreciation is an adjustment used to calculate the AMT base. -- For AMT purposes, businesses must use the 150 percent declining balance or the straight-line method to depreciate tangible personal property. -- Depreciation of real property is the same for both regular tax purposes and AMT purposes.

Which of the following items could be classified as Section 197 intangibles? (Check all that apply.)

-- Goodwill -- Customer lists -- Patents --Trademarks

Which of the following choices are categories of intangible assets? (Check all that apply.)

-- Patents and copyrights -- Research and experimentation costs -- Start-up expenditures and organizational costs

The amount of the cost that can be recovered on an annual basis for the investment in natural resources is the larger of which of the following two methods? (Check all that apply.)

-- Percentage depletion method -- Cost depletion method

Which of the following depreciation provisions are available to listed property that is used more than 50% for business purposes? (Check all that apply.)

-- Section 179 expensing on the business-use percentage of the cost -- Bonus depreciation on the business-use percentage of the cost -- MACRS depreciation on the business-use percentage of the cost

Which of the following costs should be included in the asset's original cost basis? (Check all that apply.)

-- Shipping charges -- Purchase price -- Sales tax -- Repairs prior to putting the asset in service -- Installation charges

Which of the following assets qualifies as residential rental property? (Check all that apply.)

-- Single-family rental homes -- Apartment building -- Duplex rented to individuals and families

Which of the following items are classified as Section 197 intangibles? (Check all that apply.)

-- Trademarks -- Covenants not to compete -- Goodwill

Sally's Seashells, a calendar year company, purchased three assets during April of the current year: Asset A costing $20,000 with a 5-year recovery period; Asset B costing $20,000 with a 7-year recovery period; Asset C costing $120,000 with a 27.5 year recovery period. Sally wants to maximize her depreciation deduction for the year. If she takes Section 179 expense on only one asset, she should chose __.

Asset B

Real Property

Buildings and land

True or false: In order to calculate MACRS depreciation, the business only needs to know the asset's depreciable basis, the recovery period, and which depreciation method (i.e. 200% declining balance) is used.

False

True or false: The cost of marketing or selling stock qualifies as an organizational expenditure and is amortized over 180 months.

False

True or false: When §197 does not apply, patents or copyrights should be amortized over their legal lives.

False

Which one of the following assets is generally NOT referred to as listed property?

Filing cabinet

In which accounting area(s) is an asset's estimated useful life determined by the taxpayer's assessment, rather than being predetermined based on asset type?

Financial accounting only

Which of the following statements is correct regarding the depreciable lives of business assets?

For financial accounting, management can choose the estimated life. For tax purposes, Congress has set recovery periods for various types of assets.

Depletion

Natural resources

Which of the following options is NOT a category for intangible assets?

Natural resources

Intangible assets

Nonphysical assets

Which of the following assets has a 7-year recovery period for MACRS depreciation?

Office furniture and fixtures

Which of the following calculations is used to determine an asset's adjusted basis?

Original basis + significant improvements - depreciation allowed or allowable

_____-_____ property is any property such as clothing, a home, or a car, that is for purposes OTHER THAN use in a trade, business, or income-producing venture. Machinery, furniture, and any other tangible property other than buildings and land is designated as _____ property. The term that includes buildings and land is _____ property.

Personal-Use personal real

Rambo Manufacturing Co. purchased $2,885,000 in new production equipment during 2021. All of the equipment was purchased in June. What is the maximum depreciation deduction Rambo can take this year (assuming Rambo elected out of taking bonus depreciation)?

Section 179 $785,000; MACRS $300,090

Rex's Wrecks purchased $1,251,000 in new equipment during 2021. Rex wants to use Section 179 to expense the maximum amount of the purchase. If Rex is not using bonus depreciation, how much will Rex get to expense under Section 179 and what will be the adjusted basis of the assets for calculating MACRS depreciation expense?

Section 179 $1,050,000; adjusted basis subject to MACRS $201,000

When does a business have to use the mid-quarter convention?

When more than 40% of the tangible personal property purchased is placed in service during the fourth quarter of the year

The mid-quarter test is applied _____ (before/after) the Section 179 expense is deducted from an asset's basis, and _____ (before/after) bonus depreciation is taken.

after before

A business's deductible Sec. 179 expense is limited to the taxpayer's _____ _____ before deducting the Sec. 179 expense. The business can _____ _____ any amount that cannot be deducted in the current year.

business income carry forward

The amount of depletion that can be taken on an annual basis is the larger of the amounts computed under the _____ depletion method or the _____ depletion method.

cost percentage