TAX CH10

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; It's best to choose the asset with the longest recovery period because the depreciation deduction under MACRS is less than those with shorter recovery periods.; If Asset C is 27.5-year property, this means it must be a residential real property. Section 179 can NOT be used on residential real property.

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

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

True or false: A taxpayer will use the luxury automobile limitations for depreciation in the year the car is purchased, then the regular MACRS depreciation percentages will be applied for the remaining recovery periods. True false question.

false; If the automobile depreciation limits apply in the first year, the taxpayer must use the IRS maximum limits for all subsequent years.

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

false; These costs do NOT qualify as organizational expenditures and cannot be amortized.

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

false; a patent or copyright that is purchased should be amortized over the remaining useful life of the intangible, while a self-created patent or copyright should be amortized over its legal life

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

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

list

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

All real property is depreciated using the___ -___ convention.

mid month

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

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

Businesses deduct percentage depletion when they ___the natural resource, and they deduct cost depletion in the year they ___or extract the natural resource.

sell, produce

When depreciating real property under MACRS, the recovery rates are based on the__ method

straight line

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

true; Personal property is simply tangible property, other than real property. It may be used in a trade or business or it may be used personally.

Bill purchased a used automobile in the current year for $78,000 that will be used 100% for business. Assuming that the mid-quarter convention did NOT apply, what is the amount of depreciation he is allowed to take in the second year of the asset's life, assuming he elected NOT to take bonus depreciation in the first year?

$16,100; The car has a 5-year recovery period. The purchase price subjects the car to the luxury vehicle limits. The maximum deduction for year 2 is $16,100.

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; The computer is 5-year property and the oven is 7-year property.

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

Tom purchased a 7-year asset for his business in February, three years ago, at a cost of $4,500. It is being depreciated using the half-year convention for MACRS. He did not deduct any bonus depreciation and or take a Sec. 179 expense in the year of purchase. The asset was sold in April of year 4. How much depreciation will Tom deduct for the asset in year 4?

281; .1249 x $4,500 x .5

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; The truck has a 5-year recovery period, The truck is depreciated under the half-year convention with a 5- year recovery period.

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

recovery period of light general purpose trucks and computers/peripheral equipment

5 years

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

50

Angie's Cupcake Shop bought 7-year property furniture in February of Year 1 and sold it in May of Year 3. The original cost of the furniture was $8,200. Assuming Angie is using the MACRS half-year convention for the furniture, her depreciation deduction in the year of sale will be $__

717

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.

78,000, 181,000

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 and 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 and 18100

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.

Which of the following statements is correct regarding the depreciable lives of business assets? Multiple choice question.

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

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

Goodwill Trademarks Covenants not to compete

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; Rex can take a Section 179 deduction up to his business income before the deduction. He is also limited by the total purchase ($150,000).

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

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

Which of the following assets has a 5-year recovery period for MACRS depreciation?

Light general-purpose trucks

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

Regarding natural resources OTHER THAN oil and gas, which of the following statements is true for percentage depletion, but NOT true for cost depletion? Multiple choice question.

The amount can NOT exceed 50 percent of the taxable income from the natural resource business activity before deducting the depletion expense; This is true for cost depletion, but NOT for percentage depletion.

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.; If mid-quarter convention is used for one asset placed into service during the year, it must be used for all assets placed into service for the year.

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; The ceiling amount will be reduced by $600,000 to a maximum eligible deduction of $450,000 for the current year with a $0 carryforward.

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; The cost should be $2,500 + 150 + 200 = $2,850. The repairs after using the asset will be expensed.

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; This is the recovery period for a self-created patent

During the 2021 tax year, businesses may elect to immediately expense up to $__ of tangible__ property placed in service that year under Section 179. For any assets that are completely or partially expensed, the company must reduce the __of the asset before computing MACRS depreciation expense.

1,050,000, personal, basis

For the 2021 tax year, taxpayers can elect to immediately expense __% of qualified property as bonus depreciation. The bonus depreciation is calculated (before/after) ___the Section 179 expense and (before/after) regular__ MACRS depreciation.

100, after, before

Rex's Wrecks purchased $1,650,000 in new equipment (7 year property) during 2021. Rex wants to use Section 179 to expense the maximum amount of the purchase. Assuming no limitations due to net income restrictions, Rex can expense $ __under Sec. 179, $__ in bonus depreciation, and $__ in regular MACRS depreciation (rounded to the nearest dollar).

1050000, 600000, 0

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

Automobiles Digital cameras

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

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

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

When depreciating real property under MACRS, which of the following conventions is used?

Mid-month

Which of the following assets purchased in the current year are eligible to be expensed under Section 179 assuming the cost does NOT exceed the limitations? (Check all that apply.)

New delivery truck Used equipment New office furniture ; Real property is not eligible for Sec. 179 unless it is qualified real property. Qualified real property does not residential rental property.

Match the type of real property with the MACRS recovery period for that type of property.

Nondepreciable matches Choice, Land Land 39 yrs. matches Choice, Nonresidential property placed in service after May 13, 1993 Nonresidential property placed in service after May 13, 1993 27.5 yrs. matches Choice, Residential rental property Residential rental property 31.5 yrs. matches Choice, Nonresidential property placed in service after Dec. 31, 1986 and before May 13, 1993 Nonresidential property placed in service after Dec. 31, 1986 and before May 13, 1993

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

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

Patents Trademarks Goodwill Customer lists

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

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; The maximum Sec. 179 deduction is $1,050,000. The basis of the asset is reduced by the Sec. 179 amount before applying MACRS or S/L depreciation rates.

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; The ceiling is reduced by $265,000 (2,885,000-2,620,000) for a total of $785,000. Then apply MACRS at .1429 to the residual $2,100,000.

During the prior three years, listed property was being used 75% for business and 25% for personal use. For the current and future years, business use has dropped to 40%. Which of the following statements is correct?

Since the business use has dropped to 50% or below, the excess of accelerated depreciation over straight-line for all prior years must be recaptured.; If the business use drops to 50% or below, then the excess of MACRS depreciation over straight-line for all prior years is recaptured.

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