Tax Chapter 10 Learnsmart

Antoine owns a car. He uses the car for personal transportation. Which of the following classifications apply to the car? (Check all that apply.)

Personal Property Personal Use Property

In April of 2019, 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).

90000 ; 18000

True or false: Bonus depreciation is only available on new tangible personal property with a recovery period of 20 years or less. It can NOT be taken on used property.

False

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 added to regular taxable income to calculate the AMT base.

Rex's Wrecks purchased $150,000 in new equipment during the current year. 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.

Which of the following statements is correct regarding the depreciation of automobiles weighing over 6,000 pounds?

These vehicles can be depreciated using regular MACRS percentages.

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

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

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

Costs of legal services, state fees, and accounting services that relate to creating a business entity and are incurred prior to starting the business are referred to as ___ ____

organizational expenditures

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

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

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.

False

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, the IRS has set recovery periods for various types of assets.

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 office furniture used equipment new delivery truck

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

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

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

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

listed

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

mid-month

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 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%).

Under Code Section____ , businesses may elect to immediately expense up to $____ of tangible personal property placed in service during 2019.

179 ; 1020000

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

Applicable depreciation method Applicable recovery period Applicable depreciation convention Depreciable basis 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. Capitalize the costs and amortize them over the determinable useful life. Expense the costs immediately.

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.

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

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

automobiles ; digital camera

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

False

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

Which of the following is NOT considered a start-up cost of a business?

Legal fees to draft original organizational documents

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

Light general purpose trucks

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

Trademarks Covenants not to compete Goodwill

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

office furniture and fixtures

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

customer lists patents trademarks goodwill

True or false: Once the entire cost of a resource has been recovered, the business is NOT allowed to continue deducting depletion expense for the resource.

false

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

filing cabinet

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

Sally's Seashells purchased three assets during 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.

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

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

MACRS 200% declining balance

A 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 $3,180,000 in equipment during a given year, what is the impact on the Section 179 election?

The ceiling amount will be reduced by $630,000 to a maximum eligible deduction of $390,000 for the current year.

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

single family rental home duplex rented to family or individuals apartment building

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?

$3000 The truck is depreciated under the half-year convention with a 5- year recovery period.

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

For the current 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 2019. 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).

1020000 ; 630000 ; 0

Frank purchased land containing oil reserves for $425,000. He estimates the value of the land without the oil is $25,000. He also estimates that he can extract 20,000 barrels of oil from the property. In the first year of his endeavor, the property produced 6,000 barrels of oil. Assuming Charlie uses the cost depletion method, his depletion expense for the year is $

120000

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?

16000 ; 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 $16,000.

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

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

50

Charlie purchased land containing a large amount of trees for $225,000. He estimates the value of the land without the trees is $25,000 and that the timber is worth $200,000. He also estimates that he can get 1 million board feet of lumber from cutting the trees. In the first year of his endeavor, he cuts 250,000 board feet. Assuming Charlie uses the cost depletion method, his depletion expense for the year is $

50000

The luxury automobile limitations do NOT apply to vehicles weighing more than _____ pounds. These vehicles are allowed to compute regular _____ depreciation expenses for these vehicles.

6000 ; MACRS

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 2019, 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; 18000

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

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

Rambo Manufacturing Co. purchased $2,825,000 in new production equipment during the current year. 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-$745,000; MACRS-$297,232 The ceiling is reduced by $275,000 (2,825,000-2,550,000) for a total of $745,000. Then apply MACRS at .1429 to the residual $2,080,000.

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.

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

Start with the asset's original basisSubtract prior depreciation allowed or allowable on the assetAdd costs necessary to prepare the asset for use in the business

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

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

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

The amount can NOT exceed 50 percent of the taxable income from the natural resource business activity before deducting the depletion expense.

Andrew's Art Studio, a calendar 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.

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.

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

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 ____ and ____ purposes are referred to as listed property.

personal ; business

____-_____ 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

Costs, such as investigating the possibilities of and actually creating or acquiring a trade or business, are referred to as ____ - _____costs.

start-up

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

straight line

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

straight line

The business's deductible Sec. 179 expense is limited to the business's ______ _______ before deducting the Sec. 179 expense. The business can ______ ______any amount that cannot be deducted in the current year.

taxable income; carry forward