Tax Chapter 8

Data, Inc., purchased and placed in service a $5,000 computer on August 24, year 3. This is the only asset purchase during the year. Section 179 expensing was not elected. Using the excerpt of the MACRS half-year convention table below, what is the MACRS depreciation in year 3 for the computer?

$1,000 (20% x $5,000)

On March 25, 2018, Parscale Company purchases the rights to a mineral interest for $8,000,000. At that time, the remaining recoverable units in the mineral interest are estimated to be 500,000 tons. If required, round any division to two decimal places and use in subsequent computations. Round your final answer to the nearest dollar. If 80,000 tons are mined and 75,000 tons are sold this year, the cost depletion is $___

$1,200,000

Euclid acquires a 7-year class asset on May 9, 2018, for $80,000. Euclid does not elect immediate expensing under § 179. He does not claim any available additional first-year depreciation. Click here to access the depreciation table to use for this problem. If required, round your answers to the nearest dollar. Euclid's cost recovery deduction is $___ for 2018 and $___ for 2019.

$11,432, $19,592 2018: $80,000 x .1429 (Exhibit 8.3) = $11,432 2019: $80,000 x .2449 (Exhibit 8.3) = $19,592

On January 15, 2018, Dillon purchased the rights to a mineral interest for $3,500,000. At that time it was estimated that the recoverable units would be 500,000. During the year, 40,000 units were mined and 25,000 units were sold for $800,000. Dillon incurred expenses during 2018 of $500,000. The percentage depletion rate is 22%. Determine Dillon's depletion deduction for 2018.

$175,000 Cost depletion: $3,500,000 ÷ 500,000 = $7 per unit 25,000 units sold × $7 per unit = $175,000 Percentage depletion: $800,000 × 22% =$176,000 Limit: ($800,000 - $500,000) × 50% =$150,000 Greater of cost or percentage depletion = $175,000

Three years ago, Marshall purchased an automobile for personal purposes for $38,000. In 2018, he contributes the automobile to his business. At the time of the contribution the automobile was appraised for $22,000. The basis for cost recovery of the automobile is $___.

$22,000

Tan Company acquires a new machine (ten-year property) on January 15, 2018, at a cost of $200,000. Tan also acquires another new machine (seven-year property) on November 5, 2018, at a cost of $40,000. No election is made to use the straight-line method. The company does not make the § 179 election and elects to not take additional first-year depreciation. Determine the total deductions in calculating taxable income related to the machines for 2018.

$25,716 10-year property MACRS cost recovery ($200,000 × .10) $20,000 7-year property MACRS cost recovery ($40,000 × .1429) 5,716 Total cost recovery $25,716

Indigo Company acquires a new machine (5-year MACRS property) on February 2, 2018 at a cost of $100,000. On November 18, 2018, Indigo also acquires office equipment (7-year MACRS property) at a cost of $50,000. Indigo does not make a § 179 expense election and chooses not to take additional first-year depreciation. What is Indigo's total MACRS deduction for 2018?

$27,145 5-year MACRS $100,000 × .2000 = $20,000 7-year MACRS $50,000 × .1429 = 7,145 Total = $27,145

Andre acquired a computer on March 3, 2018, for $2,800. He elects the straight-line method for cost recovery. Andre does not elect immediate expensing under § 179. He does not claim any available additional first-year depreciation. Click here to access the depreciation table to use for this problem. His cost recovery deduction for the computer is $___ for 2018 and $___ for 2019.

$280, $560 For 2018: $2,800 x 10% (Exhibit 8.5) = $280. For 2019: $2,800 x 20% (Exhibit 8.5) = $560.

Oleander Corporation, a calendar year entity, begins business on March 1, 2018. The corporation incurs startup expenditures of $64,000. In your calculations, round any division to 2 decimal places. Round your final answer to the nearest dollar. If Oleander elects § 195 treatment, the total amount of startup expenditures that it may deduct in 2018 is $___.

$3,556 [(64,000/180) * 10 months]

Hamlet acquires a 7-year class asset on November 23, 2018, for $100,000. Hamlet does not elect immediate expensing under § 179. He does not claim any available additional first-year depreciation. Click here to access the depreciation table to use for this problem. If required, round your answers to the nearest dollar. Hamlet's cost recovery deduction is $___ for 2018 and $___ for 2019.

$3,570, $27,550 2018: $100,000 x .0357 (Exhibit 8.4) = $3,570 2019: $100,000 x .2755 (Exhibit 8.4) = $27,550

Jebali Company reports gross income of $340,000 and other property-related expenses of $229,000 and uses a depletion rate of 14%. Jebali's depletion allowance is $___

$47,600 Gross income $340,000 Less: other expenses (229,000) Taxable income before depletion $111,000 Depletion allowance = $47,600* *[The lesser of $47,600 (14% x $340,000) or $55,500 (50% x $111,000)]

On April 5, 2018, Kinsey places in service a new automobile that cost $36,000. He does not elect § 179 expensing, and he elects not to take any available additional first-year depreciation. The car is used 70% for business and 30% for personal use in each tax year. Kinsey chooses the MACRS 200% declining-balance method of cost recovery (the auto is a 5-year asset). Click here to access the depreciation table to use for this problem. Assume the following luxury automobile limitations: year 1: $10,000; year 2: $16,000. Compute the total depreciation allowed for: 2018: 2019:

$5,040 = the lesser of ($36,000 x 20% x 70% = 5,040) or (10,000 x 70% = 7,000) $8,064 = the lesser of ($36,000 x 32% x 70% = 8,064) or (16,000 x 70%)

Diana acquires, for $65,000, and places in service a 5-year class asset on December 19, 2018. It is the only asset that Diana acquires during 2018. Diana does not elect immediate expensing under § 179. She elects additional first-year deprecation. Click here to access the depreciation table to use for this problem. Diana's total cost recovery deduction for the asset is $___ for 2018.

$65,000

On September 30, 2018, Priscilla purchased a business. Of the purchase price, $60,000 is allocated to a patent and $375,000 to goodwill. If required, round your intermediate values to nearest dollar and use in subsequent computations. The 2018 § 197 amortization deduction is $___

$7,250 Patent: $60,000 /15 years = $4,000 x 3/12* = $1,000 Goodwill: $375,000 /15 years = $25,000 x 3/12* = $6,250.

On October 1, 2018, Priscilla purchased a business. Of the purchase price, $60,000 is allocated to a patent and $375,000 to goodwill. If required, round your answer to the nearest dollar. The 2018 § 197 amortization deduction is $___

$7,250 [(60,000/15 * 3/12) + (375,000/15 * 3/12)]

Data, Inc., purchased and placed in service $5,000 of office furniture on August 24, year 3. This is the only asset purchase during the year. Section 179 expensing was not elected. Using the excerpt of the MACRS half-year convention table below, what is the MACRS depreciation in year 3 for the office furniture?

$715 (14.29% x $5,000)

Maple Company purchases new equipment (7-year MACRS property) on January 10, 2018, at a cost of $430,000. Maple also purchases new machines (5-year MACRS property) on July 19, 2018 at a cost of $290,000. Maple wants to maximize its MACRS deductions; assume no taxable income limitations apply. What is Maple's total MACRS deduction for 2018?

$720,000 In 2018, the maximum § 179 deduction is $1,000,000. Additional first-year (bonus) depreciation could also be claimed. As a result, the maximum MACRS deduction for 2018 is $720,000 ($430,000 + $290,000).

Identify the three factors reflected in the MACRS tables when the amount of cost recovery is determined. The three factors which the MACRS tables take into account are:

1) recovery period 2) method 3) convention

Complete the statement below regarding the amortization period of a § 197 intangible the actual useful life is less than 15 years. The amortization period for a § 197 intangible is ___, beginning ___.

15 years regardless of the actual useful life, in the month acquired

Under MACRS, if the mid-quarter convention is applicable, all property sold is treated as being sold at the mid-point of the quarter in which it is placed in service.

False, all property sold is treated as being sold at the mid-point of the quarter in which it is sold.

Land improvements are generally not eligible for cost recovery.

False, land improvements are 15-year class property.

If depreciation is claimed, it should be supported by completing ___

Form 4562

Which of the following assets would be subject to cost recovery?

Landscaping around the doctor's office.

Michael Sima, a sole proprietor craftsman, purchased an amount of equipment in the current year that exceeded the maximum allowable § 179 depreciation election limit by $20,000. Sima's total purchases of property placed in service in the current year did not exceed the limit imposed by § 179. All of the property (including the equipment) was purchased in November of the current year, and Sima elected to depreciate the maximum amount of equipment under § 179. Sima had bottom-line Schedule C income of $50,000 in the current year. Which method may Sima use to depreciate the remaining equipment in the current year?

MACRS mid-quarter convention for personal property.

Answer the following question regarding personal use property. Is property that is classified as personal use property subject to cost recovery?

No

Complete the statements below regarding § 179 expense and expense recapture. ___ income recapture is required any time property, on which an expense has been taken under § 179, is no longer used predominantly ___. ___ is required when the expensed property is converted to personal use.

Ordinary, in a trade or business, Recapture

All personal property placed in service in 2018 and used in a trade or business qualifies for additional first-year depreciation.

True

For personal property placed in service in 2018, the § 179 maximum deduction is limited to $1,000,000.

True

If an automobile is placed in service in 2018, the limitation for cost recovery in 2020 will be based on the cost recovery limits for the year 2018.

True

If more than 40% of the value of property, other than real property, is placed in service during the last quarter, all of the property placed in service in the second quarter will be allowed 7.5 months of cost recovery.

True

Property used for the production of income is not eligible for § 179 expensing.

True

Property which is classified as personalty may be depreciated.

True

Taxable income for purposes of § 179 limited expensing is computed by including the MACRS deduction.

True

The basis of cost recovery property must be reduced by at least the cost recovery allowable.

True

The cost recovery basis for property converted from personal use to business use may be the fair market value of the property at the time of the conversion.

True

The key date for calculating cost recovery is the date the asset is placed in service.

True

Regarding the computation of cost recovery in the year of sale of an asset using the mid-quarter convention, indicate whether the following statements are "True" or "False". • If the mid-quarter convention applies, the property is treated as though it were disposed of at the midpoint of the quarter. • If the mid-quarter convention applies, no cost recovery deduction is allowed in the year of sale. • If the mid-quarter convention applies, one-quarter of the annual cost recovery deduction is allowed in the year of sale.

True, False, False

Martha was considering starting a new business. During her preliminary investigations related to the new venture, she incurred the following expenditures: Salaries $22,000 Travel 18,000 Professional fees 13,000 Interest on a short-term note 4,000 Martha begins the business on July 1 of the current year. a. Classify for Martha the following expenditures as "Qualifies as a startup costs" or "Does not qualify as a startup cost". 1) Salaries 2) Travel 3) Professional fees 4) Interest on a short-term note b. If Martha elects § 195 treatment, enter the startup expenditure deduction for the current year. In your calculations, round any division to 2 decimal places. Round your final answer to the nearest dollar. Current year startup expenditure equals $___

a. 1) Qualifies as a startup cost 2) Qualifies as a startup cost 3) Qualifies as a startup cost 4) Does not qualify as a startup cost b. $3,700 [5,000 - (53,000-50,000)] + {[(53,000 - 2,000)/180] x 6 months}

Lopez acquired a building on June 1, 2013, for $1,000,000. Compute the depreciation deduction assuming the building is classified as (a) residential and (b) non residential. Click here to access the depreciation table to use for this problem. If required, round your answers to the nearest dollar. a. If the building is classified as residential rental real estate, Lopez's cost recovery deduction is $___ for 2018. b. If the building is classified as nonresidential real estate, Lopez's cost recovery deduction is $___ for 2018.

a. $36,360 b. $25,640 a. Residential rental real estate: $1,000,000 x .03636 (Exhibit 8.8) = $36,360 b. Nonresidential rental real estate: $1,000,000 x .02564 (Exhibit 8.8) = $25,640

McKenzie purchased qualifying equipment for his business that cost $212,000 in 2018. The taxable income of the business for the year is $5,600 before consideration of any § 179 deduction. If an amount is zero, enter "0". a. McKenzie's § 179 expense deduction is $___ for 2018. His § 179 carryover to 2019 is $___. b. How would your answer change if McKenzie decided to use additional first-year (bonus) depreciation on the equipment? Hint: See Concept Summary 8.5. McKenzie's § 179 expense deduction is $___ for 2018. His § 179 carryover to 2019 is $___.

a. $5,600, $206,400 b. $212,000, $0

Xavier Corporation begins business on March 1, 2018. The corporation incurs start-up expenditures of $38,000. Round your final answers to the nearest dollar. a. If Xavier elects amortization under § 195, the total start-up expenditures that Xavier may deduct in 2018 is $___ b. Assume the same facts except the start-up costs totaled $52,000. The total start-up expenditures that Xavier may deduct in 2018 is $___

a. $6,833 = 5,000 + {[(38,000-5,000)/180] x 10 months} b. $5,722 = [5,000 - (52,000 - 50,000)] + {[(52,000 - 3,000)/180] x 10 months}

Wes acquired a mineral interest during the year for $10,000,000. A geological survey estimated that 250,000 tons of the mineral remained in the deposit. During the year, 80,000 tons were mined, and 45,000 tons were sold for $12,000,000. Other related expenses amounted to $5,000,000. Assume the mineral depletion rate is 22%. a. What is the taxable income before the deduction for depletion? b. Under cost depletion, what is the amount of the deduction? c. Under percentage depletion, what is the amount of the deduction? d. Wes's lowest taxable income after the depletion deduction is ___

a. $7,000,000 b. $1,800,000 [(10,000,000/250,000)*45,000] c. 2,640,000 = lesser of (7,000,000 * 50%) or (12,000,000 * 22%) d. 4,360,000

For the following assets, indicate the cost recovery periods under MACRS. a. Land improvements. b. Water utilities. c. Single-purpose agricultural or horticultural structures. d. Office furniture, fixtures, and equipment. e. Computers and peripheral equipment. f. Any horse that is not a racehorse and is more than 12 years old at the time it is placed in service.

a. 15 b. 20 c. 10 d. 7 e. 5 f. 3

Robert purchased and placed in service $100,000 of 7-year class assets on August 10 of the current year. He also purchased and placed in service $500,000 of 5-year class assets on November 15 of the current year. He does not claim any available additional first-year depreciation. Robert elects to use the MACRS straight-line method of cost recovery on the 7-year class assets. Regarding the calculation of cost recovery for the 5-year class assets, indicate which of the following statements are "True" and which are "False". Robert is a calendar year taxpayer. a. The cost recovery on the five-year class assets is computed using mid-quarter convention MACRS. b. The cost recovery on the five-year class assets is computed using the MACRS straight-line method. c. Neither the seven-year nor five-year assets can use the straight-line method, since those assets are not real property.

a. True b. False c. False

Label the following statements as either "True" or "False" as regards the treatment of Section 179 in a year in which a carryforward has occurred. For example, in 2018, which of the following statements would pertain to a Section 179 carryforward from 2017. a. It may be reduced, dollar-for-dollar, if the cost of § 179 property placed in service is in excess of $2,500,000. b. No limit applies to the carryover if the taxpayer is considered a small business and has total assets of less than $1,000,000. c. It may be limited to the business income in the carryforward year. d. It may be limited to the additional first-year depreciation taken in the carryforward year.

a. True b. False c. True d. False

Indicate whether the following statements are "True" or "False" regarding cost recovery for tax purposes. a. Realty (real property) generally includes land and buildings permanently affixed to the land. b. Personal use property is only personalty property (personal property) that is held for personal use rather than for use in a trade or business or an income-producing activity. c. Assets used in a trade or business or for the production of income are eligible for cost recovery if they are subject to wear and tear, decay or decline from natural causes, or obsolescence. d. The key date for the commencement of depreciation is the date an asset is purchased. e. The basis of cost recovery property is reduced by the cost recovery allowed, and not less than the allowable amount.

a. True b. False c. True d. False. e. True

Harold and Bart own 75% of the stock of Orange Motors. The other 25% of the stock is owned by Jeb. Orange Motors entered into an agreement with Harold and Bart to acquire all of their Orange stock. In addition, Harold and Bart signed a noncompete agreement with Orange Motors. Under the terms of the noncompete agreement, Orange will pay Harold and Bart $15,000 each per year for four years. Help Orange Motors by classifying the following as either "True" or "False". a. The noncompete agreement is considered a § 197 intangible if it is acquired in connection with the acquisition of a business. b. If amortization is permitted, it will be over a 15-year period. c. $15,000 is the basis for purposes of calculating MACRS depreciation. d. If amortization is permitted, it will be ratably amortized over the designated period, beginning in the middle of the quarter it was acquired.

a. True b. True c. False d. False

Label the following as "True" or "False" regarding the definition of taxable income as it is used in limiting the § 179 expensing amount. a. The taxable income computation for purposes of the § 179 limit includes the deduction for MACRS. b. Taxable income of a trade or business is computed without regard to the amount expensed under § 179. c. The aggregate amount of taxable income includes net income from a trade or business as well as from the production of income activities. d. The taxable income computation for purposes of the § 179 limit excludes the deduction for additional first-year depreciation.

a. True b. True c. False d. False

Regarding how the cost of mineral rights enter into the calculation of cost depletion, classify each statement below as either "True" or "False". a. Cost depletion is determined by using the adjusted basis of the asset, and is a deduction for adjusted gross income. b. For cost depletion of the mineral rights, an economic interest in the resource is required. c. To compute the depletion for mineral rights, the depletion per unit is multiplied by the number of units sold during the year to arrive at the cost depletion allowed.

a. True b. True c. True

A professional consulting business sells professional tools and equipment and provides associated services, such as repair and maintenance, to its customer base. The company's employees include technicians who are required to provide and maintain their own tools and equipment for performing the repairs and maintenance work. The company will reimburse a technician for amounts spent to purchase tools and equipment eligible for a § 179 deduction up to a set amount each year. Any costs for tools and equipment that exceed the set amount will not be reimbursed. John is a technician for the company. During the current year, he purchased equipment that qualifies for the § 179 deduction. John paid $50,000 for the equipment and was reimbursed the set amount of $40,000. Classify for John the following as either "Yes, a relevant tax issue" or "No, not a tax issue" with respect to § 179 and the computation of his taxable income. a. Is John or the professional consulting business entitled to a § 179 deduction? b. Is the § 179 deduction allowed only for employers? c. How much, if any, can John deduct under § 179 on his own tax return? d. What are the tax consequences of the reimbursements that John receives?

a. Yes, a relevant tax issue b. No, not a tax issue c. Yes, a relevant tax issue d. Yes, a relevant tax issue

Complete the statements below that outline the difference between personal property and personal use property. Personalty is defined as ___. Personal use property is ___that is not held for income production or used in a trade or business. Therefore, cost recovery deductions ___ allowed for personal use assets.

any asset that is not realty, realty or personalty property, are not

Are land improvements used in a trade or business eligible for cost recovery? Land improvements ___ eligible for cost recovery, because they have ___.

are, a MACRS class life of 15 years

Complete the statement below in response to the question: "How does the § 179 immediate expensing deduction affect the computation of MACRS cost recovery?" The basis of the property for cost recovery purposes is ___ by the § 179 amount. The business income limitation ___ affect basis.

reduced, does not