Chapter 10
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 $(1) under Sec. 179, $(2) in bonus depreciation, and $(3) in regular MACRS depreciation (rounded to the nearest dollar).
1. 1,020,000 2. 630,000 3. 0
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 $(1).
1. 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 $(1) in regular MACRS depreciation and bonus depreciation the first year. However, he will only be able to deduct $(2) due to the luxury limitations.
1. 78,000 2. 18,000
The mid-quarter test is applied (1) (before/after) the Section 179 expense is deducted from an asset's basis, and (2) (before/after) bonus depreciation is taken.
1. after 2. before
The (1)-(2) convention applies to the amortization of purchased intangibles.
1. full 2. month
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
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 options is NOT a category for intangible assets?
Natural resources
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
A business's deductible Sec. 179 expense is limited to the taxpayer's (1) (2) before deducting the Sec. 179 expense. The business can (3) (4) any amount that cannot be deducted in the current year.
1. business 2. income 3. carry 4. forward
Business assets that are often used for both business and personal purposes are referred to as (1) property.
1. listed
Costs, such as investigating the possibilities of and actually creating or acquiring a trade or business, are referred to as (1)-(2) costs.
1. start 2. up
Select all that apply Which of the following assets qualifies as residential rental property? (Check all that apply.)
Apartment building Duplex rented to individuals and families Single-family rental homes
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.
Select all that apply Which of the following items could be classified as Section 197 intangibles? (Check all that apply.)
Customer lists Goodwill Patents Trademarks
Rex's Wrecks purchased $150,000 in new equipment during 2019. 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.
Rambo Manufacturing Co. purchased $2,885,000 in new production equipment during 2019. 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-$685,000; MACRS-$314,380
Under Code Section (1), businesses may elect to immediately expense up to $(2) of tangible personal property placed in service during 2019.
1. 179 2. 1,020,000
The mid-quarter convention is used for all assets purchased during the year when more than (1)% of the tangible (2) property purchased is placed in service during the fourth quarter of the year.
1. 40 2. personal
The MACRS recovery period for computers and peripheral equipment, cars, and light general-purpose trucks is (1) years. The recovery period for office furniture, fixtures, machinery, and equipment is (2) years.
1. 5 2. 7
Section 179 expensing, bonus depreciation, and MACRS depreciation rates are available for listed property if its business-use percentage exceeds (1)%.
1. 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 $(1).
1. 50,000
The luxury automobile limitations do NOT apply to vehicles weighing more than (1) pounds. These vehicles are allowed to compute regular (2) depreciation expenses for these vehicles.
1. 6,000 2. MACRS
The amount of depletion that can be taken on an annual basis is the larger of the amounts computed under the (1) depletion method or the (2) depletion method. (Enter only one word per blank.)
1. cost 2. percentage
The method of deducting the cost of tangible personal and real property over its useful life is (1). The method of deducting the cost of intangible assets over a specific time is (2). The method of deducting the cost of natural resources over time is (3).
1. depreciation 2. amortization 3. depletion
The (1)-(2) 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.
1. half 2. year
When depreciating real property under MACRS, the recovery rates are based on the (1)-(2) method.
1. straight 2. line
True or false: All patents or copyrights where §197 does not apply should be amortized over their legal lives.
False
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.
When depreciating real property under MACRS, which of the following conventions is used?
Mid-month
Match the type of asset with its description.
Personal property: Tangible assets such as equipment and machinery Real property: Buildings and land Intangible assets: Nonphysical assets Natural resources: Commodities such as oil, timber, and gold
Select all that apply 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-use property Personal property
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?
$16,000
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.
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
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 (1) years.
1. 39
Businesses deduct percentage depletion when they (1) the natural resource, and they deduct cost depletion in the year they (2) or extract the natural resource.
1. sell 2. produce
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
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
Select all that apply Which of the following assets are generally referred to as listed property? (Check all that apply.)
Automobiles Digital cameras
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
Select all that apply 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 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. Expense the costs immediately.
Select all that apply Which of the following items are classified as Section 197 intangibles? (Check all that apply.)
Covenants not to compete Goodwill Trademarks
Select all that apply Which of the following items are needed to calculate MACRS depreciation for an asset? (Check all that apply.)
Date placed in service Applicable depreciation convention Asset's depreciable basis Applicable depreciation method Applicable recovery period
True or false: The cost of marketing or selling stock qualifies as an organizational expenditure and is amortized over 180 months.
False
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.
Which depreciation method is most likely to be used by profitable businesses with high marginal tax rates?
MACRS 200% declining balance
Rex's Wrecks purchased $1,251,000 in new equipment during 2019. 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-$1,020,000; adjusted basis subject to MACRS-$231,000
If a business purchases $3,220,000 in equipment during 2019, what is the impact on the Section 179 election?
The ceiling amount will be reduced by $670,000 to a maximum eligible deduction of $350,000 for the current year.
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
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
The cost recovery of the capital investment in natural resources is referred to as (1).
depletion
Which of the following assets has a 5-year recovery period for MACRS depreciation?
Light general-purpose trucks
All real property is depreciated using the (1)-(2) convention.
1. mid 2. month
In order to compute MACRS depreciation, which of the following pieces of information is NOT required?
salvage or residual value for the asset
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
If an asset's business use drops to 50%, or below, the business must (1) any excess accelerated depreciation over the (2) (3) depreciation for all prior years.
1. recapture 2. straight 3. line
During the 2019 tax year, businesses may elect to immediately expense up to $(1) of tangible (2) property placed in service that year under Section 179. For any assets that are completely or partially expensed, the company must reduce the (3) of the asset before computing MACRS depreciation expense.
1. 1,020,000 2. personal 3. basis
For the 2019 tax year, taxpayers can elect to immediately expense (1)% of qualified property as bonus depreciation. The bonus depreciation is calculated (before/after) (2) the Section 179 expense and (before/after) (3) regular MACRS depreciation.
1. 100 2. after 3. before
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 $(1) in regular MACRS depreciation and bonus depreciation the first year. However, he will only be able to deduct $(2) due to the luxury limitations (considering allowable bonus depreciation).
1. 90,000 2. 18,000
In years where many new assets are purchased, regular tax depreciation will be (1) (greater/less) than AMT depreciation, resulting in an (2) (addition/subtraction) of the difference to regular taxable income to arrive at the AMT tax base.
1. greater 2. addition
Real property is classified in one of three ways: (1), which is NOT depreciable; (2) rental property, which is used as dwelling units by lessees; or (3) property.
1. land 2. residential 3. nonresidential
The (1)-(2) convention is used for all assets purchased during the year when more than (3)% of the tangible personal property purchased is placed in service during the fourth quarter of the year.
1. mid 2. quarter 3. 40
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 (1) (2).
1. organizational 2. expenditures
Select all that apply 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
Select all that apply 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. For AMT, the total AMT depreciation is added to regular taxable income to calculate the AMT base. Depreciation of real property uses longer recovery periods for AMT purposes than for regular tax purposes.
Select all that apply 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, 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. For AMT purposes, the difference between regular tax depreciation and AMT depreciation is an adjustment used to calculate the AMT base.
Which convention applies to the amortization of purchased intangibles?
Full-month
Select all that apply Which of the following costs should be included in the asset's original cost basis? (Check all that apply.)
Shipping charges Repairs prior to putting the asset in service Sales tax Purchase price Installation charges
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.
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.
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
Land and buildings are classified as (1) property, while items such as machinery, equipment, and furnishings are classified as tangible, personal property.
1. real
Business assets that are often used for both (1) and (2) purposes are referred to as listed property.
1. personal 2. business
Match the method of cost allocation to the nature of the asset being expensed over a specific time period.
Depreciation: Tangible personal and real property (except land) Amortization: Intangible assets Depletion: Natural resources
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 $(1).
1. 120,000
(1)-(2) 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 (3) property. The term that includes buildings and land is (4) property.
1. personal 2. use 3. personal 4. real
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 $20,000 with a 39 year recovery period that is made up of qualified real property (leasehold improvements). Her net income before the Section 179 expense is $20,000. So, she is only planning to expense one of the assets under Section 179, will elect out of bonus depreciation and will depreciate the other two under MACRS. Which asset should she choose if she wants to maximize her depreciation deduction, and she uses the half-year convention for tangible, personal property?
Asset B
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
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: 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
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
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
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.
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
Fill in the blanks to complete the sentence. If an asset's business use drops to 50%, or below, the business must (1) any excess accelerated depreciation over the (2) (3) depreciation for all prior years.
1. recapture 2. straight 3. line
Similar assets purchased in the same year must be depreciated using the (1) (same/different) depreciation method, but similar assets purchased in different years can be depreciated using (2) (same/different) depreciation methods.
1. same 2. different
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.
Select all that apply 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 New delivery truck Used equipment
Match the type of real property with the MACRS recovery period for that type of property.
Nondepreciable: Land 39 yrs: Nonresidential property placed in service after May 13, 1993 27.5 yrs: Residential rental property 31.5 yrs: Nonresidential property placed in service after Dec. 31, 1986 and before May 13, 1993
Which of the following calculations is used to determine an asset's adjusted basis?
Original basis + significant improvements - depreciation allowed or allowable
Select all that apply 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
Select all that apply Which of the following choices are categories of intangible assets? (Check all that apply.)
Research and experimentation costs Patents and copyrights Start-up expenditures and organizational 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.
