Chapter 10

Jose purchased a delivery van for his business through an online auction. His winning bid for the van was $24,500. In addition, Jose incurred the following expenses before using the van: shipping costs of $650; paint to match the other fleet vehicles at a cost of $1,000; registration costs of $3,200, which included $3,000 of sales tax and an annual registration fee of $200; wash and detailing for $50; and routine maintenance for $250. What is Jose's cost basis for the delivery van?

$29,150, cost basis in the delivery van, computed as follows: DescriptionAmountExplanation*Purchase price$24,500 Shipping costs 650Business preparation costPaint 1,000Business preparation costSales tax 3,000Business preparation costTotal cost basis$29,150 *Note that the registration fee, washing and detailing, and engine tune-up are costs for repairs and maintenance that are not required to be capitalized.

In January, Prahbu purchased a new machine for use in an existing production line of his manufacturing business for $90,000. Assume that the machine is a unit of property and is not a material or supply. Prahbu pays $2,500 to install the machine, and after the machine is installed, he pays $1,300 to perform a critical test on the machine to ensure that it will operate in accordance with quality standards. On November 1, the critical test is complete, and Prahbu places the machine in service on the production line. On December 3, Prahbu pays another $3,300 to perform periodic quality control testing after the machine is placed in service. How much will Prahbu be required to capitalize as the cost of the machine?

$93,800 cost basis, computed as follows: DescriptionAmountExplanationPurchase price$90,000 Installation costs 2,500Business preparation costsCritical test costs 1,300Business preparation costsCost basis in machine$93,800 Under Reg. §1.263(a)-2(d)(1) Prahbu must capitalize amounts paid to acquire or produce a unit of personal property machinery and equipment. Amounts paid to acquire or produce a unit of personal property include the invoice price, transaction costs, and costs for work performed prior to the date that the unit of property is placed in service by the taxpayer. The amounts paid for the installation and the critical test performed before the machine is placed in service must be capitalized as amounts to acquire the machine. However, the $3,300 paid for periodic quality control testing after Prahbu placed the machine in service is not required to be capitalized as amounts paid to acquire the machine. This amount is expensed as routine maintenance under Reg §1.263(a)-3(i).

Nicole organized a new corporation. The corporation began business on April 1 of year 1. She made the following expenditures associated with getting the corporation started: (Leave no answer blank. Enter zero if applicable.) ExpenseDateAmountAttorney fees for articles of incorporationFebruary 10$32,000March 1 - March 30 wagesMarch 30 4,500March 1 - March 30 rentMarch 30 2,000Stock issuance costsApril 1 20,000April 1 - May 30 wagesMay 30 12,000 Problem 10-73 Part b b. What amount of the start-up costs and organizational expenditures may the corporation immediately expense in year 1 (excluding the portion of the expenditures that are amortized over 180 months)?

. The corporation may immediately expense $5,000 of the organizational expenditure and $5,000 of the start-up costs because the amount of organizational expenditures is under $50,000 and the amount of start-up costs is under $50,000.

Last Chance Mine (LCM) purchased a coal deposit for $750,000. It estimated it would extract 12,000 tons of coal from the deposit. LCM mined the coal and sold it, reporting gross receipts of $1 million, $3 million, and $2 million for years 1 through 3, respectively. During years 1-3, LCM reported net income (loss) from the coal deposit activity in the amount of ($20,000), $500,000, and $450,000, respectively. In years 1-3, LCM actually extracted 13,000 tons of coal as follows: (Leave no answer blank. Enter zero if applicable. Enter your answers in dollars and not in millions of dollars.) (1)(2)Depletion (2)/(1)Tons Extracted per YearTons of CoalBasisRateYear 1Year 2Year 312,000$750,000$62.502,0007,2003,800 Problem 10-75 Part b b. What is LCM's percentage depletion for each year (the applicable percentage for coal is 10 percent)?

0 250000 200000 LCM's percentage depletion for each year is calculated as follows: Year 1 Year 2 Year 3 Explanation(1)Net income from activity (before depletion expense)$(20,000) $500,000 $450,000 Given in problem(2)Gross Income$1,000,000 $3,000,000 $2,000,000 Given in problem(3)Percentage×10% ×10% ×10% Given in problem(4)Percentage Depletion Expense before limit$100,000 $300,000 $200,000 (2) × (3)(5)50% of net income limitation$0 $250,000 $225,000 (1) × 50% Allowable percentage depletion$0 $250,000 $200,000 Lesser of (4) or (5) Note that percentage depletion is not limited to the basis in the property.

At the beginning of the current year, Poplock began a calendar-year dog boarding business called Griff's Palace. Poplock bought and placed in service the following assets during the year: DateCostAssetAcquiredBasisComputer equipment3/23$5,000Dog-grooming furniture5/12 7,000Pickup truck9/17 10,000Commercial building10/11 270,000Land (one acre)10/11 80,000 Assuming Poplock does not elect §179 expensing and elects not to use bonus depreciation, answer the following questions: (Use MACRS Table 1, Table 2, Table 3, Table 4 and Table 5.) (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount. Leave no answer blank. Enter zero if applicable.) rev: 11_14_2019_CS-190192 Problem 10-46 Part a a. What is Poplock's year 1 depreciation deduction for each asset?

1000 1000 2000 1445 0 a. $5,445, under the half-year convention for personal property, calculated as follows: Purchase Recovery(1) Original(2)(1) × (2)AssetDateQuarterPeriod BasisRateDepreciationComputer equipment23-Mar1st5years$5,00020.00%$1,000Dog grooming furniture12-May2nd7years$7,00014.29% 1,000Pickup truck17-Sep3rd5years$10,00020.00% 2,000Commercial building11-Oct4th39years$270,0000.535% 1,445 $5,445 Land is not depreciable.

AMP Corporation (calendar-year-end) has 2019 taxable income of $1,900,000 for purposes of computing the §179 expense. During 2019, AMP acquired the following assets: (Use MACRS Table 1, Table 2, Table 3, Table 4 and Table 5.) Placed in AssetService BasisMachinerySeptember 12$1,550,000Computer equipmentFebruary 10 365,000Office buildingApril 2 480,000Total $2,395,000 Problem 10-56 Part a a. What is the maximum amount of §179 expense AMP may deduct for 2019?

1020000 The maximum §179 expense is $1,020,000. DescriptionAmountExplanation(1)Property placed in service in 2019$1,915,000 Total §179 qualified property(2)Threshold for §179 phase-out (2,550,000)2019 amount [§179(b)(2)](3)Phase-out of maximum §179 expense$0 (1) - (2) (permanently disallowed), not less than $0.(4)Maximum 179 expense before phase-out$1,020,000 2019 amount [§179(b)(1)](5)Phase-out of maximum §179 expense$0 From (3)(6)Maximum §179 expense after phase-out$1,020,000 (4) − (5)

Carl purchased an apartment complex for $1.1 million on March 17 of year 1. of the purchase price, $300,000 was attributable to the land the complex sits on. He also installed new furniture into half of the units at a cost of $60,000. (Use MACRS Table 1, Table 2, Table 3, Table 4 and Table 5.) (Enter your answers in dollars and not in millions of dollars.) Problem 10-52 Part-b b. What is Carl's allowable depreciation deduction for year 3 if the real property is sold on January 2 of year 3? (Do not round intermediate computations.)

1212 The depreciation for year 3 is computed as follows: (1) RecoveryDate PlacedOriginal(2)(1) × (2)YearMethodPeriodin ServiceBasisRateDepreciation3SL27.5March 17$800,0003.636%$29,088 Partial year*×0.5/12 $1,212 *mid-month convention applies to real property in year of acquisition and year of disposition.

Last Chance Mine (LCM) purchased a coal deposit for $750,000. It estimated it would extract 12,000 tons of coal from the deposit. LCM mined the coal and sold it, reporting gross receipts of $1 million, $3 million, and $2 million for years 1 through 3, respectively. During years 1-3, LCM reported net income (loss) from the coal deposit activity in the amount of ($20,000), $500,000, and $450,000, respectively. In years 1-3, LCM actually extracted 13,000 tons of coal as follows: (Leave no answer blank. Enter zero if applicable. Enter your answers in dollars and not in millions of dollars.) (1)(2)Depletion (2)/(1)Tons Extracted per YearTons of CoalBasisRateYear 1Year 2Year 312,000$750,000$62.502,0007,2003,800 Problem 10-75 Part a a. What is LCM's cost depletion for years 1, 2, and 3?

125000 450000 175000 LCM's cost depletion is $125,000 for year 1, $450,000 for year 2, and $175,000 for year 3, calculated as follows: Year 1Year 2Year 3Explanation(1)Tons extracted 2,000 7,200 3,800 Given in problem(2)Depletion rate$62.50$62.50$62.50 Given in problem Cost Depletion Expense$125,000$450,000$175,000*(1) × (2) *This is the remaining basis. Under the cost depletion method, the taxpayer's amortization is limited to the cost basis in the natural resource. The full amount of amortization would have been $237,500 if this were not the case.

Last Chance Mine (LCM) purchased a coal deposit for $750,000. It estimated it would extract 12,000 tons of coal from the deposit. LCM mined the coal and sold it, reporting gross receipts of $1 million, $3 million, and $2 million for years 1 through 3, respectively. During years 1-3, LCM reported net income (loss) from the coal deposit activity in the amount of ($20,000), $500,000, and $450,000, respectively. In years 1-3, LCM actually extracted 13,000 tons of coal as follows: (Leave no answer blank. Enter zero if applicable. Enter your answers in dollars and not in millions of dollars.) (1)(2)Depletion (2)/(1)Tons Extracted per YearTons of CoalBasisRateYear 1Year 2Year 312,000$750,000$62.502,0007,2003,800 Problem 10-75 Part c c. Using the cost and percentage depletion computations from parts (a) and (b), what is LCM's actual depletion expense for each year?

125000 450000 200000 Depletion expense is the greater of cost depletion or percentage depletion calculated as follows: Tax Depletion ExpenseYear 1 Year 2 Year 3Explanation(1)Cost depletion$125,000 $450,000 $175,000Part a(2)Percentage depletion$0 $250,000 $200,000Part b Deductible depletion expense$125,000 $450,000 $200,000Greater of (1) or (2)

At the beginning of the current year, Poplock began a calendar-year dog boarding business called Griff's Palace. Poplock bought and placed in service the following assets during the year: DateCostAssetAcquiredBasisComputer equipment3/23$5,000Dog-grooming furniture5/12 7,000Pickup truck9/17 10,000Commercial building10/11 270,000Land (one acre)10/11 80,000 Assuming Poplock does not elect §179 expensing and elects not to use bonus depreciation, answer the following questions: (Use MACRS Table 1, Table 2, Table 3, Table 4 and Table 5.) (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount. Leave no answer blank. Enter zero if applicable.) rev: 11_14_2019_CS-190192 Problem 10-46 Part b b. What is Poplock's year 2 depreciation deduction for each asset?

1600 1714 3200 6923 0 $13,437, under the half-year convention for personal property, calculated as follows: Purchase Recovery(1) Original(2)(1) × (2)AssetDateQuarterPeriod BasisRateDepreciationComputer equipment23-Mar1st5years$5,00032.00%$1,600Dog grooming furniture12-May2nd7years$7,00024.49% 1,714Pickup truck17-Sep3rd5years$10,00032.00% 3,200Commercial building11-Oct4th39years$270,0002.564% 6,923 $13,437

Carl purchased an apartment complex for $1.1 million on March 17 of year 1. of the purchase price, $300,000 was attributable to the land the complex sits on. He also installed new furniture into half of the units at a cost of $60,000. (Use MACRS Table 1, Table 2, Table 3, Table 4 and Table 5.) (Enter your answers in dollars and not in millions of dollars.) Problem 10-52 Part a a. What is Carl's allowable depreciation deduction for his real property for years 1 and 2?

23032 29088 The depreciation on the real property for the 2 years is computed as follows: (1) RecoveryDate PlacedOriginal(2)(1) × (2)YearMethodPeriodin ServiceBasisRateDepreciation1SL27.5March 17$800,0002.879%$23,0322 $800,0003.636%$29,088 Note that the furniture is depreciable personal property.

On November 10 of year 1 Javier purchased a building, including the land it was on, to assemble his new equipment. The total cost of the purchase was $1,200,000; $300,000 was allocated to the basis of the land and the remaining $900,000 was allocated to the basis of the building. (Use MACRS Table 1, Table 2, Table 3, Table 4 and Table 5.) (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.) Problem 10-51 Part a a. Using MACRS, what is Javier's depreciation deduction on the building for years 1 through 3?

2889 23076 23076 The depreciation for the 3 years is computed as follows: (1) RecoveryDate PlacedOriginal(2)(1) × (2)YearMethodPeriodin ServiceBasisRateDepreciation1SL39Nov.10$900,0000.321%$2,8892 $900,0002.564%$23,0763 $900,0002.564%$23,076

Wanting to finalize a sale before year-end, on December 29, WR Outfitters sold to Bob a warehouse and the land for $125,000. The appraised fair market value of the warehouse was $75,000, and the appraised value of the land was $100,000. (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.) Problem 10-45 Part b b. What would be Bob's basis in the warehouse and in the land if the appraised value of the warehouse was $50,000 and the appraised value of the land was $125,000?

35714 89286 Bob's cost basis for the land is $89,286. Because the purchase price is less than the appraised values for the land and the warehouse, the purchase price must be allocated between the land and the warehouse. The $89,286 basis for the land is the amount of the $125,000 purchase price that is allocated to the land based on the relative value of the land ($125,000) to the value of the land ($125,000) plus the value of the warehouse ($50,000) based on the appraisal. The formula used to determine the basis allocated to the land is $125,000 (purchase price) × $125,000 / ($50,000 + $125,000).Use the same process to determine that Bob's basis in the warehouse is $35,714. [$125,000 × $50,000 / ($50,000 + $125,000)].

Brittany started a law practice as a sole proprietor. She owned a computer, printer, desk, and file cabinet she purchased during law school (several years ago) that she is planning to use in her business. FMV at Time PurchaseConverted toAsset PriceBusiness UseComputer$5,500$3,800Printer 3,300 3,150Desk 4,200 4,000File cabinet 3,200 3,225 Using the above information, what is the depreciable basis that Brittany should use in her business for each asset?

3800 3150 4000 3200 The basis of assets converted from personal use to business use is the lesser of (1) fair market value on date of conversion or (2) basis on the date of conversion. The depreciable basis of each asset is as follows: (2)Lesser of Basis on(1) or (2) (1)Date ofDepreciableAssetFMVConversion BasisComputer$3,800$5,500$3,800Printer$3,150$3,300$3,150Desk$4,000$4,200$4,000File cabinet$3,225$3,200$3,200

Wanting to finalize a sale before year-end, on December 29, WR Outfitters sold to Bob a warehouse and the land for $125,000. The appraised fair market value of the warehouse was $75,000, and the appraised value of the land was $100,000. (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.) Problem 10-45 Part a a. What is Bob's basis in the warehouse and in the land?

53571 71429 Bob's cost basis in the land is $71,429. Because the purchase price is less than the appraised values for the land and the warehouse, the purchase price must be allocated between the land and the warehouse. The $71,429 basis for the land is the amount of the $125,000 purchase price that is allocated to the land based on the relative value of the land ($100,000) to the value of the land ($100,000) plus the value of the warehouse ($75,000) based on the appraisal. The formula used to determine the basis allocated to the land is $125,000 (purchase price) × $100,000 / ($100,000 + $75,000).Use the same process to determine that Bob's basis in the warehouse is $53,571. [$125,000 × $75,000 / ($100,000 + $75,000)].

At the beginning of the year, Anna began a calendar-year business and placed in service the following assets during the year: DateCostAssetAcquiredBasisComputers1/30$28,000Office desks2/15$32,000Machinery7/25$75,000Office building8/13$400,000 Assuming Anna does not elect §179 expensing and elects not to use bonus depreciation, answer the following questions: (Use MACRS Table 1, Table 2, Table 3, Table 4 and Table 5.) (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.) Problem 10-48 Part a a. What is Anna's year 1 cost recovery for each asset?

5600 4573 10718 3852 $24,743, using the half-year convention for personal property, as calculated below. (1) (1) × (2) PurchaseRecoveryOriginal(2)CostAssetDatePeriod BasisRateRecoveryComputers30-Jan5years$28,00020.00%$5,600Office desks15-Feb7years$32,00014.29%$4,573Machinery25-Jul7years$75,00014.29%$10,718Office building13-Aug39years$400,0000.963%$3,852 $24,743

At the beginning of the year, Anna began a calendar-year business and placed in service the following assets during the year: DateCostAssetAcquiredBasisComputers1/30$28,000Office desks2/15$32,000Machinery7/25$75,000Office building8/13$400,000 Assuming Anna does not elect §179 expensing and elects not to use bonus depreciation, answer the following questions: (Use MACRS Table 1, Table 2, Table 3, Table 4 and Table 5.) (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.) Problem 10-48 Part b b. What is Anna's year 2 cost recovery for each asset?

8960 7837 18368 10256 $45,421, using the half-year convention for personal property, calculated as follows: (1) (1) × (2) PurchaseRecoveryOriginal(2)CostAssetDatePeriod BasisRateRecoveryComputers30-Jan5years$28,00032.00%$8,960Office desks15-Feb7years$32,00024.49%$7,837Machinery25-Jul7years$75,00024.49%$18,368Office building13-Aug39years$400,0002.564%$10,256 $45,421

Meg O'Brien received a gift of some small-scale jewelry manufacturing equipment that her father had used for personal purposes for many years. Her father originally purchased the equipment for $1,500. Because the equipment is out of production and no longer available, the property is currently worth $4,000. Meg has decided to begin a new jewelry manufacturing trade or business. What is her depreciable basis for depreciating the equipment?

The basis of a gift is a carryover basis from the donor; therefore, Meg's depreciable basis in the property is $1,500.

Gary inherited a Maine summer cabin on 10 acres from his grandmother. His grandparents originally purchased the property for $500 in 1950 and built the cabin at a cost of $10,000 in 1965. His grandfather died in 1980 and when his grandmother recently passed away, the property was appraised at $500,000 for the land and $700,000 for the cabin. Since Gary doesn't currently live in New England, he decided that it would be best to put the property to use as a rental. What is Gary's basis in the land and in the cabin?

The basis of inherited property is the fair market value on the date of death or, if elected by the estate, the alternate valuation date if less. Consequently, Gary's basis will be $500,000 in the land and $700,000 for the cabin.

Lina purchased a new car for use in her business during 2019. The auto was the only business asset she purchased during the year and her business was extremely profitable. Calculate her maximum depreciation deductions (including §179 expense unless stated otherwise) for the automobile in 2019 and 2020 (Lina doesn't want to take bonus depreciation for 2019 or 2020) in the following alternative scenarios (assuming half-year convention for all): (Use MACRS Table 1, Table 2, and Exhibit 10-10.) Problem 10-67 Part a a. The vehicle cost $35,000 and business use is 100 percent (ignore §179 expense).

The depreciation deduction is $7,000 in 2019 and $11,200 in 2020, calculated as follows: Description2019 Amount 2020 AmountExplanation(1)Original basis of auto$35,000 $35,000 Given in problem(2)MACRS depreciation rate 20% 32%5-yr prop, yr. 1 and yr. 2, ½ yr. convention.(3)Full MACRS depreciation$7,000 $11,200 (1) × (2)(4)Maximum auto depreciation$10,000 $16,000 luxury auto limits Depreciation deduction for year$7,000 $11,200 Lesser of (3) or (4) Next Visit question mapQuestion 20 linked to 21 22 up to 25 of 35 Total

Assume that Ernesto purchased a digital camera on July 10 of year 1 for $3,000. In year 1, 80 percent of his camera usage was for his business and 20 percent was for personal photography activities. This was the only asset he placed in service during year 1. Ignoring any potential §179 expense and bonus depreciation, answer the questions for each of the following alternative scenarios: (Use MACRS Table 1, Table 2.) (Leave no answer blank. Enter zero if applicable.) Problem 10-66 Part a a. What is Ernesto's depreciation deduction for the camera in year 1?

The depreciation deduction will be $480 in year 1, calculated as follows: DescriptionAmountExplanation(1)Original basis of camera$3,000 Assumed in problem(2)MACRS depreciation rate 20%5-yr prop, yr. 1, ½ yr. convention.(3)Full MACRS depreciation$600 (1) × (2)(4)Business use percentage 80%Assumed in the problem Depreciation deduction for year$480 (3) × (4)

AMP Corporation (calendar-year-end) has 2019 taxable income of $1,900,000 for purposes of computing the §179 expense. During 2019, AMP acquired the following assets: (Use MACRS Table 1, Table 2, Table 3, Table 4 and Table 5.) Placed in AssetService BasisMachinerySeptember 12$1,550,000Computer equipmentFebruary 10 365,000Office buildingApril 2 480,000Total $2,395,000 Problem 10-56 Part b b. What is the maximum total depreciation, including §179 expense, that AMP may deduct in 2019 on the assets it placed in service in 2019, assuming no bonus depreciation? (Round yo

The maximum depreciation deduction is $1,177,468 (half-year convention). Depreciation is maximized by applying the §179 expense against 7-year rather than 5- year property. Original§179Remaining DepreciationAssetBasisExpenseBasisRateDeductionMachinery (7-year)$1,550,000$1,020,000$530,00014.29%$75,737Computer Equipment (5-year)$365,000 $365,00020.00%$73,000Office building (39 year)$480,000 $480,0001.819%$8,731§179 Expense $1,020,000Total cost recovery $1,177,468

AMP Corporation (calendar-year-end) has 2019 taxable income of $1,900,000 for purposes of computing the §179 expense. During 2019, AMP acquired the following assets: (Use MACRS Table 1, Table 2, Table 3, Table 4 and Table 5.) Placed in AssetService BasisMachinerySeptember 12$1,550,000Computer equipmentFebruary 10 365,000Office buildingApril 2 480,000Total $2,395,000 Problem 10-56 Part b b. What is the maximum total depreciation, including §179 expense, that AMP may deduct in 2019 on the assets it placed in service in 2019, assuming no bonus depreciation? (Round your intermediate calculations to the nearest whole dollar amount.)

The maximum depreciation deduction is $1,177,468 (half-year convention). Depreciation is maximized by applying the §179 expense against 7-year rather than 5- year property. Original§179Remaining DepreciationAssetBasisExpenseBasisRateDeductionMachinery (7-year)$1,550,000$1,020,000$530,00014.29%$75,737Computer Equipment (5-year)$365,000 $365,00020.00%$73,000Office building (39 year)$480,000 $480,0001.819%$8,731§179 Expense $1,020,000Total cost recovery $1,177,468

AMP Corporation (calendar-year-end) has 2019 taxable income of $1,900,000 for purposes of computing the §179 expense. During 2019, AMP acquired the following assets: (Use MACRS Table 1, Table 2, Table 3, Table 4 and Table 5.) Placed in AssetService BasisMachinerySeptember 12$1,550,000Computer equipmentFebruary 10 365,000Office buildingApril 2 480,000Total $2,395,000 Problem 10-56 Part a a. What is the maximum amount of §179 expense AMP may deduct for 2019?

The maximum §179 expense is $1,020,000. DescriptionAmountExplanation(1)Property placed in service in 2019$1,915,000 Total §179 qualified property(2)Threshold for §179 phase-out (2,550,000)2019 amount [§179(b)(2)](3)Phase-out of maximum §179 expense$0 (1) - (2) (permanently disallowed), not less than $0.(4)Maximum 179 expense before phase-out$1,020,000 2019 amount [§179(b)(1)](5)Phase-out of maximum §179 expense$0 From (3)(6)Maximum §179 expense after phase-out$1,020,000 (4) − (5)

Juliette formed a new business to sell sporting goods this year. The business opened its doors to customers on June 1. Determine the amount of start-up costs Juliette can immediately expense (not including the portion of the expenditures that are amortized over 180 months) this year in the following alternative scenarios: (Leave no answer blank. Enter zero if applicable.) Problem 10-72 Part a a. She incurred start-up costs of $2,000.

a. $2,000, computed as follows: Start-up ExpensesDescriptionAmountExplanation(1)Maximum immediate expense$5,000 (2)Total start-up costs$2,000Given in problem(3)Phase-out threshold 50,000 (4)Immediate expense phase-out$0(2) − (3) Allowable immediate expense$2,000Lesser of (2) or [(1) minus − (4)]

After several profitable years running her business, Ingrid decided to acquire the assets of a small competing business. On May 1 of year 1, Ingrid acquired the competing business for $300,000. Ingrid allocated $50,000 of the purchase price to goodwill. Ingrid's business reports its taxable income on a calendar-year basis. (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.) Problem 10-71 Part a a. How much amortization expense on the goodwill can Ingrid deduct in year 1, year 2, and year 3?

a. Ingrid could deduct $2,222 amortization expense on the goodwill in year 1 and $3,333 of amortization expense on the goodwill in years 2 and 3, computed as follows: DescriptionAmount Explanation(1)Basis of Goodwill$50,000Provided(2)Recovery period 18015 years(3)Monthly amortization$277.78(1)/(2)(4)Months in year 1×8May through December(5)Year 1 straight-line amortization$2,222(3) × (4)(6)Months in years 2 and 3×12January through December(7)Years 2 and 3, annual straight-line amortization$3,333(3) × (6)

Nicole organized a new corporation. The corporation began business on April 1 of year 1. She made the following expenditures associated with getting the corporation started: (Leave no answer blank. Enter zero if applicable.) ExpenseDateAmountAttorney fees for articles of incorporationFebruary 10$32,000March 1 - March 30 wagesMarch 30 4,500March 1 - March 30 rentMarch 30 2,000Stock issuance costsApril 1 20,000April 1 - May 30 wagesMay 30 12,000 Problem 10-73 Part a a. What is the total amount of the start-up costs and organizational expenditures for Nicole's corporation?

a. The only qualifying organizational expenditure is the $32,000 of attorney fees related to the drafting articles of incorporation. The start-up costs are the wages ($4,500) and rent ($2,000) before business began. Therefore, total start-up costs are $6,500.

Juliette formed a new business to sell sporting goods this year. The business opened its doors to customers on June 1. Determine the amount of start-up costs Juliette can immediately expense (not including the portion of the expenditures that are amortized over 180 months) this year in the following alternative scenarios: (Leave no answer blank. Enter zero if applicable.) Problem 10-72 Part b b. She incurred start-up costs of $45,000.

b. $5,000, computed as follows: Start-up ExpensesDescriptionAmountExplanation(1)Maximum immediate expense$5,000 (2)Total start-up costs$45,000Given in problem(3)Phase-out threshold 50,000 (4)Immediate expense phase-out$0(2) - (3), not less than $0 Allowable immediate expense$5,000Lesser of (2) or [(1) minus − (4)]

Lina purchased a new car for use in her business during 2019. The auto was the only business asset she purchased during the year and her business was extremely profitable. Calculate her maximum depreciation deductions (including §179 expense unless stated otherwise) for the automobile in 2019 and 2020 (Lina doesn't want to take bonus depreciation for 2019 or 2020) in the following alternative scenarios (assuming half-year convention for all): (Use MACRS Table 1, Table 2, and Exhibit 10-10.) Problem 10-67 Part b b. The vehicle cost $80,000, and business use is 100 percent.

b. The depreciation deduction is $10,000 in 2019 and $16,000 in 2020, calculated as follows: Description2019 Amount 2020 AmountExplanation(1)Original basis of auto$80,000 $80,000 Given in problem(2)MACRS depreciation rate 20% 32%5-yr prop, yr. 1 and yr. 2, ½ yr. convention.(3)Full MACRS depreciation$16,000 $25,600 (1) × (2)(4)Maximum auto depreciation$10,000 $16,000 luxury auto limits Depreciation deduction for year$10,000 $16,000 Lesser of (3) or (4) Note that when the depreciation is limited by the automobile limitations, §179 expense will not provide any additional benefit, so it does not make sense to elect §179.

Juliette formed a new business to sell sporting goods this year. The business opened its doors to customers on June 1. Determine the amount of start-up costs Juliette can immediately expense (not including the portion of the expenditures that are amortized over 180 months) this year in the following alternative scenarios: (Leave no answer blank. Enter zero if applicable.) Problem 10-72 Part c c. She incurred start-up costs of $53,500.

c. $1,500, computed as follows: Start-up ExpensesDescriptionAmountExplanation(1)Maximum immediate expense$5,000 (2)Total start-up costs$53,500Given in problem(3)Phase-out threshold 50,000 (4)Immediate expense phase-out$3,500(2) − (3), not less than $0 Allowable immediate expense$1,500Lesser of (2) or [(1) minus − (4)]

Lina purchased a new car for use in her business during 2019. The auto was the only business asset she purchased during the year and her business was extremely profitable. Calculate her maximum depreciation deductions (including §179 expense unless stated otherwise) for the automobile in 2019 and 2020 (Lina doesn't want to take bonus depreciation for 2019 or 2020) in the following alternative scenarios (assuming half-year convention for all): (Use MACRS Table 1, Table 2, and Exhibit 10-10.) Problem 10-67 Part c c. The vehicle cost $80,000, and she used it 80 percent for business.

c. The depreciation deduction will be $8,000 in 2019 and $12,800 in 2020, calculated as follows: Description2019 Amount 2020 AmountExplanation(1)Original basis of auto$80,000 $80,000 Given in problem(2)MACRS depreciation rate 20% 32%5-yr prop, yr. 1 and yr. 2, ½ yr. convention.(3)Full MACRS depreciation$16,000 $ 25,600 (1) × (2)(4)Maximum auto depreciation$10,000 $16,000 luxury auto limits(5)Depreciation deduction for year based on 100% business use$10,000 $16,000 Lesser of (3) or (4)(6)Business use percentage 80% 80%Given in problem Depreciation deduction for year$8,000 $12,800 (5) × (6) Next Visit question mapQuestion 22 linked to 23 24 and 25 of 35 Total

Juliette formed a new business to sell sporting goods this year. The business opened its doors to customers on June 1. Determine the amount of start-up costs Juliette can immediately expense (not including the portion of the expenditures that are amortized over 180 months) this year in the following alternative scenarios: (Leave no answer blank. Enter zero if applicable.) Problem 10-72 Part d d. She incurred start-up costs of $63,000.

d. $0, computed as follows: Start-up ExpensesDescriptionAmountExplanation(1)Maximum immediate expense$5,000 (2)Total start-up costs$63,000Given in problem(3)Phase-out threshold 50,000 (4)Immediate expense phase-out$13,000(2) − (3) Allowable immediate expense$0Lesser of (2) or [(1) minus − (4)] (not less than $0)

Lina purchased a new car for use in her business during 2019. The auto was the only business asset she purchased during the year and her business was extremely profitable. Calculate her maximum depreciation deductions (including §179 expense unless stated otherwise) for the automobile in 2019 and 2020 (Lina doesn't want to take bonus depreciation for 2019 or 2020) in the following alternative scenarios (assuming half-year convention for all): (Use MACRS Table 1, Table 2, and Exhibit 10-10.) Problem 10-67 Part d d. The vehicle cost $80,000, and she used it 80 percent for business. She sold it on March 1 of year 2.

d. The depreciation deduction will be $8,000 in 2019 (as calculated in part c). The depreciation deduction will be $6,400 in 2020, calculated as follows: Description2020 AmountExplanation(1)Original basis of auto$80,000 Given in problem(2)MACRS depreciation rate 32%5-yr prop, yr. 2, ½ yr. convention.(3)Full MACRS depreciation$ 25,600 (1) × (2)(4)Maximum auto depreciation$16,000 luxury auto limit year 2(5)Depreciation for entire year$16,000 Lesser of (3) or (4)(6)Partial year 50%Half year of depreciation (half-year convention)(7)Depreciation deduction for year$8,000 (8)Business use percentage 80%Given in problem Depreciation deduction for year$6,400 (7) × (8)

Lina purchased a new car for use in her business during 2019. The auto was the only business asset she purchased during the year and her business was extremely profitable. Calculate her maximum depreciation deductions (including §179 expense unless stated otherwise) for the automobile in 2019 and 2020 (Lina doesn't want to take bonus depreciation for 2019 or 2020) in the following alternative scenarios (assuming half-year convention for all): (Use MACRS Table 1, Table 2, and Exhibit 10-10.) Problem 10-67 Part e e. The vehicle cost $80,000, and she used it 20 percent for business.

e. The depreciation deduction will be $1,600 in 2019 and $3,200 in 2020, calculated as follows: Description2019 Amount 2020 AmountExplanation(1)Original basis of auto$80,000 $80,000 Given in problem(2)MACRS (Straight-line) depreciation rate 10% 20%5-yr straight-line, ½ yr. convention.(3)Full MACRS depreciation$8,000 $ 16,000 (1) × (2)(4)Maximum auto depreciation$10,000 $16,000 luxury auto limits(5)Depreciation deduction for year based on 100% business use$8,000 $16,000 Lesser of (3) or (4)(6)Business use percentage 20% 20%Given in problem Depreciation deduction for year$1,600 $3,200 (5) × (6)

Lina purchased a new car for use in her business during 2019. The auto was the only business asset she purchased during the year and her business was extremely profitable. Calculate her maximum depreciation deductions (including §179 expense unless stated otherwise) for the automobile in 2019 and 2020 (Lina doesn't want to take bonus depreciation for 2019 or 2020) in the following alternative scenarios (assuming half-year convention for all): (Use MACRS Table 1, Table 2, and Exhibit 10-10.) Problem 10-67 Part f f. The vehicle cost $80,000 and is an SUV that weighs 6,500 pounds. Business use was 100 percent.

f. The depreciation deduction will be $36,400 in 2019 and $17,440 in 2020, calculated as follows: Description2019 Amount 2020 AmountExplanation(1)Original basis of auto$80,000 N/A Given in problem(2)Section 179 expense$25,500 N/A Maximum §179 expense for SUV(3)Depreciable basis$54,500 $54,500 (1) − (2)(4)MACRS depreciation rate$20% $32%5-yr prop, yr. 1, ½ yr. convention.(5)Full MACRS depreciation$10,900 $17,440 (3) × (4) Depreciation deduction in including §179 expense for year$36,400 $17,440 (2) + (5) The depreciation deduction on the SUV is not restricted by the automobile limitations because the vehicle weighs more than 6,000 pounds and therefore is excluded from these limitations. Note that the depreciation is maximized in b - e even without the §179 expense.