Chapter 8

Which one of the following may be depreciated using an accelerated method? a. A computer used 75 percent for farming business b. A personal pickup truck used once a year to pull the farm's float in a parade c. A printer used 30 percent for farming business d. A farm truck that is operated for personal use 60 percent of the time

a. A computer used 75 percent for farming business

If land declines in value, it may be depreciated for tax purposes. True False

False

If listed property is used less than 80 percent in a qualified business use, depreciation must be calculated using the straight-line method. True False

False

If the proceeds from the sale of property will be collected over a period of more than 1 year, a taxpayer is required to use the installment method. True False

False

The exchange of inventory qualifies for like-kind exchange treatment. True False

False

To have the like-kind exchange provisions apply, a taxpayer must make an election. True False

False

Depreciation is the process of allocating the cost of assets to expense over a period of years. True False

True

Gain recognized on the sale of a Section 1245 asset is classified as ordinary income up to the amount of depreciation claimed. True False

True

If insurance proceeds exceed the taxpayer's basis in property destroyed by fire and the proceeds are not invested in similar property, the taxpayer may be required to recognize a gain. True False

True

The election to expense is not permitted where listed property does not meet the qualified business use test. True False

True

The tax law imposes restrictions on the depreciation of "listed" property such as automobiles. True False

True

A taxpayer places a $1,090,000 5-year recovery period asset in service in 2022. This is the only asset placed in service in 2022. Assuming half-year convention, an election to expense under Section 179, and no income limitation, what is the amount of total cost recovery deduction (no bonus depreciation)? a. $1,082,000 b. $1,040,000 c. $210,000 d. $1,080,000

a. $1,082,000 The annual limit for immediate expensing is $1,080,000. There is no phase-out and no income limitation; thus, all $1,080,000 is immediately deducted in 2022. The remaining asset basis of $10,000 is subject to MACRS depreciation of $2,000 ($10,000 × 20%). Total cost recovery is $1,082,000.

An asset (not an automobile) put in service in June 2022 has a depreciable basis of $2,075,000, has a recovery period of 5 years, and is the only asset placed in service this year. Assuming bonus depreciation is used, a half-year convention, and the expensing election is not made, what is the maximum amount of cost that can be deducted in 2022? a. $2,075,000 b. $1,050,000 c. $415,000 d. $1,255,000

a. $2,075,000

On July 11, 2022, Luis purchased a small software business for $200,000. He paid $120,000 for the fixed assets of the company and $80,000 for the trade name. How much amortization may Luis deduct on his 2022 tax return for the purchased trade name? a. $2,667 b. $80,000 c. $5,333 d. $5,750

a. $2,667 $80,000 ÷ 180 months × 6 months = $2,666.66

An asset (not an automobile) placed in service in June 2022 has a depreciable basis of $35,000 and a recovery period of 5 years. Assuming bonus depreciation is used, a half-year convention, and no expensing election, what is the maximum amount of cost that can be deducted in 2022? a. $35,000 b. $24,500 c. $7,000 d. $17,500

a. $35,000

A taxpayer places a $50,000 5-year recovery period asset (not an auto) in service in 2022. This is the only asset placed in service in 2022. Assuming half-year convention and no immediate expensing, what is the adjusted basis of the assets after applying 2022 bonus depreciation? a. $50,000 b. $0 c. $10,000 d. $25,000

a. $50,000 Bonus depreciation = $50,000 × 100%. Adjusted basis is therefore $0 ($50,000 − $50,000).

Johnny owned a gas station with an adjusted basis of $300,000. After it was destroyed in a fire, he received $560,000 from the insurance company. Within the next year, he bought a new gas station for $500,000. What is Johnny's recognized gain, and what is the basis in the new building? a. $60,000; $300,000 b. $260,000; $300,000 c. $200,000; $300,000 d. $260,000; $500,000

a. $60,000; $300,000 $560,000 − $300,000 = $260,000 realized gain$560,000 − $500,000 = $60,000 recognized (taxable) gain$260,000 − $60,000 = $200,000 deferred gain$500,000 − $200,000 = $300,000 basis in new property

An asset (not an automobile) put in service in June 2022 has a depreciable basis of $87,000 and a recovery period of 5 years. It is the only asset placed in service this year. Assuming bonus depreciation is used, a half-year convention, and the expensing election is made, what is the maximum amount of cost that can be deducted in 2022 (assume no income limitation)? a. $87,000 b. $43,500 c. $8,700 d. $17,400

a. $87,000

Which one of the following is true about the Modified Accelerated Cost Recovery System (MACRS)? a. A light duty business truck is depreciated using accelerated depreciation. b. A building is depreciated using 200 percent declining balance depreciation. c. Buildings and autos both have the same depreciation life. d. Most business furniture has a 10-year recovery period.

a. A light duty business truck is depreciated using accelerated depreciation.

Aaron has a successful business with $50,000 of income in 2022. He purchased a new 7-year MACRS property with a cost of $7,000. For tax purposes, what cost recovery will provide the largest amount Aaron can deduct in 2022 for the new asset? a. Bonus and Section 179 will result in an equal amount. b. Bonus depreciation c. Typical MACRS depreciation d. Section 179 immediate expensing

a. Bonus and Section 179 will result in an equal amount Either bonus depreciation or Section 179 permit the total recovery of this property in the first year..

Which one of the following statements about Section 1231 assets is true? a. Section 1231 asset losses are netted against 1231 asset gains to determine tax treatment. b. Business property held for 1 year or less is considered a Section 1231 asset. c. Section 1231 assets are treated like capital assets when they produce losses on sale. d. Section 1231 assets include company stock.

a. Section 1231 asset losses are netted against 1231 asset gains to determine tax treatment.

On January 1, 2022, Roxy Company places a commercial storage building in service. The costs allocated to construction of the building total $300,000 and land is accounted for separately. Which of the following is a true statement with respect to the depreciation of the building? a. The depreciation expense for Year 2 would be the same regardless of whether the building is placed in service on January 1, 2022, or February 1, 2022. b. Since the building was placed in service on the first day of th

a. The depreciation expense for Year 2 would be the same regardless of whether the building is placed in service on January 1, 2022, or February 1, 2022.

Max purchases a new auto in 2022 at a cost of $56,000. He uses the car 80 percent for business. Assuming a half-year convention and bonus depreciation, but no immediate expensing, what is the depreciation deduction on the auto? a. $14,400 b. $15,360 c. $19,200 d. $44,800

b. $15,360

What is the maximum amount of depreciation including bonus depreciation on a passenger auto placed in service in 2022? a. $18,000 b. $19,200 c. $11,200 d. $8,000

b. $19,200

Jordan purchases residential rental property on June 30, 2022, for a cost of $290,000. Of this amount, $140,000 is allocable to the cost of the home, and the remaining $150,000 is allocable to the cost of the land. What is Jordan's maximum depreciation deduction for 2022? a. $1,061 b. $2,758 c. $370 d. $1,485

b. $2,758

An asset (not an automobile) was put in service in June 2022. It has a depreciable basis of $535,000 and a recovery period of 7years. The taxpayer uses bonus depreciation, a half-year convention, and no expensing election. What is the maximum amount of cost that can be deducted in 2022? a. $321,000 b. $535,000 c. $267,500 d. $107,000

b. $535,000

Which of the following is true regarding MACRS tax depreciation? a. MACRS depreciation requires that salvage value be taken into account. b. Straight-line depreciation is lower than 200 percent declining balance depreciation in the first year. c. Straight-line depreciation is lower than 150 percent declining balance depreciation in the last year. d. Double declining balance is a method of straight-line depreciation.

b. Straight-line depreciation is lower than 200 percent declining balance depreciation in the first year.

A taxpayer places a $50,000 5-year recovery period asset (not an auto) in service in 2022. This is the only asset placed in service in 2022. Assuming a half-year convention and no immediate expensing, what is the amount of bonus depreciation? a. $10,000 b. $25,000 c. $50,000 d. $0

c. $50,000

ABC Corp bought a production machine on January 1, 2020, for $31,250. The company did not elect Section 179 expensing, elected out of claiming bonus depreciation in 2020, and is depreciating the machine using the MACRS accelerated depreciation tables for 5-year property, half-year convention. What is the 2022 depreciation (Year 3) deduction for the machine? a. $12,500 b. $6,250 c. $6,000 d. $10,000

c. $6,000

In the current year, Henry, a sole proprietor, sold for $65,000 a machine that was used in his business. The machine had been purchased a few years ago for $50,000, and when it was sold, it had accumulated depreciation of $20,000 and an adjusted basis of $30,000. For the current year, how should this gain be treated? a. Section 1231 gain of $20,000 and ordinary income of $15,000 b. Ordinary income of $35,000 c. Section 1231 gain of $15,000 and ordinary income of $20,000 d. Section 1231 gain of

c. Section 1231 gain of $15,000 and ordinary income of $20,000 $65,000 − $30,000 = $35,000 gain;$35,000 − $20,000 = $15,000 Section 1231 gain ($20,000 recaptured as ordinary income under Section 1245)

Which of the following is true regarding Section 197 intangibles? a. They can be characterized as a Section 1231 gain. b. They qualify for bonus depreciation. c. They include non-compete covenants. d. They can be capitalized rather than depreciated.

c. They include non-compete covenants.

Which one of the following is a Section 197 intangible? a. A stock investment b. Computer software available for purchase by the general public c. Workforce in place d. An interest-earning certificate of deposit

c. Workforce in place

Jenny constructed a building for use as a residential rental property. The cost of the building was $164,976, and it was placed in service on August 1, 1999. The building has a 27.5-year MACRS life. What is the amount of depreciation on the building for 2022 for tax purposes? a. $6,547 b. $3,000 c. $2,250 d. $6,000

d. $6,000

What is the minimum number of years over which computers may be depreciated under MACRS? a. 7 years b. 3 years c. 10 years d. 5 years

d. 5 years