Chapter 8 Depreciation and Sale of Business Property

On January 1, 2019, Ted purchased a small software company for $155,000. He paid $95,000 for the fixed assets of the company and $60,000 for goodwill. How much amortization may Ted deduct on his 2019 tax return for the purchased goodwill?

$4,000

Used office furniture is placed in service on June 1, 2019 and has a depreciable basis of $6,000. The asset is in the 7-year recovery class and is depreciated using MACRS. The business has an $8,000 profit for the year. What is the depreciation deduction (including the election to expense) that may be claimed for 2019, assuming a $1,300 election to expense is claimed? Do not consider bonus depreciation.

$1,972

On January 1, 2019, Alan purchased a small business for $100,000. The purchase price was allocated as follows: existing equipment (used) with a 5-year MACRS life $50,000 and goodwill $50,000. Assuming he does not use bonus depreciation or elect expensing under Section 179, what is Alan's depreciation and amortization deduction for 2019?

$13,333

Vicki is a real estate sales person specializing in selling high-end properties to wealthy clients. In 2019, Vicki purchases a new Mercedes Benz for $65,000 which she uses 80 percent for her business. She has had a good year and wants to maximize her depreciation deduction. What is the maximum depreciation Vicki may claim for 2019?

$14,480

Robert sold a machine he had used in his business for longer than a year for $50,000. The machine originally cost $40,000 and at the time of sale Robert had taken depreciation of $15,000. This is the only Section 1231 transaction for this year. What does Robert report in his tax return regarding this sale?

$15,000 ordinary income and $10,000 long-term capital gain

Ponce acquired raw land costing $60,000 as an investment in 2002. In 2019, the land was sold for a total sales price of $150,000, consisting of $30,000 cash and the buyer's note for $120,000. Assume that Ponce uses the installment method to recognize the gain and receives only the $30,000 down payment in the year of sale. How much gain should Ponce recognize in 2019?

$18,000

Sam Colt experienced a small explosion in his gun factory. Two of his best machines were destroyed in the resultant fire. The first machine had an adjusted basis of $5,000 after depreciation of $6,000, and a fair market value of $3,000 just before the explosion. Sam received insurance reimbursement of $3,000. The second machine had an adjusted basis of $7,000 after depreciation of $11,000, and a fair market value of $10,000. Sam received $8,000 reimbursement for the loss of this machine. Both machines were held for over 1 year. How are these transactions reported on Sam's income tax return?

$2,000 ordinary loss and $1,000 ordinary income from Section 1245 recapture

Jeremy, a calendar-year taxpayer, buys assets for his business as follows: June 1, 2019, a manufacturing machine (7-year property) $7,000; August 15, 2019, office furniture (7-year property) $3,000; October 20, 2019, a building (excluding land) to house his business $200,000. What is his depreciation deduction for 2019 (no §179 election to expense or bonus depreciation)?

$2,499

On January 1, 2019, Larry purchases a small accounting practice from Jean for $80,000. There are no fixed assets and the entire purchase price is $40,000 for a client list and $40,000 for a 3-year covenant not to compete. What does Larry deduct for amortization of these two intangibles in his 2019 tax return?

$2,667 for the client list and $2,667 for the covenant.

On January 1, 2019, Rusty, a sole proprietor, purchased for use in his business a new production machine (7-year property) at a cost of $20,000. Rusty did not purchase any other property during 2019 and has net income from his business of $40,000 before depreciation or the election to expense. The standard double-declining balance recovery period table would allow $2,858 of depreciation expense on the $20,000 of equipment purchased in 2019. What is Rusty's maximum depreciation deduction for 2019 if he elects to use a double-declining balance recovery period table, including the amount that could be deducted under the election to expense (Section 179)? a. $22,858 b. $2,858 c. $40,000 d. $20,000 e. None of these amounts listed are correct.

$20,000

Steve sold a machine that was used in his business for $65,000. He had purchased it 4 years ago for $50,000 and had taken depreciation deductions of $20,000. How does Steve report this transaction in his tax return for the current year?

$20,000 ordinary income and $15,000 Section 1231 gain

Giles Savoy owned a small boutique hotel which was destroyed by fire. The adjusted basis of the hotel was $600,000. Giles was grateful that he carried replacement cost insurance and he received $1,200,000 from the insurance company. Giles immediately rebuilt his hotel at a cost of $1,000,000. What is Giles' taxable gain and what is his deferred gain?

$200,000 and $400,000

George buys a 2017 used Chevy Suburban, rated at over 6,000 pounds, for $30,000. He uses it 100 percent for his business. What is the maximum depreciation he may deduct in 2019 (no bonus depreciation)?

$25,000 Section 179 expense and $1,000 depreciation

Alexa exchanged land held for investment with a tax basis of $30,000 for similar land owned by Boyd worth $50,000. As part of the exchange, Boyd paid Alexa $5,000 in cash. What is Alexa's gain realized and gain recognized?

$25,000 and $5,000

During 2018, Bob and Julie bought an apartment house to rent for $1,250,000, of which $425,000 is allocated to land. What is their depreciation deduction going to be in 2019?

$29,997

Rachel places 5-year recovery property in service in her business on August 1, 2019, and 7-year recovery property in service on November 1, 2019. They cost $18,000 and $3,500, respectively. What is Rachel's 2019 depreciation deduction, assuming she does not elect bonus depreciation or expensing?

$4,100 $18,000 x 20%=$3,600 $3,500 x 14.29%=500 3,600+500=$4,100

Terry sells two pieces of equipment used in his business. Both are Section 1231 assets. One results in a $5,000 gain and the other in a $12,000 loss. Assuming there is no Section 1245 recapture, how are these transactions treated in Terry's tax return?

$5,000 ordinary income and $12,000 ordinary loss

During 2019, Randy purchases $70,000 of manufacturing equipment (7-year property) for his business. He has taxable income from his business of $50,000 before considering the election to expense. What is the maximum depreciation on the new equipment that Randy can claim against income in 2019, assuming he elects to expense the full amount permitted?

$50,000

Margaret bought a small residential rental building 15 years ago for $150,000. In the current year, she sold it for $400,000. She had taken $55,000 of straight-line depreciation. Margaret is in the 35 percent bracket for ordinary taxable income. How is her gain on this sale taxed?

$55,000 "unrecaptured depreciation" at 25 percent rate and $250,000 at 15 percent capital gains rate.

Randy has a manufacturing business. During the year, he sold four pieces of machinery, all of which he had owned for more than 1 year. The sales resulted in the following: a $3,000 gain; a $6,000 loss; a $1,000 loss and a $10,000 gain. Assuming there is no depreciation recapture, what does Randy report in his tax return?

$6,000 long-term capital gain

During the current year, Jeremy exchanges land used in his business for a similar land in a like-kind exchange. Jeremy's land had an adjusted basis of $8,000 and he received land worth $12,000 and $2,000 cash. What is Jeremy's realized gain, recognized gain, and basis in the new land?

$6,000, $2,000, and $8,000

During 2019, Don purchases $60,000 of construction equipment (7-year property) for use in his business. Don has taxable income from his business of $80,000. What is the maximum amount that Don may deduct under the election to expense?

$60,000

In January 2018, Keystone Trucking Company exchanged land, which cost $36,000 for different land having a fair market value of $82,000. In connection with the exchange, Keystone paid $40,000 in cash. What is the tax basis of the new land?

$76,000

On August 15, 2017, Susie sold a piece of property for $250,000 which she originally purchased for $50,000. She was paid $50,000 in cash and received an 8 percent note. The note is payable at $10,000, plus interest, per year for 20 years starting on August 15, 2018. Assuming that Susie uses the installment method, how much is her capital gain for 2019, the third year of the installment sale?

$8,000

Coral purchased a passenger auto for $55,000 during 2019. She uses it 90 percent for business. How much depreciation is allowed in 2019? Assume she elects out of the bonus depreciation provisions and does not take the election to expense.

$9,090

Peter sells beauty supplies to local beauty shops in his region. He uses his personal automobile and 90 percent of his miles driven are for business. In 2019, Peter buys a new car for $60,000. Assuming Peter does not elect expensing or bonus depreciation, what is his 2019 depreciation deduction for the new car?

$9,090

On July 1, 2019, Peter buys a $3,000 computer and peripherals for his home office. He uses it 100 percent of the time for his accounting business. What method of depreciation should Peter use and what is his depreciation deduction, assuming he does not elect to expense or take bonus depreciation?

200 percent declining balance and $600

Under MACRS, which of the following recovery periods is not matched with the proper standard recovery method? a. 7 years - 200 percent declining balance (with a switch to straight-line) b. 3 years - straight-line c. 39 year - straight-line d. 27.5 years - straight-line e. 5 years - 200 percent declining balance (with a switch to straight-line)

3 years - straight-line

Which of the following would be considered listed property if used in an individual's business?

A Mercedes Benz sedan

Which of the following business vehicles would be subject to the luxury automobile depreciation limits? a. A large dump truck used for hauling sand and gravel b. A doctor's used car costing $51,000 c. A BMW SUV rated at more than 6,000 pounds d. A farm tractor used to pull children on hay-rides

A doctor's used car costing $51,000

Which of the following is not a Section 1231 asset? a. Accounts receivable of a wholesale business b. A duplex rental c. An apartment building d. Machinery used in a factory e. Bluegrass Farms race horses

Accounts receivable of a wholesale business

Which of the following is not a Section 1231 asset? a.Timber b.Borden's dairy herd c.Real property used in a trade or business d.Montross Horse Center's brood mare e.Unharvested crops on a commercial farm f.Ace Hardware's inventory

Ace Hardware's inventory

Section 197 intangibles do not include which of the following? a. Goodwill b. Going-concern value c. Computer software readily available for purchase by the general public d. A covenant not to compete

Computer software readily available for purchase by the general public

Which of the following is true about MACRS depreciation? a. Commercial buildings are depreciated over 39 years using an accelerated method. b. Depreciation begins in the middle of the month in which real property is placed in service. c. Residential rental buildings are depreciated straight-line over 20 years. d. Mid-quarter MACRS is required for all assets if real property is placed in service in the last quarter of the year.

Depreciation begins in the middle of the month in which real property is placed in service.

Which of the following is a true statement? a. Depreciation is a method that accounts for the decrease in value of an asset. b. Depreciation is a method which allocates the cost of an asset over the time period the asset is used. c. Depreciation is a method which is designed to allow the taxpayer to save money with which to replace an asset. d. Depreciation is a method that accounts for the physical deterioration of an asset.

Depreciation is a method which allocates the cost of an asset over the time period the asset is used.

Which of the following statements is true concerning depreciation? a. Depreciation should only be used if the asset will depreciate in value. b. Depreciation is calculated on all assets, even land. c. Depreciation is the accounting process of allocating and deducting the cost of an asset over a period of years. d. Depreciation is used instead of tracking maintenance expense.

Depreciation is the accounting process of allocating and deducting the cost of an asset over a period of years.

Which of the following is a true statement regarding like-kind exchanges? a. A taxpayer is not required to file any forms if there is no gain recognized in a like-kind exchange. b. Personal residences are a type of property which can be exchanged tax-free under the like-kind exchange rules. c. Gain is recognized in the amount equal to the lesser of the gain realized or the "boot" received. d. In a like-kind exchange, the holding period for the new asset starts when the exchange is completed.

Gain is recognized in the amount equal to the lesser of the gain realized or the "boot" received.

Which of the following is not "listed property"? a. Passenger automobiles b. Home office video recording equipment c. Hearses used in a funeral home business d. Home office computers

Hearses used in a funeral home business

John owns the building in which he operates his business. Which of the following would not require depreciation? a. John buys computer equipment for his business. b. John buys and installs used manufacturing equipment. c. John has his equipment inspected and serviced every year. d. John replaces the entire roof on the building after a particularly bad storm.

John has his equipment inspected and serviced every year.

During 2017, Cody purchased an automobile for $35,000 which he has used 100 percent for business. On May 27, 2019, he sells the car for $30,000. He has claimed $6,000 of depreciation. Does Cody have a gain or loss and how will it be treated on his tax return?

Must recognize a $1,000 gain which will be taxed at ordinary tax rates.

On December 31, 2019, Harold, a sole proprietor, sold for $85,000 a machine that was used in his business. The machine had been purchased in 2017 for $60,000, and when it was sold it had an adjusted basis of $45,000, due to $15,000 of accumulated depreciation. For the year 2019, how should this gain be treated?

Section 1231 gain of $25,000 and ordinary income of $15,000

Burt purchased an apartment building on January 1, 2007, for $345,000. The building has been depreciated over the appropriate recovery period using the straight-line method. On December 31, 2019, the building was sold for $420,000, when the accumulated depreciation was $126,500. On his 2019 tax return, what should Burt report?

Section 1231 gain of $75,000 and unrecaptured depreciation of $126,500.

Which of the following is true concerning Section 197 intangibles? a. Section 197 intangibles are not subject to accelerated depreciation. b. Section 197 intangibles are amortized over 5 years. c. Section 197 intangibles may be amortized using the mid-quarter convention. d. Section 197 intangibles include computer software available for purchase by the general public.

Section 197 intangibles are not subject to accelerated depreciation.

Which of the following statements is true concerning Section 197 intangibles? a. Section 197 intangibles are amortized over the estimated useful life of the asset. b. Section 197 intangibles exclude computer software available for purchase by the general public. c. Section 197 intangibles include interests in land. d. Section 197 intangibles may be depreciated under MACRS.

Section 197 intangibles exclude computer software available for purchase by the general public.

Which of the following is not true of bonus depreciation in 2019? a. The bonus depreciation percentage is 50 percent for qualified property. b. Bonus depreciation is available on used property. c. Bonus depreciation is an example of the use of tax law by Congress to try to stimulate the economy. d. The taxpayer may elect out of taking bonus depreciation.

The bonus depreciation percentage is 50 percent for qualified property.

Which of the following is not true of a like-kind exchange? a. Boot includes relief of liabilities. b. Gain recognized usually varies widely from gain realized. c. The property being exchanged must be used in a trade or business or held for investment. d. Cash may be part of the like-kind exchange. e. The date of the exchange starts a new holding period for the acquired asset.

The date of the exchange starts a new holding period for the acquired asset.

Which of the following is not true about the Section 179 election to expense the cost of certain assets?

The election to expense is limited by the taxpayer's taxable income with no provision to carry over or carry back the excess.

Which of the following is true concerning the provisions for involuntary conversion? a. The provisions for involuntary conversion apply to gains only, not losses. b. The provisions for involuntary conversion state that the property must be replaced within the year following the conversion. c. The provisions for involuntary conversion require that gain is recognized in an amount equal to the lesser of the gain realized or to the extent that "boot" was received. d. The provisions for involuntary conversion require taxpayers to always defer gains.

The provisions for involuntary conversion apply to gains only, not losses.

Which of the following is not true of the tax treatment of involuntary conversions? a. The provisions are at the election of the taxpayer. b. Gain is deferred if the proceeds are reinvested in qualified replacement property. c. The basis of the new property is decreased by the deferred gain. d. The replacement period is 4 years after the involuntary conversion occurs.

The replacement period is 4 years after the involuntary conversion occurs.

Which of the following best completes this statement? Casualty gains and losses from business property a. must be reduced by the $100 floor. b. may be treated differently depending on whether the property has been held for more than or less than 1 year. c. are not subject to depreciation recapture. d. are treated the same as personal property casualty gains and losses.

may be treated differently depending on whether the property has been held for more than or less than 1 year.

Which of the following correctly completes the following sentence? Taxpayers who choose the election to expense under Section 179: a. will have the maximum expense amount reduced by $.50 for every $1.00 by which the cost of the asset exceeds a prescribed investment limit. b. may depreciate the amount of the asset cost that exceeds the expense amount allowed or chosen. c. may write off a building as long as it is used 100 percent for business. d. may not carry over any amount elected which exceeds the taxable income limitation.

may depreciate the amount of the asset cost that exceeds the expense amount allowed or chosen.