TAX Ch 11e
If an asset's business use drops to 50%, or below, the business must---------- any excess accelerated----------,------- depreciation over the depreciation for all prior years.
Blank 1: recapture, recompute, or recomputed Blank 2: straight Blank 3: line
Businesses deduct percentage depletion when ---------they the natural resource, and they deduct cost depletion in the year they or------------extract the natural resource
Blank 1: sell Blank 2: produce
Costs, such as investigating the possibilities of and actually creating or acquiring a trade or business, are referred to as , - costs.
Blank 1: start Blank 2: up
Which of the following calculations is used to determine an asset's adjusted basis?
Original basis + significant improvements - depreciation allowed or allowable
When is a business expense deemed to be reasonable in amount?
when it is not extravagant
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 The car has a 5-year recovery period. The purchase price subjects the car to the luxury vehicle limits. The maximum deduction for year 2 is $16,000. This is the luxury auto limitation for year 1. The maximum amount for year 2 = $16,000.
Barbara's Bakery purchased three new 7-year assets last year. She chose NOT to use Section 179 immediate expensing or take bonus depreciation. The furnishings were purchased for $15,000 in April, the equipment for $6,000 in July, and the appliances for $40,000 in November. Using the appropriate MACRS depreciation tables in the Appendix, what amount of depreciation expense is allowable in the current (second) year of ownership?
$16,072 Each asset must be depreciated for recovery period 2 using the mid-quarter table ($15,000 x.2347; $6,000 x.2551; $40,000 x.2755).
Jack and Diane decided to remodel their kitchen. They removed their old cabinets and replaced them with newer, nicer cabinets. They installed the old cabinets in a rental home that they own and lease to other people. The original cost of the old cabinets was $6,000. The fair market value on the date they were installed in the rental house was $2,500. The cost of the new cabinets was $11,000. What amount should Jack and Diane use as the basis for depreciation for the cabinets that have been installed in the rental property?
$2,500 The basis is the lesser of the original cost or the FMV at the date of conversion.
Alex purchased a personal lawn mower to use for mowing his lawn and the lawns at his rental properties. The depreciation expense for the mower was $300. At the end of the season, he documents that he used the mower 70% for his rental properties and 30% for personal purposes. How much can he deduct as a business expense? $0 Rationale: The business portion is deductible ($300 x .70 = $210). $90 Rationale: The business portion is deductible ($300 x .70 = $210). $300 Rationale: Only the business portion is deductible ($300 x .70 = $210). $210
$210
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 The truck is depreciated under the half-year convention with a 5- year recovery period. 5y - 20% x 15,000
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 The computer has a 5-year recovery period ($1,500 x 20%), and the oven has a 7-year recovery period ($1,200 x 14.29%).
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 5y computer; 7y oven For year 2 - 32% computer; 24.49% oven
Randy owns and rents a residential duplex that he purchased 17 years ago in the month of May. The purchase price was $250,000. During August of the current year, Randy sold the duplex. What is the amount of depreciation that can be deducted in the current year (rounded to the nearest dollar)? $5,681
$5,681 Since August is the month of the sale, the full year's depreciation should be multiplied by 7.5/12. Use the Residential Real Property table. The full year's depreciation must be allocated by 7.5/12 for the period of time Randy owned the duplex. Use the Residential Real Property table and multiply the full year's depreciation by 7.5/12 to account for the portion of the year the property was owned.
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
(425000-25000)*(6000/20000)
Which of the following business expenses are deductible for tax purposes?
*Depreciation expense on a building used to store company vehicles. * Legal fees incurred to defend the business in a lawsuit. *Advertising cost for ads placed in the local newspaper.
If a company uses a cash method of accounting, which of the following statements will be true? (Check all that apply.) Expenditures for prepaid interest expense are deducted when paid. Rationale: Prepaying interest expense does not result in a deductible expense even when the taxpayer is using the cash method. Revenue is recognized when cash is received no matter when the sale actually took place. Payments received in a noncash form (such as property or services) are NOT included in gross income. Prepaying expenses other than interest can result in an immediate tax deduction if the prepayment will be used up within 12 months.
-Paying expenses other than interest can result in an immediate tax deduction if the prepayment will be used up to 12 months - Revenue is recognized when cash is received no matter when the sale actually took place.
Which of the following choices constitutes gross income form a business?
-income from service provided -income from renting property -gross profit from inventory sales
On December 1 of the current year, Rhianna pays $2,400 for a 12-month advertising contract that will begin on March 1 of next year. Rhianna uses the cash method of accounting for her business. How much will Rhianna be able to deduct in the current year? $2,400 Rationale: Since the contract extends beyond the end of the following year and the effective date doesn't start until March, she can't deduct anything in the current year. $200 Rationale: Since the contract extends beyond the end of the following year and the effective date doesn't start until March, she can't deduct anything in the current year. $0 $150 Rationale: Since the contract extends beyond the end of the following year and the effective date doesn't start until March, she can't deduct anything in the current year.
0
Barbara's Bakery purchased furnishings (7-year property) 4 years ago. During the current year, she sold the furnishings. Her original cost in these assets was $15,000 and she did NOT use bonus depreciation or Section 179 expensing in the year she purchased them. Due to other asset purchases that year, she has been using the mid-quarter convention when calculating the depreciation, and the furnishings were purchased in the second quarter of that year. If Barbara sold the furnishings in October of the current year (recovery period 4), how much depreciation will she be able to deduct this year? During the second quarter of Year 1, Barbara's Bakery purchased furnishings (7-year property) at an original cost of $15,000. She did NOT take bonus depreciation or Section 179 expense in the year of purchase. Due to other asset purchases in Year 1, the mid-quarter convention is being used for calculating the depreciation on the furnishings. If Barbara sells the furnishings in October of Year 4 how much can she deduct for depreciation in the year of sale?
1,571 ($15,000 x.1197) x.875 = $1,571
What is the recovery period (in years) for Section 197 intangibles?
15
Under Code Section ----, businesses may elect to immediately expense up to ---- of tangible personal property placed in service during 2019.
179; 1,020,000
What is the recovery period for Section 197 intangibles? 180 months, regardless of their actual life The lesser of 180 months or their actual life The greater of 180 months or their actual life Their actual life
180 months, regardless of their actual life
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
Tom purchased a 7-year asset for his business in February, three years ago for $4,500 and used the half-year convention for MACRS. He did not deduct any bonus depreciation and he did not elect Sec. 179 expensing in the year of purchase. He sold the asset in April, 2018. How much depreciation will Tom deduct in in the current year (year 4)?
281
Rachelle purchased a warehouse 19 years ago in the month of September. The purchase price was $400,000. In May of the current year (year 20), Rachelle sold the warehouse. She will be able to deduct-----for depreciation on the warehouse in the year of sale. (Round your answer to the nearest whole dollar.)
3,846
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 _____ years.
39
Lesa drives her car approximately 18,000 miles per year. During the most recent year, she drove 7,000 miles commuting to and from work, 4,500 miles for business-related conferences and client visits, and 6,500 miles for personal trips. How many miles are considered business miles and can be used to determine the tax deduction for transportation expenses? 18,000 11,500 Rationale: Commuting to work is generally considered a personal expense and is not deductible. 0 4,500
4,500
The mid quarter convention is used for all assets purchased during the year when more than _____ of the tangible ______ property purchased is placed in service during the 4th quarter of the year
40%; personal
Barbara's Bakery purchased appliances (7 year property) in quarter 4 of Year 1. The original cost of the appliances was $40,000 and she did NOT use bonus depreciation or Section 179 expensing in the year of purchase. The mid-quarter convention has been used for the calculation of depreciation. If Barbara sells the appliances in March of Year 4, she will be able to deduct ______ of depreciation in the year of sale.
40,000*14.06%(7y for y4)*1.5/12 =703 Note: 1) We used mid quarter convention because assets are purchased in the last quarter of the year. 2) Under 4th year depreciation rate is 14.06% for whole year but we have sold the asset in march. So depreciation is calculated proportionately. Under mid quarter convention, if an asset is used for only part of the quarter before it is sold then for depreciation purpose only 45 days(1.5 Months means february 15th) are considered for calculation. 3) Total months = 1.5 months (1 month for january and 0.5 month for february)
The MACRS recovery period for computers and peripheral equipment, car, and light general-purpose trucks is ______ years. The recovery period for office furniture, fixtures, machinery, and equipment is ______ years.
5, 7
Due to the personal enjoyment element involved with meals and entertainment, taxpayers may only deduct _____% of the actual cost.
50
Section 179 expensing, bonus depreciation, and MACRS depreciation rates are available for listed property if its business-use percentage exceeds
50%
A business may immediately expense up to $ (subject to phase-out rules) of both organizational expenditures and start-up costs with any remaining cost being amortized over months.
5000 180
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
50000
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
717 or 717.09 17.49% x 8,200/2 (using the MACRS half-year convention )
year end is on the last Friday in June every year. This year end schedule is known as which of the following?
A 52/53 week year end
In 2019, Bill purchased a new automobile for $88,000 that will be used 80% for business. If Bill did NOT have to consider the limitations for depreciation on automobiles, he would be able to deduct $ -------in regular MACRS depreciation and bonus depreciation the first year. However, he will only be able to deduct $--------- due to the luxury limitations.
Blank 1: 70,400 or 70400 Blank 2: 14,400 or 14400
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 $ in regular MACRS depreciation and bonus depreciation the first year. However, he will only be able to deduct $ due to the luxury limitations.
Blank 1: 78,000 or 78000 Blank 2: 18000 or 18,000
The luxury automobile limitations do NOT apply to vehicles weighing more than ----------------------------------pounds. These vehicles are allowed to compute regular ----------------------depreciation expenses for these vehicles.
Blank 1: 6000 or 6,000 Blank 2: MACRS or macrs
The business's deductible Sec. 179 expense is limited to the business's===before deducting the Sec. 179 expense. The business can===any amount that cannot be deducted in the current year.
Blank 1: net or taxable Blank 2: income Blank 3: carry Blank 4: forward
Which of the following items are needed to calculate MACRS depreciation for an asset? (Check all that apply.)
Applicable depreciation convention Asset's original cost Applicable depreciation method Date placed in service Applicable recovery period
Sally's Seashells purchased three assets during 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 If Asset C is 27.5-year property, this means it must be a residential real property. Section 179 can NOT be used on residential real property. It's best to choose the asset with the longest recovery period because the depreciation deduction under MACRS is less than those with shorter recovery periods.
For the current year, taxpayers can elect to immediately expense ------% of qualified property as bonus depreciation. The bonus depreciation is calculated (before/after) ---------he Section 179 expense and (before/after) ---------regular MACRS depreciation.
Blank 1: 100 or one hundred Blank 2: after Blank 3: before
For the current year, the maximum depreciation on automobiles for the first year including MACRS depreciation and Sec. 179, but NOT including bonus depreciation is $. ------The maximum Section 179 deduction for SUVs and trucks weighing over 6,000 pounds is $------
Blank 1: 10000 or 10,000 Blank 2: 25500 or 25,500
Randy rents commercial warehouses to various businesses. He purchased a warehouse in May of the current year. The cost of the warehouse was $250,000 The depreciation for the current year will be
Blank 1: 4013, Blank 2: 2408,
In 2019, Bill purchased an automobile for $65,000 that will be used 80% for business. If Bill did NOT have to consider the limitations for depreciation on automobiles, he would be able to deduct $ in regular MACRS depreciation the first year. However, he will only be able to deduct $ due to the luxury limitations.
Blank 1: 52,000 or 52000 Blank 2: 14,400 or 14400
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 $ in regular MACRS depreciation and bonus depreciation the first year. However, he will only be able to deduct $ due to the luxury limitations (considering allowable bonus depreciation).
Blank 1: 90,000 or 90000 Blank 2: 18,000 or 18000
Frank purchased land containing oil reserves for $425,000. He has calculated his cost depletion for the year to be $20 per barrel for a total of $120,000 in depletion expense. He now needs to calculate his percentage depletion in case it is larger. His gross income from the oil extraction is $600,000 and he has $520,000 in operating expenses before depletion expense. Assuming this is domestic production, the amount of percentage depletion expense is $. If he uses this method he can deduct $ for tax purposes. He should use the depletion method to maximize his deduction.
Blank 1: 90000 Blank 2: $80,000 or 80000 Blank 3: cost
The accounting methods that can be chosen for tax reporting include the method, the method, and the method
Blank 1: cash or cash basis Blank 2: accrual Blank 3: hybrid or mixed
the -----, ------- convention applies to the amortization of purchased intangibles.
Blank 1: full Blank 2: month
The calculation for the amount of percentage depletion for a natural resource is determined by multiplying the from the resource extraction by a fixed percentage based on the type of natural resource
Blank 1: gross Blank 2: income
If a business wants to maximize the depreciation deduction, it should choose to take Section 179 expense on assets with the --------------------------(lowest/highest) first year recovery percentage,-------- (including/excluding) bonus depreciation.
Blank 1: lowest Blank 2: including
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
Blank 1: organizational Blank 2: expenditures, costs, or expense
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 MACRS depreciation on one-half of the total cost Section 179 expensing on the business-use percentage of the cost MACRS depreciation on the business-use percentage of the cost Section 179 expensing on the total cost
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
What are the rules concerning reporting periods for tax purposes?
Business must report their income and deductions for a full 12 month year, unless special circumstances apply
Evan incurred education-related expenditures related to his job. Under which of the following circumstances will Evan NOT be allowed to deduct these expenditures as a BUSINESS expense? A) The course or courses meet the requirements necessary to keep his job B) The course or courses only improve Evan's skills in his existing business C) The course or courses qualify Evan for a new trade or business
C
Which of the following methods is NOT acceptable for the tax treatment of research and experimentation expenditures? Capitalize the costs and amortize them over not less than 60 months beginning the first month benefits are derived. Capitalize the costs and amortize them over the determinable useful life. Capitalize the costs and depreciate them using MACRS with a 3-year recovery period. Expense the costs immediately.
Capitalize the costs and depreciate them using MACRS with a 3-year recovery period.
Which of the following expenses is NOT included with deductible business travel expenses? Charlie paid $50 to attend a play during his 3-day business trip. Charlie incurred $90 in transportation expenses when driving his personal car to a 3-day business conference. Charlie paid $15 for dinner, eaten alone, at a restaurant adjoining his hotel. Charlie paid $200 for a hotel room in the hotel where the business conference was being held.
Charlie paid $50 to attend a play during his 3-day business trip.
Rick rents commercial warehouses to various businesses. He purchased a warehouse in May of the current year at a cost of $250,000. When calculating the warehouse depreciation in the fourth year of ownership, which column of Table 5 should Rick use?
Column 5 because the original purchase was made in May, the fifth month of the year.
Which of the following statements is correct when describing the accounting methods used for tax versus financial reporting? All reporting requirements for GAAP are permissible methods of reporting for tax purposes. Rationale: The tax code does not always follow GAAP requirements (i.e. deducting bad debts). Businesses must use the same accounting method for tax purposes that they use for financial reporting purposes. Rationale: The tax code may require a different accounting method from the one currently used by a business for financial reporting. Taxable income and financial reporting income should equal the same amount. Rationale: Certain deductions and revenues have different reporting requirements for tax purposes than for financial reporting purposes. Businesses have an incentive to maximize financial reporting income, but minimize taxable income.
Correct Answer Businesses have an incentive to maximize financial reporting income, but minimize taxable income.
When a business asset is completely destroyed due to a casualty, what is the amount of the deductible loss? The insurance proceeds minus the asset's fair market value (if the FMV exceeds the proceeds) The insurance proceeds minus the adjusted basis (if the basis exceeds the proceeds) [(The asset's adjusted basis minus insurance proceeds) - $100] - 10% AGI [(The asset's fair market value minus insurance proceeds) - $100] - 10% AGI
Correct Answer The insurance proceeds minus the adjusted basis (if the basis exceeds the proceeds)
Which of the following rules for casualty losses does NOT pertain to business assets? For partial destruction, the loss equals the insurance proceeds minus the lesser of (1) the adjusted basis or (2) the decline in fair market value. Rationale: Business casualty and theft losses do not have the same AGI and dollar limits as personal casualty losses. The loss is reduced by a $100 per casualty floor and the total of all losses is reduced by 10% of AGI. The deduction is for AGI. For total destruction of property, the loss equals the adjusted basis of the asset less any insurance proceeds.
Correct Answer The loss is reduced by a $100 per casualty floor and the total of all losses is reduced by 10% of AGI.
Which of the information listed below is NOT a requirement of the documentation needed to substantiate the business portion of mixed motive expenses? The records should include the amount. Rationale: Taxpayers must maintain specific, written, contemporaneous records (of time, amount, and business purpose) for mixed-motive expenses. The records should be written. Rationale: Taxpayers must maintain specific, written, contemporaneous records (of time, amount, and business purpose) for mixed-motive expenses. The records should be contemporaneous. Rationale: Taxpayers must maintain specific, written, contemporaneous records (of time, amount, and business purpose) for mixed-motive expenses. The records should include written evidence of personal use. The time and business purpose should be included. Rationale: Taxpayers must maintain specific, written, contemporaneous records (of time, amount, and business purpose) for mixed-motive expenses.
Correct Answer The records should include written evidence of personal use.
Which of the following items are classified as Section 197 intangibles? (Check all that apply.) Start-up costs Covenants not to compete Trademarks Goodwill
Covenants not to compete Trademarks Goodwill
Which of the following accounting methods are NOT acceptable for tax reporting? Cash method Hybrid method Accrual method Credit method
Credit method
Which of the following describes the difference between business activities and hobbies? A) Hobbies do not generate revenue B) Business activities require a full-time work schedule C) Business activities do not have net losses D) Hobbies are not primarily profit-motivated
D) Hobbies are not primarily profit-motivated
Which of the following choices reduces the basis of an asset? (Check all that apply.)
Depreciation allowed, but not deducted, on the asset Depreciation actually deducted on the asset
Which of the following assets are generally referred to as listed property? (Check all that apply.)
Digital cameras Automobiles
Which of the following methods are acceptable for the tax treatment of research and experimentation expenditures? (Check all that apply.) Expense the costs immediately. Capitalize the costs and depreciate them using MACRS with a 7-year recovery period. Capitalize the costs and amortize them over not less than 60 months beginning in the month benefits are first derived from the research. Capitalize the costs and amortize them over the determinable useful life.
Expense the costs immediately. Capitalize the costs and amortize them over not less than 60 months beginning in the month benefits are first derived from the research. Capitalize the costs and amortize them over the determinable useful life.
True or false: All patents or copyrights where §197 does not apply should be amortized over their legal lives.
False A patent or copyright that is purchased should be amortized over the remaining useful life of the intangible, while a self-created patent or copyright should be amortized over its legal life.
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 Rationale: Cost depletion can no longer be used, but the business can continue to use percentage depletion.
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 Rationale: If the automobile depreciation limits apply in the first year, the taxpayer must use the IRS maximum limits for all subsequent years.
True or false: Businesses are generally not allowed to deduct losses incurred with the sale or disposal of business assets. These losses must be used to offset any gains produced by the sale of other business assets or carried forward to offset future gains. True Rationale: Losses on the sale or disposal of business assets are generally deductible. False Rationale: Losses on the sale or disposal of business assets are generally deductible.
False Rationale: Losses on the sale or disposal of business assets are generally deductible.
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 previously owned (i.e. used) property.
False Rationale: The requirement for business depreciation is only that the property is "new" to the taxpayer, so that the taxpayer cannot have previously used the specific piece of property. Thus, the property can be used property purchased from another person or business.
True or false: The cost of marketing or selling stock qualifies as an organizational expenditure and is amortized over 180 months.
False Rationale: These costs do NOT qualify as organizational expenditures and cannot be amortized.
Which of the following statements is correct regarding the deductibility of meals when a taxpayer is traveling for business? The cost of meals is fully deductible if the taxpayer is away from home overnight. The cost of meals is NOT deductible because a taxpayer would have to eat whether they were home or away from home. Fifty percent of the cost of meals is deductible only if there is a business associate with the taxpayer. Rationale: Fifty percent of the cost of meals is deductible if the taxpayer is going to be away from home overnight. Fifty percent of the cost of meals is deductible if the taxpayer is going to be away from home overnight.
Fifty percent of the cost of meals is deductible if the taxpayer is going to be away from home overnight.
Which one of the following assets is generally NOT referred to as listed property?
Filing cabinet
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.) Depreciation of real property is the same for both regular tax purposes and AMT purposes. For AMT purposes, businesses must use the 150 percent declining balance or the straight-line method to depreciate tangible personal property. Section 179 expense is NOT deductible for AMT purposes. Rationale: Section 179 and bonus depreciation are equally deductible for both regular tax and AMT. For AMT purposes, the difference between regular tax depreciation and AMT depreciation is an adjustment used to calculate the AMT base. The allowable recovery periods are longer for all depreciable assets for AMT purposes than for regular tax purposes. Rationale: The allowable recovery periods are the same.
For AMT purposes, the difference between regular tax depreciation and AMT depreciation is an adjustment used to calculate the AMT base. 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.
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.) The allowable recovery periods and conventions are the same for all depreciable assets for AMT purposes as for regular tax purposes. Bonus depreciation is deductible for both regular tax purposes and AMT purposes. For AMT, the total AMT depreciation is added to regular taxable income to calculate the AMT base. For AMT purposes, businesses must depreciate tangible personal property using the 200 percent declining balance method. Depreciation of real property uses longer recovery periods for AMT purposes than for regular tax purposes.
For AMT, the total AMT depreciation is added to regular taxable income to calculate the AMT base. For AMT purposes, businesses must depreciate tangible personal property using the 200 percent declining balance method. Depreciation of real property uses longer recovery periods for AMT purposes than for regular tax purposes.
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, the IRS has set recovery periods for various types of assets.
For financial accounting, management can choose the estimated life. For tax purposes, the IRS has set recovery periods for various types of assets.
Which convention applies to the amortization of purchased intangibles? Half-year Full-month Mid-month Mid-quarter
Full-month
Which of the following choices is INCORRECT when defining the gross income of a business? Revenues from renting property is included in gross profit for rental businesses. Rationale: Gross revenues from rental property are included in gross income. Gross income for a business may be calculated as sales less returns and discounts. Gross income from a business includes gross profit from inventory sales. Rationale: Gross income for a business is Net Sales less Cost of Goods Sold Gross income for a service business can be calculated as income from services provided. Rationale: Gross revenues from services are included in gross income.
Gross income for a business may be calculated as sales less returns and discounts.
The _____ _______ convention allows 50% of a full-years depreciation in the year the asset is placed in service, regardless of when it was actually placed in service
Half year
Rex's Wrecks purchased $150,000 in new equipment during the current year. 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. Rex can take a Section 179 deduction up to his business income before the deduction.
Snap Inc. and Crackle Corp. own a capital and profits interest in the Cereal Bowl Partnership of 20% and 25%, respectively. There are another 35 partners, all with interests of less than 5%. Snap and Crackle have a June 30 year-end and the 35 other partners have various fiscal year ends. What year end must Cereal Bowl use? June 30 Can NOT be determined
June 30 Rationale: No partners with the same year-end own a majority interest. However, the principal partners have the same year-end of June 30.
Which of the following is NOT considered a start-up cost of a business? Costs of investigating the purchase of a business Rationale: Costs of investigating the purchase of a business may be considered a start up cost Legal fees to draft original organizational documents Costs of purchasing a business Rationale: Costs of purchasing a business may be considered a start up cost. Training costs for employees before opening business
Legal fees to draft original organizational documents
Trixie (an individual), Speed Corp. and Pops, Inc. each own a capital and profits interest in Mock Five Partnership of 30%, 40% and 40%, respectively. Trixie has a calendar year-end, Speed has a May 31 year-end and Pops has an August 31 year-end. What year-end must Mock Five use? August 31 December 31 May 31
May 31 Rationale: Under the least aggregate deferral method, a May year-end results in the least deferral (see calculations in attached figure.)
When depreciating real property under MACRS, which of the following conventions is used?
Mid-month
Which of the following options is NOT a category for intangible assets? Research and experimentation costs Start-up expenditures and organizational costs Patents and copyrights Section 197 purchased intangibles Natural resources
Natural resources
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 Real property is not eligible for Sec. 179 unless it is qualified real property. Qualified real property does not include a storage warehouse. Real property is not eligible for Sec. 179 unless it is qualified real property. Qualified real property does not residential rental property. Real property is not eligible for Sec. 179 unless it is qualified real property. Qualified real property does not include land.
The term is used to describe an expense that is normal or appropriate for the business under the circumstances.
Ordinary
Which one of the following terms does the Internal Revenue Code use to describe deductible business expenses? Relevant Crucial Ordinary Important
Ordinary
Which of the following choices are categories of intangible assets? (Check all that apply.) Prepaid expenses Research and experimentation costs Patents and copyrights Property, Plant and Equipment Start-up expenditures and organizational costs Natural resources
Research and experimentation costs Patents and copyrights Start-up expenditures and organizational costs
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 The maximum Sec. 179 deduction for 2019 is $1,020,000. The basis of the asset is reduced by the Sec. 179 amount before applying MACRS or S/L depreciation rates. The maximum Sec. 179 deduction is $1,020,000. The basis of the asset is reduced by the Sec. 179 amount before applying MACRS or S/L depreciation rates. The maximum Sec. 179 deduction is $1,020,000. The basis of the asset is reduced by the Sec. 179 amount before applying MACRS or S/L depreciation rates.
Rambo Manufacturing Co. purchased $2,825,000 in new production equipment during the current year. 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-$745,000; MACRS-$297,232 The ceiling is reduced by $275,000 (2,825,000-2,550,000) for a total of $745,000. Then apply MACRS at .1429 to the residual $2,080,000
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. If the business use drops to 50% or below, then the excess of MACRS depreciation over straight-line for all prior years is recaptured.
Barbara's Bakery purchased three new 7-year assets during the current year. She chose NOT to use Section 179 immediate expensing or take bonus depreciation. The furnishings were purchased for $15,000 in April, the equipment for $6,000 in July, and the appliances for $40,000 in November. Using the appropriate MACRS depreciation tables in the Appendix, what amount of depreciation expense is allowable in the current year? $2,178 $4,429 $4,748 $8,717
Solution: The answer is $4,748 Depreciation Expense = ($15,000* 17.85% ) + ($6,000* 10.71% ) + ($40,000* 3.57% ) = $2677.50 + $642.6 + $1428 =$ 4748.1 ( $4,748 Approx ) Note: 1) Normally we use half year convention for the assets purchased during the year but in this case we used mid quarter convention because of more than 40% of assets are purchased in the last quarter of the year. = (Asset purchased in last quarter / total assets purchased in the year) *100 = ( $40,000 / $61,000) *100 = 65.57% (more than 40%) So we used mid quarter convention macrs depreciation rates for 7 year assets purchased in this year
Which of the following depreciation provisions are available to listed property that is used less than 50% for business purposes? Double declining balance depreciation on the business-use percentage of the cost Bonus depreciation on the business-use percentage of the cost Straight-line depreciation on the business-use percentage of the cost Section 179 expensing on the business-use percentage of the cost
Straight-line depreciation on the business-use percentage of the cost
Choose the items included in the calculation of an asset's adjusted basis. (Check all that apply.)
Subtract prior depreciation allowed or allowable on the asset. Add costs necessary to prepare the asset for use in the business. Start with the asset's original basis.
Your friend, Andy, is considering purchasing a vehicle for use in his business. He is asking about the depreciation rules and Section 179 expensing. What advice below is accurate and correct? (Check all that apply.) The Section 179 expense for SUVs and trucks weighing over 6,000 pounds is $25,500. The Section 179 deduction plus the regular MACRS depreciation is limited to $10,000 in the first year. Bonus depreciation is NOT allowed for vehicles using the Section 179 deduction. Bonus depreciation of up to $8,000 is allowed in addition to Sec. 179 and MACRS regular deduction. MACRS depreciation for SUVs and trucks weighing over 6,000 pounds is also $10,000.
The Section 179 expense for SUVs and trucks weighing over 6,000 pounds is $25,500. The Section 179 deduction plus the regular MACRS depreciation is limited to $10,000 in the first year. Bonus depreciation of up to $8,000 is allowed in addition to Sec. 179 and MACRS regular deduction.
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 of depletion is calculated in the year the businesses produces or extracts the natural resource. The method can NOT be used once the cost of the resource has been recovered. The amount can NOT exceed 50 percent of the taxable income from the natural resource business activity before deducting the depletion expense.
The amount can NOT exceed 50 percent of the taxable income from the natural resource business activity before deducting the depletion expense.
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 method can NOT be used once the cost of the resource has been recovered. The amount can NOT exceed 50 percent of the taxable income from the natural resource business activity before deducting the depletion expense. The amount of depletion is calculated in the year the businesses produces or extracts the natural resource.
The amount can NOT exceed 50 percent of the taxable income from the natural resource business activity before deducting the depletion expense.
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.
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.
A 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.
If a business purchases $3,180,000 in equipment during a given year, what is the impact on the Section 179 election?
The ceiling amount will be reduced by $630,000 to a maximum eligible deduction of $390,000 for the current year. The ceiling amount will be reduced by $630,000 to a maximum eligible deduction of $390,000 for the current year with a $0 carryforward.
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.
Which of the following items could be classified as Section 197 intangibles? (Check all that apply.) Organizational costs Research and experimentation expenditures Trademarks Customer lists Patents Goodwill
Trademarks Customer lists Patents Goodwill
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.
Which one of the following statements is correct regarding an asset that is used for both business and personal purposes? The deductible business expense is determined by prorating the expenses based on the percentage of time it is used for business. None of the expense related to the asset is deductible since this treatment would lend itself to taxpayer abuse. The entire amount of any expense related to the asset is deductible since it is necessary to have the asset for the business. One-half of the expense related to the asset is deductible as a business expense.
The deductible business expense is determined by prorating the expenses based on the percentage of time it is used for business.
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.
Which of the following criteria is NOT required for a meal to be considered a tax-deductible business meal? The meal must be eaten on the business premises. The taxpayer or an employee of the taxpayer must be present for the meal. The meal must be directly associated with the active conduct of the business. The amount must be reasonable under the circumstances.
The meal must be eaten on the business premises.
Which of the information listed below is NOT a requirement of the documentation needed to substantiate the business portion of mixed motive expenses? The time and business purpose should be included. Rationale: Taxpayers must maintain specific, written, contemporaneous records (of time, amount, and business purpose) for mixed-motive expenses. The records should be contemporaneous. Rationale: Taxpayers must maintain specific, written, contemporaneous records (of time, amount, and business purpose) for mixed-motive expenses. The records should be written. Rationale: Taxpayers must maintain specific, written, contemporaneous records (of time, amount, and business purpose) for mixed-motive expenses. The records should include written evidence of personal use. The records should include the amount. Rationale: Taxpayers must maintain specific, written, contemporaneous records (of time, amount, and business purpose) for mixed-motive expenses.
The records should include written evidence of personal use.
What is the recovery period for patents that have been purchased by a business (not as part of an acquisition of another entire business)? Five years The remaining legal life of the patent at the time of the purchase The legal life of the patent
The remaining legal life of the patent at the time of the purchase
Which of the following are included in the gross estate? (Check all that apply.) The value of transfers that take place at death Fair market value of property owned by decedent at death 100% of the value of land held 50/50 as tenants in common with a business partner
The value of transfers that take place at death Fair market value of property owned by decedent at death Rationale: Both the FMV of property owned by the decedent and transfers at death are included in the gross estate.
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. Bonus depreciation is NOT allowed for vehicles weighing over 6,000 pounds. These vehicles must be depreciated using straight-line rates. The depreciation may be limited by the automobile depreciation limits set by Congress.
These vehicles can be depreciated using regular MACRS percentages.
True or false: Personal property can be business property or personal-use property.
True Rationale: Personal property is simply tangible property, other than real property. It may be used in a trade or business or it may be used personally.
Which of the following choices describes how a business should account for organizational expenditures and start-up costs? (Check all that apply.) A total of up to $5,000 can be expensed immediately. All qualifying costs of each can be expensed immediately. Qualifying costs must be amortized over 180 months. Up to $5,000 of each (total of $10,000) can be expensed immediately. Any costs that are NOT immediately expensed must be amortized over 180 months.
Up to $5,000 of each (total of $10,000) can be expensed immediately. Any costs that are NOT immediately expensed must be amortized over 180 months.
Which of the following choices describes how a business should account for organizational expenditures and start-up costs? (Check all that apply.) A total of up to $5,000 can be expensed immediately. Up to $5,000 of each (total of $10,000) can be expensed immediately. All qualifying costs of each can be expensed immediately. Qualifying costs must be amortized over 180 months. Any costs that are NOT immediately expensed must be amortized over 180 months.
Up to $5,000 of each (total of $10,000) can be expensed immediately. Any costs that are NOT immediately expensed must be amortized over 180 months.
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
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 deprecation. Business is booming, so lucky purchased $15000 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. a. The new machinery can be depreciated using the same method or different method than the previously purchased machinery b. IF lucky wants to use a different depreciation method, he must recapture depreciation and change the method used on the prior purchase of machinery c. The new machinery must be depreciated using the same method as the previously purchased machinery
a. The new machinery can be depreciated using the same method or different method than the previously purchased machinery
The mid-quarter test is applied _______ the Section 179 expense is deducted from an assets basis, and _______ bonus depreciation is taken.
after, before
Which of the following choices are tests that need to be met in order to deduct an expense under the accrual method?
all events test, economic performance test
Allison purchased equipment that cost $100,000 for use in her business. She expects the equipment to be useful for the business for the next 8 years. Which of the following choices correctly describes the tax treatment of the cost of the equipment? a.) The equipment should NOT be deducted until the year Allison sells or disposes of it. b.) The equipment should be capitalized and depreciated according to the tax code c.) The equipment should be deducted in the year it is purchases
b.) The equipment should be capitalized and depreciated according to the tax code
Which of the following terms does the Internal Revenue Code use to describe deductible business expenses? a.) relevant b.) necessary c.) crucial d.) important
b.) necessary
Business assets that are often used for both-------and ----------------------------purposes are referred to as listed property.
business personal
The amount of depletion that can be taken on an annual basis is the larger of the amounts computed under the ----------- depletion method or the ---------- depletion method.
cost percentage
Which depreciation method is most likely to be used by profitable businesses with high marginal tax rates a. Alternative depreciation system b. Units of activity depreciation method c. Straight lined. MACRS 200% declining balance
d. MACRS 200% declining balance
The cost recovery of the capital investment in natural resources is referred to as
deplition
In addition to the all-events test, an accrual-basis business must meet ____________ ____________ test with respect to a liability before the corresponding expense can be deducted for tax purposes.
economic performance
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
Determining an asset's estimated useful life is different for financial accounting than for tax purposes. In which accounting area is the estimated useful life determined by the taxpayer's assessment, rather than being predetermined based on asset type? A. financial accounting B. tax accounting
financial accounting
A business may have a tax year that is shorter than a full 12 months during its ... year in the business or its ... year in business.
first, last
real property is classified in one of three ways: ___ which is NOT depreciable; ___ rental property, which is occupied by non transient lessees; or ___ property
land, residential, nonresidential
Business assets that are often used for both business and personal purposes are referred to as------property
listed or mixed-use
If a business wants to maximize the depreciation deduction, it should choose to take Section 179 expense on assets with the ------ first-year recovery percentage, -------- bonus depreciation.
lowest including
All real property is depreciated using the _____-_______ convention.
mid-month
In order to deduct the business portion of mixed motive expenses, taxpayers must have sufficient __________ to prove the business use of the asset.
records
The term is used to describe an expense that is helpful or conducive to a business activity.
necessary
an expense that is helpful or conducive to the business activity, but the expenditure need not be essential or indispensable (purchasing a tool you don't think you'd use but could ending up needing on a rare basis counts), if the expense can help generate profits (at any level) this requirement is met
necessary expense
Which of the following assets has a 7-year recovery period for MACRS depreciation? A. light general-purpose trucks B. office furniture and fixtures C. computers and peripheral equipment D. buildings
office furniture and fixtures
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
organizational cost
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 section 197 intangibles goodwill start-up costs
organizational expenditures
__________ casualty losses in a presidentially declared disaster area are generally deductible from AGI as itemized deductions, and __________ casualty losses are deductible for AGI.
personal, business
The objective of business activities to make a(n) ___. When a taxpayer's activity is pursued for personal pleasure, that activity is treated as a(n) ___ when revenues and expenses are incurred.
profit, hobby
land and buildings are classified as __ property, while items such as machinery, equipment, and furnishings are classified as tangible, personal property
real
Ordinary and necessary business expenses are deductible only to the extent they are in amount.
reasonable
In order to deduct the business portion of mixed motive expenses, taxpayers must have sufficient ______ to prove the business use of the asset
records
in order to compute MACRS depreciation, which of the following pieces of information is NOT required?
salvage or residual value
Similar assets purchased in the same year must be depreciated using the __________ depreciation method, but similar assets purchased in different years can be depreciated using __________ depreciation methods.
same, different
When depreciating real property under MACRS, the recovery rates are based in the _________-_________ method.
straight line
Sonny incurred the following expenses last month in his self-employment business: Khaki pants and a blue button-down shirt to wear to work; tuition for a course in marketing to improve his current job skills as a fashion designer; and groceries so that he could take his lunch to work. Which of these expenses is/are deductible business expenses? tuition and clothing khaki pants and blue shirt tuition for the marketing course groceries for his lunches while at work none are deductible
tuition for the marketing course
Sonny incurred the following expenses last month: Khaki pants and a blue button down shirt to wear to work, tuition for a course in marketing to improve his current job skills as a fashion designer, and groceries so that he could take his lunch to work. Which of these expenses is/are deductible business expenses?
tuition for the marketing course
