TAX EXAM 3

Lenter LLC placed in service on April 29, 2023, machinery and equipment (seven-year property) with a basis of $1,600,000. Assume that Lenter has sufficient income to avoid any limitations. Calculate the maximum depreciation deduction including §179 expensing (but ignoring bonus expensing).

$1,222,876 ---------- $440,000 × 0.1429 = $62,876 plus $1,160,000 of §179 expense.

Reid acquired two assets in 2023: on August 6th, he acquired computer equipment (five-year property) with a basis of $1,160,000 and on November 9th he acquired machinery (seven-year property) with a basis of $1,160,000. Assume that Reid has sufficient income to avoid any limitations. Calculate the maximum depreciation deduction, including §179 expensing (but not bonus depreciation).

$1,392,000.

Logan, a 50-percent active shareholder in Military Gear Incorporated (MG), is comparing the tax consequences of losses from C corporations with losses from S corporations. Assume MG has a $117,000 tax loss for the year, Logan's tax basis in his MG stock was $158,500 at the beginning of the year, and he received $83,500 ordinary income from other sources during the year. Assuming Logan's marginal tax rate is 24 percent, how much more tax will Logan pay currently if MG is a C corporation compared to the tax he would pay if it were an S corporation?

$14,040

Mike started a calendar-year business on September 1st of this year by paying 12 months of rent on his shop at $1,500 per month. What is the maximum amount of rent that Mike can deduct this year under each type of accounting method?

$18,000 under the cash method and $6,000 under the accrual method.

Brad sold a rental house that he owned for $246,500. Brad bought the rental house five years ago for $228,500 and has claimed $48,250 of depreciation expense. What is the amount and character of Brad's gain or loss assuming this is Brad's only asset sale of the year?

$18,000 §1231 gain and $48,250 unrecaptured §1250 gain

Anne LLC purchased computer equipment (five-year property) on August 29 for $35,000 and used the half-year convention to depreciate it. Anne LLC did not take §179 or bonus depreciation in the year it acquired the computer equipment. During the current year, which is the fourth year Anne LLC owned the property, the property was disposed of on January 15. Calculate the maximum depreciation expense

$2,016 --------- $35,000 × 0.1152 = $4,032 × 0.5 = $2,016

Tom Tom LLC purchased a rental house and land during the current year for $164,000. The purchase price was allocated as follows: $107,000 to the building and $57,000 to the land. The property was placed in service on May 22. Calculate Tom Tom's maximum depreciation for this first year.

$2,432 ---------- $2,432 ($107,000 × 2.273%).

Wheeler LLC purchased two assets during the current year (a full 12-month tax year). On November 16 Wheeler placed in service computer equipment (five-year property) with a basis of $15,500 and on April 20 placed in service furniture (seven-year property) with a basis of $11,300. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation).

$2,792 ----------- $15,500 × 0.05 = $775 and $11,300 × 0.1785 = $2,017. $2,792 = ($775 + $2,017).

Yasmin purchased two assets during the current year. On May 26th Yasmin placed in service computer equipment (five-year property) with a basis of $10,000 and on December 9th placed in service machinery (seven-year property) with a basis of $10,000. Calculate the maximum depreciation deduction (ignoring §179 and bonus depreciation).

$2,857.

Bozeman sold equipment that it uses in its business for $80,000. Bozeman bought the equipment two years ago for $75,000 and has claimed $20,000 of depreciation expense. What is the amount and character of Bozeman's gain or loss?

$20,000 ordinary gain, and $5,000 §1231 gain

Alexandra sold equipment that she uses in her business for $100,000. Alexandra bought the equipment two years ago for $90,000 and has claimed $25,000 of depreciation expense. What is the amount and character of Alexandra's gain or loss?

$25,000 ordinary gain, and $10,000 §1231 gain.

Peroni Corporation sold a parcel of land valued at $300,000. Its basis in the land was $250,000. For the land, Peroni received $150,000 in cash in the current year and a note providing Peroni with $150,000 in the subsequent year. What is Peroni's recognized gain in the current and subsequent year, respectively?

$25,000, $25,000

Arlington LLC exchanged land used in its business for some new land. Arlington originally purchased the land it exchanged for $30,000. The new land had a fair market value of $36,000. Arlington also received $4,000 of office equipment in the transaction. What is Arlington's recognized gain or loss on the exchange?

$4,000

Kristine sold two assets on March 20thMarch 20th of the current year. The first was machinery with an original basis of $59,000, currently in the fourth year of depreciation, and depreciated under the half-year convention. The second was furniture with an original basis of $24,000, placed in service during the fourth quarter, currently in the third year of depreciation, and depreciated under the mid-quarter convention. What is Kristine's depreciation deduction for the current year if the depreciation recovery period is seven years?

$4,275.

Bateman Corporation sold an office building that it used in its business for $800,800. Bateman bought the building 10 years ago for $599,600 and has claimed $201,200 of depreciation expense. What is the amount and character of Bateman's gain or loss?

$40,240 ordinary and $362,160 §1231 gain

Colbert operates a catering service on the accrual method. In November of year 1, Colbert received a payment of $9,000 for 18 months of catering services to be rendered from December 1st of year 1 through May 31st of year 3. When must Colbert recognize the income if his accounting methods are selected to minimize income recognition?

$500 is recognized in year 1 and $8,500 in year 2. ---------- ($9,000 ÷ 18) × 1 month = $500.

Ashburn reported a $104,950 net §1231 gain in Year 6. Assuming Ashburn reported $54,000 of nonrecaptured §1231 losses during Years 1 to 5, what amount of Ashburn's net §1231 gain for Year 6, if any, is treated as ordinary income?

$54,000

Simmons LLC purchased an office building and land several years ago for $250,000. The purchase price was allocated as follows: $200,000 to the building and $50,000 to the land. The property was placed in service on October 2. If the property is disposed of on February 27 during the 10th year, calculate Simmons's maximum depreciation in the 10th year.

$641 ------------ $641 = ($200,000 × 2.564% × 1.5 ÷ 12).

Redoubt LLC exchanged an office building used in its business for a rental house. Redoubt originally purchased the building for $80,000, and it had an adjusted basis of $53,000 at the time of the exchange. The rental house had a fair market value of $62,000. Redoubt also received $7,000 of cash in the transaction. What is Redoubt's gain or loss recognized on the exchange? What is Redoubt's basis in the rental house?

$7,000 gain. $53,000 basis in the rental house.

Clyde operates a sole proprietorship using the cash method. This year, Clyde made the following expenditures: $480 to U.S. Bank for 12 months of interest accruing on a business loan from September 1 of this year through August 31 of next year even though only $160 of interest accrued this year. $600 for 12 months of property insurance beginning on July 1 of this year. What is the maximum amount Clyde can deduct this year?

$760 --------------- 160 + 600 = 760

Butte sold a machine to a machine dealer for $50,400. Butte bought the machine for $54,600 several years ago and has claimed $12,300 of depreciation expense on the machine. What is the amount and character of Butte's gain or loss?

$8,100, ordinary gain

Sumner sold equipment that it uses in its business for $31,300. Sumner bought the equipment a few years ago for $79,350 and has claimed $39,675 of depreciation expense. Assuming that this is Sumner's only disposition during the year, what is the amount and character of Sumner's gain or loss?

$8,375, §1231 loss

Which of the following is a true statement? (A) Interest expense is not deductible if the loan is used to purchase municipal bonds. (B) Insurance premiums are not deductible if paid for "key-employee" life insurance. (C) One-half of the cost of business meals is not deductible... (D) All these choices are true. (E) None of the choices are true.

(D) All these choices are true.

Crocker and Company (CC) is a C corporation. For the year, CC reported taxable income of $565,000. At the end of the year, CC distributed all its after-tax earnings to Jimmy, the company's sole shareholder. Jimmy's marginal ordinary tax rate is 37 percent and his marginal tax rate on dividends is 23.8 percent, including the net investment income tax. What is the overall tax rate on Crocker and Company's pretax income (rounded to the nearest tenth)?

39.8%

Which of the following depreciation conventions is not used under MACRS?

Full-month

Beth operates a plumbing firm. In August of last year, she signed a contract to provide plumbing services for a renovation. Beth began the work that August and finished the work in December of last year. However, Beth didn't bill the client until January of this year, and she didn't receive the payment until March when she received payment in full. When should Beth recognize income under the accrual method of accounting?

In December of last year

Jim operates his business on the accrual method, and this year, he received $4,000 for services that he intends to provide to his clients next year. Under what circumstances can Jim defer the recognition of the $4,000 of income until next year?

Jim can elect to defer the recognition of the income if the income is not recognized for financial accounting purposes.

The sale of land held for investment results in which of the following types of gain or loss?

Capital

New and used personal property is eligible for bonus depreciation as long as the property has not been used by the taxpayer within the past five years. Qualified improvement property is eligible now provided the improvements must be made by the taxpayer after the building was first placed in service by the taxpayer.

New and used personal property is eligible for bonus depreciation as long as the property has not been used by the taxpayer within the past five years. Qualified improvement property is eligible now provided the improvements must be made by the taxpayer after the building was first placed in service by the taxpayer.

The sale of computer equipment used in a trade or business for nine months results in which of the following types of gain or loss?

Ordinary