TAX4001 - Chapter 7 (Final #1 Review)

The maximum section 179 deduction as of 2019 is $_____________.

$1,020,000

Determine the tax basis of the business asset acquired in each of the following cases: 1) Firm L paid $5,950 cash plus $416 sales tax plus a $500 installation charge for a satellite dish. 2) TTP Inc. acquired inventory in exchange for 800 shares of TTP common stock listed on Nasdaq at $212 per share on the date of exchange. 3) Firm Q acquired machinery in exchange for architectural drawings rendered by Firm's Q's junior partner. The partner spent 20 hours on the drawings, and his hourly billing rate is $350. 4) Company C purchased equipment by paying $2,000 cash at date of purchase and financing the $18,000 balance of the price under a three-year deferred payment plan.

1) $6,866 tax basis ($5,950 purchase price + $416 sales tax + $500 installation cost). 2) $169,600 tax basis (FMV of stock exchanged for inventory). 3) $7,000 tax basis (FMV of services exchange for machinery). 4) $20,000 tax basis ($2,000 cash paid + $18,000 deferred payment).

In 2018, Company W elected under Section 179 to expense $19,300 of the cost of qualifying property. However, it could deduct only $15,000 of the expense because of the taxable income limitation. In 2019, Company W's taxable income before any Section 179 deduction was $1,812,000. 1) Compute its 2019 Section 179 deduction if the total cost of qualifying property purchased in 2019 was $13,600. 2) Compute its 2019 Section 179 deduction if the total cost of qualifying property purchased in 2019 was $1,018,000.

1) Company W's deduction is $17,900 ($13,600 + $4,300 carryforward of 2018 expense) which is less than the limited dollar amount for 2019 of $1,020,000. Company W may deduct $17,900 in 2019. 2) Company W's total cost is $1,022,300, which is more than the limited dollar amount for 2019 of $1,020,000. Company W may deduct $1,020,000 in 2019 and will have a $2,300 carryfoward to 2020.

Herelt Inc., a calendar year taxpayer, purchased equipment for $383,600 and placed it in service on April 1, 2019. The equipment was seven-year recovery property, and Herelt used the half-year convention to compute MACRS depreciation. Use Table 7-2. 1) Compute Herelt's MACRS depreciation with respect to the equipment for 2019 and 2020. 2) Compute Herelt's adjusted basis in the equipment on December 31, 2020. 3) Compute Herelt's MACRS depreciation for 2021 if it disposes of the equipment on February 9, 2021.

1) Herelt's MACRS depreciation for 2019 is $54,816 ($383,600 × 14.29%). Its MACRS depreciation for 2020 is $93,944 ($383,600 × 24.49%). 2) $383,600 − $54,816 − $93,944 = $234,840 adjusted basis on December 31, 2020. 3) Herelt's MACRS depreciation for the year of disposition is based on the half-year convention. Thus, 2021 depreciation is $33,546 (50% [$383,600 × 17.49%]).

Erwin Company, a calendar year taxpayer, made only two purchases of depreciable personalty this year. The first purchase was five-year recovery property costing $312,800, and the second purchase was seven-year recovery property costing $574,000. Use Table 7-2 and Appendix 7-A. 1) Compute Erwin's first-year MACRS depreciation with respect to the personalty assuming that the first purchase occurred on February 2, and the second purchase occurred on June 18. 2) Compute Erwin's first-year MACRS depreciation with respect to the personalty assuming that the first purchase occurred on February 2, and the second purchase occurred on October 13.

1) In this case, Erwin uses the half-year convention to compute MACRS depreciation. First-year depreciation for the five-year recovery property is $62,560 (20.00% × $312,800), and first year depreciation for the seven-year recovery property is $82,025 (14.29% × $574,000). 2) Because Erwin placed 65 percent ($574,000 ÷ $886,800) of its tangible personalty in service during the fourth quarter, it must use a midquarter convention to compute MACRS depreciation. Based on the first table in Appendix 7-A, first-year depreciation for the five-year recovery property placed in service in the first quarter is $109,480 (35.00% × $312,800). Based on the last table in Appendix 7-A, first-year depreciation for the seven-year recovery property placed in service in the fourth quarter is $20,492 (3.57% × $574,000).

Knute Company purchased only one asset during its calendar taxable year. The asset cost $650,000 and has a three-year recovery period. 1) Compute MACRS depreciation with respect to this asset over the recovery period assuming that the asset was placed in service on August 18. 2) Compute MACRS depreciation with respect to this asset over the recovery period assuming that the asset was placed in service on November 9.

1) In this case, Knute uses the half-year convention to compute MACRS depreciation. Based on the recovery percentages in Table 7-2, the annual deductions are: Year 1: 33.33% × $650,000 = $216,645 Year 2: 44.45% × $650,000 = $288,925 Year 3: 14.81% × $650,000 = $96,265 Year 4: 7.41% × $650,000 = $48,165 2) Because more than 40 percent (in fact, 100 percent) of Knute's tangible personalty was placed in service during the fourth quarter, it must use a midquarter convention to compute MACRS depreciation. Based on the last table in Appendix 7-A, annual deductions for property placed in service in the fourth quarter are: Year 1: 8.33% × $650,000 = $54,145 Year 2: 61.11% × $650,000 = $397,215 Year 3: 20.37% × $650,000 = $132,405 Year 4: 10.19% × $650,000 = $66,235

Early this year, ZeZe Inc. paid a $52,000 legal fee in connection with a dispute over ZeZe's title to investment land. ZeZe's auditors required the corporation to expense the payment on this year's financial statements. According to ZeZe's tax adviser, the payment is a nondeductible capital expenditure. ZeZe's tax rate is 21 percent. 1) Compute the deferred tax asset or a deferred tax liability (identify which) resulting from this difference in accounting treatment. 2) When will the temporary difference reverse?

1) The $52,000 excess of taxable income over book income is an unfavorable difference resulting in an $10,920 deferred tax asset ($52,000 × 21%). 2) The temporary difference will reverse in the year that ZeZe disposes of the land.

Assets with a recovery period of 15 or 20 years use the _____% declining-balance method.

150%

Assets with a recovery period of 3, 5, 7, and 10 years use the _____% declining-balance method.

200%

Under the _____ method, the straight-line rate of depreciation is doubled.

200% declining-balance

Mr. Z, a calendar year taxpayer, opened a new car wash. Prior to the car wash's grand opening on October 8, Mr. Z incurred various start-up expenditures (rent, utilities, employee salaries, supplies, and so on). In each of the following cases, compute Mr. Z's first-year deduction with respect to these expenditures. (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.) 1) The start-up expenditures totaled $4,750. 2) The start-up expenditures totaled $27,320. 3) The start-up expenditures totaled $53,120. 4) The start-up expenditures totaled $88,380.

A firm may deduct the lesser of its actual start-up expenditures, or $5,000 (reduced by the amount by which total expenditures exceed $50,000). The firm must capitalize any non-deductible start-up expenditures, and may elect to amortize such cost over a 180-month period, starting with the month in which business begins. 1) $4,750 Mr. Z can deduct the entire $4,750 start-up expenditures. 2) $5,372. Mr. Z can deduct $5,000 of the expenditures and must capitalize the $22,320 remainder. He can elect to amortize the capitalized cost over 180 months at the rate of $124 per month ($22,320 / 180 = $124). First-year amortization would be $372 (3 months × $124), and Mr. Z's first-year deduction would be $5,372. 3) 2,734. 53,120 - 50,000 = $3,120 excess over $50,000. 5,000 - 3,120 = $1,880. Mr. Z can deduct $1,880 of the expenditures. He must capitalize the $51,240 remainder (53,120 - 1,880 = $51,240). He can elect to amortize the capitalized cost over 180 months at the rate of $284.67 per month ($51,240 / 180 = $284.67). First-year amortization would be $854 (3 months × $284.67), and Mr. Z's first-year deduction would be $2,734 ($1,880 + $854). 4) $1,473. Mr. Z must capitalize the entire $88,380 expenditure. He can elect to amortize the capitalized cost over 180 months at the rate of $491 per month ($88,380 / 180 = $491). Mr. Z's first-year deduction would equal the $1,473 first-year amortization (3 months × $491).

Ajax Inc. was formed on April 25 and elected a calendar year for tax purposes. Ajax paid $11,200 to the attorney who drew up the articles of incorporation and $5,100 to the CPA who advised the corporation concerning the accounting and tax implications of its organization. Ajax began business operations on July 15. To what extent can Ajax deduct its $16,300 organizational costs on its first tax return?

A firm may deduct the lesser of its actual start-up expenditures, or $5,000 (reduced by the amount by which total expenditures exceed $50,000). The firm must capitalize any non-deductible start-up expenditures, and may elect to amortize such cost over a 180-month period, starting with the month in which business begins. Ajax Inc. can deduct $5,000 of its $16,300 organizational costs and must capitalize the $11,300 remainder. It can elect to amortize the capitalized cost over 180 months at the rate of $62.78 per month. ($11,300 / 180 = 62.78) If it makes this election, Ajax can also deduct $377 amortization (6 months × $62.78). With the election, Ajax can deduct $5,377 organizational cost on its first tax return.

ABC Company purchased business property several years ago, paying $25,000 cash and borrowing $80,000 to fund the acquisition. ABC also incurred $2,000 of freight costs for shipping the property to its business location. Over time, ABC has incurred $12,000 of repair costs for the property and made $7,000 of capital improvements. ABC has also deducted $56,000 of MACRS depreciation on the property to date. Calculate ABC's adjusted tax basis in this asset.

Adjusted tax basis is $58,000 $25,000 cash paid on purchase + $80,000 acquisition debt + $2,000 freight + $7,000 capital improvements − $56,000 depreciation. The cost of repairs is deductible when incurred.

If a business has start-up costs of $10,580 how much do they need to deduct? How much should they capitalize?

Deduct $5,000 and capitalize the remainder of $5,580.

Under the __________ convention, assets are treated as if placed in service (or disposed of) in the middle of the taxable year, regardless of when they were actually placed in service (or disposed of).

Half-year.

The ____________ convention applies to assets with recovery periods of 25, 27.5, 39, or 50 years.

Mid-month

Applies when more than 40% of personalty is placed in service during the last quarter of the year.

Mid-quarter convention

A new partnership or corporation can deduct the lesser of its actual organizational costs, or $5,000.

Organizational costs

How is the mid-month convention applied?

Property placed in service at any time during a month is treated as if it was placed in service in the middle of the month. Example: Business building placed in service April 25th is treated as if placed in service April 15th.

True or false? Repair & maintenance costs that are regular and recurring in nature and do not materially add to either the value or the useful life of an asset are deductible.

True

True or false? The section 179 deduction cannot exceed current taxable income.

True

If the expenditure creates or enhances a distinct asset with a useful life substantially beyond the current year, the expenditure must be ____________.

capitalized