Chapter 10

False

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

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 used property.

False

True or false: In order to calculate MACRS depreciation, the business only needs to know the asset's depreciable basis, the recovery period, and which depreciation method (i.e. 200% declining balance) is used.

Original basis + significant improvements - depreciation allowed or allowable

Which of the following calculations is used to determine an asset's adjusted basis? Multiple choice question. Original basis + depreciation allowed or allowable - significant improvements Original basis + depreciation taken - significant improvements Original basis + significant improvements - depreciation allowed or allowable Original basis + ordinary repairs - depreciation taken

Depreciation allowed, but not deducted, on the asset Depreciation actually deducted on the asset

Which of the following choices reduces the basis of an asset? (Check all that apply.) Multiple select question. Ordinary repairs related to the asset Maintenance costs related to the asset Depreciation allowed, but not deducted, on the asset Depreciation actually deducted on the asset

Straight-line depreciation on the business-use percentage of the cost

Which of the following depreciation provisions are available to listed property that is used less than 50% for business purposes? Multiple choice question. Section 179 expensing on the business-use percentage of the cost Straight-line depreciation on the business-use percentage of the cost Bonus depreciation on the business-use percentage of the cost Double declining balance depreciation on the business-use percentage of the cost

MACRS depreciation on the business-use percentage of the cost Section 179 expensing on the business-use percentage of the cost Bonus depreciation on the business-use percentage of the cost

Which of the following depreciation provisions are available to listed property that is used more than 50% for business purposes? (Check all that apply.) Multiple select question. MACRS depreciation on the business-use percentage of the cost Section 179 expensing on the total cost Section 179 expensing on the business-use percentage of the cost MACRS depreciation on one-half of the total cost Bonus depreciation on the business-use percentage of the cost

Date placed in service Applicable depreciation method Applicable recovery period Applicable depreciation convention Asset's depreciable basis

Which of the following items are needed to calculate MACRS depreciation for an asset? (Check all that apply.) Multiple select question. Asset's condition or age Asset's expected usefulness Date placed in service Applicable depreciation method Applicable recovery period Applicable depreciation convention Asset's depreciable basis

Blank 1: business Blank 2: income Blank 3: carry Blank 4: forward

A business's deductible Sec. 179 expense is limited to the taxpayer's ____ _____ before deducting the Sec. 179 expense. The business can ____ ____ any amount that cannot be deducted in the current year.

The business will deduct one-half of a full year's depreciation on the truck in the current year.

A calendar year-end 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? Multiple choice question. The business will deduct one-half of a full year's depreciation on the truck in the current year. The business will deduct one-fourth (3 months) of a full year's depreciation on the truck in the current year. The business will deduct 3.5 quarters (10.5 months) of depreciation on the truck in the current year. The business will deduct three-fourths (9 months) of a full year's depreciation on the truck in the current year.

mid month

All real property is depreciated using the ____ - ____ convention.

Blank 1: 1,080,000 or 1080000 Blank 2: personal or qualified Blank 3: basis

During the 2022 tax year, businesses may elect to immediately expense up to $ _____ of tangible _____ property placed in service that year under Section 179. For any assets that are completely or partially expensed, the company must reduce the _____ of the asset before computing MACRS depreciation expense.

Blank 1: 100 or one hundred Blank 2: after Blank 3: before

For the 2022 tax year, taxpayers can elect to immediately expense _____% of qualified property as bonus depreciation. The bonus depreciation is calculated (before/after) the Section 179 expense and (before/after) regular MACRS depreciation.

$5000

Harry inherited 100 shares of stock from his aunt upon her death. Harry's aunt purchased the stock 10 years ago for $20 per share. The stock was worth $50 per share on the date she died. What is the amount of Harry's basis in the stock? Multiple choice question. $5000 $2000 $50 $20

The tax basis is reduced by the depreciation allowed or allowable on the asset each year.

How does depreciation affect the tax basis of an asset? Multiple choice question. The tax basis is reduced by the depreciation expense deducted on the tax return each year. The tax basis is reduced by the depreciation allowed or allowable on the asset each year. The original basis is increased by the depreciation allowed or allowable on the asset each year. The original basis is increased by the depreciation expense deducted on the tax return each year.

The ceiling amount will be reduced by $520,000 to a maximum eligible deduction of $560,000 for the current year.

If a business purchases $3,220,000 in equipment during 2022, what is the impact on the Section 179 election? Multiple choice question. The ceiling amount will be reduced by $520,000 to a maximum eligible deduction of $2,700,000. The Section 179 deduction is eliminated when purchases exceed $2,700,000 in 2022. The ceiling amount will be reduced by $520,000 to a maximum eligible deduction of $560,000 for the current year. The business will only be able to take the Section 179 deduction on $1,080,000 of the assets purchased.

Blank 1: lowest Blank 2: including

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: 78,000 Blank 2: 18,200

In 2022, 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: 70,400 or 70400 Blank 2: 14,560 or 14560

In 2022, 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: 52,000 Blank 2: 14,560

In 2022, 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 (Assuming bonus depreciation is claimed).

Blank 1: 90,000 Blank 2: 18,200

In April of 2022, 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).

salvage or residual value for the asset

In order to compute MACRS depreciation, which of the following pieces of information is NOT required? Multiple choice question. recovery period for the asset depreciation method chosen by the business date placed in service salvage or residual value for the asset depreciation convention used in the year of purchase cost or original basis of the asset

Financial accounting only

In which accounting area(s) is an asset's estimated useful life determined by the taxpayer's assessment, rather than being predetermined based on asset type? Multiple choice question. Tax accounting only Financial accounting only Both financial and tax accounting

Blank 1: greater Blank 2: addition

In years where many new assets are purchased, regular tax depreciation will be (greater/less) than AMT depreciation, resulting in an (addition/subtraction) of the difference to regular taxable income to arrive at the AMT tax base.

The land is classified as real property, but it can NOT be depreciated, even though it is a business asset.

Janet owns land that she uses in her business. Which of the following statements is correct regarding the land? Multiple choice question. The land is classified as personal-use property, and it can NOT be depreciated because it is not a business asset. The land is classified as real property, and it can be depreciated because it is a business asset. The land is classified as personal property, but it can NOT be depreciated, even though it is a business asset. The land is classified as personal property, and it can be depreciated because it is a business asset. The land is classified as real property, but it can NOT be depreciated, even though it is a business asset.

real

Land and buildings are classified as ____ property, while items such as machinery, equipment, and furnishings are classified as tangible, personal property.

The new machinery can be depreciated using the same method or a different method than the previously purchased machinery.

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 depreciation. Business is booming, so Lucky purchased $15,000 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? Multiple choice question. The new machinery can be depreciated using the same method or a different method than the previously purchased machinery. If Lucky wants to use a different depreciation method, he must recapture depreciation and change the method used on the prior purchase of machinery. The new machinery must be depreciated using the same method as the previously purchased machinery.

The land and building must be treated as separate assets with a portion of the total cost allocated to each of the assets.

Mark's Markers purchased a building and land for $750,000. How should Mark's Markers account for the purchase? Multiple choice question. The total cost will be allocated to the building in order to allow the business to deduct the maximum amount of depreciation. The land and building must be treated as separate assets with a portion of the total cost allocated to each of the assets. The total purchase price will be allocated to the land because it results in the most conservative tax treatment. The land and building must be treated as one asset because they were purchased together.

200% declining balance; straight-line

Profitable businesses will likely use Blank______ depreciation while companies with lower marginal rates that are expected to rise over time will likely use Blank______ depreciation. Multiple choice question. 200% declining balance; 150% declining balance straight-line; 200% declining balance straight-line; 150% declining balance 200% declining balance; straight-line

Section 179-$1,080,000; adjusted basis subject to MACRS-$171,000

Rex's Wrecks purchased $1,251,000 in new equipment during 2022. 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? Multiple choice question. Section 179-$171,000; adjusted basis subject to MACRS-$1,080,000 Section 179-$1,080,000; adjusted basis subject to MACRS-$171,000 Section 179-$1,000,000; adjusted basis subject to MACRS-$251,000 Section 179-$1,251,000; adjusted basis subject to MACRS-$0

equal to or less than

Straight-line depreciation is mandatory and Section 179 expensing is NOT eligible for listed property when the business-use is Blank______50%. Multiple choice question. less than equal to or greater than greater than equal to or less than

Blank 1: mid Blank 2: quarter Blank 3: 40

The ____ - ____ convention is used for all assets purchased during the year when more than ____% of the tangible personal property purchased is placed in service during the fourth quarter of the year.

Blank 1: half Blank 2: year

The ____ - ______ convention allows 50% of a full year's depreciation in the year the asset is placed in service, regardless of when it was actually placed in service.

Blank 1: 6,000 or 6000 Blank 2: MACRS or macrs

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: after Blank 2: before

The mid-quarter test is applied (before/after) the Section 179 expense is deducted from an asset's basis, and (before/after) bonus depreciation 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.

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)? Multiple choice question. 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 should use the half-year convention for the computer and the office furniture and the mid-quarter convention for the delivery truck. The art studio must use the mid-quarter convention for any assets that are not expensed under Section 179. The art studio can only use Sec. 179 to expense the computer and office furniture. The truck must be depreciated using the mid-quarter convention.

The cost of the assets will be classified as nonresidential property and recovered over 39 years.

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? Multiple choice question. The cost of the assets will be classified as nonresidential property and recovered over 39 years. The assets will be classified as personal property and the cost will be recovered over 7 years. The cost of the assets will be added to the adjusted basis of the building and depreciated over the remaining recovery period for the building.

Personal property

Antoine owns a car. He uses the car for personal transportation. Which of the following classifications apply to the car? (Check all that apply.) Multiple select question. Personal-use property Real property Income-producing property Business property Investment property Personal property

Blank 1: personal, nonbusiness, or non business Blank 2: business

Business assets that are often used for both ____ and _____ purposes are referred to as listed property.

listed

Business assets that are often used for both business and personal purposes are referred to as ____ property.

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.

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? Multiple choice question. Since the business use has dropped to 50% or below, the total amount of depreciation for all prior years must be recaptured. The depreciation for the current and future years must be computed using the MACRS straight-line method over the MACRS ADS recovery period, but no recapture is required. Since the business use has dropped to 50% or below, just Section 179 expense and bonus depreciation taken on the asset must be recaptured. 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.

Blank 1: 10,200 Blank 2: 27,000

For 2022, the maximum depreciation on luxury automobiles for the first year including MACRS depreciation and Sec. 179, but excluding bonus depreciation is $_____. The maximum Section 179 deduction for SUVs and trucks weighing over 6,000 pounds is $____.

The cost of $2,850 will be capitalized and depreciated over the asset's life. Repairs of $900 will be expensed immediately.

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? Multiple choice question. The cost of $2,850 will be capitalized and depreciated over the asset's life. Repairs of $900 will be expensed immediately. The cost of $2,650 will be capitalized and depreciated over the asset's life. The shipping and repairs of $1,100 will be expensed immediately. The cost of $2,500 will be capitalized and depreciated over the asset's life. The other costs of $1,250 will be expensed immediately. The cost of $2,700 will be capitalized and depreciated over the asset's life. The repairs and tax of $1,050 will be expensed immediately.

39

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.

He can expense the maximum $50,000 in the current year and carry forward $100,000 until next year.

Rex's Wrecks purchased $150,000 in new equipment during 2022. 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? Multiple choice question. He can NOT use the Sec. 179 expense this year because the total amount of the purchases is less than $1,080,000. He can expense the maximum $50,000 in the current year and carry forward $100,000 until next year. He can expense the maximum $1,080,000 in the current year and have nothing to carry forward until next year. He can expense all $150,000 in the current year and have nothing to carry forward until next year.

Asset B

Sally's Seashells, a calendar year company, purchased three assets during April of 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 Blank______. Multiple choice question. Asset A Asset B Asset C

50

Section 179 expensing, bonus depreciation, and MACRS depreciation rates are available for listed property if its business-use percentage exceeds _____ %.

Blank 1: same Blank 2: different

Similar assets purchased in the same year must be depreciated using the (same/different) depreciation method, but similar assets purchased in different years can be depreciated using (same/different) depreciation methods.

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 correct? (Check all that apply.) Multiple select question. 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. Section 179 expense is NOT deductible for AMT purposes. The allowable recovery periods are longer for all depreciable assets for AMT purposes than for regular tax purposes. Depreciation of real property is the same for both regular tax purposes and AMT purposes.

Depreciation of real property uses longer recovery periods for AMT purposes than for regular tax purposes. For AMT purposes, businesses must depreciate tangible personal property using the 200 percent declining balance method. For AMT, the total AMT depreciation is always added to regular taxable income to calculate the AMT base.

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.) Multiple select question. Depreciation of real property uses longer recovery periods for AMT purposes than for regular tax purposes. Bonus depreciation is deductible for both regular tax purposes and AMT purposes. For AMT purposes, businesses must depreciate tangible personal property using the 200 percent declining balance method. For AMT, the total AMT depreciation is always added to regular taxable income to calculate the AMT base. The allowable recovery periods and conventions are the same for all depreciable assets for AMT purposes as for regular tax purposes.

Blank 1: straight Blank 2: line

When depreciating real property under MACRS, the recovery rates are based on the _____ - ____ method.

Straight-line

When depreciating real property under MACRS, the recovery rates are based on which of the following methods? Multiple choice question. 200% declining balance Straight-line 150% declining balance

Mid-month

When depreciating real property under MACRS, which of the following conventions is used? Multiple choice question. Mid-year Mid-month Mid-quarter Half-year

When more than 40% of the tangible personal property purchased is placed in service during the fourth quarter of the year

When does a business have to use the mid-quarter convention? Multiple choice question. When a tangible personal property asset is placed in service during the fourth quarter of the year When more that half of a business's assets including real property purchased are placed in service during the fourth quarter of the year When more than 40% of the tangible personal property purchased is placed in service during the fourth quarter of the year When more than 60% of the tangible personal property purchased is placed in service during the fourth quarter of the year

If the business use drops to 50% or below, then the excess of MACRS depreciation over straight-line for all prior years is recaptured.

When will a taxpayer need to recapture depreciation on listed property, and how is the amount of the recapture determined? Multiple choice question. If the business use discontinues, then the excess of MACRS depreciation over straight-line for all prior years is recaptured. If the business use discontinues, then the amount of MACRS depreciation for all prior years is 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. If the business use drops to 50% or below, then the amount of MACRS depreciation for all prior years is recaptured.

MACRS 200% declining balance

Which depreciation method is most likely to be used by profitable businesses with high marginal tax rates? Multiple choice question. Units of activity depreciation method Alternative depreciation system MACRS 200% declining balance Straight-line depreciation

Digital cameras Automobiles

Which of the following assets are generally referred to as listed property? (Check all that apply.) Multiple select question. Office desk Manufacturing equipment Office furniture Digital cameras Automobiles

Light general-purpose trucks

Which of the following assets has a 5-year recovery period for MACRS depreciation? Multiple choice question. Office furniture and fixtures Machinery Light general-purpose trucks Buildings

Office furniture and fixtures

Which of the following assets has a 7-year recovery period for MACRS depreciation? Multiple choice question. Light general-purpose trucks Computers and peripheral equipment Buildings Office furniture and fixtures

Used equipment New office furniture New delivery truck

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.) Multiple select question. Used equipment Storage warehouse New office furniture Apartment complex New delivery truck Land for future building site

Single-family rental homes Duplex rented to individuals and families Apartment building

Which of the following assets qualifies as residential rental property? (Check all that apply.) Multiple select question. Hotels and motels Office building leased to businesses Single-family rental homes Shopping mall space rented to shops/stores Duplex rented to individuals and families Apartment building

For financial accounting, management can choose the estimated life. For tax purposes, Congress has set recovery periods for various types of assets.

Which of the following statements is correct regarding the depreciable lives of business assets? Multiple choice question. For tax purposes, management can choose the estimated life. For financial accounting, GAAP has set recovery periods for various types of assets. For financial accounting, management can choose the estimated life. For tax purposes, Congress has set recovery periods for various types of assets. The same recovery period (or estimated life) must be used for tax purposes as for financial accounting purposes. For tax purposes, GAAP has predetermined estimated lives. For financial accounting, Congress has set recovery periods for various types of assets.

These vehicles can be depreciated using regular MACRS percentages.

Which of the following statements is correct regarding the depreciation of automobiles weighing over 6,000 pounds? Multiple choice question. Bonus depreciation is NOT allowed for vehicles weighing over 6,000 pounds. These vehicles must be depreciated using straight-line rates. These vehicles can be depreciated using regular MACRS percentages. The depreciation may be limited by the automobile depreciation limits set by Congress.

Filing cabinet

Which one of the following assets is generally NOT referred to as listed property? Multiple choice question. Digital cameras Automobiles Airplane Filing cabinet

The Section 179 expense for SUVs and trucks weighing over 6,000 pounds is $27,000. The Section 179 deduction plus the regular MACRS depreciation is limited to $10,200 in the first year. Bonus depreciation of up to $8,000 is allowed in addition to Sec. 179 and MACRS regular deduction.

Your friend, Andy, is considering purchasing a vehicle for use in his business in 2022. He is asking about the depreciation rules and Section 179 expensing. What advice below is accurate and correct? (Check all that apply.) Multiple select question. The Section 179 expense for SUVs and trucks weighing over 6,000 pounds is $27,000. The Section 179 deduction plus the regular MACRS depreciation is limited to $10,200 in the first year. MACRS depreciation for SUVs and trucks weighing over 6,000 pounds is also $10,200. Bonus depreciation of up to $8,000 is allowed in addition to Sec. 179 and MACRS regular deduction. Bonus depreciation is NOT allowed for vehicles using the Section 179 deduction.

Blank 1: Personal Blank 2: Use Blank 3: Personal Blank 4: Real

____ -_____ property is any property such as clothing, a home, or a car, that is for purposes OTHER THAN use in a trade, business, or income-producing venture. Machinery, furniture, and any other tangible property other than buildings and land is designated as ____property. The term that includes buildings and land is ____property.