Chapter 10 Smartbook

During the 2020 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.

$1,040,000 personal basis

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? $214 computer; $171 oven $375 computer; $300 oven $525 computer; $420 oven $300 computer; $171 oven $300 computer; $240 oven $525 computer; $300 oven

$300 computer; $171 oven $214 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%). $375 computer; $300 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%). $525 computer; $420 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%). $300 computer; $240 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%). $525 computer; $300 oven The computer has a 5-year recovery period ($1,500 x 20 percent), and the oven has a 7-year recovery period ($1,200 x 14.29 percent).

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 $480 computer; $384 oven Reason: The oven is 7-year property. $368 computer; $294 oven Reason: The computer is 5-year property. $368 computer; $384 oven Reason: The computer is 5-year property and the oven is 7-year property.

$480 computer; $294 oven $480 computer; $384 oven The oven is 7-year property. $368 computer; $294 oven The computer is 5-year property. $368 computer; $384 oven The computer is 5-year property and the oven is 7-year property.

For the 2020 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.

100 after before

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; 150% declining balance 200% declining balance; straight-line straight-line; 150% declining balance straight-line; 200% declining balance

200% declining balance; straight-line

27.5 yrs. <<<---->>>Residential rental property

31.5 yrs.<<<---->>>Nonresidential property placed in service after Dec. 31, 1986 and before May 13, 1993

Nondepreciable <<<---->>> Land

39 yrs. <<<---->>>Nonresidential property placed in service after May 13, 1993

The MACRS recovery period for computers and peripheral equipment, cars, and light general-purpose trucks is ______ years. The recovery period for office furniture, fixtures, machinery, and equipment is _____ years.

5 7

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

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

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

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

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 __. Asset B Asset A Asset C

Asset B

The method of deducting the cost of tangible personal and real property over its useful life is __1__. The method of deducting the cost of intangible assets over a specific time is __2__. The method of deducting the cost of natural resources over time is __3__.

Blank 1: depreciation Blank 2: amortization Blank 3: depletion

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. True False

False The business also needs to know the applicable depreciation convention (e.g. half-year or mid-quarter) to be used as well as the date placed in service.

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. True False

False 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.

Rex's Wrecks purchased $150,000 in new equipment during 2020. 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 all $150,000 in the current year and have nothing to carry forward until next year. Reason: Rex can take a Section 179 deduction up to his business income before the deduction. He can expense the maximum $1,040,000 in the current year and have nothing to carry forward until next year. Reason: Rex can take a Section 179 deduction up to his business income before the deduction. He is also limited by the total purchase ($150,000). He can NOT use the Sec. 179 expense this year because the total amount of the purchases is less than $1,040,000. Reason: Rex can take a Section 179 deduction up to his business income before the deduction. He can expense the maximum $50,000 in the current year and carry forward $100,000 until next year.

He can expense the maximum $50,000 in the current year and carry forward $100,000 until next year. He can expense all $150,000 in the current year and have nothing to carry forward until next year. Rex can take a Section 179 deduction up to his business income before the deduction. He can expense the maximum $1,040,000 in the current year and have nothing to carry forward until next year. Rex can take a Section 179 deduction up to his business income before the deduction. He is also limited by the total purchase ($150,000). He can NOT use the Sec. 179 expense this year because the total amount of the purchases is less than $1,040,000. Rex can take a Section 179 deduction up to his business income before the deduction.

Which of the following assets has a 5-year recovery period for MACRS depreciation? Buildings Reason: Depending on the use of the building, it may be depreciated over 27.5 years or 39 years. Light general-purpose trucks Machinery Reason: This is 7-year property. Office furniture and fixtures Reason: This is 7-year property.

Light general-purpose trucks Buildings Depending on the use of the building, it may be depreciated over 27.5 years or 39 years. Machinery This is 7-year property. Office furniture and fixtures This is 7-year property.

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

MACRS 200% declining balance

Which of the following assets has a 7-year recovery period for MACRS depreciation? Computers and peripheral equipment Reason: This is 5-year property. Buildings Reason: Depending on the use of the building, it may be depreciated over 27.5 years or 39 years. Light general-purpose trucks Reason: This is 5-year property. Office furniture and fixtures

Office furniture and fixtures Computers and peripheral equipment This is 5-year property. Buildings Depending on the use of the building, it may be depreciated over 27.5 years or 39 years. Light general-purpose trucks This is 5-year property.

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

Original basis + significant improvements - depreciation allowed or allowable

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

Personal property Personal-use property

Rex's Wrecks purchased $1,251,000 in new equipment during 2020. 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-$1,251,000; adjusted basis subject to MACRS-$0 Section 179-$1,040,000; adjusted basis subject to MACRS-$211,000 Section 179-$211,000; adjusted basis subject to MACRS-$1,040,000 Section 179-$1,000,000; adjusted basis subject to MACRS-$251,000

Section 179-$1,040,000; adjusted basis subject to MACRS-$211,000 The maximum Sec. 179 deduction is $1,040,000. The basis of the asset is reduced by the Sec. 179 amount before applying MACRS or S/L depreciation rates.

Rambo Manufacturing Co. purchased $2,885,000 in new production equipment during 2020. 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-$2,590,000; MACRS-$42,156 Section 179-$295,000; MACRS-$370,111 Section 179-$745,000; MACRS-$305,806 Section 179-$1,040,000; MACRS-$263,651

Section 179-$745,000; MACRS-$305,806 Section 179-$2,590,000; MACRS-$42,156 The ceiling is reduced by $295,000 (2,885,000-2,590,000) for a total of $745,000. Then apply MACRS at .1429 to the residual $2,140,000. Section 179-$295,000; MACRS-$370,111 The ceiling is reduced by $295,000 (2,885,000-2,590,000) for a total of $745,000. Then apply MACRS at .1429 to the residual $2,140,000. Section 179-$1,040,000; MACRS-$263,651 The ceiling is reduced by $295,000 (2,885,000-2,590,000) for a total of $745,000. Then apply MACRS at .1429 to the residual $2,140,000.

Which of the following costs should be included in the asset's original cost basis? (Check all that apply.) Shipping charges Repairs prior to putting the asset in service Purchase price Depreciation Installation charges Repairs after putting the asset in service Sales tax

Shipping charges Repairs prior to putting the asset in service Purchase price Installation charges Sales tax

If a business purchases $3,220,000 in equipment during 2020, what is the impact on the Section 179 election? The ceiling amount will be reduced by $410,000 to a maximum eligible deduction of $2,810,000. The Section 179 deduction is eliminated when purchases exceed $2,590,000 in 2020. The business will only be able to take the Section 179 deduction on $1,040,000 of the assets purchased. The ceiling amount will be reduced by $630,000 to a maximum eligible deduction of $410,000 for the current year.

The ceiling amount will be reduced by $630,000 to a maximum eligible deduction of $410,000 for the current year.

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 $2,500 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. 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 $2,850 will be capitalized and depreciated over the asset's life. Repairs of $900 will be expensed immediately.

The cost of $2,850 will be capitalized and depreciated over the asset's life. Repairs of $900 will be expensed immediately. The cost should be $2,500 + 150 + 200 = $2,850. The repairs after using the asset will be expensed.

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

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

True or false: Personal property can be business property or personal-use property. True False

True

MATCH: a. Personal property b. Real property c. Intangible assets d. Natural resources

a. Tangible assets such as equipment and machinery b. Buildings and land c. Nonphysical assets d. Commodities such as oil, timber, and gold

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.

business income carry forward

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. True False

false The business also needs to know the applicable depreciation convention (e.g. half-year or mid-quarter) to be used as well as the date placed in service.

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

filing cabinet

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

listed

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.

lowest including

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

mid-quarter 40

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

real

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

salvage or residual value for the asset

Similar assets purchase 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.

same different