Chapter 10 SmartBook - Property Acquisition and Cost Recovery - EXAM 3
Which of the following items could be classified as Section 197 intangibles? (Check all that apply.) (a) Customer lists (b) Research and experimentation expenditures (c) Trademarks (d) Patents (e) Goodwill (f) Organizational costs
(a) Customer lists (c) Trademarks (d) Patents (e) Goodwill - Reason: Intangible assets such as customer lists, patents, trademarks, tradenames, goodwill, going concern value, covenants not to complete, and so forth
Which of the following depreciation provisions are available to listed property that is used less than 50% for business purposes? (a) Straight-line depreciation on the business-use percentage of the cost (b) Section 179 expensing on the business-use percentage of the cost (c) Double declining balance depreciation on the business-use percentage of the cost (d) Bonus depreciation on the business-use percentage of the cost
(a) Straight-line depreciation on the business-use percentage of the cost - Reason: When the business-use percentage of an asset is 50% or less, the business must compute depreciation for the asset using the MACRS straight-line method over the MACRS ADS.
Which of the following assets are generally referred to as listed property? (Check all that apply.) (a) Office desk (b) Automobiles (c) Digital cameras (d) Manufacturing equipment (e) Office furniture
(b) Automobiles (c) Digital cameras - Reason: Listed property - business assets that are often used for personal purposes For example, automobiles, other means of transportation (planes, boats, and recreation vehicles), and even digital cameras are considered to be listed property
Which of the following depreciation provisions are available to listed property that is used more than 50% for business purposes? (Check all that apply.) (a) MACRS depreciation on one-half of the total cost (b) Bonus depreciation on the business-use percentage of the cost (c) Section 179 expensing on the total cost (d) Section 179 expensing on the business-use percentage of the cost (e) MACRS depreciation on the business-use percentage of the cost
(b) Bonus depreciation on the business-use percentage of the cost (d) Section 179 expensing on the business-use percentage of the cost (e) MACRS depreciation on the business-use percentage of the cost
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. (a) True (b) False
(b) False - Reason: 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: 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. (a) True (b) False
(b) False - Reason: 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. (a) True (b) False
(b) False - Reason: These costs do NOT qualify as organizational expenditures and cannot be amortized.
When will a taxpayer need to recapture depreciation on listed property, and how is the amount of the recapture determined? (a) If the business use drops to 50% or below, then the amount of MACRS depreciation for all prior years is recaptured. (b) If the business use drops to 50% or below, then the excess of MACRS depreciation over straight-line for all prior years is recaptured. (c) If the business use discontinues, then the amount of MACRS depreciation for all prior years is recaptured. (d) If the business use discontinues, then the excess of MACRS depreciation over straight-line for all prior years is recaptured.
(b) If the business use drops to 50% or below, then the excess of MACRS depreciation over straight-line for all prior years is recaptured. - Reason: If a business initially uses an asset more than 50% of the time for business but subsequently its business drops to 50% or below, the depreciation expense for all prior years must be recomputed as if the business had been using the straight-line depreciation over the ADS recovery period the entire time
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? (a) Section 179-$1,000,000; adjusted basis subject to MACRS-$251,000 (b) Section 179-$1,080,000; adjusted basis subject to MACRS-$171,000 (c) Section 179-$171,000; adjusted basis subject to MACRS-$1,080,000 (d) Section 179-$1,251,000; adjusted basis subject to MACRS-$0
(b) Section 179-$1,080,000; adjusted basis subject to MACRS-$171,000 - Reason: The maximum Sec. 179 deduction for 2022 is $1,080,000. The basis of the asset is reduced by the Sec. 179 amount before applying MACRS or S/L depreciation rates.
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? (a) $10,200 (b) $19,200 (c) $16,400 (d) $26,600
(c) $16,400 - Reason: 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 $16,400.
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 choose ______. (a) Asset A (b) Asset C (c) Asset B
(c) Asset B - Reason (a): 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. - Reason (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.
Which one of the following assets is generally NOT referred to as listed property? (a) Digital cameras (b) Automobiles (c) Filing cabinet (d) Airplane
(c) Filing cabinet - Reason: For example, automobiles, other means of transportation (planes, boats, and recreation vehicles), and even digital cameras are considered to be listed property
Which of the following options is NOT a category for intangible assets? (a) Patents and copyrights (b) Start-up expenditures and organizational costs (c) Natural resources (d) Research and experimentation costs (e) Section 197 purchased intangibles
(c) Natural resources - Reason: For tax purposes, an intangible asset can be placed into one of the following four general categories: 1.) §197 purchased intangibles 2.) Organizational expenditure and start-up costs 3.) Research and experimentation costs 4.) Patents and copyrights
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? (a) Since the business use has dropped to 50% or below, the total amount of depreciation for all prior years must be recaptured. (b) 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. (c) Since the business use has dropped to 50% or below, just Section 179 expense and bonus depreciation taken on the asset must be recaptured. (d) 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.
(d) 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 a business purchases $3,220,000 in equipment during 2022, what is the impact on the Section 179 election? (a) The Section 179 deduction is eliminated when purchases exceed $2,700,000 in 2022. (b) The ceiling amount will be reduced by $520,000 to a maximum eligible deduction of $2,700,000. (c) The business will only be able to take the Section 179 deduction on $1,080,000 of the assets purchased. (d) The ceiling amount will be reduced by $520,000 to a maximum eligible deduction of $560,000 for the current year.
(d) The ceiling amount will be reduced by $520,000 to a maximum eligible deduction of $560,000 for the current year. - Reason: Under the phase-out limitation, businesses must reduce the $1,080,000 maximum available expense dollar-for-dollar for the amount of qualified property placed in service during 2022 over a $2,700,000 threshold. Computed as follows: Property placed in service in 2022 $3,220,000 Threshold for §179 phase-out - $2,700,000 Phase-out maximum before phase-out $520,000 Maximum §179 expense before phase-out - $1,080,000 Maximum §179 expense after phase-out $560,000
Straight-line depreciation is mandatory and Section 179 expensing is NOT eligible for listed property when the business-use is ______ 50%. (a) less than (b) equal to or greater than (c) greater than (d) equal to or less than
(d) equal to or less than - Reason: When the business-use percentage of an asset is 50% or less, the business must compute depreciation for the asset using the MACRS straight-line method over the MACRS ADS.
Section 179 expensing, bonus depreciation, and MACRS depreciation rates are available for listed property if its business-use percentage exceeds _____%
50 - Reason: If the business-use percentage for the year exceeds 50%, the deductible depreciation is limited to the full annual depreciation multiplied by the business-use percentage for the year.
Rex's Wrecks purchased $1,650,000 in new equipment (7 year property) during 2022. Rex wants to use Section 179 to expense the maximum amount of the purchase. Assuming no limitations due to net income restrictions, Rex can expense $_____ under Sec. 179, $_____in bonus depreciation, and $_____ in regular MACRS depreciation (rounded to the nearest dollar).
Blank 1: 1,080,000 or 1080000 Blank 2: 570,000 or 570000 Blank 3: 0 or zero - Reason: Maximum expense of §179 for 7-year property is $1,080,0000 - Reason: Bonus Depreciation = (§179 qualified property - §179 expense) * 100%
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.
Blank 1: 100 or one hundred Blank 2: after Blank 3: before
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: 78,000 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).
Blank 1: 90,000 Blank 2: 18,200 - Reason: In 2022, taxpayers are allowed to expense $8,000 of bonus depreciation above the otherwise allowable maximum depreciation (maximum depreciation of $18,200)
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. (Enter only one word per blank.)
Blank 1: business Blank 2: income Blank 3: carry Blank 4: forward or over
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.
Blank 1: greater Blank 2: addition
Business assets that are often used for both _____ and _____ purposes are referred to as listed property.
Blank 1: personal, nonbusiness, or non business Blank 2: business
Match the method of cost allocation to the nature of the asset being expensed over a specific time period. Instructions a. Depreciation b. Amortization c. Depletion i. Natural resources ii. Intangible assets iii. Tangible personal and real property (except land)
Depreciation ---> Tangible personal and real property (except land) Amortization ---> Intangible assets Depletion ---> Natural resources
Which of the following items are needed to calculate MACRS depreciation for an asset? (Check all that apply.) a.) Applicable depreciation convention b.) Asset's depreciable basis c.) Asset's condition or age d.) Date placed in service e.) Applicable recovery period f.) Asset's expected usefulness g.) Applicable depreciation method
a.) Applicable depreciation convention b.) Asset's depreciable basis d.) Date placed in service e.) Applicable recovery period g.) Applicable depreciation method
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? a.) 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. b.) The cost of $2,850 will be capitalized and depreciated over the asset's life. Repairs of $900 will be expensed immediately. c.) 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. d.) 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.
b.) The cost of $2,850 will be capitalized and depreciated over the asset's life. Repairs of $900 will be expensed immediately. - Reason: The initial basis is the cost plus all the expenses to purchase, prepare for use, and begin using the asset. These expenses include sales tax, shipping costs, and installation costs. The cost should be $2,500 + 150 + 200 = $2,850. The repairs after using the asset will be expensed.
