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Exam 8: Depreciation, Cost Recovery, Amortization, and Depletion

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Question 51

Multiple Choice

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George purchases used seven-year class property at a cost of $200,000 on April 20, 2018. Determine George's cost recovery deduction for 2018 for alternative minimum tax purposes, assuming George does not elect § 179 and does not take additional first-year depreciation.

A) $2,500
B) $10,000
C) $14,280
D) $28,580
E) None of the above

F) A) and D)
G) B) and D)

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Question 52

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Augie purchased one new asset during the year five-year property) on November 10, 2018, at a cost of $660,000. She would like to use the § 179 election and will also take additional first-year depreciation. The income from the business before the cost recovery deduction and the § 179 deduction was $600,000. Determine the maximum cost recovery deduction available on this asset for 2018.

A) $30,500
B) $580,200
C) $600,000
D) $660,000
E) None of the above

F) A) and E)
G) A) and D)

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Question 53

Multiple Choice

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White Company acquires a new machine seven-year property) on January 10, 2018, at a cost of $620,000. White makes the election to expense the maximum amount under § 179, and wants to take any additional first-year depreciation allowed. No election is made to use the straight-line method. Determine the total deductions in calculating taxable income related to the machine for 2018 assuming White has taxable income of $800,000.

Under the MACRS straight-line election for personalty, only the half-year convention is applicable.

Martin is a sole proprietor of a sandwich business. On March 4, 2018, Martin purchased and placed in service new seven-year class assets costing $580,000. Martin's business reports taxable income for the year, before any deductions associated with the purchased assets, of $160,000. Martin also received $30,000 of interest income for the year, which is not related to the business. Martin wants his adjusted gross income for the year to be as low as possible. With this objective in mind, determine how Martin should recover the cost of the acquired assets.

A major objective of MACRS is to:

Discuss the requirements in order for startup expenditures to be amortized under § 195.

If more than 40% of the value of property, other than real property, is placed in service during the last quarter, all of the property placed in service in the second quarter will be allowed 7.5 months of cost recovery.

James purchased a new business asset three-year personalty) on July 23, 2018, at a cost of $40,000. James takes additional first-year depreciation but does not elect Section 179 expense on the asset. Determine the cost recovery deduction for 2018.

Indigo Company acquires a new machine 5-year MACRS property) on February 2, 2018 at a cost of $100,000. On November 18, 2018, Indigo also acquires office equipment 7-year MACRS property) at a cost of $50,000. Indigo does not make a § 179 expense election and chooses not to take additional first-year depreciation. What is Indigo's total MACRS deduction for 2018?

If startup expenses total $53,000, $51,000 of those costs are amortized over 180 months.

In 2017, Gail had a § 179 deduction carryover of $30,000. In 2018, she elected § 179 for an asset acquired at a cost of $115,000. Gail's § 179 business income limitation for 2018 is $140,000. Determine Gail's § 179 deduction for 2018.

On June 1, 2018, Norm leases a taxi and places it in service. The lease payments are $1,000 per month. Assuming the dollar amount from the IRS table for such leases is $241, determine Norm's gross income inclusion amount.

Doug purchased a new factory building on January 15, 1990, for $400,000. On March 1, 2018, the building was sold. Determine the cost recovery deduction for the year of the sale; Doug did not use the MACRS straight-line method.

Tom purchased and placed in service used office furniture on January 3, 2018, for $40,000. Tom's accountant depreciated the furniture using straight-line depreciation over 10 years for financial reporting purposes. The accountant also used the same depreciation amounts when filing Tom's income tax returns. On January 10, 2023, Tom sold the furniture. Determine the tax basis of the furniture at the time of the sale.

The only asset Bill purchased during 2018 was a new seven-year class asset. The asset, which was listed property, was acquired on June 17 at a cost of $50,000. The asset was used 40% for business, 30% for the production of income, and the rest of the time for personal use. Bill always elects to expense the maximum amount under § 179 whenever it is applicable. The net income from the business before the § 179 deduction is $100,000. Determine Bill's maximum deduction with respect to the property for 2018.

The amount of startup expenditures that can be deducted in the year incurred is the greater of the actual amount of such expenses or $5,000.

Grape Corporation purchased a machine in December of the current year. This was the only asset purchased during the current year. The machine was placed in service in January of the following year. No assets were purchased in the following year. Grape Corporation's cost recovery would begin:

Under MACRS, equipment falling in the 7-year MACRS class will be cost recovered over seven tax years.

For real property, the ADS convention is the mid-month convention.