Question 1

MACRS applies to new and used depreciable personal property used for the production of income.

Accepted Answer

MACRS (Modified Accelerated Cost Recovery System) is a depreciation method used for tax purposes. It applies to both new and used depreciable personal property used for the production of income.

Question 2

Which of the following assets would be allowed a depreciation deduction?
I.A truck used to provide transportation to a job site.
II.A car used for personal purposes.
III.An apartment building rented out for the production of rental income.
IV.A personal-use computer of the taxpayer.
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Accepted Answer

Depreciation is allowed for assets used in a trade or business or for the production of rental income. Hence, statements I and III are correct. Statement II is incorrect since personal vehicles are not eligible for depreciation. Statement IV is also incorrect since personal-use assets cannot be depreciated, regardless of their nature.

Question 3

Which of the following would not be allowed a depreciation deduction?
I.Inventory.
II.Business equipment.
III.Land acquired as an investment.
IV.Cattle used in a dairy herd.
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Accepted Answer

Inventory cannot be depreciated, as it is not a long-term asset. Land acquired as an investment may not be depreciated either, as it is not used in business operations. Business equipment and cattle used in a dairy herd can both be depreciated.

Question 4

Under current law, taxpayers must use regular MACRS.

Accepted Answer

Taxpayers have the option to use different depreciation methods, including MACRS (Modified Accelerated Cost Recovery System), but they are not strictly required to use regular MACRS for all assets. Other methods, such as straight-line depreciation, may be used depending on the asset and circumstances.

Question 5

To be considered predominately used in a trade or business under the listed property rules, more than 75% of an asset's total use for each taxable year must be related to the taxpayer's trade or business.

Accepted Answer

To be considered predominately used in a trade or business under the listed property rules, more than 50% of an asset's total use for each taxable year must be related to the taxpayer's trade or business.

Question 6

In most cases, the taxpayer may continue to use percentage (statutory) depletion after the initial basis has been fully recovered. In other words, the taxpayer's depletion deduction can exceed the cost of the depletable asset.

Accepted Answer

According to the IRS, "If your combined depletion deduction (for oil or gas and other minerals) is more than the adjusted basis of the property (or the property's FMV if the deduction is not limited to adjusted basis), you can continue to claim the deduction. This is sometimes called “permitted over cost depletion.”" Therefore, the taxpayer may continue to use percentage (statutory) depletion after the initial basis has been fully recovered, even if it exceeds the cost of the depletable asset.

Question 7

The mid-year convention is used for personal property only.

Accepted Answer

The mid-year convention is commonly used for personal property such as cars, appliances, and electronics. It allows for a more accurate depreciation estimate by assuming that the property was used halfway through the year regardless of when it was actually acquired. However, real property (such as buildings and land) typically uses the mid-month convention.

Question 8

Felix purchases the franchise rights to a new sports team and will be able to amortize the cost over the 15-year amortization period for intangibles.

Accepted Answer

The answer of Felix purchases the franchise rights to a...

Question 9

Which of the following would be allowed a depreciation deduction?
I.Inventory.
II.Land acquired as an investment.
III.Residence used as rental property.
IV.Airplane used by company controller to attend accounting conference.
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Accepted Answer

III and IV are correct because a residence used as rental property and an airplane used for business purposes are both considered assets used in a trade or business and can be depreciated. Inventory (I) cannot be depreciated because it is considered current assets and land (II) cannot be depreciated because it is not a depreciable asset.

Question 10

The earlier the depreciation deduction can be taken, the greater the present value of the tax savings will be to the taxpayer.

Accepted Answer

This is true because taking the depreciation deduction earlier in the asset's life allows for a larger tax deduction in earlier years, which can reduce the taxpayer's taxable income and result in greater tax savings in present value terms.

Question 11

To compute cost depletion, you must know the basis subject to depletion, the recoverable quantity of the natural resource, and the quantity of the natural resource sold during the year.

Accepted Answer

Cost depletion is calculated by dividing the basis subject to depletion by the recoverable quantity of the natural resource, and then multiplying that amount by the quantity of the natural resource sold during the year. Therefore, knowledge of all three factors (basis subject to depletion, recoverable quantity, and quantity sold) is necessary to calculate cost depletion.

Question 12

If more than 40% of the depreciable basis of personal property is placed in service during the last three months of the tax year, the taxpayer must use the mid-quarter convention.

Accepted Answer

This is true according to the IRS regulations on depreciating assets. The mid-quarter convention is used when an asset is placed in service in the last quarter of the year, which includes the last three months. This is meant to prevent taxpayers from taking advantage of a full year's worth of depreciation for an asset that was only used for a short period of time.

Question 13

Sally purchased new equipment for her consulting business. She allocates the Section 179 deduction among the new assets. One piece of equipment cost $1,000,000 and was allocated one-half of the allowable Section 179 deduction and therefore has a depreciable basis of $500,000.

Accepted Answer

This statement is true. Sally allocated one-half of the allowable Section 179 deduction to the equipment that cost $1,000,000, resulting in a depreciable basis of $500,000.

Question 14

Which of the following assets would not be allowed a depreciation deduction?
I.A business computer used to process payroll and maintain a company's general ledger.
II.A personal residence of a taxpayer.
III.A building rented out for the production of rental income.
IV.A yacht rented to a fishing party.
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Accepted Answer

A personal residence of a taxpayer is not allowed a depreciation deduction because depreciation is only applicable to assets used in a business or income-producing activity. Personal use property, like a personal residence, does not qualify for depreciation.

Question 15

Under the computation of the alternative minimum tax, the Alternative Depreciation System may be used but is not required.

Accepted Answer

Under the computation of the alternative minimum tax (AMT), taxpayers are required to use the Alternative Depreciation System (ADS) for certain types of property, making it not merely an option but a requirement for AMT purposes.

Question 16

Pedro purchased used delivery equipment costing $80,000 and used computers costing $90,000 (the only assets purchased) that are used in his business. He may allocate his section 179 deduction to either or both assets.

Accepted Answer

Pedro can allocate his section 179 deduction to one or both assets.

Question 17

While Congress has enacted several different depreciation methods, all currently owned assets are depreciated using the method in effect when the asset was placed in service.

Accepted Answer

This is true. The depreciation method is determined based on the year the asset was placed in service and is not affected by any changes in methods enacted by Congress after that year.

Question 18

MACRS eliminates several sources of potential conflict between the IRS and taxpayers concerning an asset's useful life and the calculation of the depreciation deduction.

Accepted Answer

MACRS provides a predetermined useful life for assets and a set depreciation schedule, which reduces disputes between taxpayers and the IRS regarding these factors.

Question 19

Periodic capital recovery deductions for tax purposes include
I.Depletion.
II.Amortization.
III.Depreciation.
IV.Proration.
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Accepted Answer

Depletion, amortization, and depreciation are all methods of allocating the cost of an asset over its useful life for tax purposes, which allows for capital recovery. Proration is not a method of capital recovery.

Question 20

The Section 179 expense deduction is allowed on all depreciable and tangible property used in a trade or business.

Accepted Answer

The Section 179 expense deduction is not allowed on all depreciable and tangible property; it is specifically excluded for certain properties like inventory, land, investment property, and buildings, among others. It primarily applies to tangible, depreciable personal property used in the active conduct of a trade or business.

Quiz 10: Cost Recovery on Property: Depreciation, Depletion, and Amortization

MACRS applies to new and used depreciable personal property used for the production of income.

Which of the following assets would be allowed a depreciation deduction? I.A truck used to provide transportation to a job site. II.A car used for personal purposes. III.An apartment building rented out for the production of rental income. IV.A personal-use computer of the taxpayer. ​

Which of the following would not be allowed a depreciation deduction? I.Inventory. II.Business equipment. III.Land acquired as an investment. IV.Cattle used in a dairy herd. ​