Question 1

On June 1 of the current year, Tab converted a machine from personal use to rental property. At the time of the conversion, the machine was worth $90,000. Five years ago Tab purchased the machine for $120,000. The machine is still encumbered by a $50,000 mortgage. What is the basis of the machine for cost recovery?

Accepted Answer

The basis of property for cost recovery is the lower of the property's adjusted basis or fair market value at the time of conversion. In this case, the property's fair market value at the time of conversion is $90,000 and its adjusted basis is $120,000 (the original cost of $120,000 reduced by $50,000 in mortgage debt). Therefore, the basis for cost recovery is $90,000.

Question 2

If a taxpayer has a business with a net operating loss carryover reducing current year income, the taxpayer may want to elect to use straight-line depreciation to slow down the cost recovery.

Accepted Answer

By using straight-line depreciation, the amount of depreciation taken each year will be the same, which can help to reduce taxable income and maximize the benefits of the net operating loss carryover.

Question 3

Hazel purchased a new business asset (five-year asset) on September 30, 2018, at a cost of $100,000. On October 4, 2018, Hazel placed the asset in service. This was the only asset Hazel placed in service in 2018. Hazel did not elect § 179 or additional first-year depreciation. On August 20, 2019, Hazel sold the asset. Determine the cost recovery for 2019 for the asset.

Accepted Answer

The answer of Hazel purchased a new business asset (five-year...

Question 4

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

Accepted Answer

Under MACRS, equipment in the 7-year class does not have its cost recovered evenly over seven years but rather uses a predefined depreciation schedule that spans over 8 tax years.

Question 5

Which of the following assets would be subject to cost recovery?

Accepted Answer

Landscaping around the doctor's office would be subject to cost recovery as it is a tangible asset that is expected to have a limited useful life and can be depreciated over time. The painting and antique vase would be considered decorative assets and typically cannot be depreciated.

Question 6

When a business is being purchased, if possible, the purchaser should bargain for more of the purchase price being allocated to goodwill and covenants not to compete, rather than depreciable assets.

Accepted Answer

The answer of When a business is being purchased, if...

Question 7

Assets that do not decline in value on a predictable basis are not eligible for cost recovery under MACRS.

Accepted Answer

Under MACRS, only assets that have a predictable decline in value over time are eligible for cost recovery. Assets that do not have a predictable depreciation pattern are not eligible.

Question 8

Tara purchased a machine for $40,000 to be used in her business. The cost recovery allowed and allowable for the three years the machine was used are computed as follows. 
If Tara sells the machine after three years for $15,000, how much gain should she recognize?

Accepted Answer

The answer of Tara purchased a machine for $40,000 to...

Question 9

Percentage depletion enables the taxpayer to recover more than the cost of an asset in the form of tax deductions.

Accepted Answer

Percentage depletion allows taxpayers to deduct a percentage of their gross income from the sale of certain minerals, oil, and natural gas as a depletion deduction, which can exceed the cost of the asset. This enables taxpayers to recover more than the cost of the asset in the form of tax deductions.

Question 10

Alice purchased office furniture on September 20, 2017, for $100,000. On October 10, 2017, she purchased business computers for $80,000. Alice placed all of the assets in service on January 15, 2018. Alice did not elect to expense any of the assets under § 179, did not elect straight-line cost recovery, and did not take additional first-year depreciation. Determine the cost recovery deduction for the business assets for 2018.

Accepted Answer

The answer of Alice purchased office furniture on September 20,...

Question 11

Cost depletion is determined by multiplying the depletion cost per unit by the number of units sold.

Accepted Answer

This is correct. Cost depletion is a method of calculating depletion expense that is based on the total cost of the natural resource divided by the total estimated units of the resource. The resulting cost per unit is then multiplied by the number of units sold each period to determine depletion expense for that period.

Question 12

Under MACRS, the double-declining balance method is used for property other than real estate with a recovery period of 15 or 20 years.

Accepted Answer

Under MACRS, the double-declining balance method is generally used for most types of property, but real estate typically uses the straight-line method, and the specific recovery periods for property under MACRS do not dictate the use of the double-declining balance method based on a 15 or 20-year classification.

Question 13

The amortization period for $58,000 of startup expenses is 180 months.

Accepted Answer

The IRS allows businesses to amortize (spread out) the cost of startup expenses over a period of 180 months (15 years), starting with the month in which the business begins operation.

Question 14

Intangible drilling costs must be capitalized and recovered through depletion.

Accepted Answer

Intangible drilling costs are typically expensed immediately or amortized over a period, rather than being capitalized and recovered through depletion.

Question 15

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.

Accepted Answer

The cost recovery deduction for 2018 is $40,000 because James takes additional first-year depreciation, which allows for 100% bonus depreciation on qualified property placed in service after September 27, 2017, and before January 1, 2023.

Question 16

Land is generally amortized, rather than being cost recovered under MACRS.

Accepted Answer

Land is considered a non-depreciable asset and is not subject to cost recovery or amortization under MACRS (Modified Accelerated Cost Recovery System).

Question 17

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.

Accepted Answer

The amount of startup expenditures that can be deducted in the year incurred is up to $5,000, but this amount is reduced by the amount by which the total startup costs exceed $50,000.

Question 18

Tan Company acquires a new machine (ten-year property) on January 15, 2018, at a cost of $200,000. Tan also acquires another new machine (seven-year property) on November 5, 2018, at a cost of $40,000. No election is made to use the straight-line method. The company does not make the § 179 election and elects to not take additional first-year depreciation. Determine the total deductions in calculating taxable income related to the machines for 2018.

Accepted Answer

For the ten-year property, the MACRS depreciation rate for the first year is 10.00%. Therefore, depreciation expense is $20,000 ($200,000 * 10.00%). For the seven-year property, the MACRS depreciation rate for the first year is 14.29% ($5,700). Thus, total depreciation expense for the machines is $25,700 ($20,000 + $5,700).

Since the company elected to not take additional first-year depreciation or make a § 179 election, the total deductions related to the machines for 2018 is $25,716 ($25,700 + $16 [half-month convention for the ten-year property]). Therefore, the correct answer is B.

Question 19

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:

Accepted Answer

Cost recovery begins in the year the asset is placed in service, which is the following year. Since no other assets were purchased, the half-year convention applies.

Question 20

MACRS does not use salvage value. As a result, if a 7-year MACRS asset is held for 10 years, its adjusted basis will be zero.

Accepted Answer

MACRS depreciation does not consider salvage value, and by the end of the recovery period, the asset's adjusted basis is zero, even if held longer.

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