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

Question 1

Motel buildings have a cost recovery period of 27.5 years.

Answer 1

False

Question 2

The cost recovery period for 3-year class property is 4 years.

Answer 2

True

Question 3

The factor for determining the cost recovery for eligible real estate under MACRS, in the year of disposition, is taken from the month of the disposition.

Answer 3

False

Question 4

The basis of cost recovery property must be reduced by at least the cost recovery allowable.

Question 5

Taxable income for purposes of § 179 limited expensing is computed by including the MACRS deduction.

Question 6

The § 179 deduction can exceed $1,000,000 in 2018 if the taxpayer had a § 179 amount which exceeded the taxable income limitation in the prior year.

Question 7

The cost recovery basis for property converted from personal use to business use may be the fair market value of the property at the time of the conversion.

Question 8

Land improvements are generally not eligible for cost recovery.

Question 9

Under MACRS, if the mid-quarter convention is applicable, all property sold is treated as being sold at the mid-point of the quarter in which it is placed in service.

Question 10

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

Question 11

The maximum cost recovery method for all personal property under MACRS is 150% declining balance.

Question 12

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.

Question 13

Residential rental real estate includes property where 80% or more of the net rental revenues are from nontransient dwelling units.

Question 14

Property which is classified as personalty may be depreciated.

Question 15

For personal property placed in service in 2018, the § 179 maximum deduction is limited to $1,000,000.

Question 16

The key date for calculating cost recovery is the date the asset is placed in service.

Question 17

Any § 179 expense amount that is carried forward is subject to the business income limitation in the carryforward year.

Question 18

Antiques may be eligible for cost recovery if they are used in a trade or business.

Question 19

All personal property placed in service in 2018 and used in a trade or business qualifies for additional first-year depreciation.

Question 20

Taxpayers may elect to use the straight-line method under MACRS for personalty.

Question 21

A used $35,000 automobile that is used 100% for business is placed in service in 2018. If the automobile fails the 50% business usage test in the second year, no cost recovery will be recaptured.

Question 22

MACRS depreciation is used to compute earnings and profits.

Question 23

For a new car that is used predominantly in business, the "luxury auto" limit depends on whether the taxpayer takes MACRS or straight-line depreciation.

Question 24

A purchased trademark is a § 197 intangible.

Question 25

An election to use straight-line under ADS is made on an asset-by-asset basis for property other than eligible real estate.

Question 26

The inclusion amount for a leased automobile is adjusted by a business usage percentage.

Question 27

A taxpayer must use the alternative depreciation system (ADS) to compute depreciation for earnings and profits.

Question 28

All listed property is subject to the substantiation requirements of § 274.

Question 29

Once the more-than-50% business usage test is passed for listed property, it still matters if the business usage for the property drops to 50% or less during the recovery period.

Question 30

The "luxury auto" cost recovery limits change if mid-quarter cost recovery is used.

Question 31

The basis of an asset on which $20,000 has been expensed under § 179 will be reduced by $20,000, even if $20,000 cannot be expensed in the current year because of the taxable income limitation.

Question 32

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

Question 33

Property used for the production of income is not eligible for § 179 expensing.

Question 34

Goodwill associated with the acquisition of a business cannot be amortized.

Question 35

The § 179 limit for a sports utility vehicle with a GVW of 7,000 pounds will not apply if the sports utility vehicle is used as a taxi.

Question 36

If an automobile is placed in service in 2018, the limitation for cost recovery in 2020 will be based on the cost recovery limits for the year 2018.

Question 37

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

Question 38

The cost of a covenant not to complete for 10 years incurred in connection with the acquisition of a business is amortized over 10 years.

Question 39

The luxury auto cost recovery limits applies to all automobiles.

Question 40

Under the alternative depreciation system (ADS), the half-year convention must be used for personalty.

Question 41

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?

A) $70,000
B) $90,000
C) $120,000
D) $140,000
E) None of the above

Question 42

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.

Question 43

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.

A) $14,250
B) $19,000
C) $23,750
D) $38,000
E) None of the above

Question 44

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

Question 45

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

A) A painting by Picasso hanging on a physician's office wall.
B) An antique vase in a doctor's waiting room.
C) Landscaping around the doctor's office.
D) a., b., and c.
E) None of the above.

Question 46

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.

Question 47

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

Question 48

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?

A) $3,480
B) $6,360
C) $9,240
D) $11,480
E) None of the above

Question 49

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

Question 50

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.

A) $6,426
B) $14,710
C) $25,722
D) $30,290
E) None of the above

Question 51

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

Question 52

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

Question 53

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

Question 54

Intangible drilling costs must be capitalized and recovered through depletion.

Question 55

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.

A) $8,333
B) $26,666
C) $33,333
D) $40,000
E) None of the above

Question 56

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

Question 57

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.

Question 58

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.

A) $24,000
B) $25,716
C) $102,000
D) $132,858
E) None of the above

Question 59

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:

A) In the current year using a mid-quarter convention.
B) In the current year using a half-year convention.
C) In the following year using a mid-quarter convention.
D) In the following year using a half-year convention.
E) None of the above.

Question 60

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.

Question 61

On July 17, 2018, Kevin places in service a used automobile that cost $25,000. The car is used 80% for business and 20% for personal use. In 2019, he used the automobile 40% for business and 60% for personal use. Determine the cost recovery recapture for 2019.

A) $0
B) $528
C) $2,000
D) $2,500
E) None of the above

Question 62

Bonnie purchased a new business asset (five-year property) on March 10, 2018, at a cost of $30,000. She also purchased a new business asset (seven-year property) on November 20, 2018, at a cost of $13,000. Bonnie did not elect to expense either of the assets under § 179, nor did she elect straight-line cost recovery. Bonnie takes additional first-year depreciation. Determine the cost recovery deduction for 2018 for these assets.

A) $7,858
B) $9,586
C) $21,915
D) $43,000
E) None of the above

Question 63

Barry purchased a used business asset (seven-year property) on September 30, 2018, at a cost of $200,000. This is the only asset he purchased during the year. Barry did not elect to expense any of the asset under § 179, did not take additional first-year depreciation, and did not elect straight-line cost recovery. Barry sold the asset on July 17, 2019. Determine the cost recovery deduction for 2019.

A) $19,133
B) $24,490
C) $34,438
D) $55,100
E) None of the above

Question 64

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.

A) $25,000
B) $115,000
C) $130,000
D) $140,000
E) None of the above

Question 65

Diane purchased a factory building on April 15, 1993, for $5,000,000. She sells the factory building on February 2, 2018. Determine the cost recovery deduction for the year of the sale.

A) $16,025
B) $19,838
C) $26,458
D) $158,750
E) None of the above

Question 66

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.

A) $0
B) $1,587
C) $2,645
D) $12,696
E) None of the above

Question 67

Hans purchased a new passenger automobile on August 17, 2018, for $30,000. During the year the car was used 40% for business and 60% for personal use. Determine his cost recovery deduction for the car for 2018.

A) $500
B) $1,000
C) $1,200
D) $1,333
E) None of the above

Question 68

Bhaskar purchased a new factory building and land on September 10, 2018, for $3,700,000. ($500,000 of the purchase price was allocated to the land.) He elected the alternative depreciation system (ADS). Determine the cost recovery deduction for 2019.

A) $23,328
B) $80,000
C) $82,048
D) $92,500
E) None of the above

Question 69

Carlos purchased an apartment building on November 16, 2018, for $3,000,000. Determine the cost recovery for 2018.

A) $9,630
B) $11,910
C) $13,950
D) $22,740
E) None of the above

Question 70

On June 1, 2018, James places in service a new automobile that cost $40,000. The car is used 60% for business and 40% for personal use. (Assume this percentage is maintained for the life of the car.) James does not take additional first-year depreciation. Determine the cost recovery deduction for 2018.

A) $1,776
B) $1,896
C) $4,800
D) $6,000
E) None of the above

Question 71

On May 30, 2017, Jane purchased a factory building to use for her business. In August 2018, Jane paid $300,000 for improvements to the building. Determine Jane's total deduction with respect to the building improvements for 2018.

A) $2,889
B) $4,173
C) $4,815
D) $25,000
E) None of the above

Question 72

Cora purchased a hotel building on May 17, 2018, for $3,000,000. Determine the cost recovery deduction for 2019.

A) $48,150
B) $59,520
C) $69,000
D) $76,920
E) None of the above

Question 73

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.

A) $1,428
B) $2,499
C) $26,749
D) $33,375
E) None of the above

Question 74

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

Question 75

On May 2, 2018, Karen placed in service a new sports utility vehicle that cost $60,000 and has a gross vehicle weight of 6,300 lbs. The vehicle is used 60% for business and 40% for personal use. Determine Karen's total cost recovery for 2018. Karen wants to use both §179 and additional first-year depreciation.

A) $7,200
B) $25,000
C) $27,200
D) $36,000
E) None of the above

Question 76

On July 10, 2018, Ariff places in service a new sports utility vehicle that cost $70,000 and weighed 6,300 pounds. The SUV is used 100% for business. Determine Ariff's maximum deduction for 2018, assuming Ariff's § 179 business income is $110,000. Ariff does not take additional first-year depreciation.

A) $2,960
B) $25,000
C) $34,000
D) $70,000
E) None of the above

Question 77

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.

A) $88,598
B) $301,159
C) $568,574
D) $620,000
E) None of the above

Question 78

On March 1, 2018, Lana leases and places in service a passenger automobile. The lease will run for five years and the payments are $500 per month. During 2018, she uses her car 60% for business and 40% for personal activities. Assuming the dollar amount from the IRS table for auto leases is $70, determine Lana's gross income attributable to the lease.

A) $0
B) $35
C) $59
D) $70
E) None of the above

Question 79

On June 1, 2018, Irene places in service a new automobile that cost $21,000. The car is used 70% for business and 30% for personal use. (Assume this percentage is maintained for the life of the car.) She does not take additional first-year depreciation. Determine the cost recovery deduction for 2019.

A) $3,290
B) $3,570
C) $4,704
D) $10,000
E) None of the above

Question 80

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.

A) $0
B) $241
C) $907
D) $1,687
E) None of the above