Deck 8: Depreciation and Sale of Business Property

Question 1

If land declines in value, it may be depreciated for tax purposes.

Answer 1

False

Question 2

Which one of the following is true about Modified Accelerated Cost Recovery System (MACRS)?

A)A building is depreciated using 200 percent declining balance depreciation.
B)Buildings and autos both have the same depreciation life.
C)A light duty business truck is depreciated using accelerated depreciation.
D)All of the above are false.

Answer 2

C

Question 3

Routine maintenance costs for capital assets are deducted in the year the amount is paid or incurred, not capitalized as an improvement to the asset.

Answer 3

True

Question 4

In applying the statutory depreciation percentages from the MACRS tables, the cost of the asset must first be reduced by the prior year's depreciation.

Question 5

To be depreciated, must an asset actually lose value each year?

Question 6

Depreciation on property in the five-year MACRS class is claimed over a period of six tax years due to the half-year or mid-quarter convention.

Question 7

Depreciation refers to the physical deterioration or loss of value of an asset.

Question 8

Depreciation is the process of allocating the cost of assets to expense over a period of years.

Question 9

Which of the following statements with respect to the depreciation of real property under MACRS is correct?

A)Real property is depreciated using a mid-quarter convention.
B)Only one-half year of depreciation is allowed in the year of acquisition of real property, regardless of the actual date the property is placed in service.
C)Assuming the property is not disposed of during the year, the depreciation deduction for the second year of use of the real property will be greater than the depreciation deduction in the first year.
D)In some cases, where a significant amount of property is acquired during the last quarter of the taxpayer's tax year, the taxpayer may be required to use a mid-quarter convention in calculating depreciation on real property.
E)None of the above.

Question 10

Expenditures incurred to maintain an asset in good operating condition must be depreciated over the remaining useful life of the asset.

Question 11

Automobiles generally have a 3-year cost recovery period under the Modified Accelerated Cost Recovery System (MACRS).

Question 12

Residential real estate is currently assigned a 27.5-year cost recovery period under the Modified Accelerated Cost Recovery System.

Question 13

Cork Oak Corporation purchased a heavy-duty truck (not considered a passenger automobile for purposes of the listed property and luxury automobile limitations) on May 1, 2019 for use in its business. The truck, with a cost basis of $24,000, has a 5-year estimated life. It also is 5-year recovery property. How much depreciation should be taken on the truck for the 2019 calendar tax year using the conventional (for financial accounting purposes) straight-line depreciation method?

A)$400
B)$2,400
C)$3,200
D)$4,800
E)None of the above

Question 14

Steve Corp bought a $600,000 apartment building in June of 2018. Of the purchase price, $104,950 is allocated to the value of the land. What is the maximum amount of depreciation that the company can claim in 2019 (Year 2) for the building?

A)$9,752
B)$18,000
C)$25,000 under the election to expense business property
D)$21,816
E)You cannot depreciate property costing over $500,000

Question 15

Taxpayers must use the straight-line method of depreciation for all productive assets.

Question 16

If an asset's actual useful life is longer than the assigned recovery period, the MACRS tables cannot be used.

Question 17

Jenny constructed a building for use as a residential rental property. The cost of the building was $82,488, and it was placed in service on August 1, 1997. The building has a 27.5-year MACRS life. What is the amount of depreciation on the building for 2019 for tax purposes?

A)$2,250
B)$3,000
C)$6,000
D)$6,547
E)None of the above

Question 18

If a taxpayer purchases land worth $200,000 with an office building valued at $100,000 on it, how are the two depreciated for tax purposes?
Land:
Office building:

Question 19

ABC Corp bought a production machine on January 1, 2017 for $31,250. The company did not elect Section 179 expensing and elected out of claiming bonus depreciation in 2017, and is depreciating the machine using the MACRS accelerated depreciation tables for 5-year property. What is the 2019 depreciation (Year 3) deduction for the machine?

A)$6,000
B)$6,250
C)$10,000
D)$12,500
E)None of the above is correct

Question 20

Under MACRS, the same method of depreciation (accelerated or straight-line) must be used for all property in a given class placed in service during a tax year.

Question 21

An asset (not an automobile) placed in service in June 2019 has a depreciable basis of $35,000 and a recovery period of 5 years. Assuming bonus depreciation is used, a half-year convention, and no expensing election, what is the maximum amount of cost that can be deducted in 2019?

A)$7,000
B)$17,500
C)$21,000
D)$24,500
E)$35,000

Question 22

A taxpayer places a $1,050,000 5-year recovery period asset in service in 2019. This is the only asset placed in service in 2019. Assuming half-year convention, an election to expense under Section 179, and no income limitation, what is the amount of total cost recovery deduction (no bonus depreciation)?

A)$200,000
B)$210,000
C)$1,000,000
D)$1,026,000
E)$1,050,000

Question 23

An asset is placed in service on May 15, 2019 and has a depreciable basis of $40,000. The asset is in the 7-year recovery class and the half-year convention applies. What is the maximum depreciation deduction that may be claimed for 2019, excluding the election to expense and bonus depreciation?

A)$2,572
B)$5,144
C)$5,716
D)$25,000
E)None of the above

Question 24

A taxpayer places a $50,000 5-year recovery period asset in service in 2019. This is the only asset placed in service in 2019. Assuming half-year convention, no special elections (for example, election to expense), what is the amount of total cost recovery deduction?

A)$0
B)$5,000
C)$25,000
D)$30,000
E)$50,000

Question 25

On January 1, 2019, Roxburgia Company places a commercial storage building in service. The costs allocated to construction of the building total $300,000 and land is accounted for separately. Which of the following is a true statement with respect to the depreciation of the building?

A)The period over which the building must be depreciated is shorter than the period over which a residential building must be depreciated.
B)Since the building was placed in service on the first day of the year, the depreciation expense for each year the building is used, except for the year of disposition, will be the same amount.
C)Since the land is accounted for separately, the amount of depreciation expense for the building cannot be determined from the information given.
D)The depreciation expense for Year 2 would be the same regardless of whether the building is placed in service on January 1, 2019 or February 1, 2019.
E)All of the above.

Question 26

In calculating depreciation:

A)Straight-line depreciation is higher than double declining balance depreciation in the early years.
B)Straight-line depreciation is higher than double declining balance depreciation in the later years.
C)Double declining balance is a method of straight-line depreciation.
D)MACRS depreciation requires that salvage value be taken into account.

Question 27

Choose the correct statement.

A)Residential real property is depreciated over 39 years.
B)Nonresidential real property is depreciated over 27.5 years.
C)Nonresidential real property is depreciated over 39 years.
D)Depreciation on real property starts at the beginning of the year in which the property is placed in service.

Question 28

Give the depreciable or amortizable recovery periods for 2019 tax purposes for these assets:

Automobiles
Business furniture
Computers
Residential real estate
Commercial real estate
Land
Purchased goodwill

Question 29

Bonus depreciation in 2019 generally permits taxpayers to deduct 100% of the cost of the asset in the year placed in service.

Question 30

Calculate the following amounts:
a. The first year of depreciation on a residential rental building costing $100,000, purchased on November 30.
b. The first year of depreciation on an auto used 100 percent in business, costing $30,000, purchased in May 2019. (No Section 179 or bonus depreciation).
c. The second year of depreciation on a computer used exclusively for business, costing $7,000, purchased May 2018.
d. The third year of depreciation on business furniture costing $1,000, purchased in July 2017, using the half-year convention and accelerated depreciation.

Question 31

An asset (not an automobile) put in service in June 2019 has a depreciable basis of $535,000 and a recovery period of 5 years. Assuming bonus depreciation is used, a half-year convention, and no expensing election, what is the maximum amount of cost that can be deducted in 2019?

A)$107,000
B)$267,500
C)$321,000
D)$374,500
E)$535,000

Question 32

Betty purchases a used $12,000 car in 2019, to use exclusively in her business.
a. What will the standard MACRS depreciation schedule be for the 6 years the auto is depreciated (no Section 179 or bonus depreciation)?
Year 1:
Year 2:
Year 3:
Year 4:
Year 5:
Year 6:
b. If Betty holds the car until it is fully depreciated, and uses straight-line depreciation, how many years will this take?

Question 33

What is the minimum number of years over which computers may be depreciated under MACRS?

A)3 years
B)5 years
C)7 years
D)10 years
E)15 years

Question 34

A taxpayer places a $50,000 5-year recovery period asset in service in 2019. This is the only asset placed in service in 2019. Assuming half-year convention, bonus depreciation, and taxable income before cost recovery of $5,000, what is the amount of cost recovery in 2019?

A)$0
B)$5,000
C)$25,000
D)$30,000
E)$50,000

Question 35

Which of the following is true about the MACRS depreciation system?

A)No salvage value is used before depreciation percentages are applied to depreciable real estate.
B)Residential rental buildings are depreciated straight-line over 20 years.
C)Commercial real estate buildings are depreciated over 39 years using accelerated depreciation.
D)No matter when equipment is purchased during the month, it is considered to have been purchased mid-month for MACRS depreciation purposes.

Question 36

On October 21, 2019, Jay purchased a commercial building. The cost basis assigned to the building is $700,000. Jay also owns a residential apartment building he purchased on June 15, 2018 with a cost basis of $500,000.
a.Calculate Jay's total depreciation deduction for the buildings for 2019, using MACRS.
b.Calculate Jay's total depreciation deduction for the commercial building for 2020, using MACRS.

Question 37

A taxpayer places a $50,000 5-year recovery period asset in service in 2019. This is the only asset placed in service in 2019. Assuming half-year convention, no immediate expensing, what is the amount of bonus depreciation?

A)$0
B)$10,000
C)$25,000
D)$50,000
E)None of the above

Question 38

Explain the use of the half-year convention for MACRS depreciation for assets other than real estate and the exception to the half-year convention rule.

Question 39

John purchases residential rental property on June 30, 2019 for a cost of $290,000. Of this amount, $140,000 is allocable to the cost of the home and the remaining $150,000 is allocable to the cost of the land. What is John's maximum depreciation deduction for 2019?

A)$2,758
B)$1,485
C)$1,061
D)$370
E)None of the above

Question 40

A taxpayer places a $50,000 5-year recovery period asset in service in 2019. This is the only asset placed in service in 2019. Assuming half-year convention, no bonus depreciation, an election to expense under Section 179, and taxable income after all deductions except Section 179 of $5,000, what is the amount of Section 179 immediate expensing?

A)$0
B)$5,000
C)$25,000
D)$30,000
E)$50,000

Question 41

During 2019, Travis purchases $13,000 of used manufacturing equipment (7-year property) for use in his business, his only asset purchase that year. Travis has taxable income from his business of $51,000 before any cost recovery. What is the maximum amount that Travis may deduct under the election to expense? ​

A)$0
B)$13,000
C)$25,000
D)$500,000
E)None of the above

Question 42

If actual business use of an automobile is less than 100 percent, the annual automobile depreciation limitations must be reduced to reflect the actual business use only.

Question 43

If listed property is used more than 50 percent in a qualified business use, depreciation must be calculated using the straight-line method.

Question 44

The maximum annual Section 179 immediate expensing deduction in 2019 is $1,020,000.

Question 45

An asset (not an automobile) put in service in June 2019 has a depreciable basis of $2,065,000, a recovery period of 5 years, and is the only asset placed in service this year. Assuming bonus depreciation is used, a half-year convention, and the expensing election is not made, what is the maximum amount of cost that can be deducted in 2019?

A)$411,000
B)$1,411,000
C)$1,427,000
D)$2,065,000
E)None of the above

Question 46

The tax law imposes restrictions on the depreciation of "listed" property such as automobiles.

Question 47

Which one of the following may not be depreciated using an accelerated method?

A)A farming tractor
B)A computer used strictly for the farming business
C)A corn-husking machine
D)A farm truck that is operated for personal use more than 50 percent of the time
E)All of the above items may be depreciated using an accelerated method

Question 48

The election to expense is not permitted where listed property does not meet the qualified business use test.

Question 49

Taxpayers may expense the cost of depreciable personal property placed in service during the year and used in a trade or business in an amount up to a maximum of $2,550,000 annually.

Question 50

The annual automobile depreciation limitations apply only to the first four years of the asset's recovery period.

Question 51

On July 15, 2019, H.P. purchases a personal computer for his home. The computer cost $4,000. H.P. uses the computer 60 percent of the time in his business, 15 percent of the time for managing his investments and the remaining 25 percent of the time for various personal uses. Calculate H.P.'s maximum depreciation deduction for 2019 for the computer, assuming he does not make the election to expense or take bonus depreciation.

Question 52

An asset (not an automobile) put in service in June 2019 has a depreciable basis of $35,000 and a recovery period of 5 years and is the only asset placed in service this year. Assuming bonus depreciation is used, a half-year convention, and the expensing election is made, what is the maximum amount of cost that can be deducted in 2019 (assume no income limitation)?

A)$7,000
B)$17,500
C)$21,000
D)$24,400
E)$35,000

Question 53

Taxpayers choosing the election to expense:

A)May depreciate the amount of the asset cost that exceeds the amount allowed under the election to expense.
B)Will have the maximum that can be expensed under the election reduced by $0.50 for each dollar by which the cost of the asset acquired exceeds a specified limit.
C)May not carry over any amounts elected which are not allowed because of taxable income limitations.
D)May expense a $125,000 automobile so long as it is used 100 percent for business.

Question 54

Section 179 immediate expensing can be taken on used property.

Question 55

If an automobile is purchased for 100 percent use in the taxpayer's business, the annual automobile depreciation limitations do not apply.

Question 56

On January 1, 2019, Sandy, a sole proprietor, purchased for use in her business a used production machine (7-year property) at a cost of $4,000. Sandy does not purchase any other property during 2019 and has net income from her business of $80,000. If the standard recovery period table would allow $572 of depreciation expense on the $4,000 of equipment purchased in 2019, what is Sandy's maximum depreciation deduction including the Section 179 election to expense (but not bonus depreciation) for 2019?

A)$572
B)$4,000
C)$4,572
D)$25,000
E)None of the above

Question 57

Aaron has a successful business with $50,000 of income in 2019. He purchased a new 7-year MACRS property with a cost of $7,000. For tax purposes, what is the largest amount Aaron can deduct in 2019 for the new asset?

A)$500
B)$1,000
C)$3,500
D)$7,000

Question 58

An asset (not an automobile) placed in service in June 2019 has a depreciable basis of $2,555,000, a recovery period of 5 years, and is the only asset placed in service during the year. Assuming bonus depreciation is not used, a half-year convention, and the expensing election is made for the maximum eligible amount, what is the amount of cost that can be deducted in 2019 assuming the business earned taxable income of $1,000,000 before deducting any cost recovery on the asset?

A)$407,000
B)$500,000
C)$1,000,000
D)$1,407,000
E)$2,000,000

Question 59

An asset (not an automobile) put in service in June 2019 has a depreciable basis of $1,035,000, a recovery period of 5 years, and is the only asset placed in service during the year. Assuming bonus depreciation is used, a half-year convention, and the expensing election is made, what is the maximum amount of cost that can be deducted in 2019 (assume no income limitation)?

A)$207,000
B)$500,000
C)$1,017,500
D)$1,000,000
E)$1,035,000

Question 60

What is the maximum depreciation expense deduction for Year 2 (2020) for a passenger automobile, used 100 percent for qualified business use, placed in service on June 15, 2019 and costing $16,000 (the election to expense is not made and no bonus depreciation was taken)?

A)$2,800
B)$3,160
C)$16,000
D)$5,100
E)$5,120

Question 61

In the current year, Henry, a sole proprietor, sold for $65,000 a machine that was used in his business. The machine had been purchased a few years ago for $50,000, and when it was sold, it had accumulated depreciation of $20,000 and an adjusted basis of $30,000. For the current year, how should this gain be treated?

A)Ordinary income of $35,000
B)Section 1231 gain of $35,000
C)Section 1231 gain of $20,000 and ordinary income of $15,000
D)Section 1231 gain of $15,000 and ordinary income of $20,000
E)None of the above

Question 62

On June 1, 2019, Cork Oak Corporation purchased a passenger automobile for 100 percent use in its business. The auto, with a cost basis of $22,000, has a 5-year recovery period.. How much depreciation should be taken for 2019, assuming Cork Oak Corporation uses the accelerated depreciation method under MACRS but does not choose to make the election to expense or take bonus depreciation?

A)$10,000
B)$3,160
C)$4,400
D)$18,000
E)None of the above

Question 63

Acquired goodwill is considered to be a Section 197 asset amortized over 15 years for tax purposes.

Question 64

After 4 years of life in the slow lane, Doug decided to give up his goat ranch and move back to the big city. He sold the goat milking machine for $1,000. The machine originally cost $1,200 and had $820 of accumulated depreciation at the time of sale.
a. What is the total gain or loss on the sale of the goat milking machine?
b. Is the gain or loss treated as capital or ordinary? Explain.

Question 65

Which of the following assets is not a Section 1231 asset?

A)Equipment used in a business
B)The unharvested crops of a farmer
C)Timber
D)Inventory
E)All of the above are Section 1231 assets

Question 66

Ben purchased an apartment building about 10 years ago, for $200,000. The building has been depreciated over the appropriate recovery period using the straight-line method. In the current year, the building was sold for $220,000, when the accumulated depreciation was $62,500. Ben is in the 32% tax bracket; on his current year tax return, he should report:

A)Section 1231 gain of $20,000 and ordinary income of $62,500.
B)Section 1231 gain of $62,500 and ordinary income of $20,000.
C)Ordinary income of $82,500.
D)Section 1231 gain of $20,000 and "unrecaptured depreciation" taxed at 25 percent of $62,500.
E)None of the above.

Question 67

On June 1, 2019, Sandalwood Corporation purchases a passenger automobile for 100 percent use in its business. The automobile is in the 5 year cost recovery class and has a basis for depreciation of $60,000. Assuming that the corporation elects the accelerated method of cost recovery for the asset and does not elect to expense any of its cost or take bonus depreciation, what is the total tax depreciation deduction for the 2019 calendar tax year (Year 1)?

A)$11,160
B)$18,000
C)$12,000
D)$10,100
E)None of the above

Question 68

The depreciation recapture provisions are designed to prevent taxpayers from converting capital gains into ordinary income.
​

Question 69

On January 1, 2019, Ted purchased a small software company for $200,000. He paid $120,000 for the fixed assets of the company and $80,000 for goodwill. How much amortization may Ted deduct on his 2019 tax return for the purchased goodwill?

A)$0
B)$5,333
C)$5,750
D)$6,000
E)$90,000

Question 70

Scott purchases a small business from Lew on July 1, 2019. He paid the following amounts for the business:
a.How much of the $458,000 purchase price is for Section 197 intangible assets?
b.What amount can Scott deduct on his 2019 tax return as Section 197 intangible amortization?

Question 71

Elmer sold machinery used in his business for $20,000. The machinery originally cost $80,000 and had $45,000 of accumulated depreciation at the time of the sale. It is his only sale this year.
a.What is the gain or loss on the sale of the machinery?
b.Is the gain or loss treated as capital or ordinary? Explain.

Question 72

Section 197 intangibles:

A)Are amortized over a 15-year period.
B)Include goodwill, going-concern value, and information bases.
C)Were defined in the Revenue Reconciliation Act of 1993.
D)Are not amortized over the actual estimated useful life of the intangible asset.
E)All of the above are true.

Question 73

Which one of the following is true about Section 1231 assets?

A)Section 1231 assets are treated like capital assets when they produce losses on sale.
B)Business property held 1 year or less is considered a Section 1231 asset.
C)Section 1231 assets include company stock.
D)Section 1231 asset losses must be netted against 1231 asset gains before tax treatment is determined.
E)All of the above are false.

Question 74

Perry develops a successful advertising business that he subsequently sells to his competitor, Carl, for $108,000. Perry retires in the same town where he has always lived and done business. Carl insists that Perry sign a covenant not to compete. The advertising business has no tangible assets; Carl receives only the name of the business, the client lists and whatever going-concern value there is. How should Carl treat the $108,000 cost of the advertising business he purchased?

Question 75

Max purchases a new auto in 2019 at a cost of $56,000. He uses the car 80% for business. Assuming a half-year convention, bonus depreciation, but no immediate expensing, what is the depreciation deduction on the auto?

A)$44,800
B)$14,400
C)$14,480
D)$18,100
E)$10,100

Question 76

The maximum amount of depreciation including bonus depreciation on a passenger auto placed in service in 2019 is:

A)$0
B)$10,100
C)$18,000
D)$18,100

Question 77

197 intangibles:

A)Are amortized based on current fair market value rather than their actual cost.
B)Must be amortized over a 15 year life, regardless of their actual life.
C)Include intangible assets created and not purchased by the taxpayer.
D)Do not include purchased goodwill or going-concern value.

Question 78

Gain recognized on the sale of a Section 1245 asset is classified as ordinary income up to the amount of depreciation claimed.

Question 79

Which one of the following is a Section 197 intangible?

A)Computer software available for purchase by the general public
B)A building
C)A stock investment
D)An interest-earning certificate of deposit
E)Goodwill

Question 80

Shellie purchased a passenger automobile on March 2, 2019. She paid $65,000 for the automobile and can support business use of 85 percent. Calculate the amount of depreciation on the automobile for 2019 using the accelerated MACRS method (if available), assuming Shellie does not make the election to expense or claim bonus depreciation.