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

Question 1

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

Answer 1

False

Question 2

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.

Answer 2

True

Question 3

The § 179 deduction can exceed $1,020,000 in 2019 if the taxpayer had a § 179 amount that exceeded the taxable income limitation in the prior year.

Answer 3

False

Question 4

Property that is classified as personalty may be depreciated.

Question 5

The cost recovery period for three-year class property is four years.

Question 6

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

Question 7

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

Question 8

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 9

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

Question 10

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.

Question 11

For personal property placed in service in 2019, the § 179 maximum deduction is $1,020,000.

Question 12

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

Question 13

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 14

New and used personal property placed in service in 2019 and used in a trade or business qualifies for additional first-year depreciation.

Question 15

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

Question 16

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 17

Land improvements are generally not eligible for cost recovery.

Question 18

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

Question 19

The luxury auto cost recovery limits applies to all automobiles.

Question 20

Motel buildings have a cost recovery period of 27.5 years.

Question 21

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

Question 22

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

Question 23

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

Question 24

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 25

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

Question 26

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

Question 27

A used $35,000 automobile that is used 100% for business is placed in service in 2019. If the automobile fails the
50% business usage test in the second year, no cost recovery will be recaptured.

Question 28

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 29

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

Question 30

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

Question 31

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

Question 32

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 33

A purchased trademark is a § 197 intangible.

Question 34

If an automobile is placed in service in 2019, the limitation for cost recovery in 2021 will be based on the cost recovery limits for the year 2019.

Question 35

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

Question 36

Intangible drilling costs are capitalized and recovered through depletion.

Question 37

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

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

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

Question 40

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

Question 41

Bonnie purchased a new business asset (five-year property) on March 10, 2019, at a cost of $30,000. She also purchased a new business asset (seven-year property) on November 20, 2019, 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 2019 for these assets.

A) $7,858
B) $9,586
C) $21,915
D) $43,000

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

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 these.

Question 44

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

Question 45

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 46

Diane purchased a factory building on April 15, 1993, for $5,000,000. She sells the factory building on February 2,2019. Determine the cost recovery deduction for the year of the sale.

A) $16,025
B) $19,838
C) $26,458
D) $158,750

Question 47

Alice purchased office furniture on September 20, 2018, for $100,000. On October 10, 2018, she purchased business computers for $80,000. Alice placed all of the assets in service on January 15, 2019. She 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 2019.

A) $6,426
B) $14,710
C) $25,722
D) $30,290

Question 48

James purchased a new business asset (three-year personalty) on July 23, 2019, 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 2019.

A) $8,333
B) $26,666
C) $33,333
D) $40,000

Question 49

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 50

Assets that do not have a determinable useful life are not eligible for cost recovery under MACRS.

Question 51

Carlos purchased an apartment building on November 16, 2019, for $3,000,000. Determine the cost recovery for 2019.

A) $9,630
B) $11,910
C) $13,950
D) $22,740

Question 52

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'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.

Question 53

Hazel purchased a new business asset (five-year asset) on September 30, 2019, at a cost of $100,000. On October 4, 2019, she placed the asset in service. This was the only asset she placed in service in 2019. Hazel did not elect
§ 179 or additional first-year depreciation. On August 20, 2020, Hazel sold the asset. Determine the cost recovery for 2020 for the asset.

A) $14,250
B) $19,000
C) $23,750
D) $38,000

Question 54

Doug purchased a new factory building on January 15, 1991, for $400,000. On March 1, 2019, 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

Question 55

Cora purchased a hotel building on May 17, 2019, for $3,000,000. Determine the cost recovery deduction for 2020.

A) $48,150
B) $59,520
C) $69,000
D) $76,920

Question 56

Barry purchased a used business asset (seven-year property) on September 30, 2019, 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 claim additional first-year depreciation, and did not elect straight-line cost recovery. Barry sold the asset on July 17,2020. Determine the cost recovery deduction for 2020.

A) $19,133
B) $24,490
C) $34,438
D) $55,100

Question 57

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. $\begin{array}{ccc}&\text { Cost Recovery Allowed }&\text { Cost Recovery Allowable }\\ \text { Year 1 } & \$ 16,000 & \$ 8,000 \\\text { Year 2 } & 9,600 & 12,800 \\\text { Year 3 } & 5,760 & 7,680\end{array}$ 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

Question 58

Land costs generally are amortized rather than being cost recovered under MACRS.

Question 59

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 60

Tan Company acquires a new machine (10-year property) on January 15, 2019, at a cost of $200,000. Tan also acquires another new machine (7-year property) on November 5, 2019, 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 2019.

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

Question 61

During the past two years, through extensive advertising and improved customer relations, Orange Corporation estimated that it had developed customer goodwill worth $500,000. For the current year, determine the amount of goodwill Orange may amortize.

A) $100,000
B) $33,333
C) $26,667
D) $16,667
E) -0-.

Question 62

On January 15, 2019, Vern purchased the rights to a mineral interest for $3,500,000. At that time, it was estimated that the recoverable units would be 500,000. During the year, 40,000 units were mined and 25,000 units were sold for $800,000. Vern incurred expenses during 2019 of $500,000. The percentage depletion rate is 22%. Determine Vern's depletion deduction for 2019.

A) $150,000
B) $175,000
C) $176,000
D) $200,000
E) $250,000

Question 63

On June 1, 2019, Red Corporation purchased an existing business. With respect to the acquired assets of the business, Red allocated $300,000 of the purchase price to a patent. The patent will expire in 20 years. Determine the total amount that Red may amortize for 2019 for the patent.

A) $0
B) $1,667
C) $11,667
D) $35,000

Question 64

In 2018, Gail had a § 179 deduction carryover of $30,000. In 2019, she elected § 179 for an asset acquired at a cost of $115,000. Gail's § 179 business income limitation for 2019 is $140,000. Determine Gail's § 179 deduction for 2019.

A) $25,000
B) $115,000
C) $130,000
D) $140,000

Question 65

White Company acquires a new machine (seven-year property) on January 10, 2019, 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 2019 assuming White has taxable income of $800,000.

A) $88,598
B) $301,159
C) $568,574
D) $620,000

Question 66

Bhaskar purchased a new factory building and land on September 10, 2019, 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 2020.

A) $23,328
B) $80,000
C) $82,048
D) $92,500

Question 67

On May 30, 2018, Jane purchased a factory building to use for her business. In August 2019, Jane paid $300,000 for improvements to the building. Determine Jane's total deduction with respect to the building improvements for 2019.

A) $2,889
B) $4,173
C) $4,815
D) $25,000

Question 68

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

Question 69

On July 10, 2019, Ariff places in service a new SUV that cost $70,000 and weighed 6,300 pounds. The SUV is used 100% for business. Determine Ariff's maximum deduction for 2019, assuming Ariff's § 179 business income is
$110,000. Ariff does not take additional first-year depreciation.

A) $2,960
B) $25,000
C) $34,400
D) $70,000

Question 70

Orange Corporation begins business on April 2, 2019. The corporation reports startup expenditures of $64,000 all incurred last year. Determine the total amount that Orange can elect to deduct in 2019.

A) $0
B) $3,200
C) $4,267
D) $7,950

Question 71

Augie purchased one new asset during the year (five-year property) on November 10, 2019, 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 2019.

A) $30,500
B) $580,200
C) $600,000
D) $660,000

Question 72

Which of the following is not a characteristic of MACRS for property other than real estate?

A) MACRS uses shorter asset lives.
B) MACRS increases taxable income in the early years of the asset's life.
C) MACRS accelerates cost recovery.
D) MACRS decreases taxable income in the early years of the asset's life.

Question 73

On March 1, 2019, Lana leases and places in service a passenger automobile. The lease will run for five years and the payments are $500 per month. During 2019, 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

Question 74

Hans purchased a new passenger automobile on August 17, 2019, 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 2019.

A) $500
B) $1,000
C) $1,200
D) $1,333

Question 75

The only asset Bill purchased during 2019 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 2019.

A) $1,428
B) $2,499
C) $26,749
D) $33,375

Question 76

On June 1, 2019, 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

Question 77

On May 2, 2019, 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 2019. Karen wants to use both §179 and additional first-year depreciation.

A) $7,200
B) $25,500
C) $27,200
D) $36,000

Question 78

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

Question 79

On June 1, 2019, 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 2019.

A) $1,776
B) $1,896
C) $4,800
D) $6,000

Question 80

Pat purchased a used five-year class asset on March 15, 2019, for $60,000. He did not elect § 179 expensing. Determine the cost recovery deduction for 2019 for earnings and profits purposes.

A) $2,000
B) $3,000
C) $6,000
D) $12,000