Deck 8: Depreciation and Sale of Business Property

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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

Question 5

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.

Question 6

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 7

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

Question 8

Steve Corp bought a $600,000 apartment building in June of 2017.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 2018 (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 9

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 10

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

Question 11

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

Question 12

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

Question 13

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.

Question 14

ABC Corp bought a production machine on January 1, 2016 for $31,250.The company did not elect Section 179 expensing and elected out of claiming bonus depreciation in 2016, and is depreciating the machine using the MACRS accelerated depreciation tables for 5-year property.What is the 2018 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 15

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 16

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

Question 17

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 18

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, 1994.The building has a 27.5-year MACRS life.What is the amount of depreciation on the building for 2018 for tax purposes?

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

Question 19

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 20

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, 2018 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 2018 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 21

A taxpayer places a $50,000 5-year recovery period asset in service in 2018.This is the only asset placed in service in 2018.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 22

John purchases residential rental property on June 30, 2018 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 2018?

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

Question 23

On October 21, 2018, 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, 2017 with a cost basis of $500,000.
a.Calculate Jay's total depreciation deduction for the buildings for 2018, using MACRS.
b.Calculate Jay's total depreciation deduction for the commercial building for 2019, using MACRS.

Question 24

An asset is placed in service on May 15, 2018 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 2018, 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 25

A taxpayer places a $1,050,000 5-year recovery period asset in service in 2018.This is the only asset placed in service in 2018.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)?$1,010,000

A)$200,000
B)$210,000
C)$1,000,000
D)$1,010,000
E)$1,050,000

Question 26

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 2018.(No Section 179 or bonus depreciation).
c.The second year of depreciation on a computer used exclusively for business, costing $7,000, purchased May 2017.
d.The third year of depreciation on business furniture costing $1,000, purchased in July 2016, using the half-year convention and accelerated depreciation.

Question 27

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 28

A taxpayer places a $50,000 5-year recovery period asset in service in 2018.This is the only asset placed in service in 2018.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 29

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 30

Give the depreciable or amortizable lives for 2018 tax purposes for these assets:AutomobilesBusiness furnitureComputersResidential real estateCommercial real estateLandPurchased goodwill

Question 31

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 32

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 33

A taxpayer places a $50,000 5-year recovery period asset in service in 2018.This is the only asset placed in service in 2018.Assuming half-year convention, no election to expense and no income limitation, what is the amount of total cost recovery deduction?

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

Question 34

Bonus depreciation in 2018 generally permits taxpayers to deduct 100% of the cost of the asset in the year placed in service.

Question 35

On January 1, 2018, 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, 2018 or February 1, 2018.
E)All of the above.

Question 36

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 37

Betty purchases a used $12,000 car in 2018, 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 38

On August 1, 2018, David purchased manufacturing equipment for use in his business.The equipment cost $14,000 and has an estimated useful life and MACRS class life of 7 years.
a.​Calculate the amount of depreciation on the manufacturing equipment for 2018 using the accelerated MACRS method and no election to expense or use bonus depreciation is made.
b.​Calculate the amount of depreciation on the manufacturing equipment for 2018 using the accelerated MACRS method and bonus depreciation used but no election to expense.
c.Calculate the amount of depreciation on the manufacturing equipment for 2018 using the straight-line MACRS optional method and no election to expense or use bonus depreciation is made.
d.Calculate the amount of depreciation on the manufacturing equipment for 2018 for financial accounting purposes using the straight-line method of depreciation.

Question 39

On May 2, 2018, Scott purchased a commercial building.The cost basis assigned to the building is $600,000.Scott also owns a residential apartment building he purchased on June 15, 2017 with a cost basis of $400,000.
a.Calculate Scott's total depreciation deduction for the buildings for 2018, using the Modified Accelerated Cost Recovery System.
b.Calculate Scott's total depreciation deduction for the buildings for 2019, using the Modified Accelerated Cost Recovery System.

Question 40

A taxpayer places a $50,000 5-year recovery period asset in service in 2018.This is the only asset placed in service in 2018.Assuming half-year convention, bonus depreciation, and taxable income before cost recovery of $5,000, what is the amount of cost recovery in 2018?

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

Question 41

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

Question 42

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 $2,500,000 annually.

Question 43

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 44

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

Question 45

Eva purchased office equipment (7-year property)for use in her business.She paid $12,600 for the equipment on July 1, 2018.Eva did not purchase any other property during the year.For 2018, her business had net income of $6,000, before depreciation on the office equipment and before considering the election to expense.Eva elects out of bonus depreciation.
a.What is the maximum amount that Eva can elect to expense in 2018 under Section 179?
b.What is the total depreciation (regular depreciation and the amount allowed as a 2018 deduction under the election to expense) on the office equipment for 2018, assuming Eva uses the accelerated method under MACRS and claims the maximum amount allowable under the election to expense?
c.Assuming that Eva elected to expense the equipment in 2018 and that her business has net income in 2019 of $200,000, before depreciation and before considering the election to expense, what is Eva's total depreciation deduction (regular depreciation and the amount allowed under the election to expense) for the equipment for 2019?

Question 46

Lanyard purchased office equipment (7-year property)for use in his business.He paid $100,000 for the equipment on July 1, 2018.Lanyard did not purchase any other property during the year.For 2018, his business had net income of $350,000, before depreciation on the office equipment and before considering the election to expense.
a.What is the maximum amount that Lanyard can deduct in 2018 under the election to expense?
b.What is the total depreciation (regular depreciation and the amount allowed under the election to expense) on the office equipment for 2018, assuming Lanyard uses the accelerated method under MACRS and claims the maximum amount allowable under the election to expense?
c.What is Lanyard's total depreciation deduction for 2019 on the 2018 purchase of equipment?

Question 47

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 48

Aaron has a successful business with $50,000 of income in 2018.He purchased a new 7-year MACRS property with a cost of $7,000.For tax purposes, what is the largest write-off Aaron can obtain in 2018 for the new asset?

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

Question 49

The maximum annual Section 179 immediate expensing deduction in 2018 is $1,000,000.

Question 50

An asset (not an automobile)placed in service in June 2018 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 2018 assuming the business earned taxable income of $1,000,000 before deducting any cost recovery?

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

Question 51

An asset (not an automobile)put in service in June 2018 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 2018 (assume no income limitation)?

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

Question 52

During 2018, 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?$500,000

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

Question 53

On July 15, 2018, 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 2018 for the computer, assuming he does not make the election to expense or take bonus depreciation.

Question 54

An asset (not an automobile)put in service in June 2018 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 2018?

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

Question 55

Section 179 immediate expensing can be taken on used property

Question 56

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

Question 57

An asset (not an automobile)put in service in June 2018 has a depreciable basis of $2,055,000, 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 2018?

A)$411,000
B)$1,411,000
C)$1,427,000
D)$2,055,000
E)None of the above

Question 58

On January 1, 2018, 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 2018 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 2018, what is Sandy's maximum depreciation deduction including the Section 179 election to expense (but not bonus depreciation)for 2018?

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

Question 59

An asset (not an automobile)placed in service in June 2018 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 2018?

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

Question 60

An asset (not an automobile)put in service in June 2018 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 2018 (assume no income limitation)?

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

Question 61

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 62

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 63

Patrick purchased a used passenger automobile on June 1, 2018.He paid $19,000 for the automobile.During 2018, he uses the automobile 75 percent of the time for business.Patrick wishes to claim the maximum amount of depreciation possible (no bonus depreciation or election to expense).
a.Calculate Patrick's depreciation expense on the automobile for 2018.
b.​Calculate Patrick's depreciation expense on the automobile for 2019, assuming the same 75 percent business use.

Question 64

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 65

On January 1, 2018, 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 2018 tax return for the purchased goodwill?

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

Question 66

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 67

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

Question 68

On June 1, 2018, 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 2018 calendar tax year (Year 1)?

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

Question 69

Shellie purchased a passenger automobile on March 2, 2018.She paid $65,000 for the automobile and can support business use of 85 percent.Calculate the amount of depreciation on the automobile for 2018 using the accelerated MACRS method (if available), assuming Shellie does not make the election to expense or claim bonus depreciation.

Question 70

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 71

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

Question 72

Scott purchases a small business from Lew on July 1, 2018.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 2018 tax return as Section 197 intangible amortization?

Question 73

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 74

On June 1, 2018, 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 2018, 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 75

What is the maximum depreciation expense deduction for Year 2 (2019)for a passenger automobile, used 100 percent for qualified business use, placed in service on June 15, 2018 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 76

Max purchases a new auto in 2018 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)$18,000
D)$10,000
E)$8,000

Question 77

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 78

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

Question 79

The maximum amount of depreciation including bonus depreciation on a passenger auto placed in service in 2018 is:

A)$0
B)$3,160
C)$10,000
D)$18,000

Question 80

For each of the following independent situations, indicate with a "Yes" if the asset is listed property.Indicate with a "No" if the asset is not listed property.
a.Airplane used 25 percent for business ______
b.Fleet of cabs ______
c.A moving van ______
d.DVD player used 10 percent for business ______
e.A digital camera used 30 percent of the time to list eBay items ______