Question 1

13 Bonus depreciation and Section 179 expensing are never taken on the same asset.

Accepted Answer

Both 13 bonus depreciation and Section 179 expensing can be applied to the same asset, but Section 179 is typically taken first, and then bonus depreciation is applied to the remaining basis if the asset qualifies and the taxpayer chooses to use both methods.

Question 2

A donee's basis in a gift is always equal to the donor's basis.

Accepted Answer

The donee's basis in a gift can vary. Generally, if the fair market value of the gift at the time of the transfer is greater than the donor's adjusted basis, the donee's basis is the donor's adjusted basis. However, if the fair market value is less than the donor's adjusted basis, different rules apply for determining loss basis versus gain basis.

Question 3

In a basket purchase of a group of assets, the purchaser and the seller can agree to the value of the separate assets.

Accepted Answer

In a basket purchase, the purchaser and seller can indeed agree on the allocation of the total purchase price among the different assets included in the transaction. This allocation is often based on the fair market value of each asset but ultimately is subject to agreement between the parties involved.

Question 4

Section 179 expenses exceeding the annual cost limitation may be carried forward for five years only.

Accepted Answer

Section 179 expenses that exceed the annual limit can be carried forward indefinitely, not just for five years, until they are fully utilized.

Question 5

If more than 40 percent of all personalty purchased during the year is placed in service during the last quarter of the year, the mid-quarter convention must be used.

Accepted Answer

The mid-quarter convention is applied for depreciation purposes when more than 40% of the personal property (other than real estate) is placed in service during the last quarter of the tax year, requiring assets to be depreciated from the midpoint of the quarter in which they are placed in service.

Question 6

The alternative depreciation system uses a straight-line allocation of an asset's cost to determine depreciation expense.

Accepted Answer

The alternative depreciation system (ADS) indeed uses a straight-line method over longer recovery periods to allocate an asset's cost, spreading the depreciation expense evenly over the useful life of the asset.

Question 7

The cost of assets with useful lives expected to extend for 2 or more years are capitalized with costs allocated over their useful lives.

Accepted Answer

Capitalizing the cost of assets with useful lives of more than one year allows for the expense to be spread out over the useful life of the asset through depreciation, matching the expense with the revenue it generates.

Question 8

Automobiles are subject to specific limitations on the amount of annual depreciation deductions.

Accepted Answer

Automobiles, like other business assets, are subject to specific limitations on the amount of annual depreciation deductions they can claim, as determined by the IRS, to account for their wear and tear or obsolescence over time.

Question 9

The mid-year and mid-month are acceptable conventions for depreciating personalty.

Accepted Answer

The answer of The mid-year and mid-month are acceptable conventions...

Question 10

The after-tax cost of a depreciable asset is dependent on the purchaser's marginal tax rate.

Accepted Answer

The after-tax cost of a depreciable asset is indeed dependent on the purchaser's marginal tax rate because depreciation deductions reduce taxable income, and the value of these deductions is influenced by the tax rate. Higher marginal tax rates increase the value of the depreciation deductions, thereby reducing the after-tax cost of the asset.

Question 11

Depletion is the term used for the cost allocation of wasting assets.

Accepted Answer

Depletion is the accounting process used to allocate the cost of natural resources or wasting assets, such as minerals, oil, and timber, over their productive life.

Question 12

Wolfgang, a calendar-year taxpayer, purchased residential rental realty in April of year 1 for $150,000 ($50,000 of which was for the land).
A)What is Wolfgang's MACRS depreciation deduction in years 1 and 2?
B)What is his depreciation deduction in year 20 if he disposes of the asset in August of that year?
C)How would your answers change to (a) and (b) if the property is nonresidential realty?

Accepted Answer

The answer of Wolfgang, a calendar-year taxpayer, purchased residential rental...

Question 13

Joan gives an asset valued at $12,000 with a basis of $10,000 to Mary; Joan dies six-months later leaving an asset valued at $10,000 with a basis of $12,000 to Larry.What are Mary's and Larry's bases in these assets if they are then sold for their fair market value?

Accepted Answer

The answer of Joan gives an asset valued at $12,000...

Question 14

Research expenditures must be capitalized and amortized over the period the research is expected to benefit the business.

Accepted Answer

Research expenditures are typically expensed in the period they are incurred, not capitalized and amortized, according to most accounting standards like IFRS and GAAP.

Question 15

The first year's depreciation for equipment acquired in October by a calendar-year business would be based on 1½ months if it was the only asset acquired that year.

Accepted Answer

The first year's depreciation for equipment acquired in October by a calendar-year business would be based on 1½ months because the asset was only in service for that period of time during the year.

Question 16

The cost of an asset with a useful life exceeding one year can be

Accepted Answer

The cost of an asset with a useful life exceeding one year can be treated in different ways depending on accounting policies and the nature of the asset. It can be expensed immediately under certain conditions (e.g., if it's a minor cost or for certain types of businesses), capitalized until disposal (recognizing the asset on the balance sheet and depreciating it over its useful life), or capitalized with part of the costs deducted annually through depreciation or amortization.

Question 17

The lease inclusion amount increases the deduction a person may take for business use of a leased automobile.

Accepted Answer

The lease inclusion amount actually reduces the deduction a person can take for the business use of a leased automobile, as it represents a portion of the lease payments that is added back into income to account for the luxury nature of the vehicle.

Question 18

The MACRS life for all realty is 27½ years.

Accepted Answer

The MACRS (Modified Accelerated Cost Recovery System) life for residential rental property is 27.5 years, but for nonresidential real property, it is 39 years.

Question 19

Section 179 expensing does not apply to used property.

Accepted Answer

Section 179 expensing allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year, and it does apply to both new and used property, provided the used property is new to the taxpayer.

Question 20

The basis in property acquired by inheritance is normally its fair market value at the date of the
decedent's death.

Accepted Answer

The basis of property acquired by inheritance is generally the fair market value of the property on the date of the decedent's death, according to the Internal Revenue Code. This rule allows for a "step-up" in basis, potentially reducing capital gains tax if the property is sold by the heir.

Quiz 7: Property Acquisitions and Cost Recovery Deductions