Question 1

While Congress has enacted several different depreciation methods, all currently owned assets are depreciated using the method in effect when the asset was placed in service.

Accepted Answer

This statement is true. Depreciation methods are typically determined by the IRS and can be changed by Congress, but assets are depreciated using the method in effect at the time they were placed in service. This is known as the asset's "tax life."

Question 2

MACRS eliminates several sources of potential conflict between the IRS and taxpayers concerning an asset's useful life and the calculation of the depreciation deduction.

Accepted Answer

MACRS provides standardized methods for determining the useful life of assets and calculating the depreciation deduction, reducing the potential for disputes between taxpayers and the IRS over these issues.

Question 3

MACRS applies to new and used depreciable personal property used for the production of income.

Accepted Answer

MACRS (Modified Accelerated Cost Recovery System) is a method of depreciation used for personal property used for the production of income, including both new and used property. Therefore, the statement is true.

Question 4

In most cases, the taxpayer may continue to use percentage statutory) depletion after the initial basis has been fully recovered. In other words, the taxpayer's depletion deduction can exceed the cost of the depletable asset.

Accepted Answer

This is true. Once the initial basis of the depletable asset has been fully recovered through depletion deductions, the taxpayer can still continue to use percentage depletion to calculate their deduction, which may exceed the original cost of the asset. This is because the purpose of the depletion deduction is to account for the exhaustion of a natural resource, not just the recovery of the taxpayer's investment.

Question 5

To be considered predominately used in a trade or business under the listed property rules, more than 75% of an asset's total use for each taxable year must be related to the taxpayer's trade or business.

Accepted Answer

To be considered predominately used in a trade or business under the listed property rules, more than 50% of an asset's total use for each taxable year must be related to the taxpayer's trade or business.

Question 6

Under the computation of the alternative minimum tax, the Alternative Depreciation System may be used but is not required.

Accepted Answer

Under the computation of the alternative minimum tax (AMT), taxpayers are required to use the Alternative Depreciation System (ADS) for certain types of property, making it not merely an option but a requirement for AMT purposes.

Question 7

The earlier the depreciation deduction can be taken, the greater the present value of the tax savings will be to the taxpayer.

Accepted Answer

This is because the sooner the taxpayer can take the depreciation deduction, the sooner they can reduce their taxable income and therefore reduce the amount of taxes they owe, resulting in a greater present value of tax savings.

Question 8

Sally purchased new equipment for her consulting business. She allocates the Section 179 deduction among the new assets. One piece of equipment cost $112,500 and was allocated one-half of the allowable Section 179 deduction and therefore has a depreciable basis of $100,000.

Accepted Answer

The depreciable basis of the equipment is $100,000, which is less than its cost of $112,500. This indicates that a portion of the cost has been deducted as a Section 179 deduction.

Question 9

The Section 179 expense deduction is allowed on all depreciable and tangible property used in a trade or business.

Accepted Answer

The Section 179 expense deduction is not allowed on all depreciable and tangible property; it is specifically excluded for certain properties like inventory, land, investment property, and buildings, among others. It primarily applies to tangible, depreciable personal property used in the active conduct of a trade or business.

Question 10

Pedro purchased used delivery equipment costing $80,000 and used computers costing $90,000 the only assets purchased) that are used in his business. He may allocate his section 179 deduction to either or both assets.

Accepted Answer

Section 179 deduction allows a business owner to deduct the full cost of qualifying assets, such as equipment and software, up to a certain limit. In this case, Pedro can choose to allocate his section 179 deduction to either the delivery equipment or the computers, or both. Therefore, the statement is true.

Question 11

Felix purchases the franchise rights to a new sports team and will be able to amortize the cost over the 15-year amortization period for intangibles.

Accepted Answer

The answer of Felix purchases the franchise rights to a...

Question 12

Under current law, taxpayers must use regular MACRS.

Accepted Answer

Taxpayers have the option to use different depreciation methods, including MACRS (Modified Accelerated Cost Recovery System), but they are not strictly required to use regular MACRS for all assets. Other methods, such as straight-line depreciation, may be used depending on the asset and circumstances.

Question 13

The mid-year convention is used for personal property only.

Accepted Answer

The mid-year convention is a depreciation method used for personal property such as equipment, furniture, and vehicles. Real property, such as buildings and land, uses a different convention known as the mid-month convention.

Question 14

Which of the following would not be allowed a depreciation deduction? I. Inventory. II. Business equipment. III. Land acquired as an investment. IV. Cattle used in a dairy herd.
A) Only statement I is correct.
B) Statements I and III are correct.
C) Statements I, III and IV are correct.
D) Only statement IV is correct.
E) All of the assets are depreciable.

Accepted Answer

I. Inventory is not depreciable as it is considered part of cost of goods sold when sold.
II. Business equipment is depreciable as it is used for income-producing purposes.
III. Land acquired as an investment is not depreciable as land is considered a non-depreciable asset.
IV. Cattle used in a dairy herd is depreciable as it is used for income-producing purposes.

Question 15

Which of the following assets would be allowed a depreciation deduction? I. A truck used to provide transportation to a job site. II. A car used for personal purposes. III. An apartment building rented out for the production of rental income. IV. A personal-use computer of the taxpayer.
A) Only statement II is correct.
B) Statements II and IV are correct.
C) Only statement I is correct.
D) Statements I and III are correct.
E) All of the assets are depreciable.

Accepted Answer

Only statement I is correct because it is being used for a business purpose. Statement III is also correct because the apartment building is being used to generate rental income. The car in statement II and personal-use computer in statement IV are not being used for business purposes, so they cannot be depreciated.

Question 16

Which of the following would be allowed a depreciation deduction? I. Inventory. II. Land acquired as an investment. III. Residence used as rental property. IV. Airplane used by company controller to attend accounting conference.
A) Only statement III is correct.
B) Only statement IV is correct
C) Statements III and IV are correct.
D) Statements II, III, and IV are correct.
E) All of the assets are depreciable.

Accepted Answer

Inventory (statement I) is not depreciable since it is considered a current asset. Land acquired as an investment (statement II) is also not depreciable as land is considered a non-depreciable asset. However, a residence used as rental property (statement III) and an airplane used for business travel (statement IV) are both depreciable assets and therefore allowed for a depreciation deduction.

Question 17

Periodic capital recovery deductions for tax purposes include I. Depletion. II. Amortization. III. Depreciation. IV. Proration.
A) Statements I and III are correct.
B) Only statement I is correct.
C) Statements I, II and III are correct.
D) Statements I, II, and IV are correct.
E) Statements I, II, III, and IV are correct.

Accepted Answer

Depletion, amortization, and depreciation are all methods of allocating the cost of an asset over its useful life for tax purposes, which allows for capital recovery. Proration is not a method of capital recovery.

Question 18

If more than 40% of the depreciable basis of personal property is placed is service during the last three months of the tax year, the taxpayer must use the mid-quarter convention.

Accepted Answer

The mid-quarter convention is required if more than 40% of the total depreciable basis of property is placed in service in the last quarter of the tax year, according to IRS rules.

Question 19

To compute cost depletion, you must know the basis subject to depletion, the recoverable quantity of the natural resource, and the quantity of the natural resource sold during the year.

Accepted Answer

Cost depletion is calculated based on the basis subject to depletion (original acquisition cost), the recoverable quantity of the natural resource, and the quantity sold during the year.

Question 20

Which of the following assets would not be allowed a depreciation deduction? I. A business computer used to process payroll and maintain a company's general ledger. II. A personal residence of a taxpayer. III. A building rented out for the production of rental income. IV. A yacht rented to a fishing party.
A) Only statement II is correct.
B) Statements II and IV are correct.
C) Only statement I is correct.
D) Statements I and III are correct.
E) All of the assets are depreciable.

Accepted Answer

A personal residence of a taxpayer is not allowed a depreciation deduction because depreciation is only applicable to assets used in a business or income-producing activity. Personal use property, like a personal residence, does not qualify for depreciation.

Quiz 10: Cost Recovery on Property: Depreciation, Depletion, and Amortization