Question 1

The MACRS depreciation tables automatically switch to the straight-line method when the straight-line method yields a higher annual depreciation amount than the declining balance method.

Accepted Answer

This statement is true. If the straight-line method yields a higher annual depreciation amount than the declining balance method, the MACRS depreciation tables will switch to the straight-line method.

Question 2

An asset's capitalized cost basis includes only the actual purchase price, whereas expenses to purchase, prepare the asset for use, and begin using the asset are immediately expensed.

Accepted Answer

The statement is incorrect. Expenses to purchase, prepare the asset for use, and begin using the asset are typically included in the asset's capitalized cost basis.

Question 3

Tax cost recovery methods include depreciation, amortization, and depletion.

Accepted Answer

Tax cost recovery methods include depreciation for assets such as buildings and equipment, amortization for intangible assets such as patents, and depletion for natural resources such as oil and gas reserves.

Question 4

In general, a taxpayer should select longer-lived property for the §179 immediate expensing election.

Accepted Answer

This is because the immediate expensing election allows a taxpayer to deduct the cost of certain qualifying property in the year it is placed in service, rather than depreciating it over a number of years. By selecting longer-lived property, the taxpayer can take advantage of the larger §179 deduction in the year of acquisition, rather than spreading it out over several years through depreciation.

Question 5

The mid-month convention applies to real property in the year of acquisition and disposition.

Accepted Answer

The mid-month convention is used for real property only in the year of acquisition and disposition. It requires that a property is considered to have been placed in service or disposed of in the middle of the month, regardless of the actual date of acquisition or disposition. This affects the calculation of depreciation for that year.

Question 6

If tangible personal property is depreciated using the half-year convention and is disposed of during the first quarter of a subsequent year, the taxpayer must use the mid-quarter convention for the year of disposition.

Accepted Answer

The half-year convention can still be used for the year of disposition; switching to the mid-quarter convention is not required simply because the property was disposed of in the first quarter of a subsequent year. The mid-quarter convention is generally applied in the year of acquisition if more than 40% of the depreciable property is placed in service in the last quarter of the tax year.

Question 7

The basis for a personal-use asset converted to business use is the lesser of the asset's cost basis or fair market value on the date of the transfer or conversion.

Accepted Answer

This is correct according to IRS regulations regarding the conversion of personal-use assets to business use. The tax deduction for the converted asset is based on the lesser of its cost basis or fair market value on the date of conversion.

Question 8

Property expensed under the §179 immediate expensing election is not included in the 40 percent test to determine whether the mid-quarter convention must be used.

Accepted Answer

Property expensed under the §179 immediate expensing election is not included in the 40 percent test for the mid-quarter convention, which applies to property placed in service during the last quarter of the tax year.

Question 9

Bonus depreciation is used as a stimulus tool by tax policy makers.

Accepted Answer

Bonus depreciation allows businesses to immediately deduct a larger percentage of the cost of an eligible asset in the year it is placed in service, which can incentivize investment and stimulate economic growth. Therefore, it is often used as a tool by tax policy makers to encourage business spending and expansion.

Question 10

Taxpayers use the half-year convention for all assets.

Accepted Answer

The half-year convention is one option for depreciation, but taxpayers can use other conventions such as the mid-quarter convention or the full-month convention depending on the asset and circumstances.

Question 11

Depreciation is currently computed under the Modified Accelerated Cost Recovery System (MACRS).

Accepted Answer

MACRS is the current depreciation system used in the United States for tax purposes.

Question 12

The 200 percent or double declining balance method is allowable for five- and seven-year property.

Accepted Answer

The 200 percent or double declining balance method can be used for five- and seven-year property, as well as other types of property.

Question 13

All taxpayers may use the §179 immediate expensing election on certain property.

Accepted Answer

Not all taxpayers can use the §179 immediate expensing election because it is subject to limitations such as business income limits, and it is only available for certain types of property and to taxpayers who meet specific criteria.

Question 14

If a business mistakenly claims too little depreciation, the business must only reduce the asset's basis by the depreciation actually taken rather thanby the amount of the allowable depreciation.

Accepted Answer

If a business mistakenly claims too little depreciation, the business must reduce the asset's basis by the amount of the allowable depreciation that should have been claimed. This is to ensure that the correct amount of depreciation is taken over the useful life of the asset.

Question 15

If a taxpayer places only one asset (a building)in service during the fourth quarter of the year, the mid-quarter convention must be used.

Accepted Answer

The mid-quarter convention is used if more than 40% of the total depreciable basis of property is placed in service in the last quarter, not for a single asset like a building.

Question 16

Real property is depreciated using the straight-line method.

Accepted Answer

Real property, such as buildings or land, is typically depreciated using the straight-line method, where the cost of the property is evenly spread out over its useful life.

Question 17

The §179 immediate expensing election phases out based upon the amount of tangible personal property a taxpayer places in service during the year.

Accepted Answer

The §179 immediate expensing election does have a phase-out based on the amount of tangible personal property placed in service during the year. The phase-out threshold for 2021 is $2,620,000.

Question 18

The §179 immediate expensing election phases out based upon a taxpayer's taxable income.

Accepted Answer

The §179 immediate expensing election phases out based on the amount of qualifying property placed in service during the tax year, not based on the taxpayer's taxable income.

Question 19

If a machine (seven-year property)being depreciated using the half-year convention is disposed of during the seventh year, a taxpayer must multiply the appropriate depreciationpercentage from the MACRS table by 50 percent to calculate the depreciation expense properly.

Accepted Answer

In the seventh year of depreciation for property under the half-year convention, the taxpayer must apply a 50 percent adjustment to the standard MACRS depreciation rate for that year, as the convention assumes the property is in service for only half of the final year.

Question 20

Taxpayers may use historical data to determine the recovery period for tax depreciation.

Accepted Answer

Tax depreciation recovery periods are determined by the IRS and are outlined in the tax code, not based on historical data.

Quiz 10: Property Acquisition and Cost Recovery