Question 1

Clay LLC placed in service machinery and equipment (7-year property) with a basis of $3,450,000 on June 6, 2018. Assume that Clay has sufficient income to avoid any limitations. Calculate the maximum depreciation expense including §179 expensing (ignoring any possible bonus depreciation.) (Use MACRS Table 1) (Round final answer to the nearest whole number.)

Accepted Answer

The $1,000,000 §179 expense is reduced to $50,000 because of the property placed in service limitation ($3,450,000 − $2,500,000 threshold). The half-year convention applies. The expense is $535,860 which is depreciation of $3,400,000 × 0.1429 = $485,860 plus $50,000 of §179 expense.

Question 2

Potomac LLC purchased an automobile for $30,000 on August 5, 2018. What is Potomac's depreciation expense for 2018 (ignore any possible bonus depreciation)? (Use MACRS Table 1, and Exhibit 10-10)

Accepted Answer

A luxury auto's maximum depreciation in the first year is the lesser of $10,000 or its MACRS amount of $6,000 ($30,000 × 20 percent) for 2018.

Question 3

Assume that Brittany acquires a competitor's assets on September 30ᵗʰ of year 1 for $350,000. Of that amount, $300,000 is allocated to tangible assets and $50,000 is allocated equally to two §197 intangible assets (goodwill and a 1-year non-compete agreement). Given, that the non-compete agreement expires on September 30ᵗʰ of year 2, what is Brittany's amortization expense for the second year? (Round final answer to the nearest whole number.)

Accepted Answer

The full-month convention applies. If a §197 asset is disposed of before it is fully recovered, the remaining basis is added to the remaining §197 assets acquired at the same time. §197 assets have a recovery period of 180 months. The amortization is $3,333 ($50,000/180) × 12. The result is as if the asset never expired.

Question 4

Racine started a new business in the current year. She incurred $52,000 of start-up costs. If her business started on November 23ʳᵈ of the current year, what is the total expense she may deduct with respect to the start-up costs for her initial year, rounded to the nearest whole number?

Accepted Answer

The maximum immediate expense amount of $5,000 phases out dollar for dollar if more than $50,000 of start-up costs are incurred. Thus, the immediate expensing is $3,000 ($5,000 − ($52,000 − $50,000)). The remaining amount is amortized over 180 months and results in an additional deduction of $544 [($49,000/180) × 2 months] for the year.

Question 5

Taylor LLC purchased an automobile for $55,000 on July 5, 2018. What is Taylor's maximum depreciation expense for 2018 if its business use percentage is 100 percent?

Accepted Answer

A luxury auto's maximum depreciation in the first year is the lesser of $10,000 or its MACRS amount of $11,000 ($55,000 × 20%). However, the limitation is increased by $8,000 when bonus depreciation is taken. Taylor's maximum depreciation on the automobile is $18,000 ($10,000 limitation + $8,000 bonus).

Question 6

Crouch LLC placed in service on May 19, 2018 machinery and equipment (7-year property) with a basis of $3,200,000. Assume that Crouch has sufficient income to avoid any limitations. Calculate the maximum depreciation expense including §179 expensing (but ignoring bonus depreciation). (Use MACRS Table 1)

Accepted Answer

The $1,000,000 §179 expense is reduced to $300,000 because of the property placed in service limitation ($3,200,000 − $2,500,000 threshold). The half-year convention applies. The expense is $714,410 which is depreciation of $2,900,000 × .1429 = $414,410 plus $300,000 of §179 expense.

Question 7

Littman LLC placed in service on July 29, 2018 machinery and equipment (7-year property) with a basis of $600,000. Littman's income for the current year before any depreciation expense was $100,000. Which of the following statements is True to maximize Littman's total depreciation expense for 2018? (Use MACRS Table 1)

Accepted Answer

The $1,000,000 maximum §179 expense is limited by the amount of property placed in service and to income after regular MACRS depreciation but before §179 expense. The $100,000 income amount is before any cost recovery. Thus to maximize its cost recovery, Littman should first elect $16,637 of §179 expense. Littman's regular MACRS amount will be $83,363 for a total of $100,000 of cost recovery.

Question 8

Jorge purchased a copyright for use in his business in the current year. The purchase occurred on July 15ᵗʰ and the purchase price was $75,000. If the copyright has a remaining life of 75 months, what is the total amortization expense Jorge may deduct during the current year? (Assume not in an asset acquisition to which §197 applies)

Accepted Answer

The amortization is $6,000 ($75,000/75) × 6. The amortization period on a purchased copyright is the asset's remaining useful life.

Question 9

Jasmine started a new business in the current year. She incurred $10,000 of start-up costs. How much of the start-up costs can be immediately expensed (excluding amounts amortized over 180 months) for the year?

Accepted Answer

$5,000 of start-up expenses can be immediately expensed. The $5,000 maximum phases out dollar for dollar if more than $50,000 of start-up costs are incurred.

Question 10

Santa Fe purchased the rights to extract turquoise on a tract of land over a five-year period. Santa Fe paid $300,000 for extraction rights. A geologist estimates that Santa Fe will recover 5,000 pounds of turquoise. During the current year, Santa Fe extracted 1,500 pounds of turquoise, which it sold for $200,000. What is Santa Fe's cost depletion expense for the current year?

Accepted Answer

The depletion expense is $90,000 ($300,000/5,000) × 1,500.

Question 11

Which of the following assets is not eligible for bonus depreciation?

Accepted Answer

New and used personal property is eligible for bonus depreciation as long as the property has not been used by the taxpayer before. Qualified improvement property is not currently eligible.

Question 12

Lenter LLC placed in service on April 29, 2018 machinery and equipment (7-year property) with a basis of $1,600,000. Assume that Lenter has sufficient income to avoid any limitations. Calculate the maximum depreciation expense including §179 expensing (but ignoring bonus expensing). (Use MACRS Table 1)

Accepted Answer

The $1,000,000 §179 expense is not limited. The half-year convention applies. The expense is $1,085,740 which is depreciation of $600,000  × .1429 = $85,740 plus $1,000,000 of §179 expense.

Question 13

Assume that Bethany acquires a competitor's assets on March 31ˢᵗ. The purchase price was $150,000. Of that amount, $125,000 is allocated to tangible assets and $25,000 is allocated to goodwill (a §197 intangible asset). What is Bethany's amortization expense for the current year? (Round final answer to the nearest whole number.)

Accepted Answer

The full-month convention applies. §197 assets have a recovery period of 180 months. The amortization is $1,389 ($25,000/180) × 10.

Question 14

Billie Bob purchased a used camera (5-year property) for use in his sole proprietorship in the prior year. The basis of the camera was $2,400. Billie Bob used the camera in his business 60 percent of the time during the first year. During the second year, Billie Bob used the camera 40 percent for business use. Calculate Billie Bob's depreciation expense during the second year assuming the sole proprietorship had a loss during the year (Billie Bob did not place the asset in service in the last quarter). (Use MACRS Table 1)

Accepted Answer

Because the listed property's business use drops below 50%, the straight-line method must be used and all prior years' excess depreciation must be recaptured. The asset's recovery period is 5 years and the half-year convention applies. The calculation for the current year's depreciation before adjusting for the prior year is $2,400 × 0.20 × 40% = $192. But he must recapture prior depreciation of $144 ($2,400 × 0.20 × 60% = $288 taken less $144 (straight-line, ½ year)) that would have been taken. Therefore, the current year depreciation expense is $192 − $144 = $48.

Question 15

Simmons LLC purchased an office building and land several years ago for $250,000. The purchase price was allocated as follows: $200,000 to the building and $50,000 to the land. The property was placed in service on October 2. If the property is disposed of on February 27 during the 10ᵗʰ year, calculate Simmons' maximum depreciation in the 10ᵗʰ year. (Use MACRS Table 5)  EXHIBIT 10-6

Accepted Answer

The mid-month convention applies. Non-residential property has a 39-year recovery period. The depreciation is $641 ($200,000 × 2.564% × 1.5/12).

Question 16

Which of the following assets are eligible for §179 expensing?

Accepted Answer

All of the assets are eligible. Tangible personal property is eligible for §179 expensing whether it is new or used. Qualified improvement property is also eligible for §179 expensing.

Question 17

Daschle LLC completed some research and development during June of the current year. The related costs were $60,000. If Daschle wants to capitalize and amortize the costs as quickly as possible, what is the total amortization expense Daschle may deduct during the current year?

Accepted Answer

The amortization when capitalization is elected is $7,000 ($60,000/60) × 7 months. The amortization period on capitalized research and development is not less than 60 months-and 60 months is the most often elected.

Question 18

Arlington LLC purchased an automobile for $55,000 on July 5, 2018. What is Arlington's depreciation expense for 2018 if its business use percentage is 75 percent (ignore any possible bonus depreciation)?  Exhibit 10-10

Accepted Answer

A luxury auto's maximum depreciation in the first year is the lesser of $10,000 or its MACRS amount of $11,000 ($55,000 × 20%). That amount is then multiplied by the business use percentage to obtain $7,500 ($10,000 × 75%).

Question 19

Gessner LLC patented a process it developed in the current year. The patent is expected to create benefits for Gessner over a 10-year period. The patent was issued on April 15ᵗʰ and the legal costs associated with the patent were $43,000. In addition, Gessner had unamortized research expenditures of $15,000 related to the process. What is the total amortization expense Gessner may deduct during the current year?

Accepted Answer

The amortization is $4,350 ($58,000/120) × 9 months. The amortization period is the shorter of the patent's legal (20 years for utility patents) or useful life (10 years).

Question 20

Bonnie Jo purchased a used camera (5-year property) for use in her sole proprietorship. The basis of the camera was $2,400. Bonnie Jo used the camera in her business 60 percent of the time and used it for personal purposes the rest of the time during the first year. Calculate Bonnie Jo's depreciation expense during the first year assuming the sole proprietorship had a loss during the year (Bonnie did not place the property in service in the last quarter). (Use MACRS Table 1)

Accepted Answer

The asset's recovery period is 5 years and the half-year convention applies. The calculation is $2,400 × 0.20 × 60% = $288.

Quiz 10: Property Acquisition and Cost Recovery

Potomac LLC purchased an automobile for $30,000 on August 5, 2018. What is Potomac's depreciation expense for 2018 (ignore any possible bonus depreciation) ? (Use MACRS Table 1, and Exhibit 10-10)