Question 1

On March 1, 2017, Lana leases and places in service a passenger automobile. The lease will run for five years and the payments are $500 per month. During 2017, she uses her car 60% for business and 40% for personal activities. Assuming the dollar amount from the IRS table for auto leases is $70, determine Lana's gross income attributable to the lease.

Accepted Answer

The answer of On March 1, 2017, Lana leases and...

Question 2

Tom purchased and placed in service used office furniture on January 3, 2017, for $40,000. Tom's accountant depreciated the furniture using straight-line depreciation over 10 years for financial reporting purposes. The accountant also used the same depreciation amounts when filing Tom's income tax returns. On January 10, 2022, Tom sold the furniture. Determine the tax basis of the furniture at the time of the sale.

Accepted Answer

The answer of Tom purchased and placed in service used...

Question 3

The only asset Bill purchased during 2017 was a new seven-year class asset. The asset, which was listed property, was acquired on June 17 at a cost of $50,000. The asset was used 40% for business, 30% for the production of income, and the rest of the time for personal use. Bill always elects to expense the maximum amount under § 179 whenever it is applicable. The net income from the business before the § 179 deduction is $100,000. Determine Bill's maximum deduction with respect to the property for 2017.

Accepted Answer

The asset is used 70% for business and income production (40% business + 30% income production). The maximum § 179 deduction is limited to the business use percentage. Therefore, $50,000 x 70% = $35,000 is eligible for § 179. However, listed property must be used more than 50% for business to qualify for § 179, which it is not in this case (only 40% business use). Thus, Bill cannot take a § 179 deduction. Instead, he must use MACRS depreciation. The MACRS rate for a 7-year property in the first year is 14.29%. Therefore, $50,000 x 70% x 14.29% = $4,999. However, since only 40% is business use, the deductible amount is $50,000 x 40% x 14.29% = $2,856. But since the question asks for the maximum deduction with respect to the property, including both business and income production, the correct calculation is $50,000 x 70% x 14.29% = $4,999, and the business portion is $2,499.

Question 4

On July 17, 2017, Kevin places in service a used automobile that cost $25,000. The car is used 80% for business and 20% for personal use. In 2018, he used the automobile 40% for business and 60% for personal use. Determine the cost recovery recapture for 2018.

Accepted Answer

The cost recovery recapture is calculated by taking the difference in business use percentage between the years and applying it to the depreciation taken. In 2017, the business use was 80%, and in 2018 it dropped to 40%. The difference is 40%. The depreciation taken in 2017 was $5,000 (20% of $25,000). The recapture is 40% of $5,000, which is $2,000. However, since the business use dropped below 50%, the recapture is limited to the excess depreciation over straight-line, which is $528.

Question 5

Mary purchased a new five-year class asset on March 7, 2017. The asset was listed property (not an automobile). It was used 60% for business and the rest of the time for personal use. The asset cost $900,000. Mary made the § 179 election. The income from the business before the § 179 deduction was $600,000. Mary also takes additional first-year depreciation. Determine the total deductions with respect to the asset for 2017.

Accepted Answer

First, we need to determine the maximum amount that can be deducted under §179. Since the asset cost $900,000, the §179 deduction limit would be $510,000 (assuming the maximum limit of $1,010,000 for 2017).

Next, we need to determine the business use percentage to calculate the total business deduction. The asset was used 60% for business, so the total §179 deduction would be $306,000 (60% of $510,000).

Mary can also take additional first-year depreciation of 50% of the remaining cost ($900,000 - $510,000 = $390,000) which is $195,000.

Therefore, Mary's total deduction for 2017 would be $306,000 (§179 deduction) + $195,000 (additional first-year depreciation) = $501,000.

Note that the income from the business before the §179 deduction ($600,000) is not relevant to the calculation of total deductions.

Question 6

Jim acquires a new seven-year class asset on September 20, 2017, for $80,000. He placed the asset in service on October 5, 2017. He does not elect to expense any of the asset under § 179 or elect straight-line, cost recovery. He takes additional first-year depreciation. He sells the asset on August 25, 2018. This is the only asset he acquires in 2017. Determine Jim's cost recovery in 2017 and 2018.

Accepted Answer

The answer of Jim acquires a new seven-year class asset...

Question 7

Orange Corporation begins business on April 2, 2017. The corporation reports startup expenditures of $64,000 all incurred last year. Determine the total amount that Orange can elect to deduct in 2017.

Accepted Answer

The answer of Orange Corporation begins business on April 2,...

Question 8

On June 1, 2017, Norm leases a taxi and places it in service. The lease payments are $1,000 per month. Assuming the dollar amount from the IRS table for such leases is $241, determine Norm's gross income inclusion amount.

Accepted Answer

The inclusion amount for leased vehicles is calculated based on the IRS table, but it only applies if the fair market value of the vehicle exceeds a certain threshold. Since the problem does not provide the fair market value or indicate that it exceeds the threshold, the inclusion amount is $0.

Question 9

On January 15, 2017, Vern purchased the rights to a mineral interest for $3,500,000. At that time it was estimated that the recoverable units would be 500,000. During the year, 40,000 units were mined and 25,000 units were sold for $800,000. Vern incurred expenses during 2017 of $500,000. The percentage depletion rate is 22%. Determine Vern's depletion deduction for 2017.

Accepted Answer

The answer of On January 15, 2017, Vern purchased the...

Question 10

On July 10, 2017, Ariff places in service a new sports utility vehicle that cost $70,000 and weighed 6,300 pounds. The SUV is used 100% for business. Determine Ariff's maximum deduction for 2017, assuming Ariff's § 179 business income is $110,000. Ariff does not take additional first-year depreciation.

Accepted Answer

Since the SUV is used 100% for business, Ariff is eligible for a maximum Section 179 deduction of $25,000, as determined by the weight and cost limits. However, since his § 179 business income is $110,000, he can deduct the full $25,000. Therefore, Ariff's maximum deduction for 2017 is $34,000 ($25,000 + $9,000), which is the remaining cost of the SUV after the § 179 deduction.

Question 11

George purchases used seven-year class property at a cost of $200,000 on April 20, 2017. Determine George's cost recovery deduction for 2017 for alternative minimum tax purposes, assuming George does not elect § 179 and does not take additional first-year depreciation.

Accepted Answer

The answer of George purchases used seven-year class property at...

Question 12

During the past two years, through extensive advertising and improved customer relations, Orange Corporation estimated that it had developed customer goodwill worth $500,000. For the current year, determine the amount of goodwill Orange Corporation may amortize.

Accepted Answer

The answer of During the past two years, through extensive...

Question 13

On June 1, 2017, Irene places in service a new automobile that cost $21,000. The car is used 70% for business and 30% for personal use. (Assume this percentage is maintained for the life of the car.) She does not take additional first-year depreciation. Determine the cost recovery deduction for 2018.

Accepted Answer

The answer of On June 1, 2017, Irene places in...

Question 14

On May 2, 2017, Karen placed in service a new sports utility vehicle that cost $60,000 and has a gross vehicle weight of 6,300 lbs. The vehicle is used 60% for business and 40% for personal use. Determine Karen's total cost recovery for 2017. Karen wants to use both §179 and additional first-year depreciation.

Accepted Answer

The answer of On May 2, 2017, Karen placed in...

Question 15

On June 1, 2017, James places in service a new automobile that cost $40,000. The car is used 60% for business and 40% for personal use. (Assume this percentage is maintained for the life of the car.) James does not take additional first-year depreciation. Determine the cost recovery deduction for 2017.

Accepted Answer

The cost recovery deduction for 2017 is calculated as follows:

Total cost of the car = $40,000

Business use percentage = 60%

Total cost of car allocated to business use = $40,000 x 60% = $24,000

The cost recovery deduction for the first year is calculated as follows:

MACRS depreciation for the first year = 20% x $24,000 = $4,800

Since James did not take additional first-year depreciation, the final cost recovery deduction for 2017 is:

Cost recovery deduction for 2017 = $4,800 x 60% = $2,880

However, since this is only asking for the cost recovery deduction for 2017, we only need to consider the portion of the year the car is in service. Assuming the car was placed in service on June 1, 2017, there are only 214 days left in the year. Therefore, the cost recovery deduction for 2017 is:

Cost recovery deduction for 2017 = ($4,800 / 365) x 214 x 60% = $1,896

Therefore, the best choice is B.

Question 16

Augie purchased one new asset during the year (five-year property) on November 10, 2017, at a cost of $660,000. She would like to use the § 179 election and will also take additional first-year depreciation. The income from the business before the cost recovery deduction and the § 179 deduction was $600,000. Determine the total cost recovery deduction with respect to the asset for 2017.

Accepted Answer

The total cost of the asset after the § 179 election is $510,000 ($660,000 - $150,000). The additional first-year depreciation is calculated as follows:

$510,000 × 50% × 2/12 = $42,500

Therefore, the total cost recovery deduction is:

§ 179 deduction = $150,000
Additional first-year depreciation = $42,500
Regular MACRS depreciation = $395,250 ($660,000 - $150,000 - $42,500) × 20% = $79,050 in 2017
Total cost recovery deduction = $271,550 + $79,050 = $588,750.

So, the correct answer is (D).

Question 17

Bhaskar purchased a new factory building and land on September 10, 2017, for $3,700,000. ($500,000 of the purchase price was allocated to the land.) He elected the alternative depreciation system (ADS). Determine the cost recovery deduction for 2018.

Accepted Answer

The answer of Bhaskar purchased a new factory building and...

Question 18

Pat purchased a used five-year class asset on March 15, 2017, for $60,000. He did not elect § 179 expensing. Determine the cost recovery deduction for 2017 for earnings and profits purposes.

Accepted Answer

The asset is a five-year class asset, which means the MACRS depreciation method applies with the 200% declining balance method over a five-year recovery period. Placed in service in March, the property is only considered in service for half of the year. 
Using the half-year convention, the first year's depreciation would be calculated as:
Cost recovery deduction = (Cost of asset/Recovery period) x 1/2 year
= ($60,000/5) x 1/2
=$6,000 
However, for earnings and profits purposes, the cost recovery deduction is limited to 20% of the depreciable basis, which is $12,000 ($60,000 x 20%). Therefore, the cost recovery deduction for 2017 is $6,000, the lesser of the calculated deduction and the allowable deduction for earnings and profits purposes.

Question 19

On June 1, 2017, Red Corporation purchased an existing business. With respect to the acquired assets of the business, Red allocated $300,000 of the purchase price to a patent. The patent will expire in 20 years. Determine the total amount that Red may amortize for 2017 for the patent.

Accepted Answer

The patent is amortized over its useful life of 20 years. For 2017, Red can amortize the patent for 7 months (June to December), which is $300,000 / 20 years = $15,000 per year. For 7 months, it is ($15,000 / 12) * 7 = $8,750. However, the correct calculation should be $300,000 / 20 = $15,000 per year, and for 7 months, it is ($15,000 / 12) * 7 = $8,750, which is not an option. The closest correct option is $11,667, which seems to be a mistake in the options provided.

Question 20

Hans purchased a new passenger automobile on August 17, 2017, for $30,000. During the year the car was used 40% for business and 60% for personal use. Determine his cost recovery deduction for the car for 2017.

Accepted Answer

The answer of Hans purchased a new passenger automobile on...

Quiz 8: Depreciation, Cost Recovery, Amortization, and Depletion