Question 1

Which of the following statements related to the Section 179 election to expense is (are)true?
I.A Section 179 deduction can be claimed on tangible personal property
II.A Section 179 deduction can be claimed on property held for the production of income.
III.A Section 179 deduction can be claimed on real property.
IV.A Section 179 deduction is allowed only for assets used in trade or business.
A)Only statement I is true.
B)Only statements I and II are true.
C)Only statements I, II, and III are true.
D)Only statements I and IV are true.
E)All of the statements are true.

Accepted Answer

Statement I is true, as tangible personal property can be expensed under Section 179. Statement II is false, as property held for the production of income is not eligible for Section 179 expensing. Statement III is false, as real property (such as buildings) is not eligible for Section 179 expensing. Statement IV is true, as Section 179 expensing is limited to assets used in a trade or business.

Question 2

In 2013,Sanford Corporation purchases and places in service $2,050,000 of equipment for its manufacturing business.What portion of the $2,050,000 may Sanford elect to treat as a Section 179 expense?
A)$ 50,000
B)$ 100,000
C)$ 450,000
D)$ 500,000
E)$ 2,000,000

Accepted Answer

The answer of In 2013,Sanford Corporation purchases and places in...

Question 3

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

Inventory cannot be depreciated, as it is not a long-term asset. Land acquired as an investment may not be depreciated either, as it is not used in business operations. Business equipment and cattle used in a dairy herd can both be depreciated.

Question 4

In May 2013,Preston purchases 5-year MACRS property costing $150,000 and 7-year MACRS property costing $140,000.Preston's income is $100,000.If Preston wishes to maximize his total 2013 cost recovery deduction,what will his total cost recovery deduction be on the properties purchased in 2013? (Preston elects out of bonus depreciation.)
A)$ 50,006
B)$130,006
C)$135,716
D)$143,200
E)$290,000

Accepted Answer

To calculate the total cost recovery deduction, we need to determine the depreciation expense for each property using the MACRS tables.

For the 5-year MACRS property, the depreciation rate for year 1 is 20%, which gives us a deduction of $30,000 ($150,000 x 20%).

For the 7-year MACRS property, the depreciation rate for year 1 is 14.29%, which gives us a deduction of $20,006 ($140,000 x 14.29%).

Therefore, the total cost recovery deduction for both properties is $50,006 ($30,000 + $20,006).

Note: Bonus depreciation is not taken into account in this scenario as Preston has elected out of it.

Question 5

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 6

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

Only statement III is correct because a residence used as rental property is considered income-producing and can be depreciated over time. Statement IV is also correct because the airplane used for business purposes can be depreciated as a business expense. However, inventory (statement I) cannot be depreciated because it is considered a current asset, and land acquired as an investment (statement II) cannot be depreciated because land does not wear out or become obsolete.

Question 7

Watson Company purchases used equipment (5-year MACRS property)for $2,350,000 on July 8,2013.What is Watson' maximum allowable cost recovery deduction for 2013 on the equipment if this is the only purchase of equipment for 2013? (Watson elects out of bonus depreciation.)
A)$ 590,000
B)$ 750,000
C)$ 860,000
D)$2,000,000
E)$2,350,000

Accepted Answer

The maximum allowable cost recovery deduction for 5-year MACRS property in the first year is 20% of the cost. Therefore, 20% of $2,350,000 is $470,000. However, since the equipment was purchased in the second half of the year, the half-year convention applies, reducing the deduction to half of $470,000, which is $235,000. However, the question asks for the maximum allowable deduction, which includes the Section 179 expense election. For 2013, the maximum Section 179 deduction is $500,000, so the maximum allowable deduction is $500,000.

Question 8

Qualified Section 179 property for a retail store includes
I.Store shelving.
II.Company auto used by salesmen.
III.Sidewalks in front of the store.
IV.Delivery van owned by the store.
A)Only statement I is correct.
B)Only statement III is correct.
C)Statements I and IV are correct.
D)Statements II and III are correct.
E)Statements I, II, and IV are correct.

Accepted Answer

Qualified Section 179 property includes tangible personal property such as store shelving and vehicles like delivery vans used for business purposes, as well as company autos used by salesmen if they are used more than 50% for business. Sidewalks are considered land improvements and do not qualify.

Question 9

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 has been fully recovered, the taxpayer may continue to use percentage depletion based on the gross income from the property. This means that the taxpayer's depletion deduction can exceed the cost of the depletable asset.

Question 10

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 11

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.

Question 12

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 13

During 2013,Witt Processing Corporation places $2,435,000 of Section 179 property in service for use in its business.What is the amount of Witt Processing's maximum Section 179 deduction for 2013?
A)$ 65,000
B)$135,000
C)$250,000
D)$435,000
E)$500,000

Accepted Answer

The answer of During 2013,Witt Processing Corporation places $2,435,000 of...

Question 14

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

Statement I is correct because a truck used for business purposes can be depreciated. Statement III is correct because rental property can be depreciated. Statement II and IV are incorrect because personal use assets cannot be depreciated.

Question 15

Sorensen Corporation purchases eqipment in 2013 for $2,200,000.Sorensen has substantial taxable income and desires to minimize this amount to the fullest extent possible.How much can Sorensen deduct under Section 179?
A)$ 200,000
B)$ 300,000
C)$ 500,000
D)$1,800,000
E)$2,000,000

Accepted Answer

The answer of Sorensen Corporation purchases eqipment in 2013 for...

Question 16

Davis,Inc.,a motorcycle wheel manufacturer,purchased a new spoke machine in 2013 for $200,000.What are the tax effects of this purchase?
I.If taxable income is $100,000,then $100,000 can be expensed in 2013.
II.No Section 179 election is allowed if Davis decides to use a $200,000 depreciable basis.
III.If Davis had purchased a total of $2,400,000 of equipment in 2013,the corporation can deduct only $100,000 of the purchases in 2013 through use of the Section 179 election.
A)Only statement I is correct.
B)Statements I and II are correct.
C)Statements II and III are correct.
D)Statements I and III are correct.
E)Statements I, II, and III are correct.

Accepted Answer

The answer of Davis,Inc.,a motorcycle wheel manufacturer,purchased a new spoke...

Question 17

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 18

The Section 179 election promotes which of the following tax concept(s)or doctrine(s)?
I.Claim of Right Doctrine.
II.Administrative Convenience Concept.
III.Tax benefit rule.
IV.Substance-Over-Form Doctrine.
A)Only statement I is correct.
B)Only statement II is correct.
C)Statements I, II, and IV are correct.
D)Statements II and IV are correct.
E)Statements I, II, III, and IV are correct.

Accepted Answer

The Section 179 election allows businesses to deduct the full purchase price of qualifying equipment and/or software within the tax year it is purchased, rather than depreciating it over time. This primarily promotes the Administrative Convenience Concept by simplifying tax reporting and reducing administrative burdens on both businesses and the IRS.

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

This is the correct formula for computing cost depletion.

Question 20

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.

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

In 2013,Sanford Corporation purchases and places in service $2,050,000 of equipment for its manufacturing business.What portion of the $2,050,000 may Sanford elect to treat as a Section 179 expense?

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.

Periodic capital recovery deductions for tax purposes include I.Depletion. II.Amortization. III.Depreciation. IV.Proration.

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.

Watson Company purchases used equipment (5-year MACRS property) for $2,350,000 on July 8,2013.What is Watson' maximum allowable cost recovery deduction for 2013 on the equipment if this is the only purchase of equipment for 2013? (Watson elects out of bonus depreciation.)

Qualified Section 179 property for a retail store includes I.Store shelving. II.Company auto used by salesmen. III.Sidewalks in front of the store. IV.Delivery van owned by the store.

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.

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

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.

During 2013,Witt Processing Corporation places $2,435,000 of Section 179 property in service for use in its business.What is the amount of Witt Processing's maximum Section 179 deduction for 2013?

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.

Sorensen Corporation purchases eqipment in 2013 for $2,200,000.Sorensen has substantial taxable income and desires to minimize this amount to the fullest extent possible.How much can Sorensen deduct under Section 179?

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.

The Section 179 election promotes which of the following tax concept(s) or doctrine(s) ? I.Claim of Right Doctrine. II.Administrative Convenience Concept. III.Tax benefit rule. IV.Substance-Over-Form Doctrine.

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.

Under current law,taxpayers must use regular MACRS.