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1. The concept of depreciation assumes that the asset has a determinable useful life.
True False
2. The basis of cost recovery property must be reduced by the cost recovery allowed.
True False
3. Antiques may be eligible for cost recovery if they are used in a trade or business.
True False
4. The key date for calculating cost recovery is the date the asset is placed in service.
True False
5. Land improvements are generally not eligible for cost recovery.
True False
6. The cost recovery basis for property converted from personal use to business use may be the fair market value of the property at the time of the conversion.
True False
7. The maximum cost recovery method for all personal property under MACRS is 150% declining balance.
True False
8. If 150% declining-balance is used, there is no straight-line switchover.
True False
9. All personal property placed in service in 2012 and used in a trade or business qualifies for additional first-year depreciation.
True False
10. If more than 40% of the value of property, other than real property, is placed in service during the last quarter, all of the property will be allowed 1.5 months of cost recovery.
True False
11. Under MACRS, if the mid-quarter convention is applicable, all property sold is treated as being sold at the mid-point of the quarter in which it is placed in service.
True False
12. All eligible real estate under MACRS is permitted one-half month of cost recovery in the month of disposition.
True False
13. Residential rental real estate includes property where 80% or more of the net rental revenues are from nontransient dwelling units.
True False
14. Motel buildings are classified as residential rental real estate.
True False
15. Taxpayers may elect to use the straight-line method under MACRS for personalty.
True False
16. Under the MACRS straight-line election for personalty, the mid-quarter convention is applicable.
True False
17. The cost recovery period for new farm equipment placed in service during 2012 is seven years.
True False
18. In a farming business, MACRS straight-line cost recovery is required for all fruit bearing trees.
True False 19. In a farming business, if the uniform capitalization rules are not used, cost is recovered using the ADS straight-line method.
True False 20. When lessor owned leasehold improvements are abandoned because of the termination of the lease, a loss can be taken for the unrecovered basis.
True False 21. The costs of qualified leasehold improvements qualify for additional first-year depreciation.
True False 22. For personal property placed in service in 2012, the § 179 maximum deduction is limited to $139,000.
True False 23. The § 179 deduction can exceed $139,000 in 2012 if the taxpayer had a § 179 amount which exceeded the taxable income limitation in the prior year.
True False 24. Any § 179 expense amount that is carried forward is subject to the business income limitation in the carryforward year.
True False 25. Taxable income for purposes of § 179 limited expensing is computed by including the MACRS deduction.
True False 26. The basis of an asset on which $139,000 has been expensed under § 179 will be reduced by $139,000, even if $139,000 cannot be expensed in the current year because of the taxable income limitation.
True False
27. Property used for the production of income is not eligible for § 179 expensing.
True False 28. The statutory dollar cost recovery limits under § 280F do not apply to all automobiles.
True False 29. The § 179 limit for a sports utility vehicle with a GVW of 7,000 pounds used for the production of income is $25,000.
True False 30. Once the more-than-50% business usage test is passed for listed property, it does matter if the business usage for the property drops to 50% or less during the recovery period.
True False 31. If a new car that is used predominantly in business is placed in service in 2012, the statutory dollar cost recovery limit under § 280F will depend on whether the taxpayer takes MACRS or straight-line depreciation.
True False 32. If an automobile is placed in service in 2012, the limitation for cost recovery in 2014 will be based on the cost recovery limits for the year 2012.
True False 33. The statutory dollar cost recovery limits under § 280F for passenger automobiles still apply if mid-quarter cost recovery is used.
True False 34. If a used $15,000 automobile used 100% for business in the first year (2012) fails the 50% business usage test in the second year, no cost recovery will be recaptured.
True False 35. The inclusion amount for a leased automobile is adjusted by a business usage percentage.
True False
36. All listed property is subject to the substantiation requirements of § 274.
True False
37. If a taxpayer uses regular MACRS for all property, an alternative minimum tax adjustment is made with respect to the depreciation on all property, regardless of the class life.
True False
38. MACRS depreciation is used to compute earnings and profits.
True False
39. Under the alternative depreciation system (ADS), the half-year convention must be used for personalty.
True False
40. A taxpayer may elect to use the alternative depreciation system (ADS) on property used predominantly outside the United States.
True False
41. An election to use straight-line under ADS is made on an asset-by-asset basis for property other than eligible real estate.
True False
42. For real property, the ADS convention is the mid-month convention.
True False
43. The cost of a covenant not to complete for 20 years incurred in connection with the acquisition of a business is amortized over 20 years.
True False
44. Goodwill associated with the acquisition of a business cannot be amortized.
True False
45. A purchased trademark is a § 197 intangible.
True False
46. If startup expenses total $53,000 in 2012, $51,000 is amortized over 180 months.
True False
47. The amortization period in 2012 for $4,000 of startup expenses if no election is made is 180 months.
True False
48. Cost depletion is determined by multiplying the depletion cost per unit by the number of units sold.
True False
49. Percentage depletion enables the taxpayer to recover more than the cost of an asset.
True False
50. Intangible drilling costs may be expensed rather than capitalized and written off through depletion.
True False
51. Grape Corporation purchased a machine in December of the current year. This was the only asset purchased during the current year. The machine was placed in service in January of the following year. No assets were purchased in the following year. Grape Corporation’s cost recovery would begin:
A. In the current year using a mid-quarter convention.
B. In the current year using a half-year convention.
C. In the following year using a mid-quarter convention.
D. In the following year using a half-year convention.
E. None of the above.
52. Which of the following assets would be subject to cost recovery?
A. A painting by Picasso hanging on a doctor’s office wall.
B. An antique vase in a doctor’s waiting room.
C. Stock in the doctor’s LLC.
D. a., b., and c.
E. None of the above.
53. On June 1 of the current year, Tab converted a machine from personal use to rental property. At the time of the conversion, the machine was worth $90,000. Five years ago Tab purchased the machine for $120,000. The machine is still encumbered by a $50,000 mortgage. What is the basis of the machine for cost recovery?
A. $70,000.
B. $90,000.
C. $120,000.
D. $140,000.
E. None of the above.
54. Tara purchased a machine for $40,000 to be used in her business. The cost recovery allowed and allowable for the three years the machine was used are as follows:
If Tara sells the machine after three years for $15,000, how much gain should she recognize?
A. $3,480.
B. $6,360.
C. $9,240.
D. $11,480.
E. None of the above.
55. Hazel purchased a new business asset (five-year asset) on September 30, 2012, at a cost of $100,000. On October 4, 2012, Hazel placed the asset in service. This was the only asset Hazel placed in service in 2012. The only election with respect to the asset was not to take § 179. On August 20, 2013, Hazel sold the asset. Determine the cost recovery for 2013 for the asset.
A. $9,600.
B. $11,875.
C. $23,750.
D. $38,000.
E. None of the above.
56. Tan Company acquires a new machine (ten-year property) on January 15, 2012, at a cost of $200,000. Tan also acquires another new machine (seven-year property) on November 5, 2012, at a cost of $40,000. No election is made to use the straight-line method. The company does not make the § 179 election. Tan takes additional first-year depreciation. Determine the total deductions in calculating taxable income related to the machines for 2012.
A. $24,000.
B. $25,716.
C. $102,000.
D. $132,858.
E. None of the above.
57. James purchased a new business asset (three-year personalty) on July 23, 2012, at a cost of $40,000. James takes additional first-year depreciation Determine the cost recovery deduction for 2012.
A. $8,333.
B. $26,666.
C. $33,333.
D. $41,665.
E. None of the above.
58. Alice purchased office furniture on September 20, 2012, for $100,000. On October 10, she purchased business computers for $80,000. Alice did not elect to expense any of the assets under § 179, nor did she elect straight-line cost recovery. She did not take additional first-year depreciation. Determine the cost recovery deduction for the business assets for 2012.
A. $6,426.
B. $14,710.
C. $25,722.
D. $30,290.
E. None of the above.
59. Barry purchased a used business asset (seven-year property) on September 30, 2012, at a cost of $200,000. This is the only asset he purchased during the year. Barry did not elect to expense any of the asset under § 179, nor did he elect straight-line cost recovery. Barry sold the asset on July 17, 2013. Determine the cost recovery deduction for 2013.
A. $19,133.
B. $24,490.
C. $34,438.
D. $55,100.
E. None of the above.
60. Bonnie purchased a new business asset (five-year property) on March 10, 2012, at a cost of $30,000. She also purchased a new business asset (seven-year property) on November 20, 2012, at a cost of $13,000. Bonnie did not elect to expense either of the assets under § 179, nor did she elect straight-line cost recovery. Bonnies takes additional first-year depreciation. Determine the cost recovery deduction for 2012 for these assets.
A. $5,858.
B. $7,464.
C. $9,586.
D. $19,429.
E. None of the above.
61. Doug purchased a new factory building on January 15, 1988, for $400,000. On March 1, 2012, the building was sold. Determine the cost recovery deduction for the year of the sale assuming he did not use the MACRS straight-line method.
A. $0.
B. $1,587.
C. $2,645.
D. $12,696.
E. None of the above.
62. Cora purchased a hotel building on May 17, 2012, for $3,000,000. Determine the cost recovery deduction for 2013.
A. $48,150.
B. $59,520.
C. $69,000.
D. $76,920.
E. None of the above.
63. Carlos purchased an apartment building on November 16, 2012, for $3,000,000. Determine the cost recovery for 2012.
A. $9,630.
B. $11,910.
C. $13,950.
D. $22,740.
E. None of the above.
64. Diane purchased a factory building on November 15, 1993, for $5,000,000. She sells the factory building on February 2, 2012. Determine the cost recovery deduction for the year of the sale.
A. $16,025.
B. $19,844.
C. $26,458.
D. $158,750.
E. None of the above.
65. Howard’s business is raising and harvesting peaches. On March 10, 2012, Howard purchased 10,000 new peach trees at a cost of $60,000. Howard does not elect to expense assets under § 179. If eligible, Howard takes additional first-year depreciation. Determine the cost recovery deduction for 2012.
A. $0.
B. $3,000.
C. $31,500.
D. $60,000.
E. None of the above.
66. On May 15, 2012, Brent purchased new farm equipment for $120,000. Brent used the equipment in connection with his farming business. Brent does not elect to expense assets under § 179. Brent does not take additional first-year depreciation. Determine the cost recovery deduction for 2012.
A. $12,852.
B. $18,000.
C. $24,000.
D. $30,000.
E. None of the above.
67. On June 1, 2012, Sam purchased new farm machinery for $150,000. Sam used the machinery in connection with his farming business. Sam does not elect to expense assets under § 179. Sam has, however, made an election to not have the uniform capitalization rules apply to the farming business. Sam does not take additional first-year depreciation. Determine the cost recovery deduction for 2012.
A. $5,000.
B. $7,500.
C. $10,000.
D. $12,500.
E. None of the above.
68. On May 30, 2012, Jane signed a 20-year lease on a factory building to use for her business. The lease begins on June 1, 2012. In August 2012, Jane paid $300,000 for qualified leasehold improvements to the building. Jane takes additional first-year depreciation. Determine Jane’s total deduction with respect to the leasehold improvements for 2012.
A. $2,890.
B. $150,000.
C. $151,445.
D. $300,000.
E. None of the above.
69. On February 20, 2012, Susan paid $200,000 for a qualified leasehold improvement to an office building that she is going to lease to John. The lease will begin on June 1, 2012, and terminate on May 31, 2022. At the termination of the lease, the improvement will be worthless. Susan did not elect to treat the leasehold improvement property as § 179 property. She does not take additional first-year depreciation. Determine Susan’s deductible loss as a result of the termination of the lease.
A. $0.
B. $123,503.
C. $127,990.
D. $128,631.
E. None of the above.
70. White Company acquires a new machine (seven-year property) on January 10, 2012, at a cost of $600,000. White makes the election to expense the maximum amount under § 179. No election is made to use the straight-line method. White does take additional first-year depreciation. Determine the total deductions in calculating taxable income related to the machine for 2012 assuming White has taxable income of $800,000.
A. $71,593.
B. $128,610.
C. $204,877.
D. $385,296.
E. None of the above.
71. Augie purchased one new asset during the year (five-year property) on November 10, 2012, at a cost of $450,000. She made the § 179 election. The income from the business before the cost recovery deduction and the § 179 deduction was $310,000. She takes additional first-year depreciation. Determine the total cost recovery deduction with respect to the asset for 2012.
A. $22,500.
B. $154,550.
C. $302,275.
D. $310,000.
E. None of the above.
72. In 2011, Gail had a § 179 deduction carryover of $25,000. In 2012, she elected § 179 for an asset acquired at a cost of $115,000. Gail’s § 179 business income limitation for 2012 is $142,000. Determine Gail’s § 179 deduction for 2012.
A. $25,000.
B. $115,000.
C. $130,000.
D. $140,000.
E. None of the above.
73. The only asset Bill purchased during 2012 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 2012.
A. $1,428.
B. $2,499.
C. $26,749.
D. $33,375.
E. None of the above.
74. Mary purchased a new five-year class asset on March 7, 2012. 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 $600,000. Mary made the § 179 election. The income from the business before the § 179 deduction was $400,000. Mary does take additional first-year depreciation. Determine the total deductions with respect to the asset for 2012.
A. $72,000.
B. $250,000.
C. $272,000.
D. $360,000.
E. None of the above.
75. Hans purchased a new passenger automobile on August 17, 2012, 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 2012.
A. $500.
B. $1,000.
C. $1,224.
D. $1,500.
E. None of the above.
76. On June 1, 2012, 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 2013.
A. $3,060.
B. $3,290.
C. $3,430.
D. $6,720.
E. None of the above.
77. On June 1, 2012, 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 take additional first-year depreciation. Determine the cost recovery deduction for 2012.
A. $1,776.
B. $1,836.
C. $6,636.
D. $8,000.
E. None of the above.
78. On May 2, 2012, 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 the cost recovery for 2012. Karen wants to maximize her deductions.
A. $2,200.
B. $3,060.
C. $25,000.
D. $27,200.
E. None of the above.
79. On July 17, 2012, Kevin places in service a used automobile that cost $25,000. The car is used 80% for business and 20% for personal use. In 2013, he used the automobile 40% for business and 60% for personal use. Determine the cost recovery recapture for 2013.
A. $0.
B. $448.
C. $2,000.
D. $2,500.
E. None of the above.
80. Janet purchased a new car on June 5, 2012, at a cost of $18,000. She used the car 80% for business and 20% for personal use in 2012. She used the automobile 40% for business and 60% for personal use in 2013. Janet takes additional first-year depreciation. Determine Janet’s cost recovery recapture for 2013.
A. $0.
B. $928.
C. $1,008.
D. $7,408.
E. None of the above.
81. On July 10, 2012, 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 2012, assuming Ariff’s
§ 179 business income is $110,000. Ariff does not take additional first-year depreciation.
A. $2,960.
B. $25,000.
C. $34,000.
D. $70,000.
E. None of the above.
82. On March 1, 2012, Lana leases and places in service a passenger automobile. The lease will run for five years and the payments are $500 per month. During 2012, she uses her car 40% for business and 60% for personal activities. Assuming the dollar amount from the IRS table is $110, determine Lana’s deduction for the lease payments.
A. $0.
B. $1,800.
C. $2,000.
D. $2,330.
E. None of the above.
83. On June 1, 2012, 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 is $241, determine Norm’s inclusion amount.
A. $0.
B. $241.
C. $907.
D. $1,687.
E. None of the above.
84. Bhaskar purchased a new factory building on September 2, 2012, for $2,000,000. He elected the alternative depreciation system (ADS). Determine the cost recovery deduction for 2013.
A. $15,000.
B. $18,000.
C. $22,000.
D. $50,000.
E. None of the above.
85. Pat purchased a used five-year class asset on March 15, 2012, for $60,000. He did not elect § 179 expensing. Determine the cost recovery deduction for 2012 for earnings and profits purposes.
A. $2,000.
B. $3,000.
C. $6,000.
D. $12,000.
E. None of the above.
86. George purchases used seven-year class property at a cost of $200,000 on April 20, 2012. Determine George’s cost recovery deduction for 2012 for alternative minimum tax purposes, assuming George does not elect § 179.
A. $2,500.
B. $10,000.
C. $14,280.
D. $28,580.
E. None of the above.
87. 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.
A. $16,667.
B. $26,667.
C. $33,333.
D. $100,000.
E. None of the above.
88. On June 1, 2012, 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 2012 for the patent.
A. $0.
B. $1,667.
C. $11,667.
D. $35,000.
E. None of the above.
89. Orange Corporation begins business on April 2, 2012. The corporation has startup expenditures of $54,000. If Orange Corporation elects § 195, determine the total amount that Orange may deduct in 2012.
A. $1,000.
B. $2,650.
C. $3,650.
D. $5,000.
E. None of the above.
90. On January 15, 2012, 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 2012 of $500,000. The percentage depletion rate is 22%. Determine Vern’s depletion deduction for 2012.
A. $150,000.
B. $175,000.
C. $176,000.
D. $200,000.
E. $250,000.
91. Tom acquired a used five-year class asset on November 5, 2012 for $20,000. This was the only asset Tom acquired in 2012. He placed the asset in service on January 20, 2013. However, because the asset was purchased in 2012, Tom deducted regular MACRS cost recovery on the asset for the year 2012. He did not elect to expense any of the asset under § 179. In 2013, Tom purchased no assets and because he had no taxable income, he did not deduct any cost recovery. In 2014, Tom sold the five-year asset on September 25th. Determine the basis of the five-year asset at the time of the sale.
92. Jim acquires a new seven-year class asset on September 20, 2012, for $80,000. He placed the asset in service on October 5, 2012. 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, 2013. This is the only asset he acquires in 2012. Determine Jim’s cost recovery in 2012 and 2013.
93. Rod paid $950,000 for a new warehouse on April 14, 2012. He sold the warehouse on September 29, 2017. Determine the cost recovery deduction for 2012 and 2017.
94. On March 3, 2012, Sally purchased and placed in service a building costing $12,000,000. The building has 10 floors. The bottom three floors are rented out to businesses. The top seven floors are residential apartments. The gross rents from the businesses are $60,000 and the gross rents from the apartments are $110,000. Determine Sally’s cost recovery for the building in 2012.
95. Sid bought a new $410,000 seven-year class asset on August 2, 2012. On December 2, 2012, he purchased $160,000 of used five-year class assets. Sid does take additional first-year depreciation if available. If Sid elects § 179, what is the maximum write-off for these purchases for 2012?
96. Polly purchased a new hotel on July 20, 2012, for $6,000,000. On January 20, 2019, the building was sold. Determine the cost recovery deduction for the year of the sale.
97. Rustin bought used 7-year class property on May 15, 2012, for $370,000. Rustin elects § 179 and straight-line cost recovery. Rustin’s taxable income would not create a limitation for purposes of the § 179 deduction. Rustin does not take additional first-year depreciation. Determine the write-off Rustin can take in 2012.
98. Audra acquires the following new five-year class property in 2012:
Audra elects § 179 for Asset C. Audra’s taxable income from her business would not create a limitation for purposes of the § 179 deduction. Audra takes additional first-year depreciation. Determine her total cost recovery deduction (including the § 179 deduction) for the year.
99. On April 5, 2012, Orange Corporation purchased, and placed in service, seven-year class assets costing $500,000 and five-year class assets costing $140,000. Orange elects to expense the maximum amount under § 179. Orange does not take additional first-year depreciation. Assume taxable income is not a limitation. Determine Orange Corporation’s cost recovery with respect to the assets for 2012.
100. On February 15, 2012, Martin signed a 20-year lease on a commercial building. In March 2012, Martin purchased and placed in service new seven-year class assets costing $400,000. In June 2012, Martin paid $200,000 for qualified leasehold real property improvements. Martin desires to take the maximum cost recovery deduction with respect to the assets in 2012. He takes additional first-year depreciation. Assuming taxable income is not a limitation, determine Martin’s maximum cost recovery for 2012.
101. On February 21, 2012, Joe purchased new farm equipment for $600,000. Joe has made an election to not have the uniform capitalization rules apply to his farming business. He does not take additional first-year depreciation. If Joe elects § 179, what is the maximum write-off for this purchase for 2012?
102. On April 15, 2012, Sam placed in service a storage facility (a single-purpose agricultural structure) costing $80,000. Sam also purchased and planted fruit trees costing $40,000. Sam does not elect to expense any of the acquisitions under § 179. Sam elected not to take additional first-year depreciation. Determine Sam’s cost recovery from these two items for 2012.
103. On August 20, 2011, May signed a 10-year lease on a building for her business. On November 28, 2012, May paid $80,000 for a qualified leasehold improvement to the building. She takes additional first-year depreciation. What is May’s cost recovery deduction for the improvement in 2012?
104. On July 15, 2012, Mavis paid $275,000 for exterior leasehold improvements on a commercial building she was leasing. Determine the total cost recovery from the improvements in 2012. Mavis elected not to take additional first-year depreciation.
105. Joe purchased a new five-year class asset on June 1, 2012. The asset is listed property (not an automobile). It was used 55% for business and 45% for the production of income. The asset cost $1,000,000. Joe made the § 179 election. Joe’s taxable income would not create a limitation for purposes of the § 179 deduction. Joe does not take additional first-year depreciation. Determine Joe’s total cost recovery (including the § 179 deduction) for the year.
106. Nora purchased a new automobile on July 20, 2012, for $29,000. The car was used 60% for business and 40% for personal use. In 2013, the car was used 30% for business and 70% for personal use. Nora elects not to take additional first-year depreciation. Determine the cost recovery recapture and the cost recovery deduction for 2013.
107. Norm purchases a new sports utility vehicle (SUV) on October 12, 2012, for $50,000. The SUV has a gross vehicle weight of 6,200 lbs. It is used 100% of the time for business and it is the only business asset acquired by Norm during 2012. Compute the maximum deduction with respect to the SUV for 2012. Norm does take additional first-year depreciation.
108. On June 1, 2012, Gabriella purchased a computer and peripheral equipment (five-year property) for $25,000. She used the assets 40% for business, 50% for the production of income, and 10% for personal use. These are the only assets Gabriella purchased during the current year. Determine her total cost recovery deduction for the current year.
109. In 2012, Marci is considering starting a new business. Marci had the following costs associated with this venture:
Marci started the new business on October 1, 2012. Determine the deduction for Marci’s startup costs for 2012.
110. Rick purchased a uranium interest for $10,000,000 on January 3, 2012, when recoverable reserves were estimated at 200,000 units. A total of 10,000 units were extracted in 2012 and 7,000 units were sold in 2012. Gross income from the property was $2,800,000 and taxable income without the allowance for depletion was $1,000,000. Determine the depletion deduction for 2012.
112. Discuss the criteria used to determine whether a building is residential or nonresidential realty. Also explain the tax consequences resulting from this determination if the property is placed in service in 2012.
113. Discuss the effect on the cost recovery method of a taxpayer election if the uniform capitalization rules apply to a farming business.
114. Discuss the tax consequences of listed property being used for the production of income compared to being used in a trade or business.
115. Discuss the beneficial tax consequences of an SUV not being classified as a passenger automobile.
116. Discuss the reason for the inclusion amount with respect to leased automobiles.
117. Discuss the requirements in order for startup expenditures to be amortized under § 195.
1. The concept of depreciation assumes that the asset has a determinable useful life.
TRUE
2. The basis of cost recovery property must be reduced by the cost recovery allowed.
FALSE
3. Antiques may be eligible for cost recovery if they are used in a trade or business.
FALSE
4. The key date for calculating cost recovery is the date the asset is placed in service.
TRUE
5. Land improvements are generally not eligible for cost recovery.
FALSE
6. The cost recovery basis for property converted from personal use to business use may be the fair market value of the property at the time of the conversion.
TRUE
7. The maximum cost recovery method for all personal property under MACRS is 150% declining balance.
FALSE
8. If 150% declining-balance is used, there is no straight-line switchover.
FALSE
9. All personal property placed in service in 2012 and used in a trade or business qualifies for additional first-year depreciation.
FALSE 10. If more than 40% of the value of property, other than real property, is placed in service during the last quarter, all of the property will be allowed 1.5 months of cost recovery.
FALSE 11. Under MACRS, if the mid-quarter convention is applicable, all property sold is treated as being sold at the mid-point of the quarter in which it is placed in service.
FALSE 12. All eligible real estate under MACRS is permitted one-half month of cost recovery in the month of disposition.
TRUE 13. Residential rental real estate includes property where 80% or more of the net rental revenues are from nontransient dwelling units.
FALSE 14. Motel buildings are classified as residential rental real estate.
FALSE 15. Taxpayers may elect to use the straight-line method under MACRS for personalty. TRUE 16. Under the MACRS straight-line election for personalty, the mid-quarter convention is applicable.
TRUE 17. The cost recovery period for new farm equipment placed in service during 2012 is seven years. TRUE
18. In a farming business, MACRS straight-line cost recovery is required for all fruit bearing trees.
TRUE 19. In a farming business, if the uniform capitalization rules are not used, cost is recovered using the ADS straight-line method.
TRUE
20. When lessor owned leasehold improvements are abandoned because of the termination of the lease, a loss can be taken for the unrecovered basis.
TRUE
21. The costs of qualified leasehold improvements qualify for additional first-year depreciation.
TRUE
22. For personal property placed in service in 2012, the § 179 maximum deduction is limited to $139,000.
TRUE
23. The § 179 deduction can exceed $139,000 in 2012 if the taxpayer had a § 179 amount which exceeded the taxable income limitation in the prior year.
FALSE 24. Any § 179 expense amount that is carried forward is subject to the business income limitation in the carryforward year.
TRUE
25. Taxable income for purposes of § 179 limited expensing is computed by including the MACRS deduction.
TRUE
26. The basis of an asset on which $139,000 has been expensed under § 179 will be reduced by $139,000, even if $139,000 cannot be expensed in the current year because of the taxable income limitation.
TRUE
27. Property used for the production of income is not eligible for § 179 expensing.
TRUE 28. The statutory dollar cost recovery limits under § 280F do not apply to all automobiles.
TRUE 29. The § 179 limit for a sports utility vehicle with a GVW of 7,000 pounds used for the production of income is $25,000.
FALSE 30. Once the more-than-50% business usage test is passed for listed property, it does matter if the business usage for the property drops to 50% or less during the recovery period.
TRUE 31. If a new car that is used predominantly in business is placed in service in 2012, the statutory dollar cost recovery limit under § 280F will depend on whether the taxpayer takes MACRS or straight-line depreciation.
FALSE 32. If an automobile is placed in service in 2012, the limitation for cost recovery in 2014 will be based on the cost recovery limits for the year 2012.
TRUE 33. The statutory dollar cost recovery limits under § 280F for passenger automobiles still apply if mid-quarter cost recovery is used.
TRUE 34. If a used $15,000 automobile used 100% for business in the first year (2012) fails the 50% business usage test in the second year, no cost recovery will be recaptured.
FALSE 35. The inclusion amount for a leased automobile is adjusted by a business usage percentage.
36. All listed property is subject to the substantiation requirements of § 274.
TRUE 37. If a taxpayer uses regular MACRS for all property, an alternative minimum tax adjustment is made with respect to the depreciation on all property, regardless of the class life.
FALSE 38. MACRS depreciation is used to compute earnings and profits.
FALSE 39. Under the alternative depreciation system (ADS), the half-year convention must be used for personalty.
FALSE 40. A taxpayer may elect to use the alternative depreciation system (ADS) on property used predominantly outside the United States.
FALSE 41. An election to use straight-line under ADS is made on an asset-by-asset basis for property other than eligible real estate.
FALSE 42. For real property, the ADS convention is the mid-month convention.
TRUE 43. The cost of a covenant not to complete for 20 years incurred in connection with the acquisition of a business is amortized over 20 years.
FALSE 44. Goodwill associated with the acquisition of a business cannot be amortized.
FALSE
45. A purchased trademark is a § 197 intangible.
TRUE
46. If startup expenses total $53,000 in 2012, $51,000 is amortized over 180 months.
TRUE
47. The amortization period in 2012 for $4,000 of startup expenses if no election is made is 180 months.
FALSE
48. Cost depletion is determined by multiplying the depletion cost per unit by the number of units sold.
TRUE
49. Percentage depletion enables the taxpayer to recover more than the cost of an asset.
TRUE
50. Intangible drilling costs may be expensed rather than capitalized and written off through depletion.
TRUE
51. Grape Corporation purchased a machine in December of the current year. This was the only asset purchased during the current year. The machine was placed in service in January of the following year. No assets were purchased in the following year. Grape Corporation’s cost recovery would begin:
A. In the current year using a mid-quarter convention.
B. In the current year using a half-year convention.
C. In the following year using a mid-quarter convention.
D. In the following year using a half-year convention.
E. None of the above.
52. Which of the following assets would be subject to cost recovery?
A. A painting by Picasso hanging on a doctor’s office wall.
B. An antique vase in a doctor’s waiting room.
C. Stock in the doctor’s LLC.
D. a., b., and c.
E. None of the above.
53. On June 1 of the current year, Tab converted a machine from personal use to rental property. At the time of the conversion, the machine was worth $90,000. Five years ago Tab purchased the machine for $120,000. The machine is still encumbered by a $50,000 mortgage. What is the basis of the machine for cost recovery?
A. $70,000.
B. $90,000.
C. $120,000.
D. $140,000.
E. None of the above.
54. Tara purchased a machine for $40,000 to be used in her business. The cost recovery allowed and allowable for the three years the machine was used are as follows:
If Tara sells the machine after three years for $15,000, how much gain should she recognize?
A. $3,480.
B. $6,360.
C. $9,240.
D. $11,480.
E. None of the above.
55. Hazel purchased a new business asset (five-year asset) on September 30, 2012, at a cost of $100,000. On October 4, 2012, Hazel placed the asset in service. This was the only asset Hazel placed in service in 2012. The only election with respect to the asset was not to take § 179. On August 20, 2013, Hazel sold the asset. Determine the cost recovery for 2013 for the asset.
A. $9,600.
B. $11,875.
C. $23,750.
D. $38,000.
E. None of the above.
56. Tan Company acquires a new machine (ten-year property) on January 15, 2012, at a cost of $200,000. Tan also acquires another new machine (seven-year property) on November 5, 2012, at a cost of $40,000. No election is made to use the straight-line method. The company does not make the § 179 election. Tan takes additional first-year depreciation. Determine the total deductions in calculating taxable income related to the machines for 2012.
A. $24,000.
B. $25,716.
C. $102,000.
D. $132,858.
E. None of the above.
57. James purchased a new business asset (three-year personalty) on July 23, 2012, at a cost of $40,000. James takes additional first-year depreciation Determine the cost recovery deduction for 2012.
A. $8,333.
B. $26,666.
C. $33,333.
D. $41,665.
E. None of the above.
58. Alice purchased office furniture on September 20, 2012, for $100,000. On October 10, she purchased business computers for $80,000. Alice did not elect to expense any of the assets under § 179, nor did she elect straight-line cost recovery. She did not take additional first-year depreciation. Determine the cost recovery deduction for the business assets for 2012.
A. $6,426.
B. $14,710.
C. $25,722.
D. $30,290.
E. None of the above.
59. Barry purchased a used business asset (seven-year property) on September 30, 2012, at a cost of $200,000. This is the only asset he purchased during the year. Barry did not elect to expense any of the asset under § 179, nor did he elect straight-line cost recovery. Barry sold the asset on July 17, 2013. Determine the cost recovery deduction for 2013.
A. $19,133.
B. $24,490.
C. $34,438.
D. $55,100.
E. None of the above.
60. Bonnie purchased a new business asset (five-year property) on March 10, 2012, at a cost of $30,000. She also purchased a new business asset (seven-year property) on November 20, 2012, at a cost of $13,000. Bonnie did not elect to expense either of the assets under § 179, nor did she elect straight-line cost recovery. Bonnies takes additional first-year depreciation. Determine the cost recovery deduction for 2012 for these assets.
A. $5,858.
B. $7,464.
C. $9,586.
D. $19,429.
E. None of the above.
61. Doug purchased a new factory building on January 15, 1988, for $400,000. On March 1, 2012, the building was sold. Determine the cost recovery deduction for the year of the sale assuming he did not use the MACRS straight-line method.
A. $0.
B. $1,587.
C. $2,645.
D. $12,696.
E. None of the above.
62. Cora purchased a hotel building on May 17, 2012, for $3,000,000. Determine the cost recovery deduction for 2013.
A. $48,150.
B. $59,520.
C. $69,000.
D. $76,920.
E. None of the above.
63. Carlos purchased an apartment building on November 16, 2012, for $3,000,000. Determine the cost recovery for 2012.
A. $9,630.
B. $11,910.
C. $13,950.
D. $22,740.
E. None of the above.
64. Diane purchased a factory building on November 15, 1993, for $5,000,000. She sells the factory building on February 2, 2012. Determine the cost recovery deduction for the year of the sale.
A. $16,025.
B. $19,844.
C. $26,458.
D. $158,750.
E. None of the above.
65. Howard’s business is raising and harvesting peaches. On March 10, 2012, Howard purchased 10,000 new peach trees at a cost of $60,000. Howard does not elect to expense assets under § 179. If eligible, Howard takes additional first-year depreciation. Determine the cost recovery deduction for 2012.
A. $0.
B. $3,000.
C. $31,500.
D. $60,000.
E. None of the above.
66. On May 15, 2012, Brent purchased new farm equipment for $120,000. Brent used the equipment in connection with his farming business. Brent does not elect to expense assets under § 179. Brent does not take additional first-year depreciation. Determine the cost recovery deduction for 2012.
A. $12,852.
B. $18,000.
C. $24,000.
D. $30,000.
E. None of the above.
67. On June 1, 2012, Sam purchased new farm machinery for $150,000. Sam used the machinery in connection with his farming business. Sam does not elect to expense assets under § 179. Sam has, however, made an election to not have the uniform capitalization rules apply to the farming business. Sam does not take additional first-year depreciation. Determine the cost recovery deduction for 2012.
A. $5,000.
B. $7,500.
C. $10,000.
D. $12,500.
E. None of the above.
68. On May 30, 2012, Jane signed a 20-year lease on a factory building to use for her business. The lease begins on June 1, 2012. In August 2012, Jane paid $300,000 for qualified leasehold improvements to the building. Jane takes additional first-year depreciation. Determine Jane’s total deduction with respect to the leasehold improvements for 2012.
A. $2,890.
B. $150,000.
C. $151,445.
D. $300,000.
E. None of the above.
69. On February 20, 2012, Susan paid $200,000 for a qualified leasehold improvement to an office building that she is going to lease to John. The lease will begin on June 1, 2012, and terminate on May 31, 2022. At the termination of the lease, the improvement will be worthless. Susan did not elect to treat the leasehold improvement property as § 179 property. She does not take additional first-year depreciation. Determine Susan’s deductible loss as a result of the termination of the lease.
A. $0.
B. $123,503.
C. $127,990.
D. $128,631.
E. None of the above.
70. White Company acquires a new machine (seven-year property) on January 10, 2012, at a cost of $600,000. White makes the election to expense the maximum amount under § 179. No election is made to use the straight-line method. White does take additional first-year depreciation. Determine the total deductions in calculating taxable income related to the machine for 2012 assuming White has taxable income of $800,000.
A. $71,593.
B. $128,610.
C. $204,877.
D. $385,296.
E. None of the above.
71. Augie purchased one new asset during the year (five-year property) on November 10, 2012, at a cost of $450,000. She made the § 179 election. The income from the business before the cost recovery deduction and the § 179 deduction was $310,000. She takes additional first-year depreciation. Determine the total cost recovery deduction with respect to the asset for 2012.
A. $22,500.
B. $154,550.
C. $302,275.
D. $310,000.
E. None of the above.
72. In 2011, Gail had a § 179 deduction carryover of $25,000. In 2012, she elected § 179 for an asset acquired at a cost of $115,000. Gail’s § 179 business income limitation for 2012 is $142,000. Determine Gail’s § 179 deduction for 2012.
A. $25,000.
B. $115,000.
C. $130,000.
D. $140,000.
E. None of the above.
73. The only asset Bill purchased during 2012 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 2012.
A. $1,428.
B. $2,499.
C. $26,749.
D. $33,375.
E. None of the above.
74. Mary purchased a new five-year class asset on March 7, 2012. 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 $600,000. Mary made the § 179 election. The income from the business before the § 179 deduction was $400,000. Mary does take additional first-year depreciation. Determine the total deductions with respect to the asset for 2012.
A. $72,000.
B. $250,000.
C. $272,000.
D. $360,000.
E. None of the above.
75. Hans purchased a new passenger automobile on August 17, 2012, 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 2012.
A. $500.
B. $1,000.
C. $1,224.
D. $1,500.
E. None of the above.
76. On June 1, 2012, 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 2013.
A. $3,060.
B. $3,290.
C. $3,430.
D. $6,720.
E. None of the above.
77. On June 1, 2012, 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 take additional first-year depreciation. Determine the cost recovery deduction for 2012.
A. $1,776.
B. $1,836.
C. $6,636.
D. $8,000.
E. None of the above.
78. On May 2, 2012, 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 the cost recovery for 2012. Karen wants to maximize her deductions.
A. $2,200.
B. $3,060.
C. $25,000.
D. $27,200.
E. None of the above.
79. On July 17, 2012, Kevin places in service a used automobile that cost $25,000. The car is used 80% for business and 20% for personal use. In 2013, he used the automobile 40% for business and 60% for personal use. Determine the cost recovery recapture for 2013.
A. $0.
B. $448.
C. $2,000.
D. $2,500.
E. None of the above.
80. Janet purchased a new car on June 5, 2012, at a cost of $18,000. She used the car 80% for business and 20% for personal use in 2012. She used the automobile 40% for business and 60% for personal use in 2013. Janet takes additional first-year depreciation. Determine Janet’s cost recovery recapture for 2013.
A. $0.
B. $928.
C. $1,008.
D. $7,408.
E. None of the above.
81. On July 10, 2012, 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 2012, assuming Ariff’s
§ 179 business income is $110,000. Ariff does not take additional first-year depreciation.
A. $2,960.
B. $25,000.
C. $34,000.
D. $70,000.
E. None of the above.
82. On March 1, 2012, Lana leases and places in service a passenger automobile. The lease will run for five years and the payments are $500 per month. During 2012, she uses her car 40% for business and 60% for personal activities. Assuming the dollar amount from the IRS table is $110, determine Lana’s deduction for the lease payments.
A. $0.
B. $1,800.
C. $2,000.
D. $2,330.
E. None of the above.
83. On June 1, 2012, 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 is $241, determine Norm’s inclusion amount.
A. $0.
B. $241.
C. $907.
D. $1,687.
E. None of the above.
84. Bhaskar purchased a new factory building on September 2, 2012, for $2,000,000. He elected the alternative depreciation system (ADS). Determine the cost recovery deduction for 2013.
A. $15,000.
B. $18,000.
C. $22,000.
D. $50,000.
E None of the above.
85. Pat purchased a used five-year class asset on March 15, 2012, for $60,000. He did not elect § 179 expensing. Determine the cost recovery deduction for 2012 for earnings and profits purposes.
A. $2,000.
B. $3,000.
C. $6,000.
D. $12,000.
E. None of the above.
86. George purchases used seven-year class property at a cost of $200,000 on April 20, 2012. Determine George’s cost recovery deduction for 2012 for alternative minimum tax purposes, assuming George does not elect § 179.
A. $2,500.
B. $10,000.
C. $14,280.
D. $28,580.
E. None of the above.
87. 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.
A. $16,667.
B. $26,667.
C. $33,333.
D. $100,000.
E. None of the above.
88. On June 1, 2012, 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 2012 for the patent.
A. $0.
B. $1,667.
C. $11,667.
D. $35,000.
E. None of the above.
89. Orange Corporation begins business on April 2, 2012. The corporation has startup expenditures of $54,000. If Orange Corporation elects § 195, determine the total amount that Orange may deduct in 2012.
A. $1,000.
B. $2,650.
C. $3,650.
D. $5,000.
E. None of the above.
90. On January 15, 2012, 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 2012 of $500,000. The percentage depletion rate is 22%. Determine Vern’s depletion deduction for 2012.
A. $150,000.
B. $175,000.
C. $176,000.
D. $200,000.
E. $250,000.
91. Tom acquired a used five-year class asset on November 5, 2012 for $20,000. This was the only asset Tom acquired in 2012. He placed the asset in service on January 20, 2013. However, because the asset was purchased in 2012, Tom deducted regular MACRS cost recovery on the asset for the year 2012. He did not elect to expense any of the asset under § 179. In 2013, Tom purchased no assets and because he had no taxable income, he did not deduct any cost recovery. In 2014, Tom sold the five-year asset on September 25th. Determine the basis of the five-year asset at the time of the sale.
The cost of the asset must be reduced by the greater of the cost recovery allowed or allowable in calculating the basis.
92. Jim acquires a new seven-year class asset on September 20, 2012, for $80,000. He placed the asset in service on October 5, 2012. 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, 2013. This is the only asset he acquires in 2012. Determine Jim’s cost recovery in 2012 and 2013.
The mid-quarter convention applies.
93. Rod paid $950,000 for a new warehouse on April 14, 2012. He sold the warehouse on September 29, 2017. Determine the cost recovery deduction for 2012 and 2017.
2012: $950,000 ´ .01819 = $17,281.
2017: $950,000 ´ .02564 ´ 8.5/12 = $17,254.
94. On March 3, 2012, Sally purchased and placed in service a building costing $12,000,000. The building has 10 floors. The bottom three floors are rented out to businesses. The top seven floors are residential apartments. The gross rents from the businesses are $60,000 and the gross rents from the apartments are $110,000. Determine Sally’s cost recovery for the building in 2012.
The gross rents from the apartments are not 80% or more of the total gross rents and hence, the whole building cannot be treated as residential rental real estate.
95. Sid bought a new $410,000 seven-year class asset on August 2, 2012. On December 2, 2012, he purchased $160,000 of used five-year class assets. Sid does take additional first-year depreciation if available. If Sid elects § 179, what is the maximum write-off for these purchases for 2012?
Using § 179 on the used 5-year asset produces the greater total deduction in 2012.
96. Polly purchased a new hotel on July 20, 2012, for $6,000,000. On January 20, 2019, the building was sold. Determine the cost recovery deduction for the year of the sale.
$6,000,000 ´ .02564 ´ .5/12 = $6,410.
97. Rustin bought used 7-year class property on May 15, 2012, for $370,000. Rustin elects § 179 and straight-line cost recovery. Rustin’s taxable income would not create a limitation for purposes of the § 179 deduction. Rustin does not take additional first-year depreciation. Determine the write-off Rustin can take in 2012.
98. Audra acquires the following new five-year class property in 2012:
Audra elects § 179 for Asset C. Audra’s taxable income from her business would not create a limitation for purposes of the § 179 deduction. Audra takes additional first-year depreciation. Determine her total cost recovery deduction (including the § 179 deduction) for the year.
$450,000/$626,000 = 71.9%. Therefore, Audra must use the mid-quarter convention.
99. On April 5, 2012, Orange Corporation purchased, and placed in service, seven-year class assets costing $500,000 and five-year class assets costing $140,000. Orange elects to expense the maximum amount under § 179. Orange does not take additional first-year depreciation. Assume taxable income is not a limitation. Determine Orange Corporation’s cost recovery with respect to the assets for 2012.
100. On February 15, 2012, Martin signed a 20-year lease on a commercial building. In March 2012, Martin purchased and placed in service new seven-year class assets costing $400,000. In June 2012, Martin paid $200,000 for qualified leasehold real property improvements. Martin desires to take the maximum cost recovery deduction with respect to the assets in 2012. He takes additional first-year depreciation. Assuming taxable income is not a limitation, determine Martin’s maximum cost recovery for 2012.
101. On February 21, 2012, Joe purchased new farm equipment for $600,000. Joe has made an election to not have the uniform capitalization rules apply to his farming business. He does not take additional first-year depreciation. If Joe elects § 179, what is the maximum write-off for this purchase for 2012?
102. On April 15, 2012, Sam placed in service a storage facility (a single-purpose agricultural structure) costing $80,000. Sam also purchased and planted fruit trees costing $40,000. Sam does not elect to expense any of the acquisitions under § 179. Sam elected not to take additional first-year depreciation. Determine Sam’s cost recovery from these two items for 2012.
103. On August 20, 2011, May signed a 10-year lease on a building for her business. On November 28, 2012, May paid $80,000 for a qualified leasehold improvement to the building. She takes additional first-year depreciation. What is May’s cost recovery deduction for the improvement in 2012?
104. On July 15, 2012, Mavis paid $275,000 for exterior leasehold improvements on a commercial building she was leasing. Determine the total cost recovery from the improvements in 2012. Mavis elected not to take additional first-year depreciation.
105. Joe purchased a new five-year class asset on June 1, 2012. The asset is listed property (not an automobile). It was used 55% for business and 45% for the production of income. The asset cost $1,000,000. Joe made the § 179 election. Joe’s taxable income would not create a limitation for purposes of the § 179 deduction. Joe does not take additional first-year depreciation. Determine Joe’s total cost recovery (including the § 179 deduction) for the year.
$550,000 ($1,000,000 ´ 55%)
$450,000 ($1,000,000 ´ 45%)
*Property used for the production of income is not eligible for § 179 expensing.