I:10 Chapter Depreciation, Cost Recovery, Amortization and Depletion True-False
I:10-1. The MACRS system applies to property acquired after December 31, 1986. T, p. I:10-2. I:10-2. Most of the property depreciated under the original ACRS system is now fully depreciated. T, p. I:10-2. I:10-3. Recovery property includes business, investment, and personal-use assets. F, p. I:10-2. Solution: Recovery property does not include personal-use assets. I:10-4. All land must be depreciated over a 39-year recovery period. F, p. I:10-3. Solution: No depreciation is permitted for land. I:10-5. In order for an asset to be depreciated in the year of purchase, it must be placed in service before years end. T, p. I:10-3.
I:10-6. The basis of an asset must be reduced by the depreciation allowed or allowable. T, p. I:10-3. I:10-7. Land, buildings, equipment, and stock are examples of tangible property. F, p. I:10-3. Solution: Stock is intangible property. I:10-8. Personal property is any property, tangible or intangible, used by the taxpayer for his own personal use rather than in a trade or business. F, p. I:10-3. Solution: Personal property is tangible property other than real property. I:10-9. If personal-use property is converted to trade or business use, the basis for depreciation is the lesser of adjusted basis or FMV on the date of conversion. T, p. I:10-4. I:10-10. Under the MACRS rules, salvage value is not considered in the computation of the cost-recovery or depreciation amount. T, p. I:10-4.
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I:10-11. Under the MACRS system, depreciation rates for realty or real property must always use the mid-month convention in the year of acquisition. T, p. I:10-4. I:10-12. Under MACRS, tangible, personal property used in trade or business purchased and placed into service on March 1, 2007 should be depreciated for 10 months in 2007. F, p. I:10-4; Example I:10-3. Solution: The half-year convention, which assumes that all asset acquisitions occur at midpoint of the tax year, is used. I:10-13. MACRS recovery property includes tangible personal and real property that is used in a trade or business. T, p. I:10-5. I:10-14. Under the MACRS system, automobiles and computers are classified as seven-year property. F, p. I:10-5. Solution: Automobiles and computers are five-year property. I:10-15. In computing MACRS depreciation in the year of disposition of personal property used in a trade or business, the half-year convention must be applied to the amounts in the tables if the half-year convention was used in the year the asset was placed into service. T, p. I:10-5. I:10-16. Intangible assets are subject to MACRS depreciation. F, p. I:10-6. I:10-17. Sec. 179 allows taxpayers to immediately expense up to $112,000 (for 2007), subject to limitations, of the cost of tangible, personal property (and off the shelf computer software) purchased and placed into service in a trade or business. T, p. I:10-6. I:10-18. The Sec. 179 expensing election is available on an annual basis on property purchased during the year. T, p. I:10-6. I:10-19. In the case of a partnership, with regard to the Sec. 179 deduction, the limits apply at both the partnership and individual partner level. T, p. I:10-6. Solution: See Additional Comment. I:10-20. Personal property used in a rental activity qualifies for the Sec. 179 expensing election. F, p. I:10-7. Solution: Only property used in a trade or business qualifies.
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I:10-21. Section 179 tax benefits are recaptured if at any time an asset is converted to personal use. T, p. I:10-7. I:10-22. Any Sec. 179 deduction that is not allowed currently due to the taxable income limitation may be carried over and deductible in future years. T, p. I:10-7. I:10-23. Under the MACRS system, if the aggregate basis of all personal property placed in service during the last three months of the year exceeds 40% of the cost of all personal property placed in service during the tax year, the mid-quarter convention is required. T, p. I:10-8. I:10-24. The mid-quarter convention applies to personal and real property. F, p. I:10-8. Solution: The mid-quarter convention does not apply to real property. I:10-25. Under the MACRS system, the same convention that applies in the year of acquisition (e.g., half-year, mid-quarter, or mid-month) also applies in the year of disposition. T, p. I:10-9. I:10-26. The MACRS system requires that residential real property and non-residential real property be depreciated using the straight-line method. T, p. I:10-10. I:10-27. Capital improvements to real property must be depreciated over the remaining life of the property on which the improvements were made. F, p. I:10-10. Solution: Capital improvements are depreciated over the full life of the improvement. I:10-28. Residential rental property is defined as property from which more than 80% of the gross rental income is rental income from dwelling units. T, p. I:10-10.
I:10-29. Expenditures that enlarge a building, any elevator or escalator, any structural component that benefits a common area or the internal structural framework are not considered qualified leasehold improvement property. T, p. I:10-10. I:10-30. Qualified leasehold property may be depreciated over 15 years. T, p. I:10-11. I:10-31. The straight-line method may be elected for depreciating tangible personal property placed in service after 1986. T, p. I:10-11. I:10-32. The election to use ADS is made on a year-by-year, property-class by property-class basis for personal property. T, p. I:10-11. I:10-33. If the business use of listed property is 50% or less of the total usage, the alternative depreciation system must be used. T, p. I:10-12. I:10-34. If the business use of listed property decreases to 50% or less of the total usage, the I:TB10-3
property is subject to depreciation recapture. T, p. I:10-13. I:10-35. Once the business use of listed property falls to 50% or below, the alternative depreciation system must be used for the current year and all subsequent years, even if the business use percentage increases to more than 50% in a subsequent year. T, p. I:1013. I:10-36. If a luxury automobile is used 100% for business, the maximum MACRS depreciation in the first year it is placed into service is $2,960. T, p. I:10-14. I:10-37. If an SUV weighs more than 6,000 pounds, the passenger automobile rules do not apply. T, p. I:10-16. I:10-38. When a taxpayer leases an automobile; the deduction for the lease payment is offset by the inclusion in income of an amount from an IRS table. T, p. I:10-17. I:10-39. If a company acquires goodwill in connection with the acquisition of a business; the goodwill is amortizable over a 60-month period. F, p. I:10-19. Solution: Goodwill is amortizable over a 15-year period. I:10-40. Amounts paid in connection with the acquisition of a business which represent a covenant not to compete are amortizable over the lesser of the covenant's remaining life or 15 years. F, p. I:10-19. Solution: The covenant must be amortized over 15 years. I:10-41. Unless an election is made to expense or defer and amortize research and experimental expenditures, these costs must be capitalized. T, p. I:10-20. I:10-42. Most taxpayers elect to expense R&E expenditures because of the immediate tax benefit. T, p. I:10-21. I:10-43. Off the shelf computer software purchased and placed in service after December 31, 2002, is considered qualified property under Sec. 179. T, p. I:10-22. I:10-44. Computer software that is leased or licensed for use in the taxpayers trade or business generally is deductible in full in the year paid. T, p. I:10-22.
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I:10-45. Taxpayers are entitled to a depletion deduction if they have an economic interest in the property. T, p. I:10-23. I:10-46. Once cost depletion is used, it must be used in all subsequent years. F, p. I:10-23. I:10-47. Intangible drilling and development costs (IDCs) may be deducted as an expense or may be capitalized. T, p. I:10-24.
Multiple Choice
I:10-48. Joan bought a business machine for $10,000 on January 1, 2000, and later sold the machine for $7,800 when the total allowable depreciation is $3,500. The depreciation actually taken on the tax returns totaled $3,000. Joan must recognize a gain (or loss) of a. no gain or loss. b. (3,200). c. $800. d. $1,300. d, p. I:10-3; Example I:10-1. Solution: Selling Price (Amount Realized) Cost Minus: Depreciation allowed or allowable Equals: Adjusted Basis Gain $7,800 $10,000 ( 3,500) ( 6,500) $1,300
I:10-49. In April 2007 of this year, Emma acquired a machine for $50,000 for use in her business. The machine is classified as 7-year property. Emma makes no elections with regard to the property. Emmas depreciation on the machine this year is a. $5,000. b. $7,145. c. $10,000. d. $50,000. b, p. I:10-5; Example I:10-6. Solution: $50,000 x .1429 = $7,145. I:10-50. In May 2007 of this year, Cassie acquired a machine for $20,000 to use in her business. The machine is classified as 5-year property. No election is made regarding the property. Cassie's depreciation on the machine this year is a. $2,000. b. $4,000. c. $8,000. d. $20,000. b, p. I:10-6. Solution: $20,000 x .20 = $4,000. I:10-51. On January 3, 2007, John acquired and placed into service business tools costing $5,000. The tools have a 3-year class life. No other assets were purchased during that year. The I:TB10-5
depreciation in 2010 for those tools is a. $-0-. b. $185. c. $371. d. $1,667. c, p. I:10-6. Solution: (0.0741 x $5,000) = $371 per MACRS tables. I:10-52. When depreciating 5-year property, the final year of depreciation will be year a. 3. b. 4. c. 5. d. 6. d, p. I:10-6. Solution: Because, under the half-year convention, an asset is depreciated half-year in the year it is purchased and placed into service, the last half-years depreciation extends into an additional year. I:10-53. In August of 2007, David acquires and places into service business equipment costing $200,000. The equipment is classified as 5-year recovery property. No other acquisitions are made during the year. David elects to expense the maximum amount under Sec. 179. David's total deductions for the year are a. $40,000. b. $108,000. c. $126,400. d. $148,000. c, p. I:10-7; Example I:10-7. Solution: Sec. 179 immediate expensing $112,000 MACRS depreciation: Basis for depreciation: ($200,000 cost - $112,000 Sec. 179) x .20 Total depreciation
17,600 $129,600
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I:10-54. Elaine owns an unincorporated manufacturing business. In 2007, she purchases and places in service $460,000 of qualifying five-year equipment for use in her business. Her taxable income from the business before any Sec. 179 deduction is $70,000. Elaine elects to expense the maximum under Sec. 179. Which of the following statements is true regarding the Sec. 179 election? a. Elaine can deduct $78,000 as a Sec. 179 deduction in 2007. b. Elaine can deduct $112,000 as a Sec. 179 deduction in 2007. c. Elaine can deduct $70,000 as a Sec. 179 deduction in 2007; $12,000 may be carried over to next year. d. Elaine can deduct $70,000 as a Sec. 179 deduction in 2007; $8,000 may be carried over to next year. c, p. I:10-7; Example I:10-8. Solution: Maximum Sec. 179 immediate expensing Less: Limit one ($460,000 - $430,000) Sec. 179 after Limit one Limit two: Taxable incomeSec. 179 currently allowed Sec. 179 carryover to next year $112,000 ( 30,000) $ 82,000 70,000 $ 12,000
I:10-55.Tiger Corporation, a calendar-year taxpayer, purchases and places into service machinery with a 7-year life that cost $268,000. The mid-quarter convention does not apply. Tiger elects to depreciate the maximum under Sec. 179. Tigers taxable income for the year before the Sec. 179 deduction is $150,000. What is Tigers total depreciation deductions related to this property? a. $38,297 b. $112,000 c. $134,292 d. $150,297 c, p. I:10-8; Example I:10-10. Solution: Maximum Sec. 179 deduction MACRS Depreciation [($268,000 - $112,000) x .1429] = Total depreciation $112,000 22,292 $134,292
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I:10-56. Paula owns an unincorporated manufacturing business. In 2007, she purchases and places in service $470,000 of qualifying five-year equipment for use in her business. Her taxable income from the business before any Sec. 179 deduction is $60,000. Paula elects to expense the maximum under Sec. 179. What is Paulas total deduction for 2007? a. $60,000 b. $122,000 c. $135,600 d. $183,600 b, p. I:10-8; Example I:10-10. Solution: Maximum Sec. 179 immediate expensing Less: Limit one ($470,000 - $450,000) Section 179 after Limit one Limit two: Taxable incomeSec. 179 currently allowed Section 179 carryover to next year Section 179 immediate expensing MACRS depreciation: Basis for depreciation Cost Sec. 179 deduction (including carryover) Minus: Basis to depreciate Depreciation ($378,000 x 0.20) Total deductions (60,000 + 75,600)
$112,000 ( 20,000) $ 92,000 60,000 $ 32,000 $ 60,000 $470,000 ( 92,000) $378,000 $ 75,600 $135,600
I:10-57. On October 2, 2007, David acquired and placed into service 5-year business equipment costing $50,000. No other acquisitions were made during the year and Sec. 179 expensing was not elected. The depreciation for this year is a. $0. b. $2,500. c. $5,000. d. $10,000. b, p. I:10-9. Solution: 0.05 x $50,000 = $2,500. (Mid-quarter convention).
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I:10-58. On November 3, this year, Kerry acquired and placed into service 7-year business equipment costing $50,000. In addition, on May 5th of this year, Kerry had also placed in business use 5-year recovery property costing $10,000. Kerry did not elect Sec. 179 immediate expensing. No other assets were purchased during the year. The depreciation for this year is a. $3,785. b. $4,285. c. $9,145. d. $9,645. b, p. I:10-9; Example I:10-11. Solution: Equipment placed in service in last 3 months of year: $50,000/$60,000 = 83% of all equipment; therefore, the mid-quarter convention must be used on all personal property placed in service during the year. Equipment: $50,000 x .0357 = $1,785 5-year property: $10,000 x .25 = 2,500 Total Depreciation $4,285 I:10-59. Paula bought a computer for $15,000 for business use on March 18, 2005. This was the only purchase for that year. Paula used the most accelerated depreciation method available, elected out of bonus depreciation, and did not elect Sec. 179 expensing. Paula sells the machine this year. The depreciation on the computer for this year is a. $0. b. $1,440. c. $1,500. d. $2,880. b, p. I:10-10; Example I:10-13 and Table I:10-1. Solution: [.1920 x $15,000 x year] = $1,440. I:10-60. On April 12, 2005, Suzanne bought a computer for $15,000 for business use. This was the only purchase for that year. Suzanne used the most accelerated depreciation method available and did not elect Sec. 179 expensing. Suzanne sells the machine this year (2007). The depreciation on the computer for this year is a. $1,008. b. $1,440. c. $2,016. d. $2,880. b, p. I:10-10; Table I:10-1. Solution: [0.1920 x $15,000 x year] = $1,008.
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I:10-61. Harrison acquires $50,000 of 5-year property in June 2005 that is requires to be depreciated using the mid-quarter convention (because of other purchases that year). He did not elect Sec. 179 immediate expensing. If Harrison sells the property on August 23, 2007, what is the amount of depreciation claimed in 2007? a. $4,800 b. $5,625 c. $9,000 d. $9,600 b, p. I:10-10; Example I:10-14. Solution: [$50,000 x .18 x 2.5/4] = $5,625. I:10-62. For real property placed in service after 1986, depreciation under the MACRS system is calculated using the a. straight-line method and a half-year convention in the year of acquisition and in the year 1m.; of disposition. b. straight-line method and a mid-month convention in the year of acquisition and in the year of disposition. c. 200% DB method and a mid-month convention in the year of acquisition and in the year of disposition. d. 200% DB method and a half-year convention in the year of acquisition and in the year of disposition. b, p. I:10-10. Solution: Real property is depreciated using the straight-line method and the midmonth convention. I:10-63. On August 11, 2007, Nancy acquired and placed into service residential rental property, which cost $130,000; the cost of the land has been excluded. Nancy annually elects the maximum allowed Sec. 179 depreciation. The total depreciation for the year is (rounded) a. $1,773. b. $2,125. c. $26,432. d. $108,300. a, p. I:10-10. Solution: $130,000 x .01364 = $1,773. Real property is not eligible for Sec. 179 depreciation.
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I:10-64. On May 22, 2007, Hilton Corporation made some major leasehold improvements costing $120,000. They are considered qualified leasehold improvement property. Hilton annually elects the maximum depreciation under Sec. 179. What is the amount of depreciation for 2007? a. $2,821 b. $4,000 c. $8,000 d. $110,400 b, p. I:10-11; Example I:10-17. Solution: Beginning in 2006, the Jobs Act allows qualified leasehold improvements to be depreciated over 15 years rather than 39 years. Qualified leasehold improvements do not qualify for Sec. 179 depreciation. Therefore, the total depreciation is computed as follows: $120,000/15 years x year convention = $4,000. I:10-65. All of the following are true with regard to the alternative depreciation system except a. The principal type of property for which ADS is required is any tangible property which is used predominantly outside of the United States. b. The ADS election is available to real property on a property by property basis. c. The ADS election is available to personal property on a property by property basis. d. Once the ADS election is made for specified property, it is irrevocable. c, p. I:10-11. Solution: For personal property, the ADS election applies to all property within a class. I:10-66. If the business usage of listed property is less than or equal to 50% of its total usage, depreciation is calculated using a. the regular MACRS tables. b. alternative depreciation system. c. it may not be depreciated d. regular MACRS tables and a mid-month convention. b, p. I:10-12. Solution: ADS straight-line must be used for listed property which is not used more than 50% in the trade or business.
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I:10-67. In May of 2007, Eric acquired a computer system (5 year property) for $10,000 and used the computer 80% for business and 20% for personal purposes. No election was made regarding Sec. 179. The maximum depreciation deduction for 2007 is a. $800. b. $1,000. c. $1,600. d. $2,000. c, p. I:10-12; Example I:10-19. Solution: Although the computer is listed property, since it is used more than 50% in trade or business, MACRS depreciation may be used. Depreciation is $10,000 x .20 x .80 = $1,600. Only the portion used for trade or business is depreciable. I:10-68. In May of 2007, Eric acquired a computer system (5 year property) for $10,000 and used the computer 30% for business. No election was made regarding Sec. 179. The maximum depreciation deduction for 2007 is a. $300. b. $600. c. $1,000 d. $2,000. a, p. I:10-12; Example I:10-20. Solution: Because the computer is listed property which is not used more than 50% in trade or business, ADS straight-line must be used. Depreciation is $10,000 x .10 x .30= $300. I:10-69. In August of 2007, George, a college professor, acquired a computer system (5 year property) for $5,000 and used the computer 80% for teaching and research-related activities and the remaining 20% for personal use. Because Georges employer provides him with a computer in his office at the university, the employer does not require him to have a computer at home. No election was made regarding Sec. 179. The maximum depreciation deduction for 2007 is a. $0. b. $400. c. $800. d. $1,000. a, p. I:10-13; Example I:10-21. Solution: In order for an employee to take a deduction for listed property used in employment-related activities, the property must be used more than 50% for trade or business and must be for the convenience of the employer and be required as a condition of employment. Since George is not required to purchase a computer for home, no depreciation is allowed.
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I:10-70. In April of 2006, Brandon acquired five-year listed property (not an automobile) for $30,000 and used it 70% for business. No election was made regarding Sec. 179. In 2007, his business use of the property dropped to 40%. Which of the following statements is true? a. The change does not affect Brandons previous depreciation. b. Brandon must recapture $2,100 as ordinary income. c. Brandon must recapture $4,200 as ordinary income. d. Brandon must amend the previous tax return and recompute depreciation. b, p. I:10-13; Example I:10-22. Solution: The 2006 depreciation taken was: Regular MACRS depreciation assuming 100% business use $30,000 x .20 = Total depreciation if 100% business use $6,000 Business-use percentage .70 Total depreciation at 70% business use $4,200 Depreciation under ADS straight-line:* $30,000 x .10 x .70 = 2,100 Recapture of excess depreciation in 2007 $ 2,100 *Must use ADS straight-line because the computer is listed property used 50% or less in trade or business. I:10-71. In July of 2007, Pat acquired an automobile for $20,000 and used the automobile 80% for business. No election is made regarding Sec. 179. Assuming her business use remains at 80%, Pat can take a depreciation deduction in 2008 of a. $3,840. b. $4,800. c. $5,120. d. $6,400. a, p. I:10-13. Solution: Lesser of $20,000 x .80 x .32 = $5,120 or $4,800 x .80 = $3,840.
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I:10-72. On April 1, 2007, Grace leases and places into service an automobile with a FMV of $50,000. The business use of the automobile is 60%. The inclusion amount for the initial year of the lease from the IRS tables is $175. The lease payments are $800 per month. What are the tax consequences of this lease? a. deduction for lease payments of $4,320; include $105 in income b. deduction for lease payments of $7,200; include $175 in income c. deduction for lease payments of $4,320 d. deduction for lease payment of $7,200 a, p. I:10-17; Example I:10-28. Solution: Lease payments of $800 x 9 x .60 = $4,320 are allowed. The inclusion amount is $175 x .60 = $105. I:10-73. On January 1, 2007, Charlie Corporation acquires all of the net assets of Rocky Corporation for $2,000,000. The following intangible assets are included in the purchase agreement: Assets Acquisition Cost Goodwill and going concern value $105,000 Licenses $ 45,000 Patents $ 60,000 Covenant not to compete for five years $120,000 What is the total amount of amortization allowed in 2007? a. $15,000 b. $22,000 c. $31,000 d. $38,000 b, p. I:10-19; Example I:10-30. Solution: All of the intangible assets qualify as Sec. 197 intangible assets and are amortizable over 15 years. The 15-year amortization period applies to the covenant not to compete even though the covenant is only for five years. The total is computed as follows: ($105,000 + $45,000 + $60,000 + $120,000)/15 years = $22,000. I:10-74. In accounting for research and experimental expenditures, all of the following alternatives are available with the exception of a. expense R&E costs in the year paid or incurred. b. expense R&E costs in the year in which a product or process becomes marketable. c. defer and amortize R&E costs as a ratable deduction over a period of 60 months or more. d. capitalize and write off R&E costs only when the research project is abandoned or is worthless. b, p. I:10-20. Solution: In the year paid or incurred, the expenditures may be expensed, capitalized and amortized over 60 months, or capitalized.
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I:10-75. Costs that qualify as research and experimental expenditures include all of the following except a. depreciation of laboratory equipment. b. management studies. c. costs incurred in developing product improvements. d. costs of obtaining a patent such as attorney fees. b, p. I:10-20; Table I:10-4. Solution: See Management studies are specifically listed as items that do not qualify. I:10-76. This year Bauer Corporation incurs the following costs in development of new products: Laboratory supplies $ 55,000 Laboratory equipment purchased 50,000 (5-year recovery property) Salaries (lab personnel) 90,000 Utilities 20,000 Total $215,000 No benefits are realized from the research expenditures until next year. If Bauer Corporation elects to expense the research expenditures, the deduction is a. $10,000 this year and $175,000 next year. b. $175,000 next year. c. $175,000 this year. d. $215,000 this year. c, p. I:10-21; Example I:10-33. Solution: Deductible costs include: Laboratory supplies Laboratory equipment 10,000 Salaries Utilities Total $175,000 I:10-77. In calculating depletion of natural resources each period, a. cost depletion must be used. b. percentage depletion must be used. c. the greater of cost depletion or percentage depletion must be used. d. the smaller of cost depletion or percentage depletion must be used. c, p. I:10-23. Solution: The method that is used in any year is the one that results in the largest deduction. 90,000 20,000
($50,000
x
$ 55,000 0.20)
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I:10-78. Patrick acquires an oil and gas property interest for $300,000. Patrick expects to recover 50,000 barrels of oil. Intangible drilling and development costs are $80,000 and are charged to expense. Other expenses are $20,000. During the year, 13,000 barrels of oil are sold for $170,000. Patrick's depletion deduction is a. $25,500. b. $35,000. c. $70,000. d. $78,000. d, p. I:10-23; Example I:10-36. Solution: Larger of cost depletion or percentage depletion: Cost depletion = $300,000/50,000 barrels = $6 per barrel. Total Cost Depletion = $6 x 13,000 barrels = $78,000. Percentage depletion: Gross income Minus: IDCs and expenses Taxable income before depletion Limitation - Lesser of: Percentage Depletion: $170,000 x 0.15 = $25,500, or Income ceiling: ($70,000 x 100%) 70,000 The taxpayer may use the greater of cost or percentage depletion. $170,000 ( 100,000) $ 70,000
$ 25,500
Short Answer
I:10-79. Hugh purchased a car on September 15, 2007, at a cost of $30,000. Hugh used the car 100% for personal use. What is the maximum amount (including both depreciation and Sec. 179 expensing if applicable) of Hughs cost recovery deduction for 2007? Solution: None. Personal use assets may not be depreciated. p. I:10-2.
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I:10-80. Matthew Oil Company acquires a machine (seven-year property) on January 10, 2007, at a cost of $460,000. Matthew makes the election to expense the maximum amount under Sec. 179. a. Assume that the taxable income from trade or business is $500,000. What is the amount of the Sec. 179 expensing deduction for the current year? b. What is the amount of the Sec. 179 carryover to the next tax year? c. Assume instead that the taxable income from trade or business is $70,000. What is the amount of the Sec. 179 deduction allowed in the current year? d. What is the amount of the Sec. 179 carryover to the next tax year (use information in c)? e. Using the facts in c, what is the depreciation for the year? Solution: a. Section 179 ceiling: Minus: Equipment cost exceeding $450,000 Equals amount over threshold Taxable income for the year Section 179 expense (lesser of two preceding amounts) b. c. $112,000 ( 10,000) $ 102,000 $500,000 $102,000
None. There is no carryover because there was no taxable income limitation. $112,000 ( 10,000) $102,000 $ 70,000 $ 70,000
Section. 179 ceiling: Minus: Equipment cost exceeding $450,000 Equals amount over threshold Taxable income for the year Section 179 expense (lesser of two preceding amounts) d. e.
$102,000 allowable - $70,000 currently deductible = $32,000 carryover. $460,000 ( 102,000) $358,000 $ 51,158 70,000 $121,158
Basis for depreciation: Cost Section. 179 deduction Minus: Basis to depreciate Depreciation ($358,000 x 0.1429) Section 179 expense allowed Total deductions p. I:10-7.
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I:10-81. In August 2007, Marjorie acquires and places into service 7-year business equipment (tangible personal property qualifying under Sec. 179) for $128,000. This is the only asset purchased during the year; her taxable income from trade or business is $130,000. What is the maximum depreciation deduction for 2007? Solution: Section 179 immediate expensing MACRS depreciation: ($128,000 - $112,000) = $16,000 x .1429 = Total depreciation p. I:10-8; Example I:10-10. I:10-82. Gregory, a calendar-year taxpayer, acquires 5-year tangible personal property in 2007, does not elect Sec. 179, and places the property in service on the following schedule: Date placed in service January 15 May 25 November 8 What is the total depreciation for 2007? Solution: Placed in Service January 15 May 25 November 8 MACRS Depreciation $50,000 x .35 = $100,000 x .25 = $200,000 x .05 = Acquisition Cost $50,000 $100,000 $200,000 $112,000 2,286 $114,286
$17,500 $25,000 $10,000 $52,500
p. I:10-9; Example I:10-11.
I:TB10-18
I:10-83. Gregory, a calendar-year taxpayer, acquires 5-year tangible personal property in 2007 and places the property in service on the following schedule: Date placed in service Acquisition Cost January 15 $ 80,000 May 25 $200,000 November 8 $120,000 Gregory elects to expense the maximum under Sec. 179 and selects the property placed into service on November 8. Taxable income before Sec. 179 is $300,000. What is the total depreciation for 2007? Solution: Placed in Service January 15 May 25 November 8 $169,600 p. I:10-9; Example I:10-12. Sec. 179 MACRS Depreciation $80,000 x .20 = $16,000 $200,000 x .20 = $40,000 $112,000 $8,000 x .20 = $ 1,600 $112,000 + $57,600
=
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I:10-84. On June 30, 2007, Temika purchased office furniture costing $120,000 and computers with a cost of $50,000. She elects to use Sec. 179 and has business income of $200,000 without considering the Sec. 179 election. How should she allocate the Section 179 election in order to maximize her total cost recovery deductions for 2007? Solution: If Temika assigns the Sec. 179 deduction to the office furniture: Office furniture Sec. 179 Depreciation (120,000 12,000) x .1429 Total cost recovery for furniture Computers (.2 x 50,000) Total cost recovery $112,000 1,143 113,143 10,000 $123,143
If Temika assigns the Sec. 179 deduction first to the computers, then to the furniture. Computers Sec. 179 Office Furniture (112,000 50,000) Total Sec. 179 deduction Depreciation on office furniture [(120,000 62,000) x .1429] Total cost recovery $ 50,000 62,000 112,000 8,288 120,288
Temika should allocate the Sec. 179 deduction first to the office furniture to maximize her cost recovery deductions. I:10-85. During the year 2007, a calendar year taxpayer, Heavenly Hamhocks, a chain of specialty food shops, purchased equipment as follows: Date March 3 October 9 Asset Refrigerators Equipment Cost 600,000 1,200,000
Assume the property is all 5-year property. What is the maximum depreciation that may be deducted for the assets this year, 2007? Solution: The mid-quarter convention must be used because $1,200,000/$1,800,000 or 66 2/3% of the assets were purchased in the last quarter of the year. $600,000 x .35 $1,200,000 x .05 Total p. I:10-9. = = $210,000 60,000 $270,000
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I:10-86. On May 1, 2006, Empire Cosmetics, a calendar year taxpayer, purchased an apartment building for $1,000,000, of which $400,000 was allocable to the land. The corporation sold the property this year on August 23, 2007. a. What was the corporation's depreciation for the building, using statutory percentages under MACRS (SL) for 2006? b. What was the corporation's depreciation for the building, using statutory percentages under MACRS (SL) for 2007? Solution : a. $600,000 x .02273 = $13,638. p. C-7. Table 7 in Appendix C. b. $600,000 x .03636 x 7.5/12 = $13,635. p. C-7. Table 7 in Appendix C. p. I:10-10. I:10-87. In January of 2007, Ozzie Ostentatious purchased a Porsche for $150,000 to be used in his business, Tract Homes Are Us. Ozzie drove the car 80 percent of the time for business. What is the maximum amount (including both depreciation and Sec. 179 expensing if applicable) that Ozzie may deduct in 2007? Solution: Lesser of $150,000 x .80 x .20 = $24,000 or $2,960 x .80 = $2,368. p. I:10-14; Example I:10-24. I:10-88. In January 2007, Ozzie Ostentatious purchased a Ford Expedition (SUV) for $50,000 to be used 100% in his trade or business, Tract Homes are Us. What is the maximum amount (including both depreciation and Sec. 179 expensing if applicable) that Ozzie may deduct in 2007? Solution: Section 179 depreciation (maximum for SUVs) Regular MACRS [($50,000 25,000) x .20) Total for 2007 p. I:10-16; Example I:10-27. $25,000 5,000 $30,000
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Essay
I:10-89. Why would a taxpayer elect to use the alternative depreciation system rather than the MACRS rules? Solution: Use of the alternative depreciation system would be preferred if the taxpayer anticipates losses over the next few years or if the taxpayer has an NOL carryover. Use of alternative depreciation would result in lower depreciation charges, thus resulting in higher taxable income to offset anticipated losses or the NOL carryover, resulting in low taxes or no taxes. Without election of the alternative depreciation system, the NOL carryovers might be lost. Thus, the alternative method permits use of the NOL carryovers and also results in higher depreciation in later years of the asset's life when higher deductions may be preferred. p. I:10-25. I:10-90. Why would a taxpayer elect to capitalize and amortize intangible drilling costs (IDCs) rather than expense such costs? Solution: An election to expense IDCs reduces pre-depletion taxable income and thus results in a smaller percentage depletion deduction. Capitalization and amortization of such costs would generally result in a higher pre-depletion taxable income, which would result in a higher percentage depletion deduction. pp. I:10-25 and I:10-26. I:10-91. Discuss the options available regarding treatment of an amount paid in excess of the FMV of an acquired company's net assets in a business combination. Solution: Any amount paid in excess of the FMV of the acquired company's net assets may be treated as a payment for goodwill, a payment for a covenant not to compete, and/or a payment for some other type of intangible asset. The sales agreement should specify the amount of the purchase price allocated to each type of asset. Under current tax law, a wide variety of intangible assets are subject to amortization. Within reason, the purchaser should attempt to have greater amounts allocated to those assets that will provide large current depreciation or amortization deductions. Since intangibles are given a 15 year life, there will be a tendency to allocate more of the purchase price to tangible personal property. pp. I:10-26 and I:10-27.
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Issue Identification
I:10-92. Bert, a self-employed attorney, is considering either purchasing or leasing a $50,000 automobile for use in his business. What are the issues he should consider in making his decision? Solution: Bert should be aware of the fact that in addition to being considered listed property and, therefore, subject to some limitations when it comes to depreciation methods, automobiles are also subject to the luxury automobile depreciation limits. Depreciation on automobiles used more than 50% of the time for trade or business is the lesser of MACRS depreciation or a specific statutory ceiling. Depreciation on automobiles used 50% or less in trade or business is the lesser of ADS straight-line depreciation or the specific statutory ceiling. On the other hand, lease payments are fully deductible (subject to usage percentages). However, an inclusion amount obtained from an IRS table must be included in gross income. pp. I:10-13 and I:10-15.
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