The 1. concept of depreciation assumes that the asset has a determinable
useful life.
*a. True
b. False
2. The basis of cost recovery property must be reduced by the cost
recovery allowed.
a. True
*b. False
3. Antiques may be eligible for cost recovery if they are used in a
trade or business.
a. True
*b. False
4. The key date for calculating cost recovery is the date the asset is
purchased.
a. True
*b. False
5. Land improvements are generally eligible for cost recovery.
*a. True
b. False
6. The cost recovery basis for property converted from personal use to
business use is the fair market value of the property at the time of the
conversion.
a. True
*b. False
7. The cost recovery method for some personal property under MACRS is
150% declining balance.
*a. True
b. False
8. If 150% declining-balance is used, there is no straight-line
switchover.
a. True
*b. False
9. Under the MACRS mid-quarter convention, an asset sold on December 10
will be treated as though it were sold on November 15 for a calendar
year taxpayer.
*a. True
b. 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.
a. True
*b. 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.
a. True
*b. False
12. All eligible real estate under MACRS is permitted a full month of
cost recovery in the month of disposition.
a. True
*b. False
13. Residential rental real estate includes property where 80% or more
of the net rental revenues are from nontransient dwelling units.
a. True
*b. False
14. Motel buildings are classified as residential rental real estate.
a. True
*b. False
15. Taxpayers may elect to use the straight-line method under MACRS for
personalty.
*a. True
b. False
16. Under the MACRS straight-line election for personalty, the mid-
quarter convention is applicable.
*a. True
b. False
17. The cost recovery period for new farm equipment placed in service
during 2011 is seven years.
*a. True
b. False
18. In a farming business, MACRS straight-line cost recovery is required
for all fruit bearing trees.
*a. True
b. False
19. In a farming business, if the uniform capitalization rules apply,
cost is recovered using the ADS straight-line method.
a. True
*b. 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.
*a. True
b. False
21. The costs of leasehold improvements owned by the lessee on
residential rental real estate are recovered over a 27.5-year MACRS
recovery period.
*a. True
b. False
22. For all property placed in service in 2011, the 179 maximum
deduction is limited to $500,000.
a. True
*b. False
23. The 179 deduction can exceed $500,000 in 2011 if the taxpayer had
a 179 amount which exceeded the taxable income limitation in the prior
year.
a. True
*b. False
24. Any 179 expense amount that is carried forward is subject to the
business income limitation in the carryforward year.
*a. True
b. False
25. Taxable income for purposes of 179 limited expensing is computed
by including the MACRS deduction.
*a. True
b. False
26. The 179 limit of $250,000 for qualified leasehold improvement
property is in addition to the $500,000 limit for tangible personal
property.
a. True
*b. False
27. Property used for the production of income is not eligible for
179 expensing.
*a. True
b. False
28. The statutory dollar cost recovery limits under 280F do not apply
to all automobiles.
*a. True
b. 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.
a. True
*b. False
30. Once the more-than-50% business usage test is passed for listed
property, it does not matter if the business usage for the property
drops to 50% or less during the recovery period.
a. True
*b. False
31. If a new car that is used predominantly in business is placed in
service in 2011, the statutory dollar cost recovery limit under 280F
will depend on whether the taxpayer takes MACRS or straight-line
depreciation.
a. True
*b. False
32. If an automobile is placed in service in 2011, the limitation for
cost recovery in 2013 will be based on the cost recovery limits for the
year 2013.
a. True
*b. False
33. The statutory dollar cost recovery limits under 280F for
passenger automobiles still apply if mid-quarter cost recovery is used.
*a. True
b. False
34. If a used $15,000 automobile used 100% for business in the first
year (2011) fails the 50% business usage test in the second year, no
cost recovery will be recaptured.
a. True
*b. False
35. The inclusion amount for a leased automobile is adjusted by a
business usage percentage.
*a. True
b. False
36. Not all listed property is subject to the substantiation
requirements of 274.
a. True
*b. False
37. If a taxpayer uses regular MACRS for all property, an alternative
minimum tax adjustment is made with respect to the depreciation on 3,
5, 7, and 10-year property.
*a. True
b. False
38. ADS straight-line depreciation is used to compute earnings and
profits.
*a. True
b. False
39. Under the alternative depreciation system (ADS), the half-year and
mid-quarter conventions are applicable for personalty.
*a. True
b. False
40. A taxpayer may elect to use the alternative depreciation system
(ADS) on property used predominantly outside the United States.
a. True
*b. False
41. An election to use straight-line under ADS is made on a class-byclass basis for property other than eligible real estate.
*a. True
b. False
42. For real property, the ADS convention is the mid-month convention.
*a. True
b. False
43. The cost of a covenant not to complete for five years incurred in
connection with the acquisition of a business is amortized over 5 years.
a. True
*b. False
44. Goodwill associated with the acquisition of a business cannot be
amortized.
a. True
*b. False
45. A purchased trademark is a 197 intangible.
*a. True
b. False
46. If startup expenses total $50,000 in 2011, the total amount is
amortized over 180 months.
a. True
*b. False
47. The amortization period in 2011 for $4,000 of startup expenses if
no election is made is 180 months.
a. True
*b. False
48. Cost depletion is determined by multiplying the depletion cost per
unit by the number of units produced.
a. True
*b. False
49. Percentage depletion enables the taxpayer to recover only the cost
of an asset.
a. True
*b. False
50. Intangible drilling costs may be expensed rather than capitalized
and written off through depletion.
*a. True
b. 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 October of the following year. No
assets were purchased in the following year. Grape Corporations 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 doctors office wall.
b. An antique vase in a doctors waiting room.
c. Stock in the doctors 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 $70,000.
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:
Year 1
Year 2
Year 3
Cost Recovery
Allowed
$16,000
9,600
5,760
Cost Recovery
Allowable
$ 8,000
12,800
7,680
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, 2011, at a cost of $100,000. On October 4, 2011, Hazel placed the
asset in service. This was the only asset Hazel placed in service in
2011. The only election with respect to the asset was not to take
additional first-year depreciation. On August 20, 2012, Hazel sold the
asset. Determine the cost recovery for 2012 for the asset.
a. $9,600.
b. $16,000.
c. $26,000.
d. $38,000.
*e. None of the above.
56. Tan Company acquires a new machine (ten-year property) on January
15, 2011, at a cost of $200,000. Tan also acquires another new machine
(seven-year property) on November 5, 2011, 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 elects not to take additional first-year
depreciation. Determine the total deductions in calculating taxable
income related to the machines for 2011.
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, 2011, at a cost of $40,000. He did not elect to expense any of the
asset under 179, nor did he elect straight-line cost recovery. James
elects not to take additional first-year depreciation. Determine the
cost recovery deduction for 2011.
a. $8,333.
b. $16,665.
c. $33,333.
d. $41,665.
*e. None of the above.
58. Alice purchased office furniture on September 20, 2011, 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 elects not to take additional
first-year depreciation. Determine the cost recovery deduction for the
business assets for 2011.
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, 2011, 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, 2012. Determine the cost recovery deduction
for 2012.
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, 2011, at a cost of $20,000. She also purchased a new business asset
(seven-year property) on November 20, 2011, 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. Bonnie elects not to take
additional first-year depreciation. Determine the cost recovery
deduction for 2011 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, 2011, 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, 2011, for $6,000,000.
Determine the cost recovery deduction for 2012.
a. $96,300.
b. $119,040.
c. $138,000.
*d. $153,840.
e. None of the above.
63. Carlos purchased an apartment building on November 16, 2011, for
$1,000,000. Determine the cost recovery for 2011.
a. $3,210.
b. $3,970.
*c. $4,550.
d. $7,580.
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, 2011.
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. Howards business is raising and harvesting peaches. On March 10,
2011, Howard purchased 10,000 new peach trees at a cost of $60,000.
Howard does not elect to expense assets under 179. Determine the cost
recovery deduction for 2011.
a. $0.
b. $2,500.
c. $10,000.
*d. $60,000.
e. None of the above.
66. On May 15, 2011, 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 elect not to
take additional first-year depreciation. Determine the cost recovery
deduction for 2011.
*a. $12,852.
b. $18,000.
c. $24,000.
d. $30,000.
e. None of the above.
67. On June 1, 2011, 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 elect not to take additional first-year
depreciation. Determine the cost recovery deduction for 2011.
a. $5,000.
*b. $7,500.
c. $10,000.
d. $12,500.
e. None of the above.
68. On May 30, 2011, Jane signed a 20-year lease on a factory building
to use for her business. The lease begins on June 1, 2011. In August
2011, Jane paid $300,000 for qualified leasehold improvements to the
building. Jane elected to treat the qualified leasehold improvements as
179 property. Determine Janes total deduction with respect to the
leasehold improvements for 2011.
a. $2,889.
b. $250,000.
c. $250,482.
*d. $300,000.
e. None of the above.
69. On February 20, 2011, 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, 2011, and terminate on May 31, 2021. At
the termination of the lease, the improvement will be worthless. Susan
did not elect to treat the leasehold improvement property as 179
property; however, she did elect not to take additional first-year
depreciation. Determine Susans 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, 2011, at a cost of $900,000. White makes the election to
expense the maximum amount under 179. No election is made to use the
straight-line method. White does elect not to take additional first-year
depreciation. Determine the total deductions in calculating taxable
income related to the machine for 2011 assuming White has taxable
income of $800,000.
a. $64,000.
b. $128,610.
c. $257,175.
d. $500,000.
*e. None of the above.
71. Augie purchased one used asset during the year (five-year property)
on November 10, 2011, at a cost of $650,000. She made the 179
election. The income from the business before the cost recovery
deduction and the 179 deduction was $400,000. Determine the total
cost recovery deduction with respect to the asset for 2011.
a. $7,500.
b. $92,500.
c. $392,500.
d. $500,000.
*e. None of the above.
72.
she
179
179
In 2010, Gail had a 179 deduction carryover of $15,000. In 2011,
elected 179 for an asset acquired at a cost of $115,000. Gails
business income limitation for 2011 is $127,000. Determine Gails
deduction for 2011.
a. $15,000.
b. $115,000.
*c. $127,000.
d. $130,000.
e. None of the above.
73. The only asset Bill purchased during 2011 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 Bills maximum deduction with respect to the
property for 2011.
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, 2011. 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 elect not to take
additional first-year depreciation. Determine the total deductions with
respect to the asset for 2011.
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, 2011, 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
2011.
a. $500.
b. $1,000.
c. $1,224.
d. $1,500.
*e. None of the above.
76. On June 1, 2011, 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
elect not to take additional first-year depreciation. Determine the
cost recovery deduction for 2012.
a. $3,060.
b. $3,290.
*c. $3,430.
d. $6,720.
e. None of the above.
77. On June 1, 2011, 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 elect not to take additional first-year depreciation. Determine
the cost recovery deduction for 2011.
a. $1,776.
*b. $1,836.
c. $6,576.
d. $8,000.
e. None of the above.
78. On May 2, 2011, Karen placed in service a used 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 2011.
a. $2,200.
b. $3,060.
c. $25,000.
*d. $27,200.
e. None of the above.
79. On July 17, 2011, Kevin places in service a used automobile that
cost $25,000. The car is used 80% for business and 20% for personal
use. In 2012, he used the automobile 40% for business and 60% for
personal use. Determine the cost recovery recapture for 2012.
a. $0.
*b. $448.
c. $2,000.
d. $2,500.
e. None of the above.
80. purchased Janet a new car on June 5, 2011, at a cost of $18,000.
She used the car 80% for business and 20% for personal use in 2011. She
used the automobile 40% for business and 60% for personal use in 2012.
Janet elects not to take additional first-year depreciation. Determine
Janets cost recovery recapture for 2012.
a. $0.
b. $928.
*c. $1,008.
d. $1,440.
e. None of the above.
81. On July 10, 2011, 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 Ariffs maximum deduction for 2011,
assuming Ariffs 179 business income is $110,000. Ariff elects not to
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, 2011, Lana leases and places in service a passenger
automobile. The lease will run for five years and the payments are $500
per month. During 2011, she uses her car 40% for business and 60% for
personal activities. Assuming the dollar amount from the IRS table is
$110, determine Lanas 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, 2011, 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 Norms 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, 2011, for
$2,000,000. He elected the alternative depreciation system (ADS).
Determine the cost recovery deduction for 2012.
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, 2011, for
$60,000. He did not elect 179 expensing. Determine the cost recovery
deduction for 2011 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, 2011. Determine Georges cost recovery deduction
for 2011 for alternative minimum tax purposes, assuming George does not
elect 179 and the maximum cost recovery deduction is taken for regular
income tax purposes.
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, 2011, 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
five years. Determine the total amount that Red may amortize for 2011
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, 2011. The
corporation has startup expenditures of $54,000. If Orange Corporation
elects 195, determine the total amount that Orange may deduct in 2011.
a. $1,000.
b. $2,650.
*c. $3,650.
d. $5,000.
e. None of the above.
90. On January 15, 2011, 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 2011
of $500,000. The percentage depletion rate is 22%. Determine Verns
depletion deduction for 2011.
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, 2011 for
$20,000. This was the only asset Tom acquired in 2011. He placed the
asset in service on January 20, 2012. However, because the asset was
purchased in 2011, Tom deducted regular MACRS cost recovery on the asset
for the year 2011. He did not elect to expense any of the asset under
179. In 2012, Tom purchased no assets and because he had no taxable
income, he did not deduct any cost recovery. In 2013, Tom sold the
five-year asset on September 25th. Determine the basis of the five-year
asset at the time of the sale.
Correct Answer:
The cost of the asset must be reduced by the greater of the cost
recovery allowed or allowable in calculating the basis.
Cost
2011 allowed ($20,000 .
05)
2012 allowable ($20,000
.20)
2013 allowable ($20,000 .
32 .50)
Basis
$20,000
(1,000)
(4,000)
(3,200)
$11,800
92. Jim acquires a new seven-year class asset on September 20, 2011,
for $80,000. He placed the asset in service on October 5, 2011. He does
not elect to expense any of the asset under 179 or elect straightline, cost recovery. He elects not to take additional first-year
depreciation. He sells the asset on August 25, 2012. This is the only
asset he acquires in 2011. Determine Jims cost recovery in 2011 and
2012.
Correct Answer:
The mid-quarter convention applies.
2011: $80,000 .0357 = $2,856.
2012: $80,000 .2755 (2.5/4) = $13,775.
93. Rod paid $950,000 for a new warehouse on April 14, 2011. He sold
the warehouse on September 29, 2016. Determine the cost recovery
deduction for 2011 and 2016.
Correct Answer:
2011: $950,000 .01819 = $17,281.
2016: $950,000 .02564 8.5/12 = $17,254.
94. On March 3, 2011, 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 Sallys
cost recovery for the building in 2011.
Correct Answer:
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.
Residential [(70% $12,000,000) .
02879]
Nonresidential [(30% $12,000,000)
.02033]
Total cost recovery
$241,836
73,188
$315,024
95. Sid bought a new $700,000 seven-year class asset on August 2, 2011.
On December 2, 2011, he purchased $160,000 of used five-year class
assets. Sid elects not to take additional first-year depreciation. If
Sid elects 179, what is the maximum write-off for these purchases for
2011?
Correct Answer:
Seven-year property:
179 deduction
Regular MACRS [($700,000
$500,000) .1429 (Table 8.1)]
Five-year property:
Regular MACRS [$160,000 .20
(Table 8.1)]
Total deduction
$500,000
28,580
32,000
$560,580
Using the 179 deduction for the longer lived asset produces a greater total
deduction in 2011.
96. Polly purchased a new hotel on July 20, 2011, for $6,000,000. On
January 20, 2018, the building was sold. Determine the cost recovery
deduction for the year of the sale.
Correct Answer:
$6,000,000 .02564 .5/12 = $6,410.
97. Rustin bought used 7-year class property on May 15, 2011, for
$800,000. Rustin elects 179 and straight-line cost recovery. Rustins
taxable income would not create a limitation for purposes of the 179
deduction. Rustin elects not to take additional first-year depreciation.
Determine the write-off Rustin can take in 2011.
Correct Answer:
179 expense election
Cost recovery [($800,000 $500,000)
.0714 (Table 8.3)]
Total deduction
$500,000
21,420
$521,420
98. Audra acquires the following new five-year class property in 2011:
Asset
A
B
C
Total
Acquisition
Date
January 10
July
5
November 15
Cost
$106,000
70,000
450,000
$626,000
Audra elects 179 for Asset B and Asset C. Audras taxable income from
her business would not create a limitation for purposes of the 179
deduction. Audra elects not to take additional first-year depreciation.
Determine her total cost recovery deduction (including the 179
deduction) for the year.
Correct Answer:
$450,000/$626,000 = 71.9%. Therefore, Audra must use the mid-quarter
convention.
Asset A:
Regular MACRS ($106,000
.35)
Asset B:
$ 37,100
179 expense
Asset C:
179 expense
Regular MACRS [($450,000
$430,000) .05]
Total deduction
70,000
$430,000
1,000
431,000
$538,100
99. On April 5, 2011, Orange Corporation purchased, and placed in
service, seven-year class assets costing $700,000 and five-year class
assets costing $1,400,000. Orange elects to expense the maximum amount
under 179. Orange elected not to deduct additional first-year
depreciation. Assume taxable income is not a limitation. Determine
Orange Corporations cost recovery with respect to the assets for 2011.
Correct Answer:
179 limit [$500,000 ($2,100,000
$2,000,000)] =
Seven-year assets
179 expense
Regular MACRS [($700,000
$400,000) .1429]
Five-year assets
Regular MACRS ($1,400,000 .20)
Total cost recovery
$400,000
$400,000
42,870
280,000
$722,870
100. On February 15, 2011, Martin signed a 20-year lease on a
commercial building. In March 2011, Martin purchased and placed in
service seven-year class assets costing $400,000. In June 2011, 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 2011. Assuming taxable income is not a limitation,
determine Martins maximum cost recovery for 2011.
Correct Answer:
Martin should elect to treat all of the seven-year assets as 179
property and hence expense $400,000. The $200,000 for the qualified
leasehold improvement property would qualify for 100% additional firstyear depreciation. Hence, Martin could expense the entire $600,000.
101. On February 21, 2011, 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 elects not to
take additional first-year depreciation. If Joe elects 179, what is
the maximum write-off for this purchase for 2011?
Correct Answer:
179 expense
ADS straight-line [($600,000 $500,000)
.05]
Total deduction
$500,000
5,000
$505,000
102. On April 15, 2011, 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 Sams cost recovery
from these two items for 2011.
Correct Answer:
Storage facility ($80,000 .075)
(Table 8.4)
Trees ($40,000 .05) (Table 8.3)
Total cost recovery
$6,000
2,000
$8,000
103. On August 20, 2010, May signed a 10-year lease on a building for
her business. On November 28, 2011, May paid $80,000 for a qualified
leasehold improvement to the building. What is Mays cost recovery
deduction for the improvement in 2011?
Correct Answer:
May can take $80,000 of additional first-year depreciation.
104. On July 15, 2011, Mavis paid $275,000 for qualified leasehold
improvements on a commercial building she was leasing. If Mavis elects
to treat the qualified leasehold improvements as 179 property,
determine the total cost recovery from the improvements in 2011. Mavis
elected not to take additional first-year depreciation.
Correct Answer:
179 expense
Regular MACRS ($25,000 .
0333)
Total cost recovery
$250,000
833
$250,833
105. Joe purchased a new five-year class asset on June 1, 2011. 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. Joes taxable income would not
create a limitation for purposes of the 179 deduction. Joe elects not
to take additional first-year depreciation. Determine Joes total cost
recovery (including the 179 deduction) for the year.
Correct Answer:
Business use: $550,000 ($1,000,000 55%)
179 expense
Regular MACRS [($550,000 $500,000)
.20]
Production of income use: $450,000
($1,000,000 45%)
Regular MACRS ($450,000 .20)
Total deduction
$500,000
10,000
90,000
$600,000
*Property used for the production of income is not eligible for 179 expensing.
106. Nora purchased a new automobile on July 20, 2011, for $29,000. The
car was used 60% for business and 40% for personal use. In 2012, 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 2012.
Correct Answer:
Cost recovery in 2011:
MACRS ($29,000 .20) = $5,800 (limited
to $3,060*); $3,060 60%
Straight-line ($29,000 .10) = $2,900
(limited to $3,060*); $2,900 60%
Cost recovery recapture in 2012
Cost recovery in 2012:
Straight-line ($29,000 .20) = $5,800
(limited to $4,900*); $4,900 .30
$1,836
(1,740)
$
96
$1,470
*These depreciation limits are indexed annually.
107. Norm purchases a new sports utility vehicle (SUV) on October 12,
2011, 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 2011. Compute the maximum deduction with
respect to the SUV for 2011. Norm elects not to take additional firstyear depreciation.
Correct Answer:
The SUV is not classified as a passenger automobile because of its GVW
exceeding 6,000 lbs. Therefore, it is not subject to the cost recovery
limits of 280F.
Section 179 expense (limited to
$25,000)
MACRS [($50,000 $25,000) .05]
Total deduction
$25,000
1,250
$26,250
108. On June 1, 2011, 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.
Correct Answer:
A computer and peripheral equipment are listed property. Since the
more-than-50% business use test is not satisfied, Gabriella cannot
elect 179 expensing, she must use straight-line cost recovery, and is
not eligible for additional first-year depreciation. The 10% of
personal usage does not qualify for cost recovery.
$25,000 .10 90% = $2,250.
109. In 2011, Marci is considering starting a new business.
the following costs associated with this venture:
Advertising
Travel
Market surveys
Professional services
Interest expense
Taxes
$
Marci had
5,000
10,000
8,000
30,000
2,000
1,000
Marci started the new business on October 1, 2011.
deduction for Marcis startup costs for 2011.
Correct Answer:
Total startup costs ($5,000 +
$10,000 + $8,000 + $30,000) =
$53,000
Amount expensed [$5,000
($53,000 $50,000)]
Amount amortized [($53,000
$2,000)/180 3 months]
Total
$ 2,000
850
$ 2,850
Determine the
110. Rick purchased a uranium interest for $10,000,000 on January 3,
2011, when recoverable reserves were estimated at 200,000 units. A
total of 10,000 units were extracted in 2011 and 7,000 units were sold
in 2011. 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 2011.
Correct Answer:
Cost depletion
Percentage depletion
Lesser of:
22% $2,800,000 = $616,000
50% $1,000,000 = $500,000
Therefore the depletion deduction would be $500,000.
111. Discuss the difference between the half-year convention and the
mid-quarter convention.
Correct Answer:
The half-year convention assumes property is placed in service at midyear and thus provides for a half-years cost recovery for that year.
The mid-quarter convention assumes property placed in service during the
year is placed in service at the middle of the quarter in which it is
actually placed in service.
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 2011.
Correct Answer:
Residential realty is property for which 80% or more of the gross
rental revenues are from nontransient dwelling units. Residential
realty has a recovery period of 27.5 years. Nonresidential realty has a
recovery period of 39 years.
113. Discuss the effect on the cost recovery method of a taxpayer
election if the uniform capitalization rules apply to a farming
business.
Correct Answer:
The cost recovery method is generally MACRS using the 150% decliningbalance method.
114. Discuss the tax consequences of listed property being used for the
production of income compared to being used in a trade or business.
Correct Answer:
Section 179 expensing cannot be taken associated with the propertys use
for the production of income.
115. Discuss the beneficial tax consequences of an SUV not being
classified as a passenger automobile.
Correct Answer:
If an automobile is not classified as a passenger automobile, it is not
subject to the statutory dollar cost recovery limits under 280F. In
addition to a larger cost recovery deduction each year, it also results
in the total recovery of the cost over a six-year period. While the
automobile is still listed property, if it passes the more-than-50%
business use test, MACRS cost recovery can be used as well as an
election under 179. However, the 179 limit for SUVs is $25,000
rather than $500,000 in 2011. The automobile also is eligible for
additional first-year depreciation.
116. Discuss the reason for the inclusion amount with respect to leased
automobiles.
Correct Answer:
The purpose of the inclusion amount is to prevent taxpayers from
circumventing the cost recovery dollar limitations by leasing, instead
of purchasing, an automobile.
117. Discuss the requirements in order for startup expenditures to be
amortized under 195.
Correct Answer:
The expenditures must meet two requirements.
The expenditures must be paid or incurred in
connection with:
Creating an active trade or business;
Investigating the creation or acquisition of an
active trade or business; or
Any activity engaged in for profit in anticipation
of such activity becoming an active trade or
business.
Such costs must be the kinds of costs that would
be currently deductible if paid or incurred in
connection with the operation of an existing trade
or business in the same field as that entered into by
the taxpayer.