Ch 10 ICE's with solutions

Ch 10 ICE's with solutions - Burkett – Tax I – Chapter...

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Unformatted text preview: Burkett – Tax I – Chapter 10 Personal Property Example (page 1 & 2) 1. Compute maximum deduction for 2011 & 2012 for $100,000, 5 year recovery property purchased on May 5, 2011 if TP elects out of bonus and does not choose to use Section 179/Immediate Expensing. Max = 200% DB Convention = 1/2 year 2011 = 100k/5yrs x 200% x 1/2 = 20k 2012 = (100k-20k)/5yrs x 200% = 32k 2. Compute 1 using table A 10-2 on page 47 if TP elects out of bonus and does not choose to use Section 179/Immediate Expensing. 2011 = 100k x 20% = 20k 2012 = 100k x 32% = 32k (continue to use original basis when using charts) 3. Compute 1 assuming it was purchased on 12/31/11 and it was the only personal property placed in service in 2011 if TP elects out of bonus and does not choose to use Section 179/Immediate Expensing. Convention = mid quarter as if placed in service on 11/15-12/31 = 1.5 months 2011 = 100k/5yrs x 200% x (1.5/12) = 5k 2012 = (100k - 5k)/5yrs x 200% = 38k 4. Compute 3 using the table A10-6 on page 51 if TP elects out of bonus and does not choose to use Section 179/Immediate Expensing. 2011 = 100k x 5% = 5k 2012 = 100k x 38% = 38k 1 Burkett – Tax I – Chapter 10 Personal Property Example (contd) 5. What other options are available and how are they chosen? Methods: Straightline (SL) & 150% Declicing balance (DB) Recovery Period: ADS - see table A10-1 on pg. 45-46 Elect by class for all property placed in service during a year. 6. Compute minimum deduction for 2011 & 2012 for $100,000, 5 year recovery property with an Alternative Depreciation System (ADS) recovery period of 7 years purchased on May 5, 2011 if TP elects out of bonus and does not choose to use Section 179/Immediate Expensing. 2011 = 100k/7yrs x 1/2 = 7,143 2012 = 100k/7yrs = 14,286 (min = SL conv. = 1/2 yr) 7. Compute 6 using table A10-11 on page 54. 2011 = 100k x 7.14% = 7,140 2012 = 100k x 14.29% = 14,290 2 Burkett – Tax I – Chapter 10 Real Property Example Compute the maximum deduction for 2011 & 2012 for a retail store building purchased on May 31, 2011 for $120,000, w/ $20,000 allocated to land SL non-residential = 39 yrs convention = mid-month 2011 = 100k/39yrs x (7.5/12) = 1,603 2012 = 100k/39yrs = 2,564 Compute using Table A10-9 on p. 53. 2011 = 100k x 1.605% = 1,605 2012 = 100k x 2.564% = 2,564 3 Burkett – Tax I – Chapter 10 Immediate Expense/Section 179 Election Example How should the immediate expense amount be allocated between the property classes if the taxpayer purchases a $500,000 used 5 year property and a $500,000 used 7 year property in 2011 and wants to maximize the deductions? Choose sec. 179 for the 7-year property because there is a greater depreciation on 5-year property in the early years. 4 Burkett – Tax I – Chapter 10 Section 179/Immediate Expensing Election, Bonus Depreciation & MACRS Example Assume new office equipment with a 7 year recovery period is acquired for $439,000 on April 1, 2012. If this is the only property acquisition in 2012, how would you maximize the 2012 deduction? 1. Immediate expense? max = 139k (2012 limitation) 139,000 2. Bonus Depreciation? 2012 = (439k-139k) x 50% = 150k 150,000 3. MACRS? 2012 = (300k-150k)/7yrs x 200% x 1/2 = 21,429 310,429 4. Immediate expense if new office equipment costs $600,000 and the taxpayer also purchased a building costing $2,000,000. Max sec. 179 for 2012 = 139k, Phaseout = 560k (600k - 560k) = 40k reduction of Sec. 179 139k (40k) 99k 5 Burkett – Tax I – Chapter 10 Limitation on Passenger Autos Auto w/ cost of $30,000 was placed in service on July 5, 2011 and was used 80% for business. What is the maximum depreciation deduction for 2011 if TP elects out of bonus and does not choose to use Section 179/Immediate Expensing? Dep. = (30k x 80%)/5yrs x 200% x 1/2 = 4,800 max auto dep. 1st year = 3,060 x 80% = 2,448 (lower) = 2,448 With Bonus? 11,060 x 80% = 8,848 Would Sec 179 increase the deduction? Yes - No limit applies. What if business use was < 50%? Must use SL ADS (still 5-year property, see table A10-1 on pg. 43-46) No sec. 179 allowed. If we assume business % = 40% Dep. = (30k x 40%)/5yrs x 1/2 = 1,200 max auto dep. 1st year = 3,060 x 40% = 1,224 (lower) = 1,200 6 Burkett – Tax I – Chapter 10 Amortization of Sec 197 Intangibles – Purchased Goodwill A going business is purchased on 09/01/2011. $100K of the purchase price is allocated to goodwill. The business started back up on 10/01/2011 and has a 12/31 year end. Compute amortization for 2011 & 2012. 2011 = 100k/15yrs x (3/12) = 1,667 2012 = 100k/15 yrs = 6,667 7 Burkett – Tax I – Chapter 10 Leasehold Improvements Jimmy signs a 10 year lease on an empty part of a strip mall that was completed on January 1, 2011. He plans to open a retail store. He spends $40K improving the space and opens his store on August 1, 2011. What is his 2011 deduction for the leasehold improvements? 2011 = 40k/39yrs x (4.5/12) = 2012 = 40k/39yrs 385 = 1,026 and What happens when the lease expires --Jimmy closes the store? or Deduction taken for the remaining basis. 8 Burkett – Tax I – Chapter 10 Depletion Example EX 38, p. 27 - Coal deposit w/ cost of $50K, w/ estimated recovery of 350,000 tons. Taxable income before deducting depletion is $10K. Mines & sells 40,000 tons in 2010 @ $1.20/ton ($48K). (Statutory % depletion for coal is10%) Cost Depletion? 50k/350,000 tons x 40,000 tons = 5,714 % Depletion? 48k x 10% = 4,800 (lower) = 4,800 ltd to 10k x 50% = 5,000 Maximum depletion deduction? Cost depl. (above) = 5,714 (greater) = 5,714 % depl. (above) = 4,800 9 ...
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