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Exam 8: Depreciation, Cost Recovery, Amortization, and Depletion

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Question 1

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Tan Company acquires a new machine (ten-year property) on January 15, 2014, at a cost of $200,000. Tan also acquires another new machine (seven-year property) on November 5, 2014, at a cost of $40,000. No election is made to use the straight­line method. The company does not make the § 179 election and elects to not take additional first-year depreciation if available. Determine the total deductions in calculating taxable income related to the machines for 2014.

A) $24,000.
B) $25,716.
C) $102,000.
D) $132,858.
E) None of the above.

F) A) and B)
G) A) and E)

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Question 2

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Tom purchased and placed in service used office furniture on January 3, 2014, for $40,000. Tom's accountant depreciated the furniture using straight-line depreciation over 10 years for financial reporting purposes. The accountant also used the same depreciation amounts when filing Tom's income tax returns. On January 10, 2019, Tom sold the furniture. Determine the tax basis of the furniture at the time of the sale.

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The cost of the asset must be reduced by the greater of the cost recovery allowed or allowable in calculating the tax basis. Cost $40,000 2014 allowable ($40,000 × .1429) (5,716) 2015 allowable ($40,000 × .2449) (9,796) 2016 allowable ($40,000 × .1749) (6,996) 2017 allowable ($40,000 × .1249) (4,996) 2018 allowed ($40,000 × .0893) (3,572) 2019 allowable ($40,000 × .0892 × .50) (1,784) Tax basis $ 7,140

Question 3

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On February 21, 2014, Joe purchased new farm equipment for $60,000. 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 available). If Joe elects § 179, what is the maximum write­off for this purchase for 2014?

Howard's business is raising and harvesting peaches. On March 10, 2014, Howard purchased 10,000 new peach trees at a cost of $60,000. Howard does not make an election to expense assets under § 179 and does not take additional first-year depreciation (if available) . Determine the cost recovery deduction for 2014.

Cora purchased a hotel building on May 17, 2014, for $3,000,000. Determine the cost recovery deduction for 2015.

Doug purchased a new factory building on January 15, 1989, for $400,000. On March 1, 2014, 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.

The maximum cost recovery method for all personal property under MACRS is 150% declining balance.

Orange Corporation begins business on April 2, 2014. The corporation has startup expenditures of $64,000 which it incurred last year. If Orange Corporation elects § 195, determine the total amount that Orange may deduct in 2014.

Rick purchased a uranium interest for $10,000,000 on January 3, 2014, when recoverable reserves were estimated at 200,000 units. A total of 10,000 units were extracted in 2013 and 7,000 units were sold in 2014. 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 2014.

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.

Hazel purchased a new business asset (five-year asset) on September 30, 2014, at a cost of $100,000. On October 4, 2014, Hazel placed the asset in service. This was the only asset Hazel placed in service in 2014. Hazel did not elect § 179 or additional first­year depreciation if available. On August 20, 2015, Hazel sold the asset. Determine the cost recovery for 2015 for the asset.

On May 15, 2014, Brent purchased new farm equipment for $200,000. Brent used the equipment in connection with his farming business. Brent does not elect to expense assets under § 179. Brent does not take additional first­year depreciation (if available) . Determine the cost recovery deduction for 2014.

For real property, the ADS convention is the mid-month convention.

When lessor owned leasehold improvements are abandoned because of the termination of the lease, a loss can be taken for the unrecovered basis.

Discuss the difference between the half-year convention and the mid-quarter convention.

Barry purchased a used business asset (seven-year property) on September 30, 2014, 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, did not take additional first-year depreciation (if available) , and did not elect straight-line cost recovery. Barry sold the asset on July 17, 2015. Determine the cost recovery deduction for 2015.

Sid bought a new $80,000 seven-year class asset on August 2, 2014. On December 2, 2014, he purchased $24,000 of used five-year class assets. Sid does not take additional first­year depreciation if available. If Sid elects § 179, what is the maximum write-off for these purchases for 2014?

White Company acquires a new machine (seven-year property) on January 10, 2013, at a cost of $600,000. White makes the election to expense the maximum amount under § 179. No election is made to use the straight­line method. White does take additional first-year depreciation. Determine the total deductions in calculating taxable income related to the machine for 2013 assuming White has taxable income of $800,000.

For personal property placed in service in 2014, the § 179 maximum deduction is limited to $25,000.

Taxpayers may elect to use the straight-line method under MACRS for personalty.