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

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Question 41

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The factor for determining the cost recovery for eligible real estate under MACRS, in the year of disposition, is taken from the month of the disposition.

A) True
B) False

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Question 42

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Indigo Company acquires a new machine (5-year MACRS property) on February 2, 2018 at a cost of $100,000. On November 18, 2018, Indigo also acquires office equipment (7-year MACRS property) at a cost of $50,000. Indigo does not make a § 179 expense election and chooses not to take additional first-year depreciation. What is Indigo's total MACRS deduction for 2018?

A) $27,145.
B) $30,000.
C) $36,785.
D) $150,000.
E) None of the above.

F) B) and D)
G) A) and C)

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Question 43

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The basis of cost recovery property must be reduced by at least the cost recovery allowable.

George purchases used seven-year class property at a cost of $200,000 on April 20, 2018. Determine George's cost recovery deduction for 2018 for alternative minimum tax purposes, assuming George does not elect § 179 and does not take additional first-year depreciation.

Bonnie purchased a new business asset (five-year property) on March 10, 2018, at a cost of $30,000. She also purchased a new business asset (seven-year property) on November 20, 2018, 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 takes additional first-year depreciation. Determine the cost recovery deduction for 2018 for these assets.

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 2018.

On July 15, 2018, Mavis paid $275,000 for improvements on a commercial building she owns. Determine the maximum total cost recovery from the improvements in 2018.

Discuss the tax consequences of listed property being used for the production of income compared to being used in a trade or business.

Assets that do not decline in value on a predictable basis are not eligible for cost recovery under MACRS.

On June 1, 2018, 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.

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.

The cost of a covenant not to complete for 10 years incurred in connection with the acquisition of a business is amortized over 10 years.

MACRS depreciation is used to compute earnings and profits.

A taxpayer must use the alternative depreciation system (ADS) to compute depreciation for earnings and profits.

The luxury auto cost recovery limits applies to all automobiles.

On July 10, 2018, 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 2018, assuming Ariff's § 179 business income is $110,000. Ariff does not take additional first-year depreciation.

Intangible drilling costs must be capitalized and recovered through depletion.

Polly purchased a new hotel on July 20, 2018, for $6,000,000. On January 20, 2025, the building was sold. Determine the cost recovery deduction for the year of the sale.

On May 5 of the current tax year, Byrne purchased a patent that qualifies as a § 197 intangible. The cost of the patent was $207,000 and Byrne is a calendar-year taxpayer. In the current tax year, how much of the patent's cost may Byrne amortize?

Alice purchased office furniture on September 20, 2017, for $100,000. On October 10, 2017, she purchased business computers for $80,000. Alice placed all of the assets in service on January 15, 2018. Alice did not elect to expense any of the assets under § 179, did not elect straight-line cost recovery, and did not take additional first-year depreciation. Determine the cost recovery deduction for the business assets for 2018.