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

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Question 31

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

A) True
B) False

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Question 32

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The § 179 deduction can exceed $25,000 in 2014 if the taxpayer had a § 179 amount which exceeded the taxable income limitation in the prior year.

A) True
B) False

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Question 33

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Rod paid $1,950,000 for a new warehouse on April 14, 2014. He sold the warehouse on September 29, 2019. Determine the cost recovery deduction for 2014 and 2019.

On January 15, 2014, 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 2014 of $500,000. The percentage depletion rate is 22%. Determine Vern's depletion deduction for 2014.

Under the alternative depreciation system (ADS), the half-year convention must be used for personalty.

On April 5, 2014, Orange Corporation purchased, and placed in service, seven-year class assets costing $54,000 and five-year class assets costing $14,000. Orange elects to expense the maximum amount under § 179. Orange does not take additional first-year depreciation (if available). Assume taxable income is not a limitation. Determine Orange Corporation's cost recovery with respect to the assets for 2014.

In a farming business, MACRS straight-line cost recovery is required for all fruit bearing trees.

The basis of an asset on which $20,000 has been expensed under § 179 will be reduced by $20,000, even if $20,000 cannot be expensed in the current year because of the taxable income limitation.

On July 15, 2014, Mavis paid $275,000 for leasehold improvements on a commercial building she was leasing. Determine the maximum total cost recovery from the improvements in 2014.

Hans purchased a new passenger automobile on August 17, 2014, 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 2014.

Residential rental real estate includes property where 80% or more of the net rental revenues are from nontransient dwelling units.

The only asset Bill purchased during 2014 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 Bill's maximum deduction with respect to the property for 2014.

On June 1, 2014, 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 not take additional first-year depreciation (if available) . Determine the cost recovery deduction for 2014.

Once the more-than-50% business usage test is passed for listed property, it does matter if the business usage for the property drops to 50% or less during the recovery period.

Mary purchased a new five-year class asset on March 7, 2014. 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 $90,000. Mary made the § 179 election. The income from the business before the § 179 deduction was $60,000. Mary does not take additional first-year depreciation (if available) . Determine the total deductions with respect to the asset for 2014.

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.

On August 20, 2013, May signed a 10-year lease on a building for her business. On November 28, 2014, May paid $80,000 for leasehold improvements to the building. She does not take additional first-year depreciation (if available) and does not elect § 179 expensing. What is May's cost recovery deduction for the improvement in 2014?

An election to use straight-line under ADS is made on an asset-by-asset basis for property other than eligible real estate.

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.

If an automobile is placed in service in 2014, the limitation for cost recovery in 2016 will be based on the cost recovery limits for the year 2014.