Chapter 11 T/F

Question 1

Cost recovery allows the taxpayer to recover the cost of certain assets through tax deductions over a specified period.

Answer 1

True

Question 2

Depreciation deductions for property are allowed only when the property is used in the taxpayer’s trade or business or is held by the taxpayer for the production of income.

Answer 2

True

Question 3

A mortgagee is allowed to take depreciation deductions on property with respect to the amount of the loan granted.

Answer 3

False. Depreciation deductions may be taken only by the equitable owner of property, not by the mortgagee.

Question 4

Land is a depreciable asset as long as the period of ownership by the taxpayer can be estimated.

Answer 4

False. The cost of land is not depreciable.

Question 5

A depreciation deduction for property placed in service before January 1981 was allowable under one of several acceptable depreciation methods.

Answer 5

True

Question 6

Under the double-declining-balance method of depreciation, the annual amount of depreciation for an asset with a life of 5 years would be 40 percent of an asset’s unrecovered cost.

Answer 6

True

Question 7

A deduction for obsolescence may be taken when the taxpayer can predict with reasonable certainty that a particular asset will become obsolete at a fairly definite time in the future.

Answer 7

True

Question 8

Obsolescence means that the asset has a normal economic life of 10 years, after which time it will be replaced by a similar, more modern asset used for the same purpose.

Answer 8

False. Obsolescence means a loss of economic usefulness from abnormal causes rather than the ordinary physical wear and tear on the property.

Question 9

MACRS provides a cost recovery deduction for each year of a fixed recovery period

Answer 9

True

Question 10

Residential rental property placed in service this year is depreciated in the 27 ½ - year class.

Answer 10

True

Question 11

Nonresidential real estate is generally depreciated over a longer recovery period than residential real estate.

Answer 11

True

Question 12

Automobiles purchased this year must be depreciated on a straight-line basis.

Answer 12

False. Automobiles can generally be depreciated on a double-declining-balance basis over 5 years.

Question 13

For 5-year recovery period property placed in service this year, the recovery method is generally the double-declining-balance method with a later switch to the straight-line method.

Answer 13

True

Question 14

The half-year convention is used for all recovery classes of property.

Answer 14

False. The half-year convention is used for all property classes other than real property and certain intangible assets. The recovery deduction for real property is based on the month of the first year that the property was placed in service. The convention used for intangible assets is also based on the month of acquisition.

Question 15

Under MACRS, the straight-line recovery method may be elected for property that is eligible for the declining-balance method.

Answer 15

True

Question 16

Lessees who make improvements to real property can be eligible for cost recovery with respect to the improvements.

Answer 16

True

Question 17

The Sec. 179 election generally applies to depreciable tangible personal property that is acquired and used in the taxpayer’s trade or business or held for the production of income.

Answer 17

False. The Sec. 179 election generally applies to depreciable tangible personal property that is acquired and used only in the taxpayer’s trade or business. Property acquired and held for the production of income does not qualify for the Sec. 179 election.

Question 18

If an election under Sec. 179 is made to expense the cost of a depreciable asset, the maximum amount that may be expensed is currently $500,000 for property placed in service in 2011 and $125,000 for property placed in service in 2012.

Answer 18

True

Question 19

The expensing election is available for property held for investment.

Answer 19

False. The expensing election is only available for certain property used in a trade or business.

Question 20

The dollar limits applicable to luxury automobiles prevent them from ever being fully depreciated for tax purposes.

Answer 20

False. The dollar limits apply annually to cost recovery deductions. If these limits do not allow the full depreciation percentage to be taken, the recovery period is extended to allow cost recovery later.

Question 21

Certain intangible assets acquired after August 10, 1993, are eligible for amortization over a fixed period

Answer 21

True