M5 Cost Recovery Flashcards
MCQ-02195
Under the modified accelerated cost recovery system (MACRS) of depreciation for property placed in service after 1986:
Salvage value is ignored for purposes of computing the MACRS deduction.
Under the MACRS method of depreciation for property placed in service after 1986, salvage value is ignored for purposes of computing the deduction.
MCQ-04762
Dove Corp. began operating a hardware store in the current year after constructing a building at a total cost of $100,000 on land previously acquired for $50,000. In the current year, the land had a fair market value of $60,000. Dove paid real estate taxes of $5,000 in the current year. What is the total depreciable basis of Dove’s business property?
$100,000
The only amount that may be depreciated is the $100,000 that Dove spent to construct the building. The $50,000 cost of the land is not depreciable as land is not a depreciable asset. The fair market value of the land ($60,000) is irrelevant for depreciation purposes. The real estate taxes ($5,000) are a deductible expense to the business that would not be capitalized.
MCQ-05549
Rock Crab, Inc. purchases the following assets during the year:
Computer 3,000
Computer desk 1,000
Office furniture 4,000
Delivery van 25,000
What should be reported as the cost basis for MACRS five-year property?
$28,000
MACRS 5-year property includes automobiles, light trucks, computers, typewriters, copiers, duplicating equipment, and other such items. The cost basis of the MACRS 5-year property is $28,000, calculated as follows:
Computer 3,000
Delivery van 25,000
Total MACRS 5-year $28,000
MCQ-02197
With regard to depreciation computations made under the general MACRS method, the half-year convention provides that:
One-half of the first year’s depreciation is allowed in the year in which the property is placed in service, regardless of when the property is placed in service during the year, and a half-year’s depreciation is allowed for the year in which the property is disposed of.
The half-year convention provides that one-half of the first year’s depreciation is allowed in the year in which the property is placed in service, regardless of when the property is
placed in service during the year, and a half-year’s depreciation is allowed for the year in which the property is disposed of. This assumes that more than 40 percent of the assets were not placed in service during the last quarter of the year. If this were the case, the mid-quarter convention would apply.
MCQ-02044
Data Corp., a calendar year corporation, purchased and placed into service office equipment during November Year 1. No other equipment was placed into service during Year 1. Under the general MACRS depreciation system, what convention must Data use?
Mid-quarter
When a taxpayer places more than 40 percent of its property (other than certain qualifying real property) into service in the last quarter of the taxable year, the corporation must use the mid-quarter convention for MACRS depreciation purposes. With this method the acquisitions are segregated by quarter and treated as if placed in service in the middle of each
respective quarter.
MCQ-02058
On August 1, Year 1, Graham purchased and placed into service an office building costing $264,000, including $30,000 for the land. What was Graham’s MACRS deduction for the office building in Year 1?
$2,250
Only the building is depreciable, so the depreciable portion is $264,000 less $30,000 land, for a net of $234,000. The MACRS rules provide a 39-year life, straight-line depreciation, and a “mid-month” acquisition convention that treats the property as acquired in the middle of the month, regardless of the actual date of acquisition. Therefore, the August 1, Year 1, service date provides a half-month’s depreciation for August, plus a full month for September through December, for a total of 4.5 months for Year 1. ($234,000/39 years) × (4.5 months/12 months) = $2,250.
MCQ-02032
Which of the following conditions must be satisfied for a taxpayer to expense, in the year of purchase, under Internal Revenue Code Section 179, the cost of new or used tangible depreciable personal property?
I. The property must be purchased for use in the taxpayer’s active trade or business.
II. The property must be purchased from an unrelated party.
Both I and II
To qualify for IRC Section 179, the property must be tangible personal property acquired by purchase from an unrelated party for use in the active conduct of a trade or business.
Statements I and II are both correct statements concerning the criteria for property to qualify under IRC Section 179.
MCQ-15645
A taxpayer purchased five acres of land for $20,000 and placed in service other depreciable personal property that cost $100,000. Disregarding business income limitations and assuming that the annual Section 179 (Election to Expense Certain Depreciable Business Assets) limit is $1,080,000, what
maximum amount of cost recovery can the taxpayer claim this year?
$100,000
Under the Section 179 election to expense certain depreciable business assets, the taxpayer may expense the cost of qualifying depreciable property up to the annual limitation amount, which is $1,080,000 in 2022. Therefore, only the cost of the depreciable personal property can be expensed ($100,000).
MCQ-12538
A taxpayer wants to deduct the cost of a seven-year asset placed in service this year. The cost qualifies for the Section 179 election to expense assets. Which of the following statements is most accurate regarding the immediate expensing of this asset versus the depreciation of this asset over seven years?
There is no difference in the total amount that is deductible over the life of the asset.
The total amount that is deductible over time is the same for both cost recovery methods. The total cost of the asset is deducted in the first year under Section 179, subject to certain
limitations. If the asset is depreciated, a portion of the total cost is deducted each year over the life of the asset, so that the total cost of the asset has been deducted by the end of the asset’s life.
MCQ-06148
A calendar-year taxpayer purchases a new business on July 1. The contract provides the following price allocation: customer list, $100,000; trade name, $50,000; goodwill, $90,000. What is the amortization deduction for the current year?
$8,000
Customer lists, trade names and goodwill are purchased intangible assets, which taxpayers amortize over 180 months using the full-month convention beginning with the month
of acquisition. [($100,000 + $50,000 + $90,000) / 180] × 6 months = $8,000
MCQ-14662
On January 1, in connection with the purchase of all of the assets of Joe Swift’s business, Fast, Inc. entered into a covenant not to compete with Joe for a period of five years, with an option by Joe to extend it to seven years. What is the amortization period of the covenant for tax purposes?
15 years
Intangibles such as goodwill, licenses, franchises, trademarks and covenants not to compete may be amortized using the straight line basis over a period of 15 years, starting with
the month of acquisition.
MCQ-14663
Gem Corp. purchased all the assets of a sole proprietorship, including the following intangible assets:
Goodwill 50,000
Covenant not to compete 13,000
For federal income tax purposes, what amount of these purchased intangible assets should Gem amortize over the specific statutory cost recovery periods?
63,000
Acquisitions of goodwill, covenants not-to-compete, franchises, trademarks, and trade names must be amortized on a straight-line basis over a 15-year period (180 months) beginning with the month of acquisition. So, both the $50,000 acquisition of the goodwill and the $13,000 acquisition of the covenant not-to-compete—for a total cost of $63,000—are amortized over
the 15-year period statutory cost recovery period
MCQ-08897
Xylo, a calendar year C corporation, acquired the assets of Yerkes, also a calendar year C corporation, on March 1 of the current year. One of the assets acquired was a trademark to which Xylo properly allocated $1,200,000 of the purchase price. What is Xylo’s amortization deduction for the current year?
$66,667
Trademarks and other intangibles are amortized using the straight-line method over 180 months, starting with the month of acquisition. The trademark was acquired on March 1 so
there are 10 months of amortization in the current year. The amortization deduction for the current year = $1,200,000 × 10 months/180 months = $66,667 (rounded).
MCQ-15831
ABC Industries, a C corporation, was incorporated on March 1, Year 2, and elected a calendar yearend. On April 15, Year 2, prior to commencing business operations, ABC purchased the assets of DEF Corp. for $350,000. Of this amount, $90,000 was allocated to goodwill. On May 1, Year 2, ABC commenced business operations. What amount of goodwill amortization can ABC claim on its Year 2 corporate tax return?
$4,000
Intangibles such as goodwill are amortized using straight-line basis over a period of 15 years (180 months), starting with the month of acquisition. The amount of goodwill amortization that ABC can claim on its Year 2 corporate tax return is $4,000, calculated as follows: $90,000 / 180 = $500 Amortization allowed per month Since ABC started business operations on May 1, Year 2, the number of months included on the Year 2 tax return is 8. $500 × 8 months = $4,000.
