Tax Lesson 4

Question 1

Cost of business or income producing assets recovered through:

Answer 1

Cost recovery or depreciation for tangible
Amortization for intangible
Depletion for natural resources

Question 2

Depreciation

Answer 2

Allowance for wear & tear, deterioration, or obsolescence

Purpose to match cost of productive asset to revenues of asset (>1 year)

Question 3

Basis

Answer 3

Reduced by amount of cost recovery allowed or allowable

Question 4

Most types of tangible property can be depreciated. Also certain intangible:

Answer 4

Patents, copyrights, computer software 
Property must meet all following:
You own
Used in your business or income producing activity
Determinable useful life
Last more than 1 year

Question 5

Cannot depreciate

Answer 5

Property used solely for personal activities
If for both, only deduct based on business/investment use
Inventory: not held for use
Land: does not wear our, become obsolete, or get used up (can depreciate landscaping in preparing land for business use - must be closely associated with other depreciable property)
Property placed in service & disposed of in same year
Equipment used to build capital improvements
Section 197 intangibles (must be amortized)
Certain term interests

Question 6

Depreciation begins:

Depreciation stops:

Answer 6

When property placed in service for use in trade or business or production of income
When fully recovered cost or other basis or retire property from use

Question 7

ACRS & MACRS

Answer 7

Assets after 1980
Assets subject to wear&tear, obsolescence, etc
Determinable useful life
Tangible property or realty
MACRS used to depreciate most property

Question 8

Straight line

Answer 8

Deduct same amount each year over useful life unless big change in adjusted basis or useful life
If used for less than full year, prorate depreciation for number of months in use
For patents/copyrights
Useful life lesser of granted by government or remaining when acquired
If becomes valueless before end of useful life deduct remaining cost/basis in that year

Question 9

Computer software

Answer 9

Considered intangible unless:
Readily available for purchase by general public
Subject to non exclusive license &
Not substantially modified
(36 months)

Question 10

ACRS

Answer 10

1981
Based on recovery periods instead of useful life
Determined by IRS

Question 11

Cannot use MACRS

Answer 11

Property before 1987
Intangible
Films, video tapes, recordings
Corporate/partnership property in nontaxable transfer
Property you elected to exclude

Question 12

MACRS consists of 2 depreciation systems:

Answer 12

General Depreciation System
Alternative Depreciation System
ADS must be used for:
Used 50% or less in qualified business use
Tangible used outside US
Tax exempt use property
Tax exempt bond financed property
Property used predominately in farming & placed in service in any tax year during which election not to apply uniform capitalization rules to certain farming costs is in effect
Property imported from country where executive order in effect

Question 13

3, 5, 7, 27.5, 39

Answer 13

3: tractor, rent to own property
5: computers, autos, trucks, office equipment
7: office furniture & fixtures
27. 5: rental home
39: non residential real estate (office building)

Question 14

Residential Real Property & Non Residential Real Property use

Answer 14

Mid month convention

Question 15

Mid month convention:

Answer 15

Placed in service/disposed of mid month

Question 16

Mid quarter convention:

Answer 16

If total depreciable basis of MACRS placed in service in last 3 months of tax year more than 40% depreciable based of all MACRS property placed in service during year
During quarter is midpoint of quarter

Question 17

Half year convention:

Answer 17

One half year of service

Question 18

MACRS:
3 methods GDS
1 method ADS

Answer 18

200% declining balance
150% declining balance
Straight line
Straight line ADS

Question 19

Example Exam Question:
Purchased computer for office & paid $2000. Using MACRS, how much depreciation can be recognized first year?

A. $500
B. $1000
C. $400
D. $2000

Answer 19

C

Question 20

Election to Expense Assets - Section 179

Answer 20

Immediately expense $1,080,000 business tangible property
Not for realty or production of income property
Cost recovery on remaining basis
Lesser of:
Property Placed in Service (PPS)
Taxable Income (TI) or
$1080000 phased out for PPS>$2700000

Question 21

Example Exam Question:
Own & operate manufacturer of custom speed motorcycles. This year purchased new metal cutting machine costing $2,100,000. Assuming taxable income or $3,250,000 after max 179 deduction, how much taxable income before deduction?

A. $1,080,000
B. $2,700,000
C. $4,330,000
D. $3,250,000

Answer 21

C

Question 22

Bonus depreciation

Answer 22

Immediate 100% first year deduction for qualified new or used equipment acquired & placed in service between 9/28/2017-12/31/2022

Question 23

Intangible Amortization over 15 years

Answer 23

Goodwill
Trademarks
Covenants not to compete
Copyrights & patents used in trade/business

Question 24

Depletion

Answer 24

Natural resources other than land
2 methods:
Cost: asset basis/estimated total number of recoverable units of assets x number of units sold
Percentage: statutory percentage applied to gross income from property limited to 50%

Question 25

Lesson 4 Review:
Bought 2 machines in past 2 years. First on December 28 last year. Arrived January 2 current year. Installed February 15 current year. Purchase price $65k. 2nd purchased November 15 & delivered/installed December 3. Purchase price $35k. Which convention should they use?

A. Half year
B. Mid quarter
C. Mid month
D. Can choose between half year & mid quarter

Answer 25

A

Question 26

Lesson 4 Review:
Purchased computer for marketing business what property class should be used to depreciate?

A. 3 year
B. 5 year
C. 7 year
D. 10 year

Answer 26

B

Question 27

Lesson 4 Review:
Limousine service considering purchase of new automobile for use in business. What property class?

A. 3 year
B. 5 year
C. 7 year
D. 10 year

Answer 27

B

Question 28

Lesson 4 Review:
Consulting business booming. Recently built new office building. Purchase new office furniture for entire building. Which property class?

A. 3 year
B. 5 year
C. 7 year
D. 10 year

Answer 28

C

Question 29

Lesson 4 Review:
Buys office equipment for business requiring 5 year straight line depreciation. Costs $20k with no salvage value. How much deduct first year disregarding half-year & mid-quarter conventions?

A. $1000
B. $4000
C. $10000
D. $20000

Answer 29

B

Question 30

Lesson 4 Review:
Assuming MACRS, what is first year cost recovery amount for $100k worth of office furniture purchased this year?
5 year 20; 7 year 14.29

A. $7150
B. $14290
C. $20000
D. $100000

Answer 30

B

Question 31

Lesson 4 Review:
Purchase building for $100k & paid commission of $5k. Made improvements of $20k. Took cost recovery of $12k first year. What is adjusted basis at end of first year?

A. $125k
B. $113k
C. $105k
D. $88k

Answer 31

B

Question 32

Lesson 4 Review:
Purchased office equipment for $20k. Paid sales tax or $1,400 & shipping costs $3000. This is only section 179 property put into service this year. Taxable income of $100000. What is maximum section 179 deduction taken this year?

A. $20000
B. $21400
C. $23000
D. $24400

Answer 32

D

Question 33

Lesson 4 Review:
Residential rental property requires which convention?

A. Mid month
B. Mid quarter
C. Half year
D. None

Answer 33

A