South-Western Federal Taxation 2014

Comprehensive 37th Edition Hoffman

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COMPREHENSIVE VOLUME--CHAPTER
8--DEPRECIATION, COST RECOVERY,
AMORTIZATION, AND DEPLETION

Student: ___________________________________________________________________________

1. Property which is classified as personalty may be depreciated.

True False

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

3. Antiques may be eligible for cost recovery if they are used in a trade or business.
True False

4. The key date for calculating cost recovery is the date the asset is placed in service.
True False

5. Land improvements are generally not eligible for cost recovery.

True False

6. The cost recovery basis for property converted from personal use to business use may be the fair market
value of the property at the time of the conversion.
True False

7. The maximum cost recovery method for all personal property under MACRS is 150% declining balance.
True False

8. The cost recovery period for 3-year class property is 4 years.

True False
9. All personal property placed in service in 2013 and used in a trade or business qualifies for additional
first-year depreciation.
True False

10. If more than 40% of the value of property, other than real property, is placed in service during the last
quarter, all of the property placed in service in the second quarter will be allowed 7.5 months of cost recovery.
True False

11. 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.
True False

12. 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.
True False

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

14. Motel buildings have a cost recovery period of 27.5 years.

True False

15. Taxpayers may elect to use the straight-line method under MACRS for personalty.
True False

16. Under the MACRS straight-line election for personalty, only the half-year convention is applicable.
True False

17. The cost recovery method for new farm equipment placed in service during 2013 is 200% declining
balance.
True False
18. In a farming business, MACRS straight-line cost recovery is required for all fruit bearing trees.
True False

19. In a farming business, if the uniform capitalization rules are not used, cost is recovered using the ADS
straight-line method.
True False

20. When lessor owned leasehold improvements are abandoned because of the termination of the lease, a loss
can be taken for the unrecovered basis.
True False

21. The costs of qualified leasehold improvements qualify for additional first-year depreciation.
True False

22. For personal property placed in service in 2013, the § 179 maximum deduction is limited to $500,000.
True False

23. The § 179 deduction can exceed $500,000 in 2013 if the taxpayer had a § 179 amount which exceeded the
taxable income limitation in the prior year.
True False

24. Any § 179 expense amount that is carried forward is subject to the business income limitation in the
carryforward year.
True False

25. Taxable income for purposes of § 179 limited expensing is computed by including the MACRS deduction.
True False

26. The basis of an asset on which $500,000 has been expensed under § 179 will be reduced by $500,000, even
if $500,000 cannot be expensed in the current year because of the taxable income limitation.
True False
27. Property used for the production of income is not eligible for § 179 expensing.
True False

28. The statutory dollar cost recovery limits under § 280F does apply to all automobiles.
True False

29. The § 179 limit for a sports utility vehicle with a GVW of 7,000 pounds will not apply if the sports utility
vehicle is used as a taxi.
True False

30. 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.
True False

31. If a new car that is used predominantly in business is placed in service in 2013, the statutory dollar cost
recovery limit under § 280F will depend on whether the taxpayer takes MACRS or straight-line depreciation.
True False

32. If an automobile is placed in service in 2013, the limitation for cost recovery in 2015 will be based on the
cost recovery limits for the year 2013.
True False

33. The statutory dollar cost recovery limits under § 280F for passenger automobiles are changed if mid-quarter
cost recovery is used.
True False

34. If a used $35,000 automobile used 100% for business in the first year (2013) fails the 50% business usage
test in the second year, no cost recovery will be recaptured.
True False

35. The inclusion amount for a leased automobile is adjusted by a business usage percentage.
True False
36. All listed property is subject to the substantiation requirements of § 274.
True False

37. If a taxpayer uses regular MACRS for all property, an alternative minimum tax adjustment is made with
respect to the depreciation on all property, regardless of the class life.
True False

38. MACRS depreciation is used to compute earnings and profits.

True False

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

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

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

42. For real property, the ADS convention is the mid-month convention.
True False

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

44. Goodwill associated with the acquisition of a business cannot be amortized.

True False
45. A purchased trademark is a § 197 intangible.
True False

46. If startup expenses total $53,000 in 2013, $51,000 is amortized over 180 months.
True False

47. The amortization period in 2013 for $58,000 of startup expenses is 180 months.
True False

48. Cost depletion is determined by multiplying the depletion cost per unit by the number of units sold.
True False

49. Percentage depletion enables the taxpayer to recover more than the cost of an asset.
True False

50. Intangible drilling costs must be capitalized and written off through depletion.
True False

51. Grape Corporation purchased a machine in December of the current year. This was the only asset purchased
during the current year. The machine was placed in service in January of the following year. No assets were
purchased in the following year. Grape Corporation’s cost recovery would begin:
A. In the current year using a mid-quarter convention.
B. In the current year using a half-year convention.
C. In the following year using a mid-quarter convention.
D. In the following year using a half-year convention.
E. None of the above.

52. Which of the following assets would be subject to cost recovery?

A. A painting by Picasso hanging on a doctor’s office wall.
B. An antique vase in a doctor’s waiting room.
C. Landscaping around the doctor’s office.
D. a., b., and c.
E. None of the above.
53. On June 1 of the current year, Tab converted a machine from personal use to rental property. At the time of
the conversion, the machine was worth $90,000. Five years ago Tab purchased the machine for $120,000. The
machine is still encumbered by a $50,000 mortgage. What is the basis of the machine for cost recovery?
A. $70,000.
B. $90,000.
C. $120,000.
D. $140,000.
E. None of the above.

54. Tara purchased a machine for $40,000 to be used in her business. The cost recovery allowed and allowable
for the three years the machine was used are as follows:

Cost Recovery Allowed Cost Recovery Allowable

Year 1 $16,000 $ 8,000
Year 2 9,600 12,800
Year 3 5,760 7,680

If Tara sells the machine after three years for $15,000, how much gain should she recognize?
A. $3,480.
B. $6,360.
C. $9,240.
D. $11,480.
E. None of the above.

55. Hazel purchased a new business asset (five-year asset) on September 30, 2013, at a cost of $100,000. On
October 4, 2013, Hazel placed the asset in service. This was the only asset Hazel placed in service in
2013. The only election with respect to the asset was not to take § 179. On August 20, 2014, Hazel sold the
asset. Determine the cost recovery for 2014 for the asset.
A. $9,600.
B. $11,875.
C. $23,750.
D. $38,000.
E. None of the above.

56. Tan Company acquires a new machine (ten-year property) on January 15, 2013, at a cost of $200,000. Tan
also acquires another new machine (seven-year property) on November 5, 2013, at a cost of $40,000. No
election is made to use the straight-line method. The company does not make the § 179 election. Tan elects to
not take additional first-year depreciation. Determine the total deductions in calculating taxable income related
to the machines for 2013.
A. $24,000.
B. $25,716.
C. $102,000.
D. $132,858.
E. None of the above.
57. James purchased a new business asset (three-year personalty) on July 23, 2013, at a cost of $40,000. James
takes additional first-year depreciation Determine the cost recovery deduction for 2013.
A. $8,333.
B. $26,666.
C. $33,333.
D. $41,665.
E. None of the above.

58. Alice purchased office furniture on September 20, 2012, for $100,000. On October 10, 2012, she purchased
business computers for $80,000. Alice placed all of the assets in service on January 15, 2013. Alice did not elect
to expense any of the assets under § 179, nor did she elect straight-line cost recovery. She did not take
additional first-year depreciation. Determine the cost recovery deduction for the business assets for 2013.
A. $6,426.
B. $14,710.
C. $25,722.
D. $30,290.
E. None of the above.

59. Barry purchased a used business asset (seven-year property) on September 30, 2013, at a cost of $200,000.
This is the only asset he purchased during the year. Barry did not elect to expense any of the asset under § 179,
nor did he elect straight-line cost recovery. Barry sold the asset on July 17, 2014. Determine the cost recovery
deduction for 2014.
A. $19,133.
B. $24,490.
C. $34,438.
D. $55,100.
E. None of the above.

60. Bonnie purchased a new business asset (five-year property) on March 10, 2013, at a cost of $30,000. She
also purchased a new business asset (seven-year property) on November 20, 2013, 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. Bonnies
takes additional first-year depreciation. Determine the cost recovery deduction for 2013 for these assets.
A. $5,858.
B. $7,464.
C. $9,586.
D. $19,429.
E. None of the above.
61. Doug purchased a new factory building on January 15, 1988, for $400,000. On March 1, 2013, the building
was sold. Determine the cost recovery deduction for the year of the sale assuming he did not use the MACRS
straight-line method.
A. $0.
B. $1,587.
C. $2,645.
D. $12,696.
E. None of the above.

62. Cora purchased a hotel building on May 17, 2013, for $3,000,000. Determine the cost recovery deduction
for 2014.
A. $48,150.
B. $59,520.
C. $69,000.
D. $76,920.
E. None of the above.

63. Carlos purchased an apartment building on November 16, 2013, for $3,000,000. Determine the cost
recovery for 2013.
A. $9,630.
B. $11,910.
C. $13,950.
D. $22,740.
E. None of the above.

64. Diane purchased a factory building on April 15, 1993, for $5,000,000. She sells the factory building on
February 2, 2013. Determine the cost recovery deduction for the year of the sale.
A. $16,025.
B. $19,838.
C. $26,458.
D. $158,750.
E. None of the above.

65. Howard’s business is raising and harvesting peaches. On March 10, 2013, Howard purchased 10,000 new
peach trees at a cost of $60,000. Howard does not elect to expense assets under § 179. If eligible, Howard takes
additional first-year depreciation. Determine the cost recovery deduction for 2013.
A. $0.
B. $3,000.
C. $31,500.
D. $60,000.
E. None of the above.
66. On May 15, 2013, Brent purchased new farm equipment for $200,000. Brent used the equipment in
connection with his farming business. Brent does not elect to expense assets under § 179. Brent does not take
additional first-year depreciation. Determine the cost recovery deduction for 2013.
A. $12,852.
B. $21,420.
C. $30,000.
D. $36,000.
E. None of the above.

67. On June 1, 2013, Sam purchased used farm machinery for $150,000. Sam used the machinery in connection
with his farming business. Sam does not elect to expense assets under § 179. Sam has, however, made an
election to not have the uniform capitalization rules apply to the farming business. Sam takes additional
first-year depreciation when available. Determine the cost recovery deduction for 2013.
A. $5,000.
B. $7,500.
C. $10,000.
D. $78,750.
E. None of the above.

68. On May 30, 2013, Jane signed a 20-year lease on a factory building to use for her business. The lease
begins on June 1, 2013. In August 2013, Jane paid $300,000 for qualified leasehold improvements to the
building. Jane takes additional first-year depreciation. Determine Jane’s total deduction with respect to the
leasehold improvements for 2013.
A. $2,890.
B. $150,000.
C. $154,995.
D. $300,000.
E. None of the above.

69. On February 20, 2013, Susan paid $200,000 for a leasehold improvement to an office building that she is
going to lease to John. The leasehold improvement is not a qualified leasehold improvement. The lease will
begin on June 1, 2013, and terminate on May 31, 2023. At the termination of the lease, the improvement will be
worthless. Determine Susan’s deductible loss as a result of the termination of the lease.
A. $0.
B. $123,503.
C. $127,990.
D. $128,631.
E. None of the above.
70. White Company acquires a new machine (seven-year property) on January 10, 2013, at a cost of $600,000.
White makes the election to expense the maximum amount under § 179. No election is made to use the
straight-line method. White does take additional first-year depreciation. Determine the total deductions in
calculating taxable income related to the machine for 2013 assuming White has taxable income of $800,000.
A. $71,593.
B. $128,610.
C. $385,296.
D. $390,868.
E. None of the above.

71. Augie purchased one new asset during the year (five-year property) on November 10, 2013, at a cost of
$650,000. She made the § 179 election. The income from the business before the cost recovery deduction and
the § 179 deduction was $600,000. She takes additional first-year depreciation. Determine the total cost
recovery deduction with respect to the asset for 2013.
A. $22,500.
B. $154,550.
C. $500,000.
D. $600,700.
E. None of the above.

72. In 2012, Gail had a § 179 deduction carryover of $30,000. In 2013, she elected § 179 for an asset acquired
at a cost of $115,000. Gail’s § 179 business income limitation for 2013 is $140,000. Determine Gail’s § 179
deduction for 2013.
A. $25,000.
B. $115,000.
C. $130,000.
D. $140,000.
E. None of the above.

73. The only asset Bill purchased during 2013 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 2013.
A. $1,428.
B. $2,499.
C. $26,749.
D. $33,375.
E. None of the above.
74. Mary purchased a new five-year class asset on March 7, 2013. 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 $900,000.
Mary made the § 179 election. The income from the business before the § 179 deduction was $600,000. Mary
does take additional first-year depreciation. Determine the total deductions with respect to the asset for 2013.
A. $72,000.
B. $271,600.
C. $524,000.
D. $600,000.
E. None of the above.

75. Hans purchased a new passenger automobile on August 17, 2013, 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 2013.
A. $500.
B. $1,000.
C. $1,224.
D. $1,500.
E. None of the above.

76. On June 1, 2013, Irene places in service a new automobile that cost $21,000. The car is used 70% for
business and 30% for personal use. (Assume this percentage is maintained for the life of the car.) She does not
take additional first-year depreciation. Determine the cost recovery deduction for 2014.
A. $3,160.
B. $3,290.
C. $3,570.
D. $6,720.
E. None of the above.

77. On June 1, 2013, 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
take additional first-year depreciation. Determine the cost recovery deduction for 2013.
A. $1,776.
B. $1,836.
C. $6,696.
D. $11,160.
E. None of the above.
78. On May 2, 2013, Karen placed in service a new sports utility vehicle that cost $60,000 and has a gross
vehicle weight of 6,300 lbs. The vehicle is used 60% for business and 40% for personal use. Determine the
cost recovery for 2013. Karen wants to maximize her deductions.
A. $2,200.
B. $3,060.
C. $25,000.
D. $27,200.
E. None of the above.

79. On July 17, 2013, Kevin places in service a used automobile that cost $25,000. The car is used 80% for
business and 20% for personal use. In 2014, he used the automobile 40% for business and 60% for personal use.
Determine the cost recovery recapture for 2014.
A. $0.
B. $528.
C. $2,000.
D. $2,500.
E. None of the above.

80. Janet purchased a new car on June 5, 2013, at a cost of $20,000. She used the car 80% for business and 20%
for personal use in 2013. She used the automobile 40% for business and 60% for personal use in 2014. Janet
takes additional first-year depreciation. Determine Janet’s cost recovery recapture for 2014.
A. $0.
B. $928.
C. $1,008.
D. $7,328.
E. None of the above.

81. On July 10, 2013, 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 2013, assuming Ariff’s
§ 179 business income is $110,000. Ariff does not take additional first-year depreciation.
A. $2,960.
B. $25,000.
C. $34,000.
D. $70,000.
E. None of the above.
82. On March 1, 2013, Lana leases and places in service a passenger automobile. The lease will run for five
years and the payments are $500 per month. During 2013, she uses her car 60% for business and 40% for
personal activities. Assuming the dollar amount from the IRS table is $20, determine Lana’s inclusion as a
result of the lease.
A. $0.
B. $10.
C. $17.
D. $20.
E. None of the above.

83. On June 1, 2013, Norm leases a taxi and places it in service. The lease payments are $1,000 per month.
Assuming the dollar amount from the IRS table is $241, determine Norm’s inclusion amount.
A. $0.
B. $241.
C. $907.
D. $1,687.
E. None of the above.

84. Bhaskar purchased a new factory building on September 10, 2013, for $3,700,000. Five hundred thousand
of the purchase price was allocated to the land. He elected the alternative depreciation system
(ADS). Determine the cost recovery deduction for 2014.
A. $23,328.
B. $80,000.
C. $82,048.
D. $92,500.
E. None of the above.

85. Pat purchased a used five-year class asset on March 15, 2013, for $60,000. He did not elect § 179
expensing. Determine the cost recovery deduction for 2013 for earnings and profits purposes.
A. $2,000.
B. $3,000.
C. $6,000.
D. $12,000.
E. None of the above.
86. George purchases used seven-year class property at a cost of $200,000 on April 20, 2013. Determine
George’s cost recovery deduction for 2013 for alternative minimum tax purposes, assuming George does not
elect § 179.
A. $2,500.
B. $10,000.
C. $14,280.
D. $28,580.
E. None of the above.

87. 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.
A. $16,667.
B. $26,667.
C. $33,333.
D. $100,000.
E. None of the above.

88. On June 1, 2013, Red Corporation purchased an existing business. With respect to the acquired assets of the
business, Red allocated $300,000 of the purchase price to a patent. The patent will expire in 20 years.
Determine the total amount that Red may amortize for 2013 for the patent.
A. $0.
B. $1,667.
C. $11,667.
D. $35,000.
E. None of the above.

89. Orange Corporation begins business on April 2, 2013. The corporation has startup expenditures of $64,000
which it incurred last year. If Orange Corporation elects § 195, determine the total amount that Orange may
deduct in 2013.
A. $0.
B. $3,200.
C. $4,267.
D. $7,950.
E. None of the above.
90. On January 15, 2013, 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 2013 of $500,000. The percentage depletion rate is
22%. Determine Vern’s depletion deduction for 2013.
A. $150,000.
B. $175,000.
C. $176,000.
D. $200,000.
E. $250,000.

91. Tom purchased and placed in service used office furniture on January 3, 2013, for $40,000. Tom’s
accountant depreciated the furniture using straight-line depreciation over 10 years for financial reporting
purposes. The accountant also used the same depreciation amounts when filing Tom’s income tax returns. On
January 10, 2018, Tom sold the furniture. Determine the tax basis of the furniture at the time of the sale.

92. Jim acquires a new seven-year class asset on September 20, 2013, for $80,000. He placed the asset in
service on October 5, 2013. He does not elect to expense any of the asset under § 179 or elect straight-line, cost
recovery. He takes additional first-year depreciation. He sells the asset on August 25, 2014. This is the only
asset he acquires in 2013. Determine Jim’s cost recovery in 2013 and 2014.

93. Rod paid $1,950,000 for a new warehouse on April 14, 2013. He sold the warehouse on September 29,
2018. Determine the cost recovery deduction for 2013 and 2018.
94. On March 3, 2013, Sally purchased and placed in service a building costing $12,000,000. The building has
10 floors. The bottom three floors are rented out to businesses. The top seven floors are residential
apartments. The gross rents from the businesses are $60,000 and the gross rents from the apartments are
$110,000. Determine Sally’s cost recovery for the building in 2013.

95. Sid bought a new $1,210,000 seven-year class asset on August 2, 2013. On September 12, 2013, he
purchased $860,000 of used five-year class assets. Sid does take additional first-year depreciation if available.
If Sid elects § 179, what is the maximum write-off for these purchases for 2013?

96. Polly purchased a new hotel on July 20, 2013, for $6,000,000. On January 20, 2020, the building was sold.
Determine the cost recovery deduction for the year of the sale.
97. Rustin bought used 7-year class property on May 15, 2013, for $728,000. Rustin elects § 179 and
straight-line cost recovery. Rustin’s taxable income would not create a limitation for purposes of the § 179
deduction. Determine the maximum write-off Rustin can take in 2013.

98. Audra acquires the following new five-year class property in 2013:

Asset Acquisition Date Cost

A January 10 $ 106,000
B July 5 70,000
C November 15 1,950,000
Total $2,126,000

Audra elects § 179 for Asset C. Audra’s taxable income from her business would not create a limitation for purposes of the § 179 deduction. Audra
takes additional first-year depreciation. Determine her total cost recovery deduction (including the § 179 deduction) for the year.

99. On April 5, 2013, Orange Corporation purchased, and placed in service, seven-year class assets costing
$540,000 and five-year class assets costing $140,000. Orange elects to expense the maximum amount under §
179. Orange does not take additional first-year depreciation. Assume taxable income is not a
limitation. Determine Orange Corporation’s cost recovery with respect to the assets for 2013.
100. Martin is a sole proprietor of a business. On March 4, 2013, Martin purchased and placed in service new
seven-year class assets costing $560,000. Martin’s business has income for the year, before any deductions
associated with the purchased assets, of $160,000. Martin also has $30,000 of interest income for the year
which is not related to the business. Martin wants his adjusted gross income for the year to be as low as
possible. With this objective in mind, determine how Martin should recover the cost of the acquired assets.

101. On February 21, 2013, Joe purchased new farm equipment for $600,000. Joe has made an election to not
have the uniform capitalization rules apply to his farming business. He does not take additional first-year
depreciation. If Joe elects § 179, what is the maximum write-off for this purchase for 2013?

102. On April 15, 2013, Sam placed in service a storage facility (a single-purpose agricultural structure) costing
$80,000. Sam also purchased and planted fruit trees costing $40,000. Sam does not elect to expense any of the
acquisitions under § 179. Sam elected not to take additional first-year depreciation. Determine Sam’s cost
recovery from these two items for 2013.
103. On August 20, 2012, May signed a 10-year lease on a building for her business. On November 28, 2013,
May paid $80,000 for a qualified leasehold improvement to the building. She takes additional first-year
depreciation, but does not elect § 179 expensing. What is May’s cost recovery deduction for the improvement in
2013?

104. On July 15, 2013, Mavis paid $275,000 for qualified leasehold improvements on a commercial building
she was leasing. Determine the maximum total cost recovery from the improvements in 2013.

105. Joe purchased a new five-year class asset on June 1, 2013. The asset is listed property (not an automobile).
It was used 55% for business and 45% for the production of income. The asset cost $1,000,000. Joe made the §
179 election. Joe’s taxable income would not create a limitation for purposes of the § 179 deduction. Joe does
not take additional first-year depreciation. Determine Joe’s total cost recovery (including the § 179 deduction)
for the year.
106. Nora purchased a new automobile on July 20, 2013, for $29,000. The car was used 60% for business and
40% for personal use. In 2014, the car was used 30% for business and 70% for personal use. Nora elects not to
take additional first-year depreciation. Determine the cost recovery recapture and the cost recovery deduction
for 2014.

107. Norm purchases a new sports utility vehicle (SUV) on October 12, 2013, for $50,000. The SUV has a
gross vehicle weight of 6,200 lbs. It is used 100% of the time for business and it is the only business asset
acquired by Norm during 2013. Compute the maximum deduction with respect to the SUV for 2013. Norm
does take additional first-year depreciation.

108. On June 1, 2013, 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.
109. In 2013, Marci is considering starting a new business. Marci had the following costs associated with this
venture:

Advertising $ 5,000
Travel 10,000
Market surveys 8,000
Professional services 30,000
Interest expense 2,000
Taxes 1,000

Marci started the new business on January 5, 2014. Determine the deduction for Marci’s startup costs for 2013.

110. Rick purchased a uranium interest for $10,000,000 on January 3, 2013, when recoverable reserves were
estimated at 200,000 units. A total of 10,000 units were extracted in 2013 and 7,000 units were sold in 2013.
Gross income from the property was $2,800,000 and taxable income without the allowance for depletion was
$1,000,000. Determine the depletion deduction for 2013.

111. Discuss the difference between the half-year convention and the mid-quarter convention.
112. 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 2013.

113. Discuss the effect on the cost recovery method of a taxpayer election if the uniform capitalization rules
apply to a farming business.

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

115. Discuss the beneficial tax consequences of an SUV not being classified as a passenger automobile.
116. Discuss the reason for the inclusion amount with respect to leased automobiles.

117. Discuss the requirements in order for startup expenditures to be amortized under § 195.

118. Discuss the tax implications of a seller allocating the selling price to goodwill or a covenant not to
compete.
COMPREHENSIVE VOLUME--CHAPTER
8--DEPRECIATION, COST RECOVERY, AMORTIZATION,
AND DEPLETION Key

1. Property which is classified as personalty may be depreciated.

TRUE

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

3. Antiques may be eligible for cost recovery if they are used in a trade or business.
FALSE

4. The key date for calculating cost recovery is the date the asset is placed in service.
TRUE

5. Land improvements are generally not eligible for cost recovery.

FALSE

6. The cost recovery basis for property converted from personal use to business use may be the fair market
value of the property at the time of the conversion.
TRUE

7. The maximum cost recovery method for all personal property under MACRS is 150% declining balance.
FALSE

8. The cost recovery period for 3-year class property is 4 years.

TRUE
9. All personal property placed in service in 2013 and used in a trade or business qualifies for additional
first-year depreciation.
FALSE

10. If more than 40% of the value of property, other than real property, is placed in service during the last
quarter, all of the property placed in service in the second quarter will be allowed 7.5 months of cost recovery.
TRUE

11. 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.
FALSE

12. 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.
FALSE

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

14. Motel buildings have a cost recovery period of 27.5 years.

FALSE

15. Taxpayers may elect to use the straight-line method under MACRS for personalty.
TRUE

16. Under the MACRS straight-line election for personalty, only the half-year convention is applicable.
FALSE

17. The cost recovery method for new farm equipment placed in service during 2013 is 200% declining
balance.
FALSE
18. In a farming business, MACRS straight-line cost recovery is required for all fruit bearing trees.
TRUE

19. In a farming business, if the uniform capitalization rules are not used, cost is recovered using the ADS
straight-line method.
TRUE

20. When lessor owned leasehold improvements are abandoned because of the termination of the lease, a loss
can be taken for the unrecovered basis.
TRUE

21. The costs of qualified leasehold improvements qualify for additional first-year depreciation.
TRUE

22. For personal property placed in service in 2013, the § 179 maximum deduction is limited to $500,000.
TRUE

23. The § 179 deduction can exceed $500,000 in 2013 if the taxpayer had a § 179 amount which exceeded the
taxable income limitation in the prior year.
FALSE

24. Any § 179 expense amount that is carried forward is subject to the business income limitation in the
carryforward year.
TRUE

25. Taxable income for purposes of § 179 limited expensing is computed by including the MACRS deduction.
TRUE

26. The basis of an asset on which $500,000 has been expensed under § 179 will be reduced by $500,000, even
if $500,000 cannot be expensed in the current year because of the taxable income limitation.
TRUE
27. Property used for the production of income is not eligible for § 179 expensing.
TRUE

28. The statutory dollar cost recovery limits under § 280F does apply to all automobiles.
FALSE

29. The § 179 limit for a sports utility vehicle with a GVW of 7,000 pounds will not apply if the sports utility
vehicle is used as a taxi.
FALSE

30. 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.
TRUE

31. If a new car that is used predominantly in business is placed in service in 2013, the statutory dollar cost
recovery limit under § 280F will depend on whether the taxpayer takes MACRS or straight-line depreciation.
FALSE

32. If an automobile is placed in service in 2013, the limitation for cost recovery in 2015 will be based on the
cost recovery limits for the year 2013.
TRUE

33. The statutory dollar cost recovery limits under § 280F for passenger automobiles are changed if mid-quarter
cost recovery is used.
FALSE

34. If a used $35,000 automobile used 100% for business in the first year (2013) fails the 50% business usage
test in the second year, no cost recovery will be recaptured.
TRUE

35. The inclusion amount for a leased automobile is adjusted by a business usage percentage.
TRUE
36. All listed property is subject to the substantiation requirements of § 274.
TRUE

37. If a taxpayer uses regular MACRS for all property, an alternative minimum tax adjustment is made with
respect to the depreciation on all property, regardless of the class life.
FALSE

38. MACRS depreciation is used to compute earnings and profits.

FALSE

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

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

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

42. For real property, the ADS convention is the mid-month convention.
TRUE

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

44. Goodwill associated with the acquisition of a business cannot be amortized.

FALSE
45. A purchased trademark is a § 197 intangible.
TRUE

46. If startup expenses total $53,000 in 2013, $51,000 is amortized over 180 months.
TRUE

47. The amortization period in 2013 for $58,000 of startup expenses is 180 months.
TRUE

48. Cost depletion is determined by multiplying the depletion cost per unit by the number of units sold.
TRUE

49. Percentage depletion enables the taxpayer to recover more than the cost of an asset.
TRUE

50. Intangible drilling costs must be capitalized and written off through depletion.
FALSE

51. Grape Corporation purchased a machine in December of the current year. This was the only asset purchased
during the current year. The machine was placed in service in January of the following year. No assets were
purchased in the following year. Grape Corporation’s cost recovery would begin:
A. In the current year using a mid-quarter convention.
B. In the current year using a half-year convention.
C. In the following year using a mid-quarter convention.
D. In the following year using a half-year convention.
E. None of the above.

52. Which of the following assets would be subject to cost recovery?

A. A painting by Picasso hanging on a doctor’s office wall.
B. An antique vase in a doctor’s waiting room.
C. Landscaping around the doctor’s office.
D. a., b., and c.
E. None of the above.
53. On June 1 of the current year, Tab converted a machine from personal use to rental property. At the time of
the conversion, the machine was worth $90,000. Five years ago Tab purchased the machine for $120,000. The
machine is still encumbered by a $50,000 mortgage. What is the basis of the machine for cost recovery?
A. $70,000.
B. $90,000.
C. $120,000.
D. $140,000.
E. None of the above.

54. Tara purchased a machine for $40,000 to be used in her business. The cost recovery allowed and allowable
for the three years the machine was used are as follows:

Cost Recovery Allowed Cost Recovery Allowable

Year 1 $16,000 $ 8,000
Year 2 9,600 12,800
Year 3 5,760 7,680

If Tara sells the machine after three years for $15,000, how much gain should she recognize?
A. $3,480.
B. $6,360.
C. $9,240.
D. $11,480.
E. None of the above.

55. Hazel purchased a new business asset (five-year asset) on September 30, 2013, at a cost of $100,000. On
October 4, 2013, Hazel placed the asset in service. This was the only asset Hazel placed in service in
2013. The only election with respect to the asset was not to take § 179. On August 20, 2014, Hazel sold the
asset. Determine the cost recovery for 2014 for the asset.
A. $9,600.
B. $11,875.
C. $23,750.
D. $38,000.
E. None of the above.

56. Tan Company acquires a new machine (ten-year property) on January 15, 2013, at a cost of $200,000. Tan
also acquires another new machine (seven-year property) on November 5, 2013, at a cost of $40,000. No
election is made to use the straight-line method. The company does not make the § 179 election. Tan elects to
not take additional first-year depreciation. Determine the total deductions in calculating taxable income related
to the machines for 2013.
A. $24,000.
B. $25,716.
C. $102,000.
D. $132,858.
E. None of the above.
57. James purchased a new business asset (three-year personalty) on July 23, 2013, at a cost of $40,000. James
takes additional first-year depreciation Determine the cost recovery deduction for 2013.
A. $8,333.
B. $26,666.
C. $33,333.
D. $41,665.
E. None of the above.

58. Alice purchased office furniture on September 20, 2012, for $100,000. On October 10, 2012, she purchased
business computers for $80,000. Alice placed all of the assets in service on January 15, 2013. Alice did not elect
to expense any of the assets under § 179, nor did she elect straight-line cost recovery. She did not take
additional first-year depreciation. Determine the cost recovery deduction for the business assets for 2013.
A. $6,426.
B. $14,710.
C. $25,722.
D. $30,290.
E. None of the above.

59. Barry purchased a used business asset (seven-year property) on September 30, 2013, at a cost of $200,000.
This is the only asset he purchased during the year. Barry did not elect to expense any of the asset under § 179,
nor did he elect straight-line cost recovery. Barry sold the asset on July 17, 2014. Determine the cost recovery
deduction for 2014.
A. $19,133.
B. $24,490.
C. $34,438.
D. $55,100.
E. None of the above.

60. Bonnie purchased a new business asset (five-year property) on March 10, 2013, at a cost of $30,000. She
also purchased a new business asset (seven-year property) on November 20, 2013, 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. Bonnies
takes additional first-year depreciation. Determine the cost recovery deduction for 2013 for these assets.
A. $5,858.
B. $7,464.
C. $9,586.
D. $19,429.
E. None of the above.
61. Doug purchased a new factory building on January 15, 1988, for $400,000. On March 1, 2013, the building
was sold. Determine the cost recovery deduction for the year of the sale assuming he did not use the MACRS
straight-line method.
A. $0.
B. $1,587.
C. $2,645.
D. $12,696.
E. None of the above.

62. Cora purchased a hotel building on May 17, 2013, for $3,000,000. Determine the cost recovery deduction
for 2014.
A. $48,150.
B. $59,520.
C. $69,000.
D. $76,920.
E. None of the above.

63. Carlos purchased an apartment building on November 16, 2013, for $3,000,000. Determine the cost
recovery for 2013.
A. $9,630.
B. $11,910.
C. $13,950.
D. $22,740.
E. None of the above.

64. Diane purchased a factory building on April 15, 1993, for $5,000,000. She sells the factory building on
February 2, 2013. Determine the cost recovery deduction for the year of the sale.
A. $16,025.
B. $19,838.
C. $26,458.
D. $158,750.
E. None of the above.

65. Howard’s business is raising and harvesting peaches. On March 10, 2013, Howard purchased 10,000 new
peach trees at a cost of $60,000. Howard does not elect to expense assets under § 179. If eligible, Howard takes
additional first-year depreciation. Determine the cost recovery deduction for 2013.
A. $0.
B. $3,000.
C. $31,500.
D. $60,000.
E. None of the above.
66. On May 15, 2013, Brent purchased new farm equipment for $200,000. Brent used the equipment in
connection with his farming business. Brent does not elect to expense assets under § 179. Brent does not take
additional first-year depreciation. Determine the cost recovery deduction for 2013.
A. $12,852.
B. $21,420.
C. $30,000.
D. $36,000.
E. None of the above.

67. On June 1, 2013, Sam purchased used farm machinery for $150,000. Sam used the machinery in connection
with his farming business. Sam does not elect to expense assets under § 179. Sam has, however, made an
election to not have the uniform capitalization rules apply to the farming business. Sam takes additional
first-year depreciation when available. Determine the cost recovery deduction for 2013.
A. $5,000.
B. $7,500.
C. $10,000.
D. $78,750.
E. None of the above.

68. On May 30, 2013, Jane signed a 20-year lease on a factory building to use for her business. The lease
begins on June 1, 2013. In August 2013, Jane paid $300,000 for qualified leasehold improvements to the
building. Jane takes additional first-year depreciation. Determine Jane’s total deduction with respect to the
leasehold improvements for 2013.
A. $2,890.
B. $150,000.
C. $154,995.
D. $300,000.
E. None of the above.

69. On February 20, 2013, Susan paid $200,000 for a leasehold improvement to an office building that she is
going to lease to John. The leasehold improvement is not a qualified leasehold improvement. The lease will
begin on June 1, 2013, and terminate on May 31, 2023. At the termination of the lease, the improvement will be
worthless. Determine Susan’s deductible loss as a result of the termination of the lease.
A. $0.
B. $123,503.
C. $127,990.
D. $128,631.
E. None of the above.
70. White Company acquires a new machine (seven-year property) on January 10, 2013, at a cost of $600,000.
White makes the election to expense the maximum amount under § 179. No election is made to use the
straight-line method. White does take additional first-year depreciation. Determine the total deductions in
calculating taxable income related to the machine for 2013 assuming White has taxable income of $800,000.
A. $71,593.
B. $128,610.
C. $385,296.
D. $390,868.
E. None of the above.

71. Augie purchased one new asset during the year (five-year property) on November 10, 2013, at a cost of
$650,000. She made the § 179 election. The income from the business before the cost recovery deduction and
the § 179 deduction was $600,000. She takes additional first-year depreciation. Determine the total cost
recovery deduction with respect to the asset for 2013.
A. $22,500.
B. $154,550.
C. $500,000.
D. $600,700.
E. None of the above.

72. In 2012, Gail had a § 179 deduction carryover of $30,000. In 2013, she elected § 179 for an asset acquired
at a cost of $115,000. Gail’s § 179 business income limitation for 2013 is $140,000. Determine Gail’s § 179
deduction for 2013.
A. $25,000.
B. $115,000.
C. $130,000.
D. $140,000.
E. None of the above.

73. The only asset Bill purchased during 2013 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 2013.
A. $1,428.
B. $2,499.
C. $26,749.
D. $33,375.
E. None of the above.
74. Mary purchased a new five-year class asset on March 7, 2013. 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 $900,000.
Mary made the § 179 election. The income from the business before the § 179 deduction was $600,000. Mary
does take additional first-year depreciation. Determine the total deductions with respect to the asset for 2013.
A. $72,000.
B. $271,600.
C. $524,000.
D. $600,000.
E. None of the above.

75. Hans purchased a new passenger automobile on August 17, 2013, 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 2013.
A. $500.
B. $1,000.
C. $1,224.
D. $1,500.
E. None of the above.

76. On June 1, 2013, Irene places in service a new automobile that cost $21,000. The car is used 70% for
business and 30% for personal use. (Assume this percentage is maintained for the life of the car.) She does not
take additional first-year depreciation. Determine the cost recovery deduction for 2014.
A. $3,160.
B. $3,290.
C. $3,570.
D. $6,720.
E. None of the above.

77. On June 1, 2013, 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
take additional first-year depreciation. Determine the cost recovery deduction for 2013.
A. $1,776.
B. $1,836.
C. $6,696.
D. $11,160.
E. None of the above.
78. On May 2, 2013, Karen placed in service a new sports utility vehicle that cost $60,000 and has a gross
vehicle weight of 6,300 lbs. The vehicle is used 60% for business and 40% for personal use. Determine the
cost recovery for 2013. Karen wants to maximize her deductions.
A. $2,200.
B. $3,060.
C. $25,000.
D. $27,200.
E. None of the above.

79. On July 17, 2013, Kevin places in service a used automobile that cost $25,000. The car is used 80% for
business and 20% for personal use. In 2014, he used the automobile 40% for business and 60% for personal use.
Determine the cost recovery recapture for 2014.
A. $0.
B. $528.
C. $2,000.
D. $2,500.
E. None of the above.

80. Janet purchased a new car on June 5, 2013, at a cost of $20,000. She used the car 80% for business and 20%
for personal use in 2013. She used the automobile 40% for business and 60% for personal use in 2014. Janet
takes additional first-year depreciation. Determine Janet’s cost recovery recapture for 2014.
A. $0.
B. $928.
C. $1,008.
D. $7,328.
E. None of the above.

81. On July 10, 2013, 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 2013, assuming Ariff’s
§ 179 business income is $110,000. Ariff does not take additional first-year depreciation.
A. $2,960.
B. $25,000.
C. $34,000.
D. $70,000.
E. None of the above.
82. On March 1, 2013, Lana leases and places in service a passenger automobile. The lease will run for five
years and the payments are $500 per month. During 2013, she uses her car 60% for business and 40% for
personal activities. Assuming the dollar amount from the IRS table is $20, determine Lana’s inclusion as a
result of the lease.
A. $0.
B. $10.
C. $17.
D. $20.
E. None of the above.

83. On June 1, 2013, Norm leases a taxi and places it in service. The lease payments are $1,000 per month.
Assuming the dollar amount from the IRS table is $241, determine Norm’s inclusion amount.
A. $0.
B. $241.
C. $907.
D. $1,687.
E. None of the above.

84. Bhaskar purchased a new factory building on September 10, 2013, for $3,700,000. Five hundred thousand
of the purchase price was allocated to the land. He elected the alternative depreciation system
(ADS). Determine the cost recovery deduction for 2014.
A. $23,328.
B. $80,000.
C. $82,048.
D. $92,500.
E. None of the above.

85. Pat purchased a used five-year class asset on March 15, 2013, for $60,000. He did not elect § 179
expensing. Determine the cost recovery deduction for 2013 for earnings and profits purposes.
A. $2,000.
B. $3,000.
C. $6,000.
D. $12,000.
E. None of the above.
86. George purchases used seven-year class property at a cost of $200,000 on April 20, 2013. Determine
George’s cost recovery deduction for 2013 for alternative minimum tax purposes, assuming George does not
elect § 179.
A. $2,500.
B. $10,000.
C. $14,280.
D. $28,580.
E. None of the above.

87. 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.
A. $16,667.
B. $26,667.
C. $33,333.
D. $100,000.
E. None of the above.

88. On June 1, 2013, Red Corporation purchased an existing business. With respect to the acquired assets of the
business, Red allocated $300,000 of the purchase price to a patent. The patent will expire in 20 years.
Determine the total amount that Red may amortize for 2013 for the patent.
A. $0.
B. $1,667.
C. $11,667.
D. $35,000.
E. None of the above.

89. Orange Corporation begins business on April 2, 2013. The corporation has startup expenditures of $64,000
which it incurred last year. If Orange Corporation elects § 195, determine the total amount that Orange may
deduct in 2013.
A. $0.
B. $3,200.
C. $4,267.
D. $7,950.
E. None of the above.
90. On January 15, 2013, 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 2013 of $500,000. The percentage depletion rate is
22%. Determine Vern’s depletion deduction for 2013.
A. $150,000.
B. $175,000.
C. $176,000.
D. $200,000.
E. $250,000.

91. Tom purchased and placed in service used office furniture on January 3, 2013, for $40,000. Tom’s
accountant depreciated the furniture using straight-line depreciation over 10 years for financial reporting
purposes. The accountant also used the same depreciation amounts when filing Tom’s income tax returns. On
January 10, 2018, Tom sold the furniture. Determine the tax basis of the furniture at the time of the sale.

The cost of the asset must be reduced by the greater of the cost recovery allowed or allowable in calculating the
tax basis.

Cost $40,000
2013 allowable ($40,000 ´ .1429) (5,716)
2014 allowable ($40,000 ´ .2449) (9,796)
2015 allowable ($40,000 ´ .1749) (6,996)
2016 allowable ($40,000 ´ .1249) (4,996)
2017 allowed ($40,000 ´ .0893) (3,572)
2018 allowable ($40,000 ´ .0892 ´ .50) (1,784)
Tax basis $ 7,140

92. Jim acquires a new seven-year class asset on September 20, 2013, for $80,000. He placed the asset in
service on October 5, 2013. He does not elect to expense any of the asset under § 179 or elect straight-line, cost
recovery. He takes additional first-year depreciation. He sells the asset on August 25, 2014. This is the only
asset he acquires in 2013. Determine Jim’s cost recovery in 2013 and 2014.

The mid-quarter convention applies.

2013

Additional first-year depreciation ($80,000 ´ .50) $40,000

MACRS cost recovery ($40,000 ´ .0357) 1,428
Total for 2013 $41,428
2014
MACRS cost recovery [$40,000 ´ .2755 ´ (2.5/4)] $ 6,888
93. Rod paid $1,950,000 for a new warehouse on April 14, 2013. He sold the warehouse on September 29,
2018. Determine the cost recovery deduction for 2013 and 2018.

2013: $1,950,000 ´ .01819 = $35,471.

2018: $1,950,000 ´ .02564 ´ 8.5/12 = $35,415.

94. On March 3, 2013, Sally purchased and placed in service a building costing $12,000,000. The building has
10 floors. The bottom three floors are rented out to businesses. The top seven floors are residential
apartments. The gross rents from the businesses are $60,000 and the gross rents from the apartments are
$110,000. Determine Sally’s cost recovery for the building in 2013.

The gross rents from the apartments are not 80% or more of the total gross rents and hence, the whole building
cannot be treated as residential rental real estate.

Residential [(70% ´ $12,000,000) ´ .02879] $241,836

Nonresidential [(30% ´ $12,000,000) ´ .02033] 73,188
Total cost recovery $315,024

95. Sid bought a new $1,210,000 seven-year class asset on August 2, 2013. On September 12, 2013, he
purchased $860,000 of used five-year class assets. Sid does take additional first-year depreciation if available.
If Sid elects § 179, what is the maximum write-off for these purchases for 2013?

§ 179 expense [$500,000 – ($2,070,000 – $2,000,000)] $430,000

Taking § 179 expense on 7-year property:

7-year property
§ 179 expense $ 430,000
Additional first-year depreciation [($1,210,000 – $430,000) ´ .50] 390,000
MACRS cost recovery ($390,000 ´ .1429) 55,731

5-year property
MACRS cost recovery ($860,000 ´ .20) 172,000
Total deduction $1,047,731

Taking § 179 expense on 5-year property:

7-year property
Additional first-year depreciation ($1,210,000 ´ .50) $ 605,000
MACRS cost recovery ($605,000 ´ .1429) 86,455
5-year property
§ 179 expense 430,000
MACRS cost recovery [($860,000 – $430,000) ´ .20] 86,000
Total deduction $1,207,455

Using § 179 on the used 5-year asset produces the greater total deduction in 2013.
96. Polly purchased a new hotel on July 20, 2013, for $6,000,000. On January 20, 2020, the building was sold.
Determine the cost recovery deduction for the year of the sale.

$6,000,000 ´ .02564 ´ .5/12 = $6,410.

97. Rustin bought used 7-year class property on May 15, 2013, for $728,000. Rustin elects § 179 and
straight-line cost recovery. Rustin’s taxable income would not create a limitation for purposes of the § 179
deduction. Determine the maximum write-off Rustin can take in 2013.

§ 179 expense election $500,000

Cost recovery [($728,000 – $500,000) ´ .0714 (Table 8.3)] 16,279
Total deduction $516,279

98. Audra acquires the following new five-year class property in 2013:

Asset Acquisition Date Cost

A January 10 $ 106,000
B July 5 70,000
C November 15 1,950,000
Total $2,126,000

Audra elects § 179 for Asset C. Audra’s taxable income from her business would not create a limitation for purposes of the § 179 deduction. Audra
takes additional first-year depreciation. Determine her total cost recovery deduction (including the § 179 deduction) for the year.

$1,950,000/$2,126,000 = 91.7%. Therefore, Audra must use the mid-quarter convention.

Asset A:
Additional first-year depreciation ($106,000 ´ .50) $ 53,000
MACRS cost recovery ($53,000 ´ .35) 18,550
Asset B:
Additional first-year depreciation ($70,000 ´ .50) 35,000
MACRS cost recovery ($35,000 ´ .15) 5,250
Asset C:
§ 179 expense [$500,000 – ($2,126,000 – $2,000,000)] 374,000
Additional first-year depreciation [($1,950,000 – $374,000) ´ .50] 788,000
MACRS cost recovery ($788,000 ´ .05) 39,400
Total deduction $1,313,200
99. On April 5, 2013, Orange Corporation purchased, and placed in service, seven-year class assets costing
$540,000 and five-year class assets costing $140,000. Orange elects to expense the maximum amount under §
179. Orange does not take additional first-year depreciation. Assume taxable income is not a
limitation. Determine Orange Corporation’s cost recovery with respect to the assets for 2013.

§ 179 $500,000
limit

Seven-yea
r assets
§ 179 expense $500,000
Regular MACRS [($540,000 – $500,000) ´ .1429] 5,716
Five-year
assets
Regular MACRS ($140,000 ´ .20) 28,000
Total cost $533,716
recovery

100. Martin is a sole proprietor of a business. On March 4, 2013, Martin purchased and placed in service new
seven-year class assets costing $560,000. Martin’s business has income for the year, before any deductions
associated with the purchased assets, of $160,000. Martin also has $30,000 of interest income for the year
which is not related to the business. Martin wants his adjusted gross income for the year to be as low as
possible. With this objective in mind, determine how Martin should recover the cost of the acquired assets.

Electing § 179:

§ 179 expense $500,000

Business income before MACRS deductions $160,000
Additional first-year depreciation
[($560,000 – $500,000) ´ 50%] (30,000)
MACRS cost recovery ($30,000 ´ .1429) (4,287)
Business income limitation $125,713
§ 179 limit $125,713
Business income $ –0–
Interest income 30,000
Adjusted gross income $ 30,000

Not
electing §
179:

Business income before MACRS deductions $160,000

Additional first-year depreciation ($560,000 ´ 50%) (280,000)
MACRS cost recovery ($280,000 ´ .1429) (40,012)
Business income ($160,012)
Interest income 30,000
Adjusted gross income ($130,012)

Not electing § 179 will produce the lowest adjusted gross income because the § 179 expense cannot create a business loss.
101. On February 21, 2013, Joe purchased new farm equipment for $600,000. Joe has made an election to not
have the uniform capitalization rules apply to his farming business. He does not take additional first-year
depreciation. If Joe elects § 179, what is the maximum write-off for this purchase for 2013?

§ 179 expense $500,000

ADS straight-line [($600,000 – $500,000) ´ .05] 5,000
Total deduction $505,000

102. On April 15, 2013, Sam placed in service a storage facility (a single-purpose agricultural structure) costing
$80,000. Sam also purchased and planted fruit trees costing $40,000. Sam does not elect to expense any of the
acquisitions under § 179. Sam elected not to take additional first-year depreciation. Determine Sam’s cost
recovery from these two items for 2013.

Storage facility ($80,000 ´ .075) (Table 8.4) $6,000

Trees ($40,000 ´ .05) (Table 8.3) 2,000
Total cost recovery $8,000

103. On August 20, 2012, May signed a 10-year lease on a building for her business. On November 28, 2013,
May paid $80,000 for a qualified leasehold improvement to the building. She takes additional first-year
depreciation, but does not elect § 179 expensing. What is May’s cost recovery deduction for the improvement in
2013?

Additional first-year depreciation ($80,000 ´ .50) $40,000

MACRS cost recovery ($40,000 ´ .0333) 1,332
Total deduction $41,332

104. On July 15, 2013, Mavis paid $275,000 for qualified leasehold improvements on a commercial building
she was leasing. Determine the maximum total cost recovery from the improvements in 2013.

§ 179 expense $250,000

Additional first-year depreciation [($275,000 – $250,000) ´ 50%] 12,500
Regular MACRS ($12,500 ´ .0333) 416
$262,916
105. Joe purchased a new five-year class asset on June 1, 2013. The asset is listed property (not an automobile).
It was used 55% for business and 45% for the production of income. The asset cost $1,000,000. Joe made the §
179 election. Joe’s taxable income would not create a limitation for purposes of the § 179 deduction. Joe does
not take additional first-year depreciation. Determine Joe’s total cost recovery (including the § 179 deduction)
for the year.

Business use: $550,000 ($1,000,000 ´ 55%)

§ 179 expense $500,000

Regular MACRS [($550,000 – $500,000) ´ .20] 10,000

Production of income use: $450,000 ($1,000,000 ´ 45%)

Regular MACRS ($450,000 ´ .20) 90,000
Total deduction $600,000

*Property used for the production of income is not eligible for § 179 expensing.

106. Nora purchased a new automobile on July 20, 2013, for $29,000. The car was used 60% for business and
40% for personal use. In 2014, the car was used 30% for business and 70% for personal use. Nora elects not to
take additional first-year depreciation. Determine the cost recovery recapture and the cost recovery deduction
for 2014.

Cost recovery in 2013:

MACRS ($29,000 ´ .20) = $5,800 (limited to $3,160*); $3,160 ´ 60% $1,896

Straight-line ($29,000 ´ .10) = $2,900 (limited to $3,160*); $2,900 ´ 60% (1,740)
Cost recovery recapture in 2014 $ 156
Cost recovery in 2014:
Straight-line ($29,000 ´ .20) = $5,800 (limited to $5,100*); $5,100 ´ .30 $1,530

*These depreciation limits are indexed annually.

107. Norm purchases a new sports utility vehicle (SUV) on October 12, 2013, for $50,000. The SUV has a
gross vehicle weight of 6,200 lbs. It is used 100% of the time for business and it is the only business asset
acquired by Norm during 2013. Compute the maximum deduction with respect to the SUV for 2013. Norm
does take additional first-year depreciation.

The SUV is not classified as a passenger automobile because of its GVW exceeding 6,000 lbs. Therefore, it is
not subject to the cost recovery limits of § 280F.

Section 179 expense (limited to $25,000) $25,000

Additional first-year depreciation [($50,000 – $25,000) ´ .50] 12,500
MACRS cost recovery ($12,500 ´ .05) 625
Total deduction $38,125
108. On June 1, 2013, 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.

A computer and peripheral equipment are listed property. Since the more-than-50% business use test is not
satisfied, Gabriella cannot elect § 179 expensing, she must use straight-line cost recovery, and is not eligible for
additional first-year depreciation. The 10% of personal usage does not qualify for cost recovery.

$25,000 ´ .10 ´ 90% = $2,250.

109. In 2013, Marci is considering starting a new business. Marci had the following costs associated with this
venture:

Advertising $ 5,000
Travel 10,000
Market surveys 8,000
Professional services 30,000
Interest expense 2,000
Taxes 1,000

Marci started the new business on January 5, 2014. Determine the deduction for Marci’s startup costs for 2013.

Marci is not allowed to deduct any startup costs in 2013 because the business was not started until 2014.

110. Rick purchased a uranium interest for $10,000,000 on January 3, 2013, when recoverable reserves were
estimated at 200,000 units. A total of 10,000 units were extracted in 2013 and 7,000 units were sold in 2013.
Gross income from the property was $2,800,000 and taxable income without the allowance for depletion was
$1,000,000. Determine the depletion deduction for 2013.

Cost depletion

Percentage depletion

Lesser of:
22% ´ $2,800,000 = $616,000
50% ´ $1,000,000 = $500,000

Therefore the depletion deduction would be $500,000.

111. Discuss the difference between the half-year convention and the mid-quarter convention.

The half-year convention assumes property is placed in service at mid-year and thus provides for a half-year’s
cost recovery for that year. The mid-quarter convention assumes property placed in service during the year is
placed in service at the middle of the quarter in which it is actually placed in service.

112. 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 2013.

Residential realty is property for which 80% or more of the gross rental revenues are from nontransient
dwelling units. Residential realty has a recovery period of 27.5 years. Nonresidential realty has a recovery
period of 39 years.

113. Discuss the effect on the cost recovery method of a taxpayer election if the uniform capitalization rules
apply to a farming business.

The cost recovery method is generally MACRS using the 150% declining-balance method.

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

Section 179 expensing cannot be taken on property used for the production of income. For listed property,
additional first-year depreciation is not available if the property fails the more-than-50% business use test in the
first year.

115. Discuss the beneficial tax consequences of an SUV not being classified as a passenger automobile.

If an automobile is not classified as a passenger automobile, it is not subject to the statutory dollar cost recovery
limits under § 280F. In addition to a larger cost recovery deduction each year, it also results in the total recovery
of the cost over a six-year period. While the automobile is still listed property, if it passes the more-than-50%
business use test, MACRS cost recovery can be used as well as an election under § 179. However, the § 179
limit for SUVs is $25,000 rather than $500,000 in 2013. The automobile also is eligible for additional first-year
depreciation.

116. Discuss the reason for the inclusion amount with respect to leased automobiles.

The purpose of the inclusion amount is to prevent taxpayers from circumventing the cost recovery dollar
limitations by leasing, instead of purchasing, an automobile.
117. Discuss the requirements in order for startup expenditures to be amortized under § 195.

The expenditures must meet two requirements.

· The expenditures must be paid or incurred in connection with:

· Creating an active trade or business;

· Investigating the creation or acquisition of an active trade or business; or

· Any activity engaged in for profit in anticipation of such activity becoming an active trade or business.

· Such
costs
must
be the
kinds
of
costs
that
would
be
current
ly
deducti
ble if
paid or
incurre
d in
connec
tion
with
the
operati
on of
an
existin
g trade
or
busines
s in the
same
field as
that
entered
into by
the
taxpay
er.

118. Discuss the tax implications of a seller allocating the selling price to goodwill or a covenant not to
compete.

Goodwill is a capital asset and any gain or loss recognized on the sale of the goodwill will be capital gain or
loss. A covenant not to compete is an ordinary asset and any gain or loss will be ordinary gain or loss.