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

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Question 21

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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 these.

F) All of the above
G) None of the above

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Question 22

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

A) True
B) False

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Question 23

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The "luxury auto" cost recovery limits change if mid-quarter cost recovery is used.

All listed property is subject to the substantiation requirements of § 274.

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

For personal property placed in service in 2019, the § 179 maximum deduction is $1,020,000.

Sid bought a new $1,320,000 seven-year class asset on August 2, 2019.On December 2, 2019, he purchased $800,000 of used five-year class assets.If Sid elects § 179 and does not take additional first-year depreciation, what is the maximum cost recovery deduction for these purchases for 2019?

Percentage depletion enables the taxpayer to recover more than the cost of an asset in the form of tax deductions.

On June 1, 2019, 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.Determine the cost recovery deduction for 2019.

Land costs generally are amortized rather than being cost recovered under MACRS.

Hans purchased a new passenger automobile on August 17, 2019, 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 2019.

On January 15, 2019, Dillon 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.Dillon incurred expenses during 2019 of $500,000.The percentage depletion rate is 22%.Determine Dillon's depletion deduction for 2019.

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.

On May 5 of the current tax year, Byrne purchased a patent that qualifies as a § 197 intangible.The cost of the patent was $207,000 and Byrne is a calendar year taxpayer.In the current tax year, how much of the patent's cost may Byrne amortize?

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

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

Bonnie purchased a new business asset (five-year property) on March 10, 2019, at a cost of $30,000.She also purchased a new business asset (seven-year property) on November 20, 2019, 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.Bonnie takes additional first-year depreciation.Determine the cost recovery deduction for 2019 for these assets.

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.

Tom purchased and placed in service used office furniture on January 3, 2019, for $40,000.Tom's accountant depreciated the furniture using straight-line depreciation over 10 years for financial reporting purposes.The accountant used the same depreciation amounts when filing Tom's income tax returns.On January 10, 2024, Tom sold the furniture.Determine the tax basis of the furniture at the time of the sale.

On April 5, 2019, Orange Corporation purchased and placed in service 7-year class assets costing $1,050,000 and 5- 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's maximum cost recovery with respect to the assets for 2019.