Exam 7: Property Acquisitions and Cost Recovery Deductions

Explain the basic procedure for determining the net cost of a depreciable asset using net cash flow with a five-year MACRS life and no salvage value.

The first and last years of MACRS depreciation deductions for a 5-year asset costing $10,000 using the half-year convention are:

Biggie Corporation can buy an auto for $29,500 (including taxes, license, and title fees) or it can lease the same car for $390 per month with $2,500 up front for tax, license, and fees. The corporation only keeps its cars for two years and it expects to be able to sell the car for $19,000 at the end of two years if it purchases the car. The corporation is in the 21 percent tax bracket, uses a 6 percent discount rate for evaluation, and assume that the lease inclusion amounts for years 1 and 2 are 70 and 150, respectively. Should Biggie Corporation buy or lease the auto in 2018 (assume lease payments are all made at the end of the year).

Other Objective Questions Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions: -Joan gives an asset valued at $12,000 with a basis of $10,000 to Mary; Joan dies six-months later leaving an asset valued at $10,000 with a basis of $12,000 to Larry. What are Mary's and Larry's bases in these assets if they are then sold for their fair market value?

Moore Corporation (a calendar-year taxpayer), acquired a 5-year asset costing $10,000 on April 2^nd. What are the first and last years of MACRS depreciation deductions using the mid-quarter convention?

On October 12, 2018, Wilson Corporation (a calendar-year taxpayer) acquires 5-year property for $9,000. This is the only property acquired this year and neither Section 179 expensing nor bonus depreciation were claimed. What is Wilson's total depreciation deduction for 2018?

Other Objective Questions Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions: -Mid-month convention

Gregory Corporation, a calendar-year corporation, purchased an office building in March of year 1. In September of year 17, it sold the building. What fraction must be applied to the MACRS percentage to determine the year 17 depreciation?

The first year's depreciation for equipment acquired in October by a calendar-year business would be based on 1½ months if it was the only asset acquired that year.

Other Objective Questions Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions: -Barber Corporation purchased all the assets of TECO Corporation for $1,820,000. An appraisal yielded the following: the building had a fair market value of $1,200,000; equipment a value of $1,000,000; and office equipment a value of $400,000. What is the depreciable basis for the office equipment?

Rodriguez Corporation acquired 7-year property costing $450,000 on October 1, 2018. This is the only property acquired this year and Rodriguez elects to expense the maximum amount under Section 179 without applying bonus depreciation. Rodriguez's income before deducting depreciation is $320,000. What is the maximum amount that Rodriguez can deduct in 2018 for Section 179 expensing?

Sanjuro Corporation (a calendar-year corporation) purchased and placed in service the following assets during 2018: All assets are used 100% for business use. The warehouse building does not include the cost of the land on which it is located which was an additional $1,000,000. The corporation has $3,000,000 income from operations before calculating depreciation deductions. Sanjuro Corporation made whatever elections were necessary to maximize its overall depreciation deduction for 2018. To maximize its total cost recovery deduction, what was Sanjuro Corporation's cost recovery deduction for the used office equipment for 2018?

Other Objective Questions Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions: -Mixed-use depreciation limitations

What is the difference in after-tax cost of a five-year machine costing $10,000 that is depreciated using MACRS depreciation versus the alternative depreciation system? The taxpayer is in the 35 percent tax marginal bracket and uses a 6 percent discount rate for evaluation. No Section 179 expensing or bonus depreciation is claimed for this property

Other Objective Questions Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions: -Alternative depreciation system

The MACRS life for all realty is 27½ years.

If a business acquired a new machine in 2018, explain how it could have recovered its cost most efficiently. How does this differ from the maximum cost recovery deduction if the machine was instead acquired in 2017?

The mid-year and mid-month are acceptable conventions for depreciating personalty.

Sanjuro Corporation (a calendar-year corporation) purchased and placed in service the following assets during 2018: All assets are used 100% for business use. The warehouse building does not include the cost of the land on which it is located which was an additional $1,000,000. The corporation has $3,000,000 income from operations before calculating depreciation deductions. Sanjuro Corporation made whatever elections were necessary to maximize its overall depreciation deduction for 2018. To maximize its total cost recovery deduction, what was Sanjuro Corporation's cost recovery deduction for the automobile for 2018?

Section 179 expenses exceeding the annual cost limitation may be carried forward for five years only.