Exam 9: Property Acquisition and Cost Recovery

Which of the following would be considered an improvement rather than a routine maintenance?

Olney LLC placed in service on July 19, 2014 machinery and equipment (7-year property) with a basis of $850,000. Assume that Olney has sufficient income to avoid any limitations. Calculate the maximum depreciation expense including §179 expensing, rounded to the nearest whole number (but ignoring bonus expensing). Assume the 2013 §179 limits are extended to 2014.

Santa Fe purchased the rights to extract turquoise on a tract of land over a five-year period. Santa Fe paid $300,000 for extraction rights. A geologist estimated that Santa Fe will recover 5,000 pounds of turquoise. During the past several years, 4,000 pounds were extracted. During the current year, Santa Fe extracted 1,500 pounds of turquoise, which it sold for $250,000. What is Santa Fe's cost depletion expense for the current year?

Taxpayers use the half-year convention for all assets.

Phyllis purchased $8,000 of specialized audio equipment that she uses in her business regularly. Occasionally, she uses the equipment for personal use. During the first year, Phyllis used the equipment for business use 70 percent of the time; however, during the current (second) year the business use fell to 40 percent. Assume that the equipment is seven-year MACRS property and is under the half-year convention. Assume the ADS recovery period is 10 years. What is the depreciation allowance for the current year, rounded to the nearest whole number?

Crouch LLC placed in service on May 19, 2014 machinery and equipment (7-year property) with a basis of $2,200,000. Assume that Crouch has sufficient income to avoid any limitations. Calculate the maximum depreciation expense including §179 expensing (but ignoring bonus expensing). Assume that the 2013 §179 limits are extended to 2014:

Oksana started an LLC on November 2 of the current year. She incurred $30,000 of start-up costs. How much of the start-up costs can be immediately expensed for the year? How much amortization may Oksana deduct in the first year?

The 200 percent or double declining balance method is allowable for five and seven year property.

An example of an asset that is both personal-use and personal property is:

Simmons LLC purchased an office building and land several years ago for $250,000. The purchase price was allocated as follows: $200,000 to the building and $50,000 to the land. The property was placed in service on October 2. If the property is disposed of on February 27 during the 10th year, calculate Simmons' maximum depreciation in the 10th year:

How is the recovery period of an asset determined?

The mid-month convention applies to real property in the year of acquisition and disposition.

Jasmine started a new business in the current year. She incurred $10,000 of start-up costs. How much of the start-up costs can be immediately expensed for the year?

The alternative depreciation system requires both a slower method of recovery and longer recovery periods.

An asset's capitalized cost basis includes only the actual purchase price; whereas the other expenses associated with the asset are immediately expensed.

If a taxpayer places only one asset (a building) in service during the fourth quarter of the year, the mid-quarter convention must be used.

Potomac LLC purchased an automobile for $30,000 on August 5, 2014. What is Potomac's depreciation expense for 2014 (ignore any possible bonus depreciation)?

Putin Corporation began business on September 23rd of the current year. It incurred $40,000 of start-up costs and $60,000 of organizational expenditures. 1) How much may be immediately expensed for the year? 2) How much amortization may be deducted in the first year, rounded to the nearest whole number?

Billie Bob purchased a used computer (5-year property) for use in his sole proprietorship in the prior year. The basis of the computer was $2,400. Billie Bob used the computer in his business 60 percent of the time during the first year. During the second year, Billie Bob used the computer 40 percent for business use. Calculate Billie Bob's depreciation expense during the second year assuming the sole proprietorship had a loss during the year (Billie Bob did not place the asset in service in the last quarter):

Beth's business purchased only one asset during the current year. Beth placed in service machinery (7-year property) on December 1 with a basis of $50,000. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation):