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

Jim acquires a new seven-year class asset on September 20, 2017, for $80,000. He placed the asset in service on October 5, 2017. 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, 2018. This is the only asset he acquires in 2017. Determine Jim's cost recovery in 2017 and 2018.

On July 15, 2017, Mavis paid $275,000 for improvements on a commercial building she owns. Determine the maximum total cost recovery from the improvements in 2017.

Rick purchased a uranium interest for $10,000,000 on January 3, 2017, when recoverable reserves were estimated at 200,000 units. A total of 10,000 units were extracted in 2017 and 7,000 units were sold in 2017. 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 2017.

On June 1, 2017, 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.

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

If startup expenses total $53,000, $51,000 of those costs are amortized over 180 months.

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.

Joe purchased a new five-year class asset on June 1, 2017. 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.

For personal property placed in service in 2017, the § 179 maximum deduction is limited to $510,000.

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

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

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

White Company acquires a new machine (seven-year property) on January 10, 2017, at a cost of $610,000. White makes the election to expense the maximum amount under § 179, and wants to take any additional first-year depreciation allowed. No election is made to use the straight-line method. Determine the total deductions in calculating taxable income related to the machine for 2017 assuming White has taxable income of $800,000.

Rustin bought used 7-year class property on May 15, 2017, for $738,000. 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 cost recovery deduction Rustin can claim for 2017.

Mary purchased a new five-year class asset on March 7, 2017. 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 also takes additional first-year depreciation. Determine the total deductions with respect to the asset for 2017.

On March 1, 2017, Lana leases and places in service a passenger automobile. The lease will run for five years and the payments are $500 per month. During 2017, she uses her car 60% for business and 40% for personal activities. Assuming the dollar amount from the IRS table for auto leases is $70, determine Lana's gross income attributable to the lease.

Land improvements are generally not eligible for cost recovery.

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

A purchased trademark is a § 197 intangible.

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