Exam 10: Property Acquisition and Cost Recovery

Businesses may immediately expense research and experimentation expenditures or they may elect to capitalize these costs and amortize them using the straight-line method over a period of not less than 60 months.

Anne LLC purchased computer equipment (5-year property) on August 29 with a basis of $30,000 and used the half-year convention. During the current year, which is the fourth year Anne LLC owned the property, the property was disposed of on January 15. Calculate the maximum depreciation expense:

Cost depletion is available to all natural resource producers.

Like financial accounting, most acquired business property must be capitalized for tax purposes.

If tangible personal property is depreciated using the half-year convention and is disposed of during the first quarter of a subsequent year, the taxpayer must use the mid-quarter convention for the year of disposition.

Assume that Brittany acquires a competitor's assets on September 30^th of year 1 for $350,000. Of that amount, $300,000 is allocated to tangible assets and $50,000 is allocated equally to two §197 intangible assets (goodwill and a 1-year non-compete agreement). Given, that the non-compete agreement expires on September 30^th of year 2, what is Brittany's amortization expense for the second year, rounded to the nearest whole number?

Property expensed under the §179 immediate expensing election is not included in the 40 percent test to determine whether the mid-quarter convention must be used.

Which of the following is not usually included in an asset's tax basis?

Boxer LLC has acquired various types of assets recently used 100% in its trade or business. Below is a list of assets acquired during 2015 and 2016: Asset Cost Basis Comrention Date Placed in Senrice Machinery 25,000 Half year January 24, 2015 Warehouse 800,000 Mid month August 1, 2015 Furniture 100,000 October 5, 2016 Computer equipment 65,000 October 10, 2016 Office equipment 34,000 September 28, 2016 Automobile 35,000 July 15, 2016 Office building 800,000 September 24, 2016 Boxer did not elect §179 expense and elected out of bonus depreciation in 2015, but would like to elect §179 expense for 2016 (assume that taxable income is sufficient). Calculate Boxer's maximum depreciation expense for 2016, rounded to the nearest whole number (ignore bonus depreciation for 2016). If necessary, use the 2015 luxury automobile limitation amount for 2016 and assume that the 2015 §179 limits are identical to 2016.

Assume that Yuri acquires a competitor's assets on May 1^st. The purchase price was $500,000. Of the amount, $325,000 is allocated to tangible assets and $175,000 is allocated to goodwill (a §197 intangible asset). What is Yuri's amortization expense for the current year, rounded to the nearest whole number?

Which is not an allowable method under MACRS?

Depreciation is currently computed under the Modified Accelerated Cost Recovery System (MACRS).

Northern LLC only purchased one asset this year. In 2016, Northern LLC placed in service on September 6^th machinery and equipment (7-year property) with a basis of $2,200,000. Assume that Northern has sufficient income to avoid any limitations. Calculate the maximum depreciation expense including §179 expensing (ignore any potential bonus expensing), rounded to the nearest whole number. Assume the 2015 §179 limits are identical to 2016.

Which of the allowable methods allows the most accelerated depreciation?

The §179 immediate expensing election phases out based upon a taxpayer's taxable income.

How is the recovery period of an asset determined?

Flax, LLC purchased only one asset this year. Flax placed in service a computer (5-year property) on January 16 with a basis of $14,000. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation).

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

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

Bonnie Jo purchased a used computer (5-year property) for use in her sole proprietorship. The basis of the computer was $2,400. Bonnie Jo used the computer in her business 60 percent of the time and used it for personal purposes the rest of the time during the first year. Calculate Bonnie Jo's depreciation expense during the first year assuming the sole proprietorship had a loss during the year (Bonnie did not place the property in service in the last quarter):