Deck 6: Property Acquisitions and Cost Recovery Deductions

Question 1

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

Answer 1

The cash outflow is the cost of the asset when acquired. The cash inflow is the sum of the present value of inflows in years one through six in which depreciation is taken. The present value of the inflow in each year is determined by the cost recovery deduction times the taxpayer's marginal tax rate (the tax reduction due to depreciation expense) times the discount factor used by the taxpayer for evaluation. The net cash flow is the difference between this initial outflow and the sum of the present value of inflows.

Question 2

Wolfgang, a calendar-year taxpayer, purchased a $100,000 piece of residential rental realty in April of year 1.
a. What is Wolfgang's MACRS depreciation deduction in years 1 and 2?
b. What is his depreciation deduction in year 20 if he disposes of the asset in August of that year?
c. How would your answers change to (a) and (b) if the property is nonresidential realty?

Answer 2

a. Year 1: $100,000 x .02576 = $2,576; Year 2: $100,000 x .03636 = $3,636
b. Year 20: $100,000 x .03637 x (7.5/12) = $2,273
c. Year 1: $100,000 x .01819 = $1,819; Year 2 = $100,000 x .02564 = $2,564
Year 20: $100,000 x .02564 x (7.5/12) = $1,603

Question 3

Morgan Corporation, a calendar-year corporation, purchased a $2,800,000 factory building in February, $950,000 of new machinery in April, $80,000 of new office furniture in August, 900,000 of used machinery in October, and $130,000 of additional new office furniture in December.
a. What is the corporation's maximum cost recovery deduction for 2011 assuming the corporation expects at least $2,000,000 of income before depreciation deductions in 2011.
b. How would your answers change if the furniture and machinery will not be purchased until 2012?

Answer 3

a. For 2011: $1,030,000/$2,060,000 = 50% personalty acquired in the last quarter of the tax year; Section 179 allows $500,000 to be expensed but qualifying assets exceed $2,000,000 by $60,000; thus the corporation can only expense $440,000 under Section 179. If the corporation expenses $440,000 of the used machines acquired in October, the half-year convention can be used for the remaining machines and office equipment ($590,000/$1,620,000 = 36%). It is important to maximize the Section 179 expense deduction on the used machines as they are not eligible for bonus depreciation.
Building: $2,800,000 x .02247 = $62,916 depreciation
New Machinery: $950,000 @ 100% bonus depreciation
New Office furniture 1: $80,000 @ 100% bonus depreciation
New Office furniture 2: $130,000 @ 100% bonus depreciation
Used Machinery: $440,000 expensed under Section 179 + ([$900,000 - $440,000] .1429) = $505,734
Total cost recovery in 2011 = $1,728,650 ($62,916 + $950,000 + $80,000 + $130,000 + 505,734)
b. Income exceeds $625,000 in 2012 so that no Section 179 expense deduction is allowed and bonus depreciation is reduced to 50%. The new machinery and the office furniture are eligible for the 50% bonus depreciation.
Building: $2,800,000 x .02247 = $62,916 depreciation
New Machinery: ($950,000 x .50) + ([$950,000 - $475,000].1429) = $542,877.50 bonus and MACRS depreciation
Office furniture 1: ($80,000 x .50) + ([$80,000 - $40,000] .1429) = $45,716 bonus and MACRS depreciation
Office furniture 2: ($130,000 x .50) + ([$130,000 - $65,000] .1429) = $74,288.50 bonus and MACRS depreciation
Used Machinery: $900,000 x .1429) = $128,610
Total cost recovery in 2012 = 854,408 ($62,916 + $542,877.50 + $45,716 + $74,288.50 + $128,610)

Question 4

Warren leases an auto valued at $19,750 for his business and personal use on May 1, 2011. His extensive records indicate he used the automobile 85 percent for business and 15 percent for personal use. He starts making monthly lease payments of $235 on June 1, 2011. What are the tax consequences for Warren in years 1 and 2 as a result of this lease contract?

Question 5

Concorde Corporation purchased a coal mine for $2,000,000. It estimates the mine contains at least 800,000 tons of coal. In year 1, it mines and sells 40,000 tons. At the end of the year, it revises the estimates of the tons of coal available for mining to 600,000. In year 2 it sells the 60,000 of 75,000 tons mined in year 2. Determine Concorde's depletion deduction in years 1 and 2.

Question 6

Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions:

-MACRS depreciation

A)personalty(P)
B)realty(R)
C)both(B)

Question 7

Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions:

-Section 179 expensing

A)personalty(P)
B)realty(R)
C)both(B)

Question 8

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

A)personalty(P)
B)realty(R)
C)both(B)

Question 9

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

A)personalty(P)
B)realty(R)
C)both(B)

Question 10

Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions:

-Reduction for personal use

A)personalty(P)
B)realty(R)
C)both(B)

Question 11

Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions:

-Mid-quarter convention

A)personalty(P)
B)realty(R)
C)both(B)

Question 12

Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions:

-Lease inclusion amounts

A)personalty(P)
B)realty(R)
C)both(B)

Question 13

Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions:

-Listed property limitations

A)personalty(P)
B)realty(R)
C)both(B)

Question 14

Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions:

-Half-year convention

A)personalty(P)
B)realty(R)
C)both(B)

Question 15

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

A)personalty(P)
B)realty(R)
C)both(B)

Question 16

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?

A) Mary = $12,000; Larry = $12,000
B) Mary = $12,000; Larry = $10,000
C) Mary = $10,000; Larry = $12,000
D) Mary = $10,000; Larry = $10,000

Question 17

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

A) $2,000 and $2,000
B) $2,000 and $1,152
C) $2,000 and $576
D) $2,000 and $1,000

Question 18

During the year, Garbin Corporation (a calendar-year corporation that manufactures furniture) purchased the following assets:
$$\begin{array} { l c r } \text { Date } & { \text { Asset } } & { \text { Cost } } \\\text { February 15 } & \text { Tools } & \$ 40,000 \\\text { March 3 } & \text { Machines } & 50,000 \\\text { October 6 } & \text { Office Building } & 110,000\end{array}$$
In computing depreciation of these assets, which of the following averaging conventions will be used?

A) Half-year and mid-month
B) Mid-quarter and mid-month
C) Half-year, mid-quarter, and mid-month
D) Mid-quarter only

Question 19

Cora purchased a new machine for $1,735,000 and some used office furniture for $480,000 in July 2011. What is Cora's maximum cost recovery deduction?

A) $316524
B) $886,092
C) $2,047,866
D) $2,215,000

Question 20

Chipper, a calendar-year corporation, purchased new machinery for $1,125,000 in February, 2011. In October, it purchased $1,075,000 of used machinery. What is Chipper's maximum cost recovery deduction for 2011?

A) $2,200,000
B) $1,578,603
C) $1,452,668
D) $1,321,473

Question 21

What is the maximum amount of assets that can be purchased in the last quarter of a year to avoid the mid-quarter convention if $120,000 of assets are purchased in the first three quarters? (Ignore Section 179 expensing.)

A) $40,000
B) $48,000
C) $80,000
D) $120,000

Question 22

Table 1: Sanjuro Corporation (a calendar-year corporation) purchased and placed in service the following assets during 2011:
$$\begin{array} { l c r } \text { Date Acquired } & \text { Asset Description } & \underline { \text { Cost } } \\\text { February 18 } & \text { Warehouse Building } & \$ 2,450,000 \\\text { June 2 } & \text { Used Automobile } & \$ 30,000 \\\text { August 18 } & \text { New Computer Equipment } & \$ 220,000 \\\text { September 20 } & \text { New Machinery } & \$ 1,050,000 \\\text { December 15 } & \text { Used Office Equipment } & \$ 875,000\end{array}$$
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 wishes to maximize its overall depreciation deduction for 2011 and is willing to make any necessary elections.

-Refer to the information in Table 1. What is Sanjuro Corporation's maximum cost recovery deduction for the warehouse in 2011?

A) $55,052
B) $60,295
C) $70,536
D) $77,959

Question 23

Table 1: Sanjuro Corporation (a calendar-year corporation) purchased and placed in service the following assets during 2011:
$$\begin{array} { l c r } \text { Date Acquired } & \text { Asset Description } & \underline { \text { Cost } } \\\text { February 18 } & \text { Warehouse Building } & \$ 2,450,000 \\\text { June 2 } & \text { Used Automobile } & \$ 30,000 \\\text { August 18 } & \text { New Computer Equipment } & \$ 220,000 \\\text { September 20 } & \text { New Machinery } & \$ 1,050,000 \\\text { December 15 } & \text { Used Office Equipment } & \$ 875,000\end{array}$$
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 wishes to maximize its overall depreciation deduction for 2011 and is willing to make any necessary elections.

-Refer to the information in Table 1. What is Sanjuro Corporation's maximum for cost recovery deduction for the automobile for 2011?

A) $2,960
B) $3,060
C) $11,060
D) $17,960

Question 24

Table 1: Sanjuro Corporation (a calendar-year corporation) purchased and placed in service the following assets during 2011:
$$\begin{array} { l c r } \text { Date Acquired } & \text { Asset Description } & \underline { \text { Cost } } \\\text { February 18 } & \text { Warehouse Building } & \$ 2,450,000 \\\text { June 2 } & \text { Used Automobile } & \$ 30,000 \\\text { August 18 } & \text { New Computer Equipment } & \$ 220,000 \\\text { September 20 } & \text { New Machinery } & \$ 1,050,000 \\\text { December 15 } & \text { Used Office Equipment } & \$ 875,000\end{array}$$
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 wishes to maximize its overall depreciation deduction for 2011 and is willing to make any necessary elections.

-Refer to the information in Table 1. What is Sanjuro Corporation's cost recovery deduction for the computer equipment for 2011 if it wants to maximize its overall depreciation deduction?

A) $220,000
B) $132,000
C) $44,000
D) $33,000

Question 25

Table 1: Sanjuro Corporation (a calendar-year corporation) purchased and placed in service the following assets during 2011:
$$\begin{array} { l c r } \text { Date Acquired } & \text { Asset Description } & \underline { \text { Cost } } \\\text { February 18 } & \text { Warehouse Building } & \$ 2,450,000 \\\text { June 2 } & \text { Used Automobile } & \$ 30,000 \\\text { August 18 } & \text { New Computer Equipment } & \$ 220,000 \\\text { September 20 } & \text { New Machinery } & \$ 1,050,000 \\\text { December 15 } & \text { Used Office Equipment } & \$ 875,000\end{array}$$
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 wishes to maximize its overall depreciation deduction for 2011 and is willing to make any necessary elections.

-Refer to the information in Table 1. What is Sanjuro Corporation's cost recovery deduction for the used office equipment for 2011 if it wants to maximize its overall depreciation deduction?

A) $28,750
B) $43,750
C) $403,595
D) $450,038

Question 26

Table 1: Sanjuro Corporation (a calendar-year corporation) purchased and placed in service the following assets during 2011:
$$\begin{array} { l c r } \text { Date Acquired } & \text { Asset Description } & \underline { \text { Cost } } \\\text { February 18 } & \text { Warehouse Building } & \$ 2,450,000 \\\text { June 2 } & \text { Used Automobile } & \$ 30,000 \\\text { August 18 } & \text { New Computer Equipment } & \$ 220,000 \\\text { September 20 } & \text { New Machinery } & \$ 1,050,000 \\\text { December 15 } & \text { Used Office Equipment } & \$ 875,000\end{array}$$
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 wishes to maximize its overall depreciation deduction for 2011 and is willing to make any necessary elections.

-Refer to the information in Table 1. What is Sanjuro Corporation's maximum total cost recovery deduction for 2011?

A) $512,550
B) $1,298,060
C) $1,731,707
D) $2,175,000

Question 27

Table 1: Sanjuro Corporation (a calendar-year corporation) purchased and placed in service the following assets during 2011:
$$\begin{array} { l c r } \text { Date Acquired } & \text { Asset Description } & \underline { \text { Cost } } \\\text { February 18 } & \text { Warehouse Building } & \$ 2,450,000 \\\text { June 2 } & \text { Used Automobile } & \$ 30,000 \\\text { August 18 } & \text { New Computer Equipment } & \$ 220,000 \\\text { September 20 } & \text { New Machinery } & \$ 1,050,000 \\\text { December 15 } & \text { Used Office Equipment } & \$ 875,000\end{array}$$
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 wishes to maximize its overall depreciation deduction for 2011 and is willing to make any necessary elections.

-Refer to the information in Table 1. What is Sanjuro Corporation's maximum deduction for cost recovery for the warehouse for 2012?

A) $62,818
B) $55,052
C) $49,809
D) $44,566

Question 28

Table 1: Sanjuro Corporation (a calendar-year corporation) purchased and placed in service the following assets during 2011:
$$\begin{array} { l c r } \text { Date Acquired } & \text { Asset Description } & \underline { \text { Cost } } \\\text { February 18 } & \text { Warehouse Building } & \$ 2,450,000 \\\text { June 2 } & \text { Used Automobile } & \$ 30,000 \\\text { August 18 } & \text { New Computer Equipment } & \$ 220,000 \\\text { September 20 } & \text { New Machinery } & \$ 1,050,000 \\\text { December 15 } & \text { Used Office Equipment } & \$ 875,000\end{array}$$
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 wishes to maximize its overall depreciation deduction for 2011 and is willing to make any necessary elections.

-Refer to the information in Table 1. What is Sanjuro Corporation's maximum deduction for cost recovery for the automobile for 2013?

A) $2,850
B) $2,950
C) $5,376
D) $8,960

Question 29

Table 1: Sanjuro Corporation (a calendar-year corporation) purchased and placed in service the following assets during 2011:
$$\begin{array} { l c r } \text { Date Acquired } & \text { Asset Description } & \underline { \text { Cost } } \\\text { February 18 } & \text { Warehouse Building } & \$ 2,450,000 \\\text { June 2 } & \text { Used Automobile } & \$ 30,000 \\\text { August 18 } & \text { New Computer Equipment } & \$ 220,000 \\\text { September 20 } & \text { New Machinery } & \$ 1,050,000 \\\text { December 15 } & \text { Used Office Equipment } & \$ 875,000\end{array}$$
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 wishes to maximize its overall depreciation deduction for 2011 and is willing to make any necessary elections.

-Refer to the information in Table 1. What is Sanjuro Corporation's cost recovery deduction for the computer equipment for 2012 assuming the necessary elections were made to maximize overall depreciation in 2011?

A) $0
B) $35,200
C) $56,122
D) $70,400

Question 30

Table 1: Sanjuro Corporation (a calendar-year corporation) purchased and placed in service the following assets during 2011:
$$\begin{array} { l c r } \text { Date Acquired } & \text { Asset Description } & \underline { \text { Cost } } \\\text { February 18 } & \text { Warehouse Building } & \$ 2,450,000 \\\text { June 2 } & \text { Used Automobile } & \$ 30,000 \\\text { August 18 } & \text { New Computer Equipment } & \$ 220,000 \\\text { September 20 } & \text { New Machinery } & \$ 1,050,000 \\\text { December 15 } & \text { Used Office Equipment } & \$ 875,000\end{array}$$
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 wishes to maximize its overall depreciation deduction for 2011 and is willing to make any necessary elections.

-Refer to the information in Table 1. What is Sanjuro Corporation's cost recovery deduction for the office equipment for 2012 assuming the necessary elections were made to maximize overall depreciation in 2011?

A) $11,000
B) $31,680
C) $78,595
D) $134,695

Question 31

Table 1: Sanjuro Corporation (a calendar-year corporation) purchased and placed in service the following assets during 2011:
$$\begin{array} { l c r } \text { Date Acquired } & \text { Asset Description } & \underline { \text { Cost } } \\\text { February 18 } & \text { Warehouse Building } & \$ 2,450,000 \\\text { June 2 } & \text { Used Automobile } & \$ 30,000 \\\text { August 18 } & \text { New Computer Equipment } & \$ 220,000 \\\text { September 20 } & \text { New Machinery } & \$ 1,050,000 \\\text { December 15 } & \text { Used Office Equipment } & \$ 875,000\end{array}$$
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 wishes to maximize its overall depreciation deduction for 2011 and is willing to make any necessary elections.

-Refer to the information in Table 1. What is Sanjuro Corporation's cost recovery deduction for the automobile for 2014 assuming the necessary elections were made to maximize overall depreciation in 2011?

A) $0
B) $1,775
C) $3,184
D) $3,226

Question 32

Table 1: Sanjuro Corporation (a calendar-year corporation) purchased and placed in service the following assets during 2011:
$$\begin{array} { l c r } \text { Date Acquired } & \text { Asset Description } & \underline { \text { Cost } } \\\text { February 18 } & \text { Warehouse Building } & \$ 2,450,000 \\\text { June 2 } & \text { Used Automobile } & \$ 30,000 \\\text { August 18 } & \text { New Computer Equipment } & \$ 220,000 \\\text { September 20 } & \text { New Machinery } & \$ 1,050,000 \\\text { December 15 } & \text { Used Office Equipment } & \$ 875,000\end{array}$$
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 wishes to maximize its overall depreciation deduction for 2011 and is willing to make any necessary elections.

-Refer to the information in Table 1. What is Sanjuro Corporation's cost recovery deduction for the warehouse for 2013 if it is sold in November of 2013?

A) $62,818
B) $54,966
C) $48,170
D) $3,724

Question 33

Table 1: Sanjuro Corporation (a calendar-year corporation) purchased and placed in service the following assets during 2011:
$$\begin{array} { l c r } \text { Date Acquired } & \text { Asset Description } & \underline { \text { Cost } } \\\text { February 18 } & \text { Warehouse Building } & \$ 2,450,000 \\\text { June 2 } & \text { Used Automobile } & \$ 30,000 \\\text { August 18 } & \text { New Computer Equipment } & \$ 220,000 \\\text { September 20 } & \text { New Machinery } & \$ 1,050,000 \\\text { December 15 } & \text { Used Office Equipment } & \$ 875,000\end{array}$$
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 wishes to maximize its overall depreciation deduction for 2011 and is willing to make any necessary elections.

-Refer to the information in Table 1. What is Sanjuro Corporations cost recover deduction for the office equipment for 2013 if they are sold in December of 2013?

A) $81,345
B) $76,519
C) $48,098
D) $0