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Exam 5: Business Deductions

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Question 21

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On June 1 of the current year, Tab converted a machine from personal use to rental property.At the time of the conversion, the machine was worth $90,000.Five years ago Tab purchased the machine for $120,000.The machine is still encumbered by a $50,000 mortgage.What is the basis of the machine for cost recovery?

A) $70,000
B) $90,000
C) $120,000
D) $140,000
E) None of the above

F) A) and C)
G) C) and D)

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Question 22

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If a taxpayer has a business with a net operating loss carryover reducing current year income, the taxpayer may want to elect to use straight-line depreciation to slow down the cost recovery.

A) True
B) False

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Question 23

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Which of the following depreciation conventions are not used under MACRS?

On January 15, 2018, Dillon purchased the rights to a mineral interest for $3,500,000.At that time it was estimated that the recoverable units would be 500,000.During the year, 40,000 units were mined and 25,000 units were sold for $800,000.Dillon incurred expenses during 2018 of $500,000.The percentage depletion rate is 22%.Determine Dillon's depletion deduction for 2018.

If more than 40% of the value of property, other than real property, is placed in service during the last quarter, all of the property placed in service in the second quarter will be allowed 7.5 months of cost recovery.

The § 179 deduction can exceed $1,000,000 in 2018 if the taxpayer had a § 179 amount which exceeded the taxable income limitation in the prior year.

All personal property placed in service in 2018 and used in a trade or business qualifies for additional first-year depreciation.

The "luxury auto" cost recovery limits change if mid-quarter cost recovery is used.

During the past two years, through extensive advertising and improved customer relations, Orange Corporation estimated that it had developed customer goodwill worth $500,000.For the current year, determine the amount of goodwill Orange Corporation may amortize.

LD Partnership, a cash basis taxpayer, purchases land and a building for $200,000 with $150,000 of the cost being allocated to the building.The gross receipts of the partnership are less than $100,000.LD must capitalize the $50,000 paid for the land, but can deduct the $150,000 paid for the building in the current tax year.

Under what circumstance can a bribe be deducted?

Antiques may be eligible for cost recovery if they are used in a trade or business.

Tom purchased and placed in service used office furniture on January 3, 2018, for $40,000.Tom's accountant depreciated the furniture using straight-line depreciation over 10 years for financial reporting purposes.The accountant also used the same depreciation amounts when filing Tom's income tax returns.On January 10, 2023, Tom sold the furniture.Determine the tax basis of the furniture at the time of the sale.

Pat purchased a used five-year class asset on March 15, 2018, for $60,000.He did not elect § 179 expensing.Determine the cost recovery deduction for 2018 for earnings and profits purposes.

Augie purchased one new asset during the year five-year property) on November 10, 2018, at a cost of $660,000.She would like to use the § 179 election and will also take additional first-year depreciation.The income from the business before the cost recovery deduction and the § 179 deduction was $600,000.Determine the maximum cost recovery deduction available on this asset for 2018.

For a taxpayer who is engaged in a trade or business, the cost of investigating a business in the same field is deductible only if the taxpayer acquires the business.

Doug purchased a new factory building on January 15, 1990, for $400,000.On March 1, 2018, the building was sold.Determine the cost recovery deduction for the year of the sale; Doug did not use the MACRS straight-line method.

The basis of cost recovery property must be reduced by at least the cost recovery allowable.

Norm purchases a new sports utility vehicle SUV) on October 12, 2018, for $60,000.The SUV has a gross vehicle weight of 6,200 lbs.It is used 100% of the time for business and it is the only business asset acquired by Norm during 2018.Compute the maximum deduction with respect to the SUV for 2018.Norm does not take additional first-year depreciation.

A taxpayer's note or promise to pay satisfies the "actually paid" requirement for the cash basis method of accounting.