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Exam 5: Business Deductions

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Question 31

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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.

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Question 32

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Green, Inc., manufactures and sells widgets.During the current year, an examination of the company records showed the following items: $\begin{array}{lr}\text { Domestic production gross receipts } & \$ 3,000,000 \\\text { Cost of goods sold for domestic products } & 750,000 \\\text { Expenses directly related to domestic production gross } & \\\text { receipts (other than wages) } & 300,000 \\\text { W-2 wages paid to employees engaged in qualified domestic } & \\\text { production activities } & 300,000 \\\text { Ratable portion of other expenses } & 100,000 \\\text { Total W-2 wages } & 325,000 \\\text { Taxable income } & 1,600,000\end{array}$ ? Determine Green's domestic production activities deduction for the current year.

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Question 33

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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.

Discuss the criteria used to determine whether a building is residential or nonresidential realty.Also explain the tax consequences resulting from this determination if the property is placed in service in 2017.

All personal property placed in service in 2017 and used in a trade or business qualifies for additional first-year depreciation.

Legal fees incurred in connection with a criminal defense are not deductible even if the crime is associated with a trade or business.

In the current year, Oriole Corporation donated a painting worth $30,000 to the Texas Art Museum, a qualified public charity.The museum included the painting in its permanent collection.Oriole Corporation purchased the painting 5 years ago for $10,000.Oriole's charitable contribution deduction is $30,000 (ignoring the taxable income limitation).

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

Cost depletion is determined by multiplying the depletion cost per unit by the number of units sold.

Motel buildings have a cost recovery period of 27.5 years.

Heron Corporation, a calendar year C corporation, had an excess charitable contribution for 2016 of $5,000.In 2017, Heron made a further charitable contribution of $20,000.Heron's 2017 deduction is limited to $15,000 (10% of taxable income).The 2017 contribution must be applied first against the $15,000 limitation.

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

Property used for the production of income is not eligible for § 179 expensing.

Percentage depletion enables the taxpayer to recover more than the cost of an asset in the form of tax deductions.

Polly purchased a new hotel on July 20, 2017, for $6,000,000.On January 20, 2024, the building was sold.Determine the cost recovery deduction for the year of the sale.

Norm purchases a new sports utility vehicle (SUV) on October 12, 2017, 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 2017.Compute the maximum deduction with respect to the SUV for 2017.Norm does not take additional first-year depreciation.

On April 5, 2017, Orange Corporation purchased, and placed in service, seven-year class assets costing $540,000 and five-year class assets costing $140,000.Orange elects to expense the maximum amount under § 179.Orange does not take additional first-year depreciation.Assume taxable income is not a limitation.Determine Orange Corporation's cost recovery with respect to the assets for 2017.

The factor for determining the cost recovery for eligible real estate under MACRS, in the year of disposition, is taken from the month of the disposition.

Taxpayers may elect to use the straight-line method under MACRS for personalty.

The § 179 deduction can exceed $510,000 in 2017 if the taxpayer had a § 179 amount which exceeded the taxable income limitation in the prior year.