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Tax Ch.8

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

a. True b. False

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

a. True b. False

True
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.

a. True b. False

True, (what is the rule?)
In a farming business, MACRS straight-line cost recovery is required for all fruit bearing trees.

a. True b. False

True
For personal property placed in service in 2014, the § 179 maximum deduction is limited to $25,000.

a. True b. False

True, 179 election is an annual election that applies to the acquisition cost of property placed in service that year
Grape Corporation purchased a machine in December of the current year. This was the only asset purchased during the current year. The machine was placed in service in January of the following year. No assets were purchased in the following year. Grape Corporation’s cost recovery would begin:

a. In the following year using a half-year convention.
b. In the following year using a mid-quarter convention.
c. In the current year using a half-year convention.
d. In the current year using a mid-quarter convention.
e. None of these choices are correct.

(A), MACRS views property as placed in service in the middle of the asset’s first year. mid-quarter applies if more than 40% of the value of property other than eligible real estate is placed in service during the last quarter of the year.
Tara purchased a machine for $40,000 to be used in her business. The cost recovery allowed and allowable for the three years the machine was used are as follows:
Cost Recovery Allowed Cost Recovery Allowable
Year 1 $16,000 $ 8,000
Year 2 9,600 12,800
Year 3 5,760 7,680

If Tara sells the machine after three years for $15,000, how much gain should she recognize?

a. None of these choices are correct.
b. $11,480
c. $9,240
d. $6,360
e. $3,480

(b), The basis of cost recovery property is reduced by the cost recovery allowed, and by not less than the allowable amount. ((40,000-16-12,8-7680)-15,000))
Hazel purchased a new business asset (five-year asset) on September 30, 2014, at a cost of $100,000. On October 4, 2014, Hazel placed the asset in service. This was the only asset Hazel placed in service in 2014. Hazel did not elect § 179 or additional first-year depreciation if available. On August 20, 2015, Hazel sold the asset. Determine the cost recovery for 2015 for the asset.

a. $38,000
b. $14,250
c. $19,000
d. $23,750

d, 100,000 x .38 x 2.5/4, because put into action during the fourth quarter but sold in the 3rd quarter, if sold in the first quarter would be .5/4.
Tan Company acquires a new machine (ten-year property) on January 15, 2014, at a cost of $200,000. Tan also acquires another new machine (seven-year property) on November 5, 2014, at a cost of $40,000. No election is made to use the straight-line method. The company does not make the § 179 election and elects to not take additional first-year depreciation if available. Determine the total deductions in calculating taxable income related to the machines for 2014.

a. $25,716
b. $132,858
c. None of these choices are correct.
d. $102,000
e. $24,000

a, because more than 40% was placed in service at the beginning of the year, qualifies for half year convention. Table 8.1 is used.
Barry purchased a used business asset (seven-year property) on September 30, 2014, at a cost of $200,000. This is the only asset he purchased during the year. Barry did not elect to expense any of the asset under § 179, did not take additional first-year depreciation (if available), and did not elect straight-line cost recovery. Barry sold the asset on July 17, 2015. Determine the cost recovery deduction for 2015.

a. $19,133
b. $34,438
c. $24,490
d. None of these choices are correct.
e. $55,100

c, 200,000 x 24.49/2 (divide by 2 because disposed of in the second year)
Bonnie purchased a new business asset (five-year property) on March 10, 2013, at a cost of $30,000. She also purchased a new business asset (seven-year property) on November 20, 2013, at a cost of $13,000. Bonnie did not elect to expense either of the assets under § 179, nor did she elect straight-line cost recovery. Bonnie takes additional first-year depreciation. Determine the cost recovery deduction for 2013 for these assets.

a. None of these choices are correct.
b. $5,858
c. $7,464
d. $19,429
e. $9,586

a, take half of the costs of the assets placed in service and if there isn’t answer than there is no.
Diane purchased a factory building on April 15, 1994, for $5,000,000. She sells the factory building on February 2, 2014. Determine the cost recovery deduction for the year of the sale.

a. $16,025
b. $26,458
c. None of these choices are correct.
d. $19,838
e. $22,725.

a, (5000000*.02564*1.5/12)
Howard’s business is raising and harvesting peaches. On March 10, 2014, Howard purchased 10,000 new peach trees at a cost of $60,000. Howard does not make an election to expense assets under § 179 and does not take additional first-year depreciation (if available). Determine the cost recovery deduction for 2014.

a. None of these choices are correct.
b. $31,500
c. $1,532
d. $3,000
e. $12,000

d, ADS Straight-line for personal property assuming half-year convention
On May 15, 2014, Brent purchased new farm equipment for $200,000. Brent used the equipment in connection with his farming business. Brent does not elect to expense assets under § 179. Brent does not take additional first-year depreciation (if available). Determine the cost recovery deduction for 2014.

a. None of these choices are correct.
b. $30,000
c. $12,852
d. $21,420
e. $36,000

d, 7 year 150% double declining chart
White Company acquires a new machine (seven-year property) on January 10, 2013, at a cost of $600,000. White makes the election to expense the maximum amount under § 179. No election is made to use the straight-line method. White does take additional first-year depreciation. Determine the total deductions in calculating taxable income related to the machine for 2013 assuming White has taxable income of $800,000.

a. None of these choices are correct.
b. $128,610
c. $385,296
d. $390,868
e. $71,593

a
On June 1, 2014, Red Corporation purchased an existing business. With respect to the acquired assets of the business, Red allocated $300,000 of the purchase price to a patent. The patent will expire in 20 years. Determine the total amount that Red may amortize for 2014 for the patent.

a. $35,000
b. $1,667
c. $0
d. $11,667
e. None of these choices are correct.

d, 300,000/15*7/12

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