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Exam 8: Depreciation, Cost Recovery, Amortization, and Depletion

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Question 51

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On January 15, 2017, Vern 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. Vern incurred expenses during 2017 of $500,000. The percentage depletion rate is 22%. Determine Vern's depletion deduction for 2017.

A) $150,000
B) $175,000
C) $176,000
D) $200,000
E) $250,000

F) C) and E)
G) A) and C)

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Question 52

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Rod paid $1,950,000 for a new warehouse on April 14, 2017. He sold the warehouse on September 29, 2022. Determine the cost recovery deduction for 2017 and 2022.

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2017: $1,950,000 × ....

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Question 53

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Once the more-than-50% business usage test is passed for listed property, it still matters if the business usage for the property drops to 50% or less during the recovery period.

Pat purchased a used five-year class asset on March 15, 2017, for $60,000. He did not elect § 179 expensing. Determine the cost recovery deduction for 2017 for earnings and profits purposes.

James purchased a new business asset (three-year personalty) on July 23, 2017, at a cost of $40,000. James takes additional first-year depreciation but does not elect Section 179 expense on the asset. Determine the cost recovery deduction for 2017.

Discuss the tax implications of a seller allocating the selling price to goodwill or a covenant not to compete.

On June 1, 2017, Irene places in service a new automobile that cost $21,000. The car is used 70% for business and 30% for personal use. (Assume this percentage is maintained for the life of the car.) She does not take additional first-year depreciation. Determine the cost recovery deduction for 2018.

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

The basis of an asset on which $20,000 has been expensed under § 179 will be reduced by $20,000, even if $20,000 cannot be expensed in the current year because of the taxable income limitation.

A taxpayer may elect to use the alternative depreciation system (ADS) to compute depreciation for earnings and profits.

The key date for calculating cost recovery is the date the asset is placed in service.

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.

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

If an automobile is placed in service in 2017, the limitation for cost recovery in 2019 will be based on the cost recovery limits for the year 2017.

Discuss the requirements in order for startup expenditures to be amortized under § 195.

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

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

Bhaskar purchased a new factory building and land on September 10, 2017, for $3,700,000. ($500,000 of the purchase price was allocated to the land.) He elected the alternative depreciation system (ADS) . Determine the cost recovery deduction for 2018.

On June 1, 2017, Norm leases a taxi and places it in service. The lease payments are $1,000 per month. Assuming the dollar amount from the IRS table for such leases is $241, determine Norm's gross income inclusion amount.

On July 17, 2017, Kevin places in service a used automobile that cost $25,000. The car is used 80% for business and 20% for personal use. In 2018, he used the automobile 40% for business and 60% for personal use. Determine the cost recovery recapture for 2018.