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Exam 9: Property Acquisition and Cost Recovery

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Question 1

True/False

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Taxpayers may always expense a portion of start-up costs and organizational expenditures.

A) True
B) False

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Question 2

Multiple Choice

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Tom Tom LLC purchased a rental house and land during the current year for $150,000. The purchase price was allocated as follows: $100,000 to the building and $50,000 to the land. The property was placed in service on May 22. Calculate Tom Tom's maximum depreciation for this first year:

A) $1,605
B) $2,273
C) $2,408
D) $3,410
E) None of these

F) A) and E)
G) A) and B)

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Question 3

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Columbia LLC placed in service on October 9, 2014 machinery and equipment (7-year property) with a basis of $2,150,000. Assume that Columbia has sufficient income to avoid any limitations. Calculate the maximum depreciation expense including §179 expensing (but ignoring bonus expensing) for the year, rounded to the nearest whole number. Assume the 2013 §179 limits are extended to 2014.

Significant limits are placed on the depreciation of luxury automobiles.

Lucky Strike Mine (LLC) purchased a silver deposit for $1,500,000. It estimated it would extract 500,000 ounces of silver from the deposit. Lucky Strike mined the silver and sold it reporting gross receipts of $1.8 million, $2.5 million, and $2 million for years 1 through 3, respectively. During years 1 - 3, Lucky Strike reported net income (loss) from the silver deposit activity in the amount of ($100,000) , $400,000, and $100,000, respectively. In years 1 - 3, Lucky Strike actually extracted 300,000 ounces of silver as follows: $\begin{array}{ll}\begin{array}{|c|}\hline \text { Ounces extracted per year}\quad\end{array}\\\begin{array} { | l | l | l | } \hline \text { Year 1 } & \text { Year 2 } & \text { Year 3 } \\\hline 50,000 & 150,000 & 100,000 \\\hline\end{array}\end{array}$ What is Lucky Strike's depletion expense for year 2 if the applicable percentage depletion for silver is 15 percent?

Occasionally bonus depreciation is used as a stimulus tool by tax policy makers.

Arlington LLC purchased an automobile for $40,000 on July 5, 2014. What is Arlington's depreciation expense for 2014 if its business use percentage is 75 percent (ignore any possible bonus depreciation) ?

Sequoia purchased the rights to cut timber on several tracts of land over a fifteen year period. It paid $500,000 for cutting rights. A timber engineer estimates that 500,000 board feet of timber will be cut. During the current year, Sequoia cut 45,000 board feet of timber, which it sold for $900,000. What is Sequoia's cost depletion expense for the current year?

Yasmin purchased two assets during the current year. Yasmin placed in service computer equipment (5-year property) on May 26th with a basis of $10,000 and machinery (7-year property) on December 9th with a basis of $10,000. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation).

Depletion is the method taxpayers use to recover their capital investment in natural resources.

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

If a business mistakenly claims too little depreciation, the business must only reduce the asset's basis by the depreciation actually taken rather than the amount of the allowable depreciation.

Assume that Bethany acquires a competitor's assets on March 31st. The purchase price was $150,000. Of that amount, $125,000 is allocated to tangible assets and $25,000 is allocated to goodwill (a §197 intangible asset) . What is Bethany's amortization expense for the current year, rounded to the nearest whole number?

Bonnie Jo purchased a used computer (5-year property) for use in her sole proprietorship. The basis of the computer was $2,400. Bonnie Jo used the computer in her business 60 percent of the time and used it for personal purposes the rest of the time during the first year. Calculate Bonnie Jo's depreciation expense during the first year assuming the sole proprietorship had a loss during the year (Bonnie did not place the property in service in the last quarter) :

Suvi, Inc. purchased two assets during the current year. Suvi placed in service computer equipment (5-year property) on August 10 with a basis of $20,000 and machinery (7-year property) on November 18 with a basis of $10,000. Calculate the maximum depreciation expense, rounded to a whole number (ignoring §179 and bonus depreciation) :

Janey purchased machinery on April 8th of the current year. The relevant costs for the year are as follows: machinery for $10,000, $800 shipping, $50 for delivery insurance, $500 for installation, $750 for sales tax, $150 for the annual tune up, and $200 of property taxes (an annual tax on business property). What is Janey's tax basis for the machinery?

In general, a taxpayer should select longer-lived property for the §179 immediate expensing election.

Wheeler LLC purchased two assets during the current year. Wheeler placed in service computer equipment (5-year property) on November 16 with a basis of $15,000 and furniture (7-year property) on April 20 with a basis of $11,000. Calculate the maximum depreciation expense, rounding to a whole number (ignoring §179 and bonus depreciation) :

In general, major integrated oil and gas producers may take the greater of cost or percentage depletion.

The §179 immediate expensing election phases out based upon the amount of tangible personal property a taxpayer places in service during the year.