Solution Manual For South Western Federal Taxation 2020 Individual Income Taxes 43rd Edition James C Young

Solution Manual for South-Western Federal Taxation
2020: Individual Income Taxes, 43rd Edition, James

C. Young
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-2020-individual-income-taxes-43rd-edition-james-c-young/
Solution Manual for South-Western Federal Taxation 2020: Individual Income Taxes, 43rd Editi
CHAPTER 8
DEPRECIATION, COST RECOVERY, AMORTIZATION, AND DEPLETION
SOLUTIONS TO PROBLEM MATERIALS
DISCUSSION QUESTIONS
1. (LO 1) Personal use property is any property (realty or personalty) that is held for personal use rather
than for use in a trade or business or an income-producing activity. Cost recovery deductions are not
allowed for personal use assets.
2. (LO 1) Personal property is any asset that is not real property. Personal use property is any property
(realty or personalty) that is held for personal use rather than for use in a trade or business or an
income-producing activity.
3. (LO 1) Land improvements have a MACRS class life of 15 years. Certain types of real property (e.g.,
land improvements) are cost recovered as MACRS personalty.
4. (LO 2) These are among the relevant issues for Henry.

• Can a portion of the purchase costs of a ski resort, which are allocated to the construction costs of
the resort’s mountain roads, trails, and slopes, be depreciated?
• If such costs can be depreciated, what is the correct recovery period?
• Can costs incurred subsequent to the purchase, attributable to maintenance of such mountain
roads, trails, and slopes, be depreciated?
5. (LO 2) The three factors the MACRS tables take into account are (1) recovery period, (2) method,
and (3) convention.
6. (LO 2) The asset is treated as if it were placed in service in the middle of the quarter. The factors in
the table take this into account; as a result, the cost of the asset is multiplied by the factor to determine
the first year’s cost recovery. See Exhibit 8.4.
7. (LO 2) The asset is treated as if it were sold in the middle of the quarter; hence, one-half quarter of
cost recovery is allowed in the quarter of the sale. If the sale is in the first quarter, the ratio is 0.5/4; in
the second quarter, 1.5/4; in the third quarter, 2.5/4; and in the fourth quarter, 3.5/4.
8. (LO 2) Even if MACRS straight-line is elected for the 7-year class assets, the cost recovery on the
5-year class assets is computed using regular MACRS with a mid-quarter convention unless a
separate election is made to use MACRS straight-line for the 5-year class assets (the mid-quarter
convention also applies to the 7-year class assets). With respect to the mid-quarter convention, the
assumption is made that Robert is a calendar year taxpayer.
8-1
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8-2 2020 Individual Income Taxes/Solutions Manual
9. (LO 2) The following issues are among those relevant for Jim.
• What is the cost of a self-produced animal for purposes of computing its cost recovery?
• What is the proper placed-in-service date relating to self-produced breeding animals?
• What is the MACRS class life for a self-produced breeding animal?
• What is the proper cost recovery convention to use for self-breeding animals?
10. (LO 3) Ordinary income recapture is required anytime property on which an expense has been taken
under § 179 is coverted to personal use (no longer used predominantly in a trade or business).
11. (LO 3) The basis of the property for cost recovery purposes is reduced by the § 179 amount [after it is
adjusted for property placed in service in excess of the appropriate acquisition limit ($2,550,000 in
2019 and $2,500,000 in 2018)]. The business income limitation does not affect basis.
12. (LO 3) The § 179 amount eligible for expensing in a carryforward year is limited to the lesser of (1)
the statutory dollar amount ($1,020,000 in 2019 and $1,000,000 in 2018) reduced by the cost of § 179
property placed in service in excess of the appropriate acquisition limit in the carryforward year
($2,550,000 for 2019 and $2,500,000 for 2018) or (2) the business income limitation in the
carryforward year.
13. (LO 3) For § 179 purposes, business income is defined as the aggregate amount of taxable income of
any trade or business of the taxpayer without regard to the amount expensed under § 179. Therefore,
the taxable income computation for purposes of the § 179 limit includes the deduction for additional
first-year depreciation and MACRS.
14. (LO 2, 3) The following issues are among those relevant to John.
• Is John entitled to a § 179 deduction?
• How much, if any, can John deduct under § 179 on his own tax return?
• What are the tax consequences of the reimbursements that John receives (including whether he
received the reimbursement in the current year or the following year)?
15. (LO 4) The cost of listed property that does not pass the more-than-50% business usage test must be
recovered using the straight-line method. If the listed property is an automobile, the cost recovery is
further limited by the cost recovery limitations.
16. (LO 4) The property is subject to cost recovery recapture, which is included in the taxpayer’s income
tax return as ordinary income. The amount of the inclusion is the excess cost recovery, which is the
excess of the cost recovery deduction taken in prior years using the statutory percentage method over
the amount that would have been allowed if the straight-line method had been used since the property
was placed in service.
17. (LO 7) The amortization period for a § 197 intangible is 15 years regardless of the actual useful life.
18. (LO 7) The following issues are among those relevant for Orange Motors.
• Does the noncompete agreement come under § 197 for intangibles?
• Was the noncompete agreement in connection with the acquisition of a trade or business?
• Can the cost of the noncompete agreement be amortized over a period other than the normal
statutory period if the noncompete agreement is legally enforceable for a shorter period of time?
• What is the normal statutory period for amortizing intangibles?
Depreciation, Cost Recovery, Amortization, and Depletion 8-3
19. (LO 4, 7) The following issues are among those relevant for George.
• Are all of the expenditures qualifying expenditures?
• Which of the expenditures must be capitalized?
• Which of the expenditures will qualify for amortization under § 195?
• What amount may be deducted under § 195 for 2019?
• How will the acquisition cost of the assets be allocated to various classes of assets (e.g.,
equipment, building, land, and intangibles)?
• Can George use the immediate expense election (§ 179) and/or additional first-year (bonus)
depreciation on any of the assets? If yes, should he?
20. (LO 8) The cost basis is divided by the estimated recoverable units of the asset to arrive at the
depletion per unit. The depletion per unit then is multiplied by the number of units sold during the
year to arrive at the cost depletion allowed.
COMPUTATIONAL EXERCISES
21. (LO 2) The IRS provides tables that specify cost recovery allowances for personalty and for realty. To
determine the amount of the cost recovery allowances, simply identify the asset by class and go to the
appropriate table for the percentage (Exhibit 8.3).
2019 $80,000 × 0.1429 = $11,432.
2020 $80,000 × 0.2449 = $19,592.
22. (LO 2) The mid-quarter convention 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. Hamlet acquired 100% of
assets in the last quarter of the year. Therefore, the mid-quarter convention applies (Exhibit 8.4).
2019 $100,000 × 0.0357 = $3,570.
2020 $100,000 × 0.2755 = $27,550.
23. (LO 2) The IRS provides tables that specify cost recovery allowances for personalty and for realty.
Under MACRS, the cost recovery period for residential rental real estate is 27.5 years and the straight-
line method is used for computing the cost recovery allowance. Nonresidential real estate uses a
recovery period of 39 years; it also is depreciated using the straight-line method. Cost recovery is
computed by multiplying the applicable rate by the cost recovery basis (Exhibit 8.8).
a. Residential rental real estate: $1,000,000 × 0.03636 = $36,360.
b. Nonresidential rental real estate: $1,000,000 × 0.02564 = $25,640.
24. (LO 2) The IRS provides tables that specify cost recovery allowances for personalty and for realty.
The taxpayer may elect to use the straight-line method for depreciable personal property. The
property is depreciated using the class life (recovery period) of the asset with a half-year convention
or a mid-quarter convention, whichever applies. The election is available on a class-by-class and
year-by-year basis (see Concept Summary 8.4). The percentages for the straight-line election with a
half-year convention appear in Exhibit 8.5.
2019 $2,800 × 0.10 = $280.
2020 $2,800 × 0.20 = $560.
25. (LO 2, 3) Additional first-year depreciation is taken in the year in which the qualifying property is
placed in service; it may be claimed in addition to the otherwise available depreciation deduction.
After the additional first-year depreciation is calculated, the standard MACRS cost recovery
allowance is calculated by multiplying the cost recovery basis (original cost recovery basis less
additional first-year depreciation) by the percentage that reflects the applicable cost recovery method
and convention. Because the asset was purchased during the last quarter of the year and is the only
asset purchased during the year, the mid-quarter convention applies (Exhibit 8.4).
Diana’s deduction is computed as follows:

100% additional first-year depreciation: ($65,000 × 100%) = $65,000.
26. (LO 3)
a. In 2019, § 179 permits the taxpayer to elect to deduct up to $1,020,000 of the acquisition cost
of tangible personal property used in a trade or business.
Two additional limitations apply to the amount deductible under § 179. First, the ceiling
amount on the deduction is reduced dollar for dollar when § 179 property placed in service
during the taxable year exceeds a maximum amount ($2,550,000 in 2019). Second, the § 179
deduction cannot exceed the taxpayer’s trade or business taxable income, computed without
regard to the § 179 amount.
§ 179 deduction before adjustment $212,000
Less: Dollar limitation reduction ($212,000 < $2,550,000) (–0–)
Remaining § 179 deduction $212,000
§ 179 deduction allowed due to business income limitation $ 5,600
§ 179 deduction carryforward ($212,000 − $5,600) $206,400
b. Additional first-year depreciation is not limited to business income. As a result, McKenzie

could deduct the entire $212,000 using bonus depreciation. However, other limitations may
apply (e.g., the excess business loss limitation; see text Section 7-5).
27. (LO 4) The law places special limitations on cost recovery deductions for passenger automobiles. The
luxury auto limits are imposed before any percentage reduction for personal use. The cost recovery
limitations are maximum amounts. If the regular MACRS calculation produces a lesser amount of
cost recovery, the lesser amount is used. Note: The 2018 luxury auto amounts are used.
Year MACRS Amount Recovery Limitation Deduction Allowed

2019 $8,400 $7,000 $7,000
($60,000 × 0.20 × 70%) ($10,000 × 70%)
2020 $13,440 $11,200 $11,200
($60,000 × 0.32 × 70%) ($16,000 × 70%)
28. (LO 7) Taxpayers can claim an amortization deduction on intangible assets called “amortizable § 197
intangibles.” The amount of the deduction is determined by amortizing the adjusted basis of such
intangibles ratably over a 15-year period beginning in the month in which the intangible is acquired.
The 2019 § 197 amortization deduction of $7,250 ($1,000 + $6,250) is computed as follows:
Patent: $60,000/15 years = $4,000 × 3/12 = $1,000.
Goodwill: $375,000/15 years × 3/12 = $6,250.
29. (LO 8) Cost depletion is determined using the adjusted basis of the asset. The basis is divided by the
estimated recoverable units of the asset (e.g., barrels and tons) to arrive at the depletion per unit. This
amount is then multiplied by the number of units sold (not the units produced) during the year to
arrive at the cost depletion allowed.
Parscale’s depletion per ton is $16 ($8,000,000 adjusted basis/500,000 estimated recoverable tons). If
75,000 tons are sold this year, the cost depletion is $1,200,000 ($16 depletion per ton × 75,000 tons
sold).
30. (LO 8) Percentage depletion (also referred to as statutory depletion) uses a specified percentage
provided by the Code. The percentage varies according to the type of mineral interest involved. The
rate is applied to the gross income from the property, but in no event may percentage depletion
exceed 50% of the taxable income from the property before the allowance for depletion.
Gross income $340,000
Less: Other expenses (229,000)
Taxable income before depletion $111,000
Depletion allowance $ 47,600*
*[The lesser of $47,600 (14% × $340,000) or $55,500 (50% × $111,000)].
PROBLEMS
31. (LO 1, 2)
Cost of asset $200,000
Less: Greater of allowed and allowable cost recovery:
2017 $ 910
2018 7,272 (8,182)
Basis at the end of 2018 $191,818
Less: Cost recovery for 2019 ($200,000 × 0.03636 × 0.5/12) (303)
Basis on date of sale $191,515
Loss on sale of asset ($180,000 − $191,515) ($ 11,515)
32. (LO 1, 2) José’s basis for cost recovery is $300,000 because the basis of the house at the date of the
conversion from personal use to rental property ($300,000) is less than the $400,000 fair market
value. The cost recovery is $8,637 [$300,000 × 0.02879 (Exhibit 8.8)].
33. (LO 2)
a. The office furniture qualifies for additional first-year depreciation. As a result, the entire
$130,000 cost can be deducted as additional first-year depreciation.
b. The property is 7-year class property. Cost recovery would be calculated as follows:
Additional first-year depreciation $52,000
MACRS cost recovery [($130,000 − $52,000) × 0.1429 (Exhibit 8.3)] 11,146
Total cost recovery $63,146
34. (LO 2)
a. The office machine is 7-year class property; because it was acquired prior to September 28,
2017, bonus depreciation is limited to 50% of the machine’s cost.
2017
Additional first-year depreciation ($75,000 × 50%) $37,500
MACRS cost recovery [($75,000 − $37,500) × 0.1429 (Exhibit 8.3)] 5,359
2018
MACRS Cost Recovery ($37,500 × 0.2449) $ 9,184
b. 2019
MACRS cost recovery [$37,500 × (0.1749 × 1/2)] $ 3,279
35. (LO 2)
a. 2019
MACRS cost recovery ($200,000 × 0.20) (Exhibit 8.3) $40,000
b. 2020
MACRS cost recovery [$200,000 × 0.32 (Exhibit 8.3) × 1/2] $32,000
36. (LO 2) The mid-quarter convention must be used because the cost of the computers acquired in the
fourth quarter exceeds 40% of the cost of all of the personal property acquired during the year
($70,000/$150,000 = 47%).
Furniture (7-year class property)
MACRS cost recovery [$40,000 × 0.1785 (Exhibit 8.4)] $ 7,140
Trucks (5-year class property)
MACRS cost recovery [$40,000 × 0.15 (Exhibit 8.4)] 6,000
Computers (5-year class property)
MACRS cost recovery [$70,000 × 0.05 (Exhibit 8.4)] 3,500
37. (LO 2)
a. The building was placed in service in October.
2019 $3,800,000 × 0.00535 (Exhibit 8.8) = $20,330
b. 2023 $3,800,000 × 0.02564 (Exhibit 8.8) × 6.5/12 = $52,776
38. (LO 2) The building meets the 80% gross receipts from dwelling units test. Therefore, it is classified
as residential real property. The building’s depreciable basis is $1,500,000 [$2,000,000 (cost) −
$500,000 (land)].
$1,500,000 × 0.02576 (Exhibit 8.8) = $38,640
39. (LO 2)
2019 $10,800,000 × 0.01605 (Exhibit 8.8) = $173,340
2029 $10,800,000 × 0.02564 (Exhibit 8.8) = $276,912
40. (LO 2) The building’s depreciable basis is $1,300,000 [$1,600,000 (cost) − $300,000 (land)].
a. 2019 $1,300,000 × 0.0197 (Exhibit 8.8) = $25,610
b. 2025 $1,300,000 × 0.03636 (Exhibit 8.8) × 10.5/12 = $41,360
41. (LO 2, 3, 9)
a. 5-year class property
Immediate expense deduction under § 179 $200,000
7-year class property
Immediate expense deduction under § 179
($520,000 − $200,000) 320,000
MACRS cost recovery
[($420,000 − $320,000) × 0.1429] 14,290
Total deduction $534,290
b. 7-year class property

Immediate expense deduction under § 179 $420,000
5-year class property
Immediate expense deduction under § 179 100,000
MACRS cost recovery
[($200,000 − $100,000) × 0.20] 20,000
c. The deduction for the year would be $5,710 larger ($540,000 − $534,290) if § 179 expense
was first allocated to the 7-year class property (i.e., the longer lived asset). Therefore, she
should elect to expense the 7-year property (the furniture) first.
d. The present value of the tax savings is $146,491.
5-Year 7-Year Tax Savings

Year Asset Asset Total (@ 24%)
1 $120,000 $420,000 $540,000 $129,600
2 32,000 0 32,000 7,680
3 19,200 0 19,200 4,608
4 11,520 0 11,520 2,765
5 11,520 0 11,520 2,765
6 5,760 0 5,760 1,382
7 0 0 0
8 0 0 0
Total $200,000 $420,000 $620,000 $148,800 NPV $146,490.76
e. If Lori chooses not to use the § 179 expense election, the present value of the tax savings
generated from using MACRS deductions is $130,520. As the present value of the tax
savings from using the § 179 deduction on the 7-year asset is $15,971 greater ($146,491 less
$130,520), Lori should expense the 7-year asset.
5-Year 7-Year Tax Savings

Year Asset Asset Total (@ 24%)
1 $ 40,000 $ 60,018 $100,018 $ 24,004
2 64,000 102,858 166,858 40,046
3 38,400 73,458 111,858 26,846
4 23,040 52,458 75,498 18,120
5 23,040 37,506 60,546 14,531
6 11,520 37,464 48,984 11,756
7 37,506 37,506 9,001
8 18,732 18,732 4,496
Total $200,000 $420,000 $620,000 $148,800 NPV $130,520.14
f. Here is a version of a spreadsheet (with formulas displayed):
42. (LO 2, 3)
Section 179 amount (less than $1,020,000 limit) $620,000
Income limitation
Income before § 179 and cost recovery $250,000
Cost recovery ($95,000) (95,000)
Income before § 179 amount $155,000
Section 179 amount of $620,000 (limited to $155,000)

Total deduction with respect to the 7-year assets in 2019 $155,000
Section 179 carryforward ($620,000 − $155,000) $465,000
Alternatively, Olga could choose not to elect § 179 on the equipment and just use bonus depreciation
to completely cost recover the assets. However, this choice would result in a business loss, and the
excess business loss rules might apply (see text Section 7-5).
43. (LO 2, 3, 9)
a. 2018
Section 179 expense (no business income limitation) $200,000
MACRS cost recovery [($560,000 − $200,000) × 0.1429; Exhibit 8.3] 51,444
2019
MACRS cost recovery [($560,000 − $200,000) × 0.2449; Exhibit 8.3] $ 88,164
Total deduction $ 88,164
b. Form 4562 (2018) would be completed as follows:
44. (LO 3, 4) Young, Nellen, Hoffman, Raabe, & Maloney, CPAs

5191 Natorp Boulevard
Mason, OH 45040
December 20, 2019
Mr. Jabari Johnson
100 Morningside
Clinton, MS 39058
Dear Mr. Johnson:
I am responding to your inquiry concerning the amount of cost recovery you may deduct in the first year
of operation of a new taxi. If the automobile is purchased at the beginning of 2020 for $48,000, the total
cost recovery deductions in the first year will be $48,000 (via an expense election under § 179 or via
additional first-year depreciation).
Because the car will be used as a taxi, it is not subject to the cost recovery limitations imposed on
passenger automobiles. This $48,000 cost recovery assumes that your income from your taxi business
before consideration of this cost recovery will be at least $48,000 and an election is made under § 179
to expense the maximum allowable amount. Alternatively, additional first-year (bonus) depreciation
could be taken with no business income limitation.
If you need additional information or need clarification of our calculations, please contact me.
Sincerely yours,
Tanuja Singh, CPA
Partner
TAX FILE MEMORANDUM
DATE: December 20, 2019
FROM: Tanuja Singh
SUBJECT: Jabari Johnson: Calculations for cost recovery in year of acquisition
Facts Jabari Johnson is considering purchasing an automobile at the beginning of 2020 to be used
100% as a taxi. The cost of the automobile is $48,000. Jabari wants to know the total recovery for the
year of acquisition of the car.
Calculations Because the automobile will be used as a taxi, it is not subject to the cost recovery
limitations for passenger automobiles. Therefore, Jabari can elect § 179 expensing and expense the
entire cost of the automobile (which is less than the $1,020,000 maximum § 179 election amount in
2019; this amount will increase in 2020). In deducting the full § 179 amount of $48,000, the
assumption is made that Jabari’s income from the taxi business before consideration of the § 179
expense will equal or exceed $48,000.
45. (LO 2, 4) Even though the car is a used car, it is eligible for additional first-year depreciation, if
available.
Cost $38,000
Regular MACRS percentage (mid-quarter convention); Exhibit 8.4 × 5%
Cost recovery but subject to the § 280F limitation $ 1,900
Recovery limit [limited to $18,000 ($10,000 + $8,000)*] $ 1,900
Less: Personal usage (20% × $1,900) (380)
MACRS cost recovery $ 1,520
*These cost recovery limits are indexed annually. The 2018 amounts are used.
46. (LO 4)
2018
MACRS cost recovery ($75,000 × 0.20) = $15,000 (limited to $10,000*) $10,000
2019
($75,000 × 0.32) = $24,000 (limited to $16,000*) $16,000
So the deduction for 2018 is $10,000; for 2019, it is $16,000.

*These cost recovery limits are indexed annually. Because the car was placed in service in 2018, cost
recovery limitation amounts from 2018 are used.
47. (LO 2, 3, 4)
a. Because the Escalade has a GVW rating in excess of 6,000 pounds, it is not a passenger
automobile and, as a result, is not subject to the luxury auto cost recovery limitations. However,
because the vehicle is an SUV with a GVW between 6,000 and 14,000 pounds, the § 179
expense amount is limited to $25,500 in 2019.
Helen’s total MACRS deductions would be computed as follows:
§ 179 expense $25,500

MACRS cost recovery [($62,000 − $25,500) × 0.20; Exhibit 8.3] 7,300
b. If Helen chooses to use bonus depreciation on the SUV, then the entire $62,000 cost would
be recovered in 2019.
48. (LO 2, 4) Recall that only business use percentages are used in determining whether the more-than-50%
business use test applies (production of income and personal use percentages are ignored). However,
both business and production of income use percentages are used for cost recovery purposes.
Deduction for 2019
MACRS cost recovery ($60,000 × 0.20; Exhibit 8.3) = $12,000
(limited to $10,000*) × 80% $8,000
Deduction for 2020

Straight-line ($60,000 × 0.20; Exhibit 8.7) = $12,000
(limited to $16,000*) × 70% $8,400
Cost recovery recapture in 2020 (related to 2019)

2019 MACRS deduction $8,000
2019 Straight-line ($60,000 × 0.10) = $6,000
(limited to $10,000*) × 80% (4,800)
Excess $3,200
*These cost recovery limits are indexed annually. The 2018 amounts are used.
49. (LO 2, 4, 9)
100% business use [$4,000 × 0.20 (Exhibit 8.3)] × 100% $800
45% business use [$4,000 × 0.10 (Exhibit 8.7)] × 45% (180)
Reduced cost recovery if personal use occurs $620
Tax cost ($620 × 32%) $198
50. (LO 2, 4, 9) Young, Nellen, Hoffman, Raabe, & Maloney, CPAs

Mason, OH 45040
December 20, 2018
Mr. Dennis Harding
150 Avenue I
Memphis, TN 38112
Dear Mr. Harding:
I am writing in response to your request concerning the tax consequences of purchasing versus leasing
an automobile. Our calculations are based on the data you provided in our telephone conversation.
If the automobile is purchased, the total cost recovery deductions for the five years will be $45,706. If
the automobile is leased, lease payment deductions will total $22,500. In addition, you also must
include $884 in your gross income.
If you need additional information or clarification of our calculations, please contact us.
Sincerely yours,
Ishita J. Jones, CPA
Partner
TAX FILE MEMORANDUM

FROM: Ishita J. Jones
SUBJECT: Dennis Harding: Calculation of lease versus purchase
Facts Dennis Harding is considering purchasing or leasing an automobile on January 1, 2019. The
purchase price of the automobile is $48,500. The lease payments for five years would be $375 per
month. The inclusion dollar amounts for the next five years would be $60, $130, $194, $232, and $268.
Dennis wants to know the effect on his adjusted gross income for purchasing versus leasing the
automobile for five years.
Calculations
Purchase: Cost recovery deductions
2019 ($48,500 × 0.20) = $9,700 (limited to $10,000*) $ 9,700
2020 [$48,500 × 0.32 = $15,520 (limited to $16,000*)] 15,520
2021 [$48,500 × 0.192 = $9,312 (limited to $9,600*)] 9,312
2022 [$48,500 × 0.1152 = $5,587 (limited to $5,760*)] 5,587
2023 [$48,500 × 0.1152 = $5,587 (limited to $5,760*)] 5,587
Total cost recovery deductions $45,706
*These cost recovery limits are indexed annually. The 2018 amounts are used here.
Lease:
Lease payments ($375 × 60) $22,500
Inclusion dollar amounts ($60 + $130 + $194 + $232 + $268) $ 884
51. (LO 2, 5)
For regular income tax liability
MACRS cost recovery ($16,000 × 0.20; Exhibit 8.3) $3,200
For AMT liability
($16,000 × 0.15; Exhibit 8.6) $2,400
52. (LO 2, 5, 9)
a. Using ADS over the first three years generates $44,870 of depreciation (versus $56,270 using
MACRS). The total tax cost of this difference is $3,648, and the PV of this tax cost is $3,464.
Tax Cost PV PV of Tax
Year ADS MACRS Difference (@ 32%) Factor Cost
1 $10,710 $14,290 ($ 3,580) ($1,146) 1.0000 ($1,146)
2 19,130 24,490 (5,360) (1,715) 0.9434 (1,618)
3 15,030 17,490 (2,460) (787) 0.8900 (700)
Total $44,870 $56,270 ($11,400) ($3,648) ($3,464)
b. Over the life of the asset, total depreciation is the same (and the overall tax cost or savings is
zero). However, the present value of tax savings generated via ADS in the later years of the
asset’s life is not sufficient to overcome the present value of the tax cost of this choice in the
asset’s early years. Overall, the present value of the tax cost of using ADS (versus MACRS)
is $788.
Tax (Cost) PV of Tax
or Savings PV (Cost) or
Year ADS MACRS Difference (@ 32%) Factor Savings
1 $ 10,710 $ 14,290 ($3,580) ($1,146) 1.0000 ($1,146)
2 19,130 24,490 (5,360) (1,715) 0.9434 (1,618)
3 15,030 17,490 (2,460) (787) 0.8900 (700)
4 12,250 12,490 (240) (77) 0.8396 (65)
5 12,250 8,930 3,320 1,062 0.7921 841
6 12,250 8,920 3,330 1,065 0.7473 796
7 12,250 8,930 3,320 1,062 0.7050 749
8 6,130 4,460 1,670 534 0.6651 355
Total $100,000 $100,000 ($ 0) $ 0 ($ 788)
c. Here is a version of a spreadsheet (with formulas displayed):
53. (LO 2, 7, 9) Young, Nellen, Hoffman, Raabe, & Maloney, CPAs

Mason, OH 45040
October 15, 2019
Mr. Mike Saxon
200 Rolling Hills Drive
Shavertown, PA 18708
Dear Mr. Saxon:
This letter is in response to your request concerning the tax consequences of allocating the purchase
price of a business between the two assets purchased: a warehouse and goodwill.
If the purchase price of $2,000,000 is allocated $1,200,000 to the warehouse and $800,000 to
goodwill, the total recovery in the first year of operations will be $82,865. Cost recovery on the
warehouse will be $29,532, and amortization of the goodwill will be $53,333. If the purchase price is
allocated $1,500,000 to the warehouse and $500,000 to goodwill, the total recovery in the first year of
operations will be $70,248. Cost recovery on the warehouse will be $36,915, and amortization of the
goodwill will be $33,333.
Therefore, under the first option, your deductions in the first year will be $12,617 greater ($82,865 −
$70,248). The building is written off over 39 years, whereas the goodwill is written off over 15 years.
Thus, the higher the allocation to goodwill, the faster the write-off. Should you need more
information or clarification of calculations, please contact us.
Sincerely yours,
Janelle J. Jones, CPA

Partner
TAX FILE MEMORANDUM
DATE: October 15, 2019
FROM: Janelle J. Jones
SUBJECT: Mike Saxon: Calculations of amount of recovery depending on the allocation of

purchase price between a warehouse and goodwill
Facts Mike is negotiating the purchase of a business. The final purchase price ($2,000,000) has been
determined, but the allocation of the purchase price between a warehouse and goodwill is still subject
to discussion. Two alternatives are being considered. The first alternative allocates $1,200,000 to the
warehouse and $800,000 to goodwill. The second alternative allocates $1,500,000 to the warehouse
and $500,000 to goodwill. Mike wants to know the total recovery during the first year of operation
from each alternative.
Calculations
Alternative 1
Warehouse [$1,200,000 × 0.02461 (Exhibit 8.8)] $29,532
Goodwill ($800,000/15 years) 53,333
Total recovery $82,865
Alternative 2
Warehouse [$1,500,000 × 0.02461 (Exhibit 8.8)] $36,915
Goodwill ($500,000/15 years) 33,333
Total recovery $70,248
Additional deductions in first year under Alternative 1

($82,865 − $70,248) $12,617
54. (LO 7)
Deductible amount [$5,000 − ($64,000 − $50,000)] $ –0–
Amortizable amount [($64,000/180) × 10 months] 3,556
Total deduction for startup expenditures $3,556
55. (LO 7)
Deductible amount [$5,000 − ($53,000* − $50,000)] $2,000
Amortizable amount {[($53,000 − $2,000)/180] × 6 months} 1,700
Total deduction for startup expenditures $3,700
*Startup expenses do not include interest expense.
56. (LO 8)
Gross income $12,000,000
Less: Expenses (5,000,000)
Taxable income before depletion $ 7,000,000
Cost depletion ($10,000,000/250,000 × 45,000) = $1,800,000
Percentage depletion (22% × $12,000,000 = $2,640,000, limited
to 50% × $7,000,000 = $3,500,000) (2,640,000)
Taxable income $ 4,360,000
CUMULATIVE PROBLEMS
57. Net income from Writers Anonymous (Note 1) $ 17,500

Interest income 4,000
Self-employment tax deduction (Note 4) (1,237)
Adjusted gross income $ 20,263
Less: Itemized deductions (greater than $12,000 standard deduction) (12,650)
Deduction for qualified business income (Note 5) (1,523)
Taxable income $ 6,090
Tax on $6,090 from 2018 Tax Tables $ 608

Self-employment tax (Note 4) 2,473
Less: Estimated tax payments (3,000)
Net tax payable (or refund due) for 2018 $ 81
See the tax return solution beginning on p. 8-25 of this Solutions Manual.
Notes
(1) The net income of Writers Anonymous is calculated as follows:

Income from sales $85,000
Less: Rent $16,500
Utilities 7,900
Supplies 1,800
Insurance 5,000
Travel excluding meals ($3,500 − $1,200) 2,300
Meals [$1,200 − $600 ($1,200 × 50%)] 600
Depreciation and § 179 deduction (Note 3) 33,400 (67,500)
Income from business $17,500
(2) The itemized deductions include the following:
State income tax* $ 2,950
Home mortgage interest 6,000
Property taxes on home* 2,500
Charitable contributions 1,200
Total itemized deductions $12,650
*State income taxes are greater than state sales taxes; total state and local taxes are less than
the $10,000 limit.
(3) Furniture and fixtures

§ 179 expense deduction $21,000
Cost recovery ($21,000 − $21,000) × 0.1429 –0– $21,000
Computer equipment
§ 179 expense deduction $12,400
Cost recovery ($12,400 − $12,400) × 0.2000 –0– 12,400
All of the assets acquired by Ms. Morgan can be expensed in 2018. If all assets cannot be
expensed, the § 179 limited expensing election would be allocated to the longest-lived assets
first. In this case, it would be associated first with the furniture and fixtures ($21,000) and
then with the computer equipment ($12,400). The furniture and fixtures have a 7-year
recovery period, whereas the computer equipment uses a 5-year recovery period.
(4) The self-employment tax is calculated as follows (see Chapter 13):
1. Net earnings from self-employment. $17,500
2. Multiply line 1 by 92.35%. 16,161
3. If the amount on line 2 is $127,200 or less, multiply the
line 2 amount by 15.3%. This is the self-employment tax. $ 2,473
One-half of the self-employment tax, or $1,237, is a deduction for AGI.
(5) Janice’s qualified business income is $16,263 [her business net income ($17,500) less her
self-employment tax deduction ($1,237)]. Her modified taxable income is $7,613 [AGI
($20,263) less itemized deductions ($12,650)]. Her qualified business income deduction is
$1,523, the lesser of:
1. 20% of QBI ($16,263); 20% × $16,263 = $3,253.
2. 20% of modified taxable income ($7,613); 20% × $7,613 = $1,523.
58. Young, Nellen, Hoffman, Raabe, & Maloney, CPAs

Mason, OH 45040
December 21, 2019
Mr. John Smith
1045 Center Street
Lindon, UT 84042
Dear Mr. Smith:
I am writing in response to your request concerning the effects on your 2019 adjusted gross income of
selling IBM stock and using some of the proceeds to purchase an automobile to be used in your
business.
If the stock was not sold and the car was not purchased, your adjusted gross income would be
$136,000. If the stock was sold and the car was purchased, your adjusted gross income would be
$136,200. The supporting calculations follow.
No sale of stock and no purchase of car
Fees for services $912,000

Less: Business expenses
Building rental $36,000
Office furniture and equipment rental 9,000
Office supplies 2,500
Utilities 4,000
Salaries ($34,000 + $42,000) 76,000
Payroll taxes 7,000
Fuel and oil 21,000
Cost recovery (Note 3) –0–
Total business expenses (155,500)
Business income before § 179 deduction $756,500
Less: § 179 deduction (Note 1) (640,000)
Business income $116,500
Dividend income 9,500
Adjusted gross income $136,000
Notes
(1) Section 179 deduction of $640,000 (maximum § 179 deduction is $1,020,000; total
acquisitions are less than $2,550,000).
(2) The inheritance of IBM stock worth $110,000 from Aunt Mildred is excludible under § 101.
(3) Cost recovery (none; § 179 expense reduces MACRS basis to zero).
Sale of stock and purchase of car

Utilities 4,000
Salaries ($34,000 + $42,000) 76,000
Payroll taxes 7,000
Fuel and oil 21,000
Cost recovery (Note 3)
Car 14,800
Gain on stock sale (Note 2) 15,000
Notes
John’s recognized gain on the sale of the IBM stock is $15,000 ($125,000 amount realized −
$110,000 adjusted basis) and is automatically classified as a long-term capital gain.
(3) Cost recovery
Car
Total potential deduction $75,000
Limited to ($10,000* + $4,800) $14,800
*The cost recovery limits are indexed annually. The 2018 amounts are used.
Should you want more information or need us to clarify our calculations, please contact us.
Sincerely,
Josita J. Jones, CPA
Partner
TAX FILE MEMORANDUM

FROM: Josita J. Jones
SUBJECT: John Smith: Calculation of adjusted gross income for (1) no sale of stock or purchase
of car versus (2) sale of stock and purchase of car
Facts John is considering selling inherited IBM stock with an adjusted basis to him of $110,000 for
$125,000 on December 29, 2019. He would use $75,000 of the proceeds to purchase a car that would
be used 100% for business. John wants to know the effect these transactions would have on his
adjusted gross income.
No sale of stock and no purchase of car
Utilities 4,000
Salaries ($34,000 + $42,000) 76,000
Payroll taxes 7,000
Fuel and oil 21,000
Cost recovery (Note 3) –0–
Notes
(3) Cost recovery (none; § 179 expense reduces MACRS basis to zero).
Sale of stock and purchase of car
Utilities 4,000
Salaries ($34,000 + $42,000) 76,000
Payroll taxes 7,000
Fuel and oil 21,000
Cost recovery (Note 3)
Car 14,800
Gain on stock sale (Note 2) 15,000
Notes
John’s recognized gain on the sale of the IBM stock is $15,000 ($125,000 amount realized −
$110,000 adjusted basis) and is automatically classified as a long-term capital gain.
(3) Cost recovery
Car
Total potential deduction $75,000
Limited to ($10,000* + $4,800) $14,800
*The cost recovery limits are indexed annually. The 2018 amounts are used.
RESEARCH PROBLEMS
1. CLIENT LETTER
Young, Nellen, Hoffman, Raabe, & Maloney, CPAs

Mason, OH 45040
April 1, 2020
Ms. Cassandra Martin, CFO

Dave’s Sport Shop
867 Broadway
New York, NY 10003
Dear Ms. Martin:

This letter is in response to your request to provide Dave’s Sport Shop with tax advice regarding the
tax treatment of the inventory management software purchased in 2019.
Generally, tax law provides that the cost of off-the-shelf software is recovered over 36 months, which
would mean that the full cost of the software could not be deducted in the year of purchase. However,
software is eligible for IRC § 179 expensing. In 2019, this provision allows for up to $1,020,000 of the
cost of property other than real estate placed in service in the year to be immediately expensed. As long
as Dave’s Sport Shop has not exceeded this limit with other property acquired in 2019 and expensed
under § 179, the full cost of the software can be deducted under the provisions of § 179.
If we can be of assistance in helping you to maximize your cost recovery deductions, please let me
know.
Sincerely,
Gayle B. Anders, CPA

Partner
TAX FILE MEMORANDUM
DATE: March 30, 2020
FROM: Gayle B. Anders
SUBJECT: Amortization of software costs

Cassandra Martin, CFO of Dave’s Sport Shop, has requested that we provide tax advice regarding the
immediate deduction of the cost of inventory management software purchased in the 2019 tax year.
Per IRC § 167(a), off-the-shelf software that has not been substantially modified is amortized over
36 months. (Note that software acquired as part of the purchase of a trade or business is an IRC § 197
intangible, subject to 15-year amortization. The client has not indicated that the software was acquired
as a part of the acquisition of a business.)
However, software is eligible for IRC § 179 expensing as well as additional first-year depreciation. As
long as Dave’s has not exceeded the maximum § 179 limit in 2019 ($1,020,000) with other property
acquired, the full cost of the software can be deducted in 2019. I did not mention the additional first-
year depreciation provisions to the client. If acquisitions qualifying for § 179 exceed $1,020,000 for
the year, we should contact the client to make her aware of this additional benefit.
I have notified Cassandra Martin of the amortization and § 179 provisions.
2. The facts of the case are similar to Chief Counsel Advice Memorandum 201234024, May 9, 2012. In
the memorandum, it was determined that a vineyard constituted § 179 property. Hence, taxpayers
were entitled to elect to expense the costs incurred when the vineyard was planted on the current
year’s income tax return. Therefore, Jed should be able to deduct the costs incurred in planting the
vineyard in 2015 on his 2019 income tax return. This is assuming that all of the other requirements
under § 179 have been satisfied.
3. The facts of the case are similar to Bruce Selig, 70 TCM 1125, T.C.Memo. 1995–519. In this case, the
court ruled that a deduction was allowable. The Court found that over time, the exotic automobiles
would, because of those exotic features, become obsolete in the petitioner’s business. The fact that
petitioner failed to show the useful lives of the automobiles was irrelevant to the decision.
Research Problems 4 to 6
These research problems require that students utilize online resources to research and answer the questions.
As a result, solutions may vary among students and courses. You should determine the skill and experience
levels of the students before assigning these problems, coaching where necessary. Encourage students to use
reliable websites and blogs of the IRS and other government agencies, media outlets, businesses, tax
professionals, academics, think tanks, and political outlets to research their answers.
4. MarketWatch provides such a calculator: marketwatch.com/tools/carleaseorbuy. There are several

free financial calculator apps, including EZ Financial Calculator and Car Payment Calculator (both
available for iOS and Android devices). Edmunds.com also provides a helpful discussion of the costs
and benefits of leasing versus buying: edmunds.com/car-buying/should-you-lease-or-buy-your-
car.html.
5. Students should be able to locate a wide variety of information. The Big Four firms have significant
practices in this area. Here are links your students might find.
pwc.com/us/en/services/tax/specialized-tax/tax-depreciation.html
deloitte.com/us/en/pages/tax/solutions/tax-depreciation-expense-planning-and-reporting.html
tax.kpmg.us/services/accounting-methods-credits/fixed-assets.html
ey.com/gl/en/services/tax/worldwide-capital-and-fixed-assets-guide---country-list
6. The referenced spreadsheets (2013 tax year; the most recent tax year for all entities as of our
publication date) are available on the IRS Tax Statistics website.
(1) Corporate:
irs.gov/statistics/soi-tax-stats-returns-of-active-corporations-table-27
(2) Partnerships:
irs.gov/statistics/soi-tax-stats-partnership-statistics-by-sector-or-industry
The 2013 tax year file: 13pa01.xls
(3) Nonfarm Sole Proprietorships:
irs.gov/statistics/soi-tax-stats-nonfarm-sole-proprietorship-statistics
The 2013 tax year file: 13sp01br.xls
CHECK FIGURES
21. $11,432; $19,592. 41.b. $540,000.

22. $3,570; $27,550. 41.d. $146,491.
23.a. $36,360. 41.e. $130,520.
23.b. $25,640. 42. Cost recovery $155,000; § 179
24. $280; $560. carryforward $465,000.
25. $65,000. 43. 2018: $251,444; 2019: $88,164.
26. $5,600; $206,400. 44. $48,000.
27. $7,000; $11,200. 45. $1,520.
28. $7,250. 46. $10,000 in 2018; $16,000 in 2019.
29. $1,200,000. 47.a. $32,800.
30. $47,600. 47.b. $62,000.
31. Loss $11,515. 48. Deduction in 2019 $8,000; deduction in
32. $300,000 basis; $8,637 cost recovery. 2020 $8,400; recapture in 2020 $3,200.
33.a. $130,000. 49. $198.
33.b. $63,146. 51. Regular tax deduction $3,200; AMT
34.a. $42,859; $9,184. deduction $2,400.
34.b. $3,279. 52.a. PV of tax cost is ($3,464).
35.a. $40,000. 52.b. PV of tax cost is ($788).
35.b. $32,000. 53. The first option produces a $12,617
36. $16,640. greater deduction.
37.a. $20,330. 54. $3,556.
37.b. $52,776. 55. $3,700.
38. $38,640. 56. $4,360,000 taxable income.
39. 2019: $173,340; 2029: $276,912. 57. Tax due for 2018 $81.
40.a. $25,610. 58. AGI without purchase $136,000; AGI
40.b. $41,360. with stock sale and car purchase $136,200.
41.a. $534,290.
SOLUTION TO ETHICS & EQUITY FEATURE
Section 179 Limitation (p. 8-14). Joe can expense the cost of the truck under § 179. The income limitation is
the aggregate amount of taxable income derived from the conduct of any trade or business. Although Joe
reported a net operating loss from one business, the sale of his other business had a profit of $300,000.
Therefore, taxable income is not a limitation.
SOLUTIONS TO BECKER CPA REVIEW QUESTIONS
Detailed answer feedback for Becker CPA Review questions is available on the instructor companion site
(cengage.com/login).
1. c 5. c
2. b 6. b
3. c 7. c
4. d 8. a
57.
57. continued
57. continued
57. continued
57. continued
57. continued
57. continued
57. continued
57. continued
Solution Manual for South-Western Federal Taxation 2020: Individual Income Taxes, 43rd Editi
57. continued
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DEPRECIATION, COST RECOVERY, AMORTIZATION, AND DEPLETION

SOLUTIONS TO PROBLEM MATERIALS

4. (LO 2) These are among the relevant issues for Henry.

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2020 $2,800 × 0.20 = $560.

Diana’s deduction is computed as follows:

b. Additional first-year depreciation is not limited to business income. As a result, McKenzie

Year MACRS Amount Recovery Limitation Deduction Allowed

*[The lesser of $47,600 (14% × $340,000) or $55,500 (50% × $111,000)].

b. 7-year class property

d. The present value of the tax savings is $146,491.

5-Year 7-Year Tax Savings

5-Year 7-Year Tax Savings

f. Here is a version of a spreadsheet (with formulas displayed):

Section 179 amount of $620,000 (limited to $155,000)

b. Form 4562 (2018) would be completed as follows:

44. (LO 3, 4) Young, Nellen, Hoffman, Raabe, & Maloney, CPAs

So the deduction for 2018 is $10,000; for 2019, it is $16,000.

Helen’s total MACRS deductions would be computed as follows:

§ 179 expense $25,500

Deduction for 2020

Cost recovery recapture in 2020 (related to 2019)

50. (LO 2, 4, 9) Young, Nellen, Hoffman, Raabe, & Maloney, CPAs

TAX FILE MEMORANDUM

c. Here is a version of a spreadsheet (with formulas displayed):

53. (LO 2, 7, 9) Young, Nellen, Hoffman, Raabe, & Maloney, CPAs

Janelle J. Jones, CPA

DATE: October 15, 2019

FROM: Janelle J. Jones

SUBJECT: Mike Saxon: Calculations of amount of recovery depending on the allocation of

Additional deductions in first year under Alternative 1

*Startup expenses do not include interest expense.

57. Net income from Writers Anonymous (Note 1) $ 17,500

Tax on $6,090 from 2018 Tax Tables $ 608

(1) The net income of Writers Anonymous is calculated as follows:

(3) Furniture and fixtures

58. Young, Nellen, Hoffman, Raabe, & Maloney, CPAs

No sale of stock and no purchase of car

Fees for services $912,000

Sale of stock and purchase of car

DATE: December 20, 2019

Young, Nellen, Hoffman, Raabe, & Maloney, CPAs

Ms. Cassandra Martin, CFO

Dear Ms. Martin:

Gayle B. Anders, CPA

TAX FILE MEMORANDUM

DATE: March 30, 2020

FROM: Gayle B. Anders

SUBJECT: Amortization of software costs

I have notified Cassandra Martin of the amortization and § 179 provisions.

4. MarketWatch provides such a calculator: marketwatch.com/tools/carleaseorbuy. There are several

The 2013 tax year file: 13pa01.xls

(3) Nonfarm Sole Proprietorships:

The 2013 tax year file: 13sp01br.xls

21. $11,432; $19,592. 41.b. $540,000.