Jose purchased a delivery van for his business through an online auction.

His
winning bid for the van was $24,500. In addition, Jose incurred the following
expenses before using the van: shipping costs of $650; paint to match the
other fleet vehicles at a cost of $1,000; registration costs of $3,200, which
included $3,000 of sales tax and an annual registration fee of $200; wash and
detailing for $50; and an engine tune-up for $250.

What is Jose's cost basis for the delivery van?

Purchase price: 24,500
Shipping costs 650
Paint 1,000
Sales tax 3,000

Total cost basis$29,150

Emily purchased a building to store inventory for her business. The purchase
price was $760,000. Emily also paid legal fees of $300 to acquire the building.
In March, Emily incurred $2,000 to repair minor leaks in the roof (from storm
damage earlier in the month) and $5,000 to make the interior suitable for her
finished goods.

What is Emily's cost basis in the new building?

$765,300 cost basis, computed as follows:

Description Amount Explanation

Purchase price $ 760,000
Improvements 5,000 Business preparation costs
Legal fees 300 Business preparation costs
Cost basis in building$ 765,300*
*Note that the $2,000 repair for the roof was not capitalized. The repair is likely a routine
maintenance expenditure rather than a capitalized cost under Reg. 1.263(a)-3. The roof repair is
reasonably expected to occur more than once in a 10-year period. However, if the expense resulted
in a betterment, restoration, or adaptation to new or different use, it would be capitalized. The legal
fees would be capitalized as expenses to purchase the building and the costs to modify the interior
would be capitalized as improvement costs.

In January, Prahbu purchased for $90,000 a new machine for use in an

existing production line of his manufacturing business. Assume that the
machine is a unit of property and is not a material or supply. Prahbu pays
$2,500 to install the machine, and after the machine is installed, he pays
$1,300 to perform a critical test on the machine to ensure that it will operate in
accordance with quality standards. On November 1, the critical test is
complete, and Prahbu places the machine in service on the production line.
On December 3, Prahbu pays another $3,300 to perform periodic quality
control testing after the machine is placed in service.

How much will Prahbu be required to capitalize as the cost of the machine?
$93,800 cost basis, computed as follows:

Description Amount Explanation

Purchase price $ 90,000
Installation costs 2,500 Business preparation costs
Critical test costs 1,300 Business preparation costs
Cost basis in machine$ 93,800
Under Reg. §1.263(a)-2(d)(1) Prahbu must capitalize amounts paid to acquire or produce a unit of
personal property machinery and equipment. Amounts paid to acquire or produce a unit of personal
property include the invoice price, transaction costs, and costs for work performed prior to the date
that the unit of property is placed in service by the taxpayer. The amounts paid for the installation
and the critical test performed before the machine is placed in service must be capitalized as
amounts to acquire the machine. However, the $3,300 paid for periodic quality control testing after
Prahbu placed the machine in service is not required to be capitalized as amounts paid to acquire
the machine. This amount is expensed as routine maintenance under Reg §1.263(a)-3(i).
Wanting to finalize a sale before year-end, on December 29, WR Outfitters
sold to Bob a warehouse and the land for $125,000.
a. What is Bob's basis in the warehouse and in the land if the appraised
value of the warehouse was $75,000 and the appraised value of the
land was $100,000?
Warehouse$53,571
Land$71,429

Bob's cost basis in the land is $71,429. Because the purchase price is less than the appraised
values for the land and the warehouse, the purchase price must be allocated between the land and
the warehouse. The $71,429 basis for the land is the amount of the $125,000 purchase price that is
allocated to the land based on the relative value of the land ($100,000) to the value of the land
($100,000) plus the value of the warehouse ($75,000) based on the appraisal. The formula used to
determine the basis allocated to the land is $125,000 (purchase price) × $100,000 ÷ ($100,000 +
$75,000).

Use the same process to determine that Bob's basis in the warehouse is $53,571 [$125,000 ×
$75,000 ÷ ($100,000 + $75,000)].

b. What would be Bob’s basis in the warehouse and in the land if the appraised value of
the warehouse was $50,000 and the appraised value of the land was $125,000?

Warehouse$35,714
Land$89,286

Bob's cost basis for the land is $89,286. Because the purchase price is less than the appraised
values for the land and the warehouse, the purchase price must be allocated between the land and
the warehouse. The $89,286 basis for the land is the amount of the $125,000 purchase price that is
allocated to the land based on the relative value of the land ($125,000) to the value of the land
($125,000) plus the value of the warehouse ($50,000) based on the appraisal. The formula used to
determine the basis allocated to the land is $125,000 (purchase price) × $125,000 ÷ ($50,000 +
$125,000).

Use the same process to determine that Bob's basis in the warehouse is $35,714 [$125,000 ×
$50,000 ÷ ($50,000 + $125,000)].

c. Which appraisal would Bob likely prefer?

Appraised value in part (a)
Bob would likely prefer the appraisal from part (a), because the appraisal allows
him to allocate more basis to the warehouse, which is depreciable.
_______________________________________________________

At the beginning of the current year, Poplock began a calendar-year dog

boarding business called Griff's Palace. Poplock bought and placed in service
the following assets during the year:
Asset Date AcquiredCost Basis
Computer equipment 3/23 $ 5,000
Dog-grooming furniture 5/12 7,000
Pickup truck 9/17 10,000
Commercial building 10/11 270,000
Land (one acre) 10/11 80,000
Assuming Poplock does not elect §179 expensing and elects not to use bonus
depreciation, answer the following questions: (Use MACRS Table 1, Table
2, Table 3, Table 4 and Table 5.)

a. What is Poplock's year 1 depreciation deduction for each asset?

Computer equipment$1,000
Dog grooming furniture$1,000
Pickup truck$2,000
Commercial building$1,445
Land$0
Total$5,445

$5,445, under the half-year convention for personal property, calculated as follows:

(1)
Purchase Recovery Original (1) × (2)
Asset Date Quarter Period Basis (2) Rate Depreciation
Computer
23-March 1st1st 5 years $ 5,000 20.00% $ 1,000
equipment
 (1)
Purchase Recovery Original (1) × (2)
Asset Date Quarter Period Basis (2) Rate Depreciation
Dog-grooming
7 years
furniture 12-May 2nd2nd $ 7,000 14.29% $ 1,000
17-
Pickup truck 3 3rd 5 years $ 10,000
rd
20.00% $ 2,000
September
Commercial 11- $
4th4th 39 years 0.535% $ 1,445
building October 270,000
Total $ 5,445

b. What is Poplock's year 2 depreciation deduction for each asset?

$13,437, under half-year convention for personal property, calculated as follows:

(1)
Purchase Recovery Original (1) × (2)
Asset Date Quarter Period Basis (2) Rate Depreciation
Computer
23-March 1st1st 5 years $ 5,000 32.00% $ 1,600
equipment
Dog-grooming
7 years
furniture 12-May 2nd2nd $ 7,000 24.49% $ 1,714
17-
Pickup truck 3 3rd 5 years $ 10,000
rd
32.00% $ 3,200
September
Commercial 11- $
4th4th 39 years 2.564% $ 6,923
building October 270,000
Total $ 13,437

________________________________________________

DLW Corporation acquired and placed in service the following assets during
the year:
Asset Date Acquired Cost Basis
Computer equipment 2/17 $ 10,000
Furniture 5/12 $ 17,000
Commercial building 11/1 $ 270,000
Assuming DLW does not elect §179 expensing and elects not to use bonus
depreciation, answer the following questions: (Use MACRS Table 1, Table
2, Table 3, Table 4 and Table 5.)

a. What is DLW's year 1 cost recovery for each asset?

$5,296, under the half-year convention for personal property, calculated as follows:

(1)
Purchase Recovery Original (1) × (2)
Asset Date Quarter Period Basis (2) Rate Depreciation
Computer 17-
1st1st 5 years $ 10,000 20.00% $ 2,000
equipment February
Furniture 12-May 2nd2nd 7 years $ 17,000 14.29% $ 2,429
 (1)
Purchase Recovery Original (1) × (2)
Asset Date Quarter Period Basis (2) Rate Depreciation
Commercial 1- $
4th4th 39 years 0.321% $ 867
building November 270,000
Total Cost
$ 5,296
Recovery

b. What is DLW's year 3 cost recovery for each asset if DLW sells these
assets on 1/23 of year 3?
c. $2,735, under the half-year convention for personal property, calculated as follows:

Original Recovery Portion of Cost

Asset Basis Period Rate Year Recovery
Computer
$ 10,000 5 years 19.20% 50.00% $ 960
equipment
Furniture $ 17,000 7 years 17.49% 50.00% $ 1,487
Commercial
$ 270,000 39 years 2.564% 4.17% $ 288
building
Total Cost
$ 2,735
Recovery

At the beginning of the year, Anna began a calendar-year business and

placed in service the following assets during the year:
Asset Date Acquired Cost Basis
Computers 1/30 $ 28,000
Office desks 2/15 $ 32,000
Machinery 7/25 $ 75,000
Office building 8/13 $ 400,000
Assuming Anna does not elect §179 expensing and elects not to use bonus
depreciation, answer the following questions: (Use MACRS Table 1, Table
2, Table 3, Table 4 and Table 5.)

a. What is Anna's year 1 cost recovery for each asset?

$24,743, using the half-year convention for personal property, as calculated below:

Purchase Recovery (1) Original (1) × (2) Cost

Asset Date Period Basis (2) Rate Recovery
Computers 30-January 5 years $ 28,000 20.00% $ 5,600
Office 15-
7 years
desks February $ 32,000 14.29% $ 4,573
Machinery 25-July 7 years $ 75,000 14.29% $ 10,718
Office
13-August 39 years $ 400,000 0.963% $ 3,852
building
Total $ 24,743
 b. What is Anna's year 2 cost recovery for each asset?
c. $45,421, using the half-year convention for personal property, calculated as follows:

Purchase Recovery (1) Original (1) × (2) Cost

Asset Date Period Basis (2) Rate Recovery
Computers 30-January 5 years $ 28,000 32.00% $ 8,960
Office 15-
7 years
desks February $ 32,000 24.49% $ 7,837
Machinery 25-July 7 years $ 75,000 24.49% $ 18,368
Office
13-August 39 years $ 400,000 2.564% $ 10,256
building
Total $ 45,421

Evergreen Corporation (calendar year-end) acquired the following assets

during the current year: (Use MACRS Table 1 and Table 2.)
Asset Date Placed in ServiceOriginal Basis
Machinery October 25 $ 70,000
Computer equipment February 3 10,000
Used delivery truck* August 17 23,000
Furniture April 22 150,000

*The delivery truck is not a luxury automobile.

a. What is the allowable depreciation on Evergreen's property in the

current year, assuming Evergreen does not elect §179 expense and
elects out of bonus depreciation?
$38,038, under the half-year convention, calculated as follows:

Placed in (1) Original (2) (1) × (2)

Asset Service Basis Rate Depreciation
Computer equipment
February 3 $ 10,000 20.00% $ 2,000
(5 year)
Furniture (7 year) April 22 $ 150,000 14.29% $ 21,435
Used delivery truck
August 17 $ 23,000 20.00% $ 4,600
(5 year)
Machinery (7 year) October 25 $ 70,000 14.29% $ 10,003
Total $ 253,000 $ 38,038

b. What is the allowable depreciation on Evergreen's property in the current

year if Evergreen does not elect out of bonus depreciation and elects out of
§179 expense?
$210,008, using 80 percent bonus depreciation. All of Evergreen's assets placed in service during
the year are eligible for bonus depreciation.
 (1) (2) Bonus (3) (4) (3) × (4)
Placed in Original Depreciatio Remainin MACRS Depreciatio
Asset Service Basis n (1) × 80% g Basis Rate n Deduction
Computer
equipment Februar $ $
(5 year) y 3 10,000 $ 8,000 2,000 20% $ 400
Furniture (7 April 150,00 30,00 14.29
year) 22 0 120,000 0 % 4,287
Used delivery
truck (5 August
year) 17 23,000 18,400 4,600 20% 920
Machinery (7 October $ 14,00
year) 25 70,000 56,000 0 14.29% 2,001
Bonus
depreciatio
n 202,400
$
$
Total 253,00
210,008
0

Convers Corporation (calendar year-end) acquired the following assets during

the current tax year: (ignore §179 expense and bonus depreciation for this
problem): (Use MACRS Table 1, Table 2, and Table 5.)
Date Placed in Original
Asset Service Basis
Machinery October 25 $ 70,000
Computer
February 3 10,000
equipment
Delivery
March 17 23,000
truck*
Furniture April 22 150,000
Total $ 253,000

*The delivery truck is not a luxury automobile.

In addition to these assets, Convers installed qualified real property (MACRS,

15 year, 150% DB) on May 12 at a cost of $300,000.

a. What is the allowable MACRS depreciation on Convers's property in the

current year assuming Convers does not elect §179 expense and elects
out of bonus depreciation?

$53,038, under the half-year convention, as computed below:

 Placed in (1) Original (2) (1) × (2
Asset Service Basis Rate Depreciat
Machinery (7 year) October 25 $ 70,000 14.29% $ 1
Computer equipment (5 year) February 3 10,000 20.00%
Delivery truck (5 year) March 17 23,000 20.00%
Furniture (7 year) April 22 150,000 14.29% 2
Qualified real property (15-
May 12 300,000 5.00% 1
year)
Total $ 553,000 $ 5

b. What is the allowable MACRS depreciation on Convers's property in the

current year assuming Convers does not elect out of bonus depreciation
(but does not take §179 expense)?

$453,008, under the half-year convention, as computed below. Note that the qualified improvement
property qualifies for bonus.

(1) (2) Bonus (3) (4) (3) × (4)

Placed in Original Depreciatio Remainin MACRS Depreciatio
Asset Service Basis n (1) × 80% g Basis Rate n Deduction
$
Machinery (7
October $ 14,00 14.29
year)
25 70,000 $ 56,000 0 % $ 2,001
Computer
equipment Februar
(5 year) y 3 10,000 8,000 2,000 20% 400
Delivery
truck (5 March
year) 17 23,000 18,400 4,600 20% 920
Furniture (7 April 150,00 30,00 14.29
year) 22 0 120,000 0 % 4,287
Qualified
$
real
300,00
property 60,00
0
(15-year) May 12 240,000 0 5% 3,000
Bonus
depreciatio
n 442,400
$
$
Total 553,00
453,008
0

Assume that ACW Corporation has 2023 taxable income of $1,500,000 for
purposes of computing the §179 expense. The company acquired the
following assets during 2023 (assume no bonus depreciation): (Use
MACRS Table 1, Table 2, and Table 5.)
 Placed in
Asset Service Basis
Machinery September 12 $ 470,000
Computer equipment February 10 70,000
Delivery truck August 21 93,000
Qualified real property (MACRS, 15
April 2 1,380,000
year, 150% DB)
$
Total
2,013,000
a. What is the maximum amount of §179 expense ACW may deduct for 2023?
the maximum §179 expense is $1,160,000.
Description Amount Expl
(1) Qualifying property placed in service during $
Total of qualifying ass
year 2,013,000
(2) Threshold for §179 phase-out (2,890,000) 2023 amount [§179(b)(2)
(3) Phase-out of maximum §179 expense $ 0 (1) − (2) (permanently
$0
$
(4) Maximum §179 expense before phase-out 2023 amount [§179(b)(1)
1,160,000
(5) Phase-out of maximum §179 expense 0 From (3)
(6) Maximum §179 expense after phase-out $
(4) − (5)
1,160,000

b. What is the maximum total depreciation that ACW may deduct in 2023 on the
assets it placed in service in 2023?
The maximum depreciation deduction is $1,270,763 (half-year convention).
Depreciation is maximized by applying the §179 expense against the qualified real property up to its
maximum amount. The remaining basis in the qualified real property is then depreciated over 15
years.
Original §179 Remainin Depreciatio
Asset Basis Expense g Basis Rate n Deduction
Machinery $ $ 14.29
(7-year) 470,000 470,000 % $ 67,163
Computers $ 20.00
(5-year) $ 70,000 70,000 % $ 14,000
Delivery
Truck (5- $ 20.00
year) $ 93,000 93,000 % $ 18,600
Qualified
real
property $ $
(MACRS, 15 1,380,00 1,160,00 $
year) 0 0 220,000 5.00% $ 11,000
§179 $
Expense 1,160,000
Total $
Depreciatio 1,270,763
 Original §179 Remainin Depreciatio
Asset Basis Expense g Basis Rate n Deduction
n Deduction

haz Corporation has taxable income in 2023 of $1,312,000 for purposes of

computing the §179 expense and acquired the following assets during the
year:
Placed in
Asset Service Basis
Office furniture September 12 $ 780,000
Computer equipment February 10 930,000
Delivery truck August 21 68,000
Qualified real property September
1,500,000
(MACRS, 15 year, 150% DB) 30
$
Total
3,278,000
What is the maximum total depreciation deduction that Chaz may deduct in
2023?
$2,846,292. Chaz will need to use both §179 expensing and bonus depreciation to maximize the
total depreciation deduction for the year. The allowable §179 expense amount is $772,000 because
of the amount of qualified property placed in service during the year ($1,160,000 − ($3,278,000 −
$2,890,000)).

§179 Remaining Bonus Deprecia

Asset Original Basis Expense Basis 80%
Office furniture (7-year) $ 780,000 $ 780,000
Computer equipment (5-year) 930,000 930,000
Delivery Truck (5-year) 68,000 68,000
Qualified real property (15- $
728,000
year) 1,500,000 772,000
§179 Expense 772,000
Bonus depreciation $
Total Depreciation Deduction

Phil owns a ranch business and uses four-wheelers to do much of his work.
Occasionally, though, he and his boys will go for a ride together as a family
activity. During year 1, Phil put 765 miles on the four-wheeler that he bought
on January 15 for $6,500. Of the miles driven, only 175 miles were for
personal use. Assume four-wheelers qualify to be depreciated according to
the five-year MACRS schedule and the four-wheeler was the only asset Phil
purchased this year. (Use MACRS Table 1, Table 2, Table 3, Table
4 and Table 5.)
Note: Do not round intermediate calculations. Round your final answers to the
nearest whole dollar amount.
The depreciation deduction will be $1,003 in year 1, calculated as follows:
The depreciation deduction will be $1,003 in year 1, calculated as follows:

Description Amount Explanation

(1) Original basis of 4- $
Assumed in problem
wheeler 6,500
5-year property, year 1, half-year
(2) MACRS depreciation rate 20%
convention
$
(3) Full MACRS depreciation (1) × (2)
1,300
(4) Business use percentage 77.12% 590 miles ÷ 765 miles
Depreciation deduction $
(3) × (4)
for year 1,003

b. Calculate the allowable depreciation for year 2 if total miles were 930 and personal
use miles were 400 (ignore the §179 expense and bonus depreciation).

The depreciation deduction will be $1,185 in year 2, calculated as follows:

Description Amount Explanation
(1) Original basis of 4- $
Assumed in problem
wheeler 6,500
5-year property, year 2, half-
(2) MACRS depreciation rate 32%
year convention
$
(3) Full MACRS depreciation (1) × (2)
2,080
(4) Business use percentage 56.99% 530 miles ÷ 930 miles
Depreciation deduction $
(3) × (4)
for year 1,185

Nicole organized a new corporation. The corporation began business on April

1 of year 1. She made the following expenditures associated with getting the
corporation started:
Expense Date Amount
Attorney fees for articles of February $
incorporation 10 32,000
March 1–March 30 wages March 30 4,500
March 1–March 30 rent March 30 2,000
Stock issuance costs April 1 20,000
April 1–May 30 wages May 30 12,000
Note: Leave no answer blank. Enter zero if applicable.
a. What is the total amount of the start-up costs and organizational
expenditures for Nicole's corporation?
Start-up costs $6,500
Organizational expenditures $32,000
 The only qualifying organizational expenditure is the $32,000 of attorney fees related to the
drafting articles of incorporation. The start-up costs are the wages ($4,500) and rent ($2,000)
before business began. Therefore, total start-up costs are $6,500

b. What amount of the start-up costs and organizational expenditures may

the corporation immediately expense in year 1 (excluding the portion of
the expenditures that are amortized over 180 months)?
start up costs= 5000
org expenditures expensed = 5000

The corporation may immediately expense $5,000 of the organizational expenditure and $5,000
of the start-up costs because the amount of organizational expenditures is under $50,000 and
the amount of start-up costs is under $50,000.

c. What amount can the corporation deduct as amortization expense for

the organizational expenditures and for the start-up costs for year 1 [not
including the amount determined in part (b)]?

The corporation will deduct amortization expense of $1,350 for organizational expenditures and $75 of
amortization for start-up costs, computed as follows:

Start-up costs
Description Amount Explanation
$
(1) Maximum immediate expense §195(b)(1)(A)(ii)
5,000
$
(2) Total start-up expenditures
6,500
(3) Phase-out threshold 50,000 §195(b)(1)(A)(ii)
(2) − (3), not less
(4) Immediate expense phase-out $ 0
than $0
$
(5) Allowable immediate expense (1) − (4)
5,000
(6) Remaining organizational $
(2) − (5)
expenditures 1,500
15 years §195(b)(1)
(7) Recovery period in months 180
(B)
(8) Monthly straight-line
8.33 (6)÷(7)
amortization
(9) Nicole Business months during April through
× 9
year 1 December
Year 1 straight-line
amortization for start-up (8) × (9)
costs $ 75
 Organizational expenditures
Description Amount Explanation
$
(1) Maximum immediate expense §248(a)(1)
5,000
(2) Total organizational $
Given in problem
expenditures 32,000
(3) Phase-out threshold 50,000 §248(a)(1)(B)
(2) − (3), not
(4) Immediate expense phase-out $ 0
less than $ 0
$
(5) Allowable immediate expense (1) − (4)
5,000
(6) Remaining organizational $
(2) − (5)
expenditures 27,000
15 years §248(a)
(7) Recovery period in months 180
(2)
(8) Monthly straight-line
150 (6)÷(7)
amortization
(9) Nicole Business months during April through
× 9
year 1 December
Year 1 straight-line amortization $
(8) × (9)
for organizational expenditures 1,350

d. What would be the total allowable organizational expenditures if Nicole

started a sole proprietorship instead of a corporation?
allowable org expenditures=$0.00

Organizational expenditures are only authorized for corporations (§248) and partnerships
(§709). They are not authorized for sole proprietorships. Typically, sole proprietorships do not
incur many of the expenses that would qualify as organizational expenditures anyway.

Last Chance Mine (LCM) purchased a coal deposit for $750,000. It estimated
it would extract 12,000 tons of coal from the deposit. LCM mined the coal and
sold it, reporting gross receipts of $1 million, $3 million, and $2 million for
years 1 through 3, respectively. During years 1–3, LCM reported net income
(loss) from the coal deposit activity in the amount of ($20,000), $500,000, and
$450,000, respectively. In years 1–3, LCM extracted 13,000 tons of coal as
follows:
Tons Extracted per
(1) Tons of (2) Depletion (2) ÷ (1) Year
Coal Basis Rate Year 1 Year 2 Year 3
$
12,000 $ 62.50 2,000 7,200 3,800
750,000
 a. What is LCM's cost depletion for years 1, 2, and 3?
LCM's cost depletion is $125,000 for year 1, $450,000 for year 2, and $175,000 for year 3,
calculated as follows:
Description Year 1 Year 2 Year 3 Explanation
Given in
(1) Tons extracted 2,000 7,200 3,800
problem
Given in
(2) Depletion rate $ 62.50 $ 62.50 $ 62.50
problem
Cost Depletion $ $ $
(1) × (2)
Expense 125,000 450,000 175,000*Note
*Note:This is the remaining basis. Under the cost depletion method, the taxpayer's amortization is
limited to the cost basis in the natural resource. The full amount of amortization would have been
$237,500 if this were not the case.

b. What is LCM's percentage depletion for each year (the applicable

percentage for coal is 10 percent)?
c. LCM 's percentage depletion for each year is calculated as follows:

Description Year 1 Year 2 Year 3 Explanation

(1) Net income from
activity (before $ Given in
depletion expense) (20,000) $ 500,000 $ 450,000 problem
(2) Gross Income $ $ $ Given in
1,000,000 3,000,000 2,000,000 problem
(3) Percentage Given in
× 10% × 10% × 10%
problem
(4) Percentage Depletion
Expense before limit $ 100,000 $ 300,000 $ 200,000 (2) × (3)
(5) 50% of net income
$ 0 $ 250,000 $ 225,000 (1) × 50%
limitation
Allowable percentage Lesser of
$ 0 $ 250,000 $ 200,000
depletion (4) or (5)

Note that percentage depletion is not limited to the basis in the property.

d. Using the cost and percentage depletion computations from parts (a)
and (b), what is LCM's actual depletion expense for each year?
e. Depletion expense is the greater of cost depletion or percentage depletion calculated as
follows:

Tax Depletion Expense Year 1 Year 2 Year 3 Explanation

$ $ $
(1) Cost depletion Part a
125,000 450,000 175,000
$ $
(2) Percentage depletion $ 0 Part b
250,000 200,000
Deductible depletion $ $ $ Greater of (1) or
expense 125,000 450,000 200,000 (2)
Lina purchased a new car for use in her business during 2023. The auto was
the only business asset she purchased during the year, and her business was
extremely profitable. Calculate her maximum depreciation deductions
(including §179 expense unless stated otherwise) for the automobile in 2023
and 2024 (Lina doesn't want to take bonus depreciation for 2023 or 2024) in
the following alternative scenarios (assuming half-year convention for all):
(Use MACRS Table 1, Table 2, and Exhibit 10-10.)
a. The vehicle cost $35,000, and business use is 100 percent (ignore §179
expense).
Depreciation
Year
deduction
2023 $7,000
2024 $11,200

The depreciation deduction is $7,000 in 2023 and $11,200 in 2024, calculated as follows:

2023 2024
Description Amount Amount Explanation
(1) Original basis of $ $
Given in problem
auto 35,000 35,000
(2) MACRS depreciation 20% 32% 5-year property, year 1 and
rate year 2, half-year
convention
(3) Full MACRS $
depreciation $7,000 11,200 (1) × (2)
(4) Maximum auto $ $
Luxury auto limits
depreciation 11,200 18,000
Depreciation $
$ 7,000 Lesser of (3) or (4)
deduction for year 11,200

b. The vehicle cost $80,000, and business use is 100 percent.

c. The depreciation deduction is $11,200 in 2023 and $18,000 in 2024, calculated as follows:

2023 2024
Description Amount Amount Explanation
(1) Original basis of $ $
Given in problem
auto 80,000 80,000
(2) MACRS depreciation 20% 32% 5-year property, year 1 and
rate year 2, half-year
convention
(3) Full MACRS $ $
(1) × (2)
depreciation 16,000 25,600
(4) Maximum auto $ $
Luxury auto limits
depreciation 11,200 18,000
 Depreciation $ $
Lesser of (3) or (4)
deduction for year 11,200 18,000

Note that when the depreciation is limited by the automobile limitations, §179 expense will not
provide any additional benefit, so it does not make sense to elect §179.

f. The vehicle cost $80,000, and she used it 80 percent for business.
g. The depreciation deduction will be $8,960 in 2023 and $14,400 in 2024,
calculated as follows:

2023 2024
Description Amount Amount Explanation
(1) Original basis of $ $
Given in problem
auto 80,000 80,000
(2) MACRS depreciation 20% 32% 5-year property,
rate year 1 and year 2,
half-year
convention
(3) Full MACRS $ $
(1) × (2)
depreciation 16,000 25,600
(4) Maximum auto $ $
Luxury auto limits
depreciation 11,200 18,000
(5) Depreciation
deduction for year
based on 100% business $ $
use 11,200 18,000 Lesser of (3) or (4)
(6) Business use
80% 80% Assumed in problem
percentage
Depreciation $ $
(5) × (6)
deduction for year 8,960 14,400

After several profitable years running her business, Ingrid decided to acquire
the assets of a small competing business. On May 1 of year 1, Ingrid acquired
the competing business for $300,000. Ingrid allocated $50,000 of the
purchase price to goodwill. Ingrid’s business reports its taxable income on a
calendar-year basis.
How much amortization expense on the goodwill can Ingrid deduct in year 1,
year 2, and year 3?
Deductible Amortization Expense
Year 1 $2,222
Year 2 $3,333
Year 3 $3,333
Ingrid could deduct $2,222 amortization expense on the goodwill in year 1 and $3,333 of
amortization expense on the goodwill in years 2 and 3, computed as follows:

Description Amount Explanation

$
(1) Basis of Goodwill Provided
50,000
(2) Recovery period 180 15 years
$
(3) Monthly amortization (1) ÷ (2)
277.78
May through
(4) Months in year 1 × 8
December
(5) Year 1 straight-line amortization $ 2,222 (3) × (4)
January through
(6) Months in years 2 and 3 × 12
December
(7) Years 2 and 3, annual straight-line
amortization $ 3,333 (3) × (6)

In lieu of the original facts, assume that Ingrid purchased only a phone list with
a useful life of five years for $10,000. How much amortization expense on the
phone list can Ingrid deduct in year 1, year 2, and year 3?

Phone List
Year 1 amortization expense $444
Year 2 amortization expense $667
Year 3 amortization expense $667

Ingrid's amortization for the phone list for year 1 is $444, years 2 and 3 is $667, computed as follows:
Phone
Description List Explanation
$
(1) Basis of phone list Provided
10,000
(2) Recovery period in months 180 15 years
(3) Monthly amortization $ 55.55 (1) ÷ (2)
May through
(4) Months in year 1 × 8
December
(5) Year 1 straight-line
$ 444 (3) × (4)
amortization
January through
(6) Months in years 2 and 3 × 12
December
 (7) Years 2 and 3, annual
straight-line amortization $ 667 (3) × (6)

Although Ingrid purchased only the phone list, it is still considered a §197 intangible and will be amortized
over 180 months (see §197).

Karane Enterprises, a calendar-year manufacturer based in College Station,

Texas, began business in 2022. In the process of setting up the business,
Karane has acquired various types of assets. Below is a list of assets
acquired during 2022:
Asset Cost Date Placed in Service
Office furniture $ 150,000 02/03/2022
Machinery 1,560,000 07/22/2022
Used delivery truck*Note: 40,000 08/17/2022
*Note:Not considered a luxury automobile.

During 2022, Karane was very successful (and had no §179 limitations) and
decided to acquire more assets in 2023 to increase its production capacity.
These are the assets acquired during 2023:
Date Placed in
Asset Cost Service
Computers and information
$ 400,000 03/31/2023
system
Luxury auto*Note: 80,000 05/26/2023
Assembly equipment 1,200,000 08/15/2023
Storage building 700,000 11/13/2023
*Note:Used 100% for business purposes.
Karane generated taxable income in 2023 of $1,732,500 for purposes of
computing the §179 expense limitation. (Use MACRS Table 1, Table 2, Table
3, Table 4, Table 5, and Exhibit 10-10.)
Note: Leave no answer blank. Enter zero if applicable. Input all the values as
positive numbers.
Required:
a. Compute the maximum 2022 depreciation deductions, including §179 expense
(ignoring bonus depreciation)
Total Cost
Current MACRS
Description Cost §179 Expense MACRS Basis Recovery
Depreciation
Deduction
Office $150,000selected $0selected answer $150,000selected $21,435selected
$21,435
furniture answer correct correct answer correct answer correct
1,560,000selected 1,080,000selected 480,000selected 68,592selected
Machinery 1,148,592
answer correct answer correct answer correct answer correct
Used 40,000selected 0selected answer 40,000selected 8,000selected 8,000
delivery truck answer correct correct answer correct answer correct
Total $1,750,000 $1,080,000 $670,000 $98,027 $1,178,027

b. Compute the maximum 2023 depreciation deductions, including §179

expense (ignoring bonus depreciation).
Total
Current Cost
c. Descrip Section 179 MACRS MACRS Recover
Cost
tion Expense Basis Depreciatio y
n Deducti
on
2022 Assets
$150,000selec $150,000sele $36,735selec
Office $0selected
ted answer cted answer ted answer $36,735
furniture answer correct
correct correct correct
1,560,000sele 480,000select 68,592select
0selected
Machinery cted answer ed answer ed answer 68,592
answer correct
correct correct incorrect
40,000selecte 40,000selecte 12,800select
Used 0selected
d answer d answer ed answer 12,800
delivery truck answer correct
correct correct correct
2023 Assets
Computers
400,000select 400,000select 80,000select
and 0selected
ed answer ed answer ed answer 80,000
Information answer correct
correct correct correct
System
80,000selecte 80,000selecte 11,200select
0selected
Luxury Auto d answer d answer ed answer 11,200
answer correct
correct correct correct
1,200,000sele 1,160,000sele 40,000selecte 5,716selecte
Assembly 1,165,71
cted answer cted answer d answer d answer
Equipment 6
correct correct correct correct
700,000select 700,000select 2,247selecte
Storage 0selected
ed answer ed answer d answer 2,247
Building answer correct
correct correct correct
$1,377,2
Total $4,130,000 $1,160,000 $1,890,000 $217,290
90
*Red text indicates no response was expected in a cell or a formula-based calculation is incorrect; no points deducted.

d. Compute the maximum 2023 depreciation deductions, including §179

expense, but now assume that Karane would like to take bonus
depreciation.
 Total
Current Cost
e. Descr Section 179 MACRS MACRS Recov
Cost Bonus
iption Expense Basis Depreciati ery
on Deduct
ion
2022
Assets
$150,000sel $150,000sel $36,735sel
$0selected $0selected
Office ected ected ected $36,73
answer answer
Furniture answer answer answer 5
correct correct
correct correct correct
1,560,000se 68,592sele
0selected 0selected 480,000sele
lected cted
Machinery answer answer cted answer 68,592
answer answer
correct correct correct
correct incorrect
12,800sele
Used 40,000selec 0selected 0selected 40,000selec
cted
Delivery ted answer answer answer ted answer 12,800
answer
Truck correct correct correct correct
correct
2023
Assets
Computers 400,000sel
400,000sele 0selected 0selected 0selected
and ected 400,00
cted answer answer answer answer
Information answer 0
correct correct incorrect incorrect
System incorrect
11,200sele
80,000selec 0selected 8,000selec 72,000selec
Luxury cted
ted answer answer ted answer ted answer 19,200
Auto answer
correct correct correct correct
correct
1,200,000se 1,160,000se 40,000sele
0selected 0selected
Assembly lected lected cted 1,200,0
answer answer
Equipment answer answer answer 00
incorrect incorrect
correct correct incorrect
700,000sele 0selected 0selected 700,000sele 2,247selec
Storage
cted answer answer answer cted answer ted answer 2,247
Building
correct correct correct correct correct
$1,739,
Total $4,130,000 $1,160,000 $448,000 $1,442,000 $131,574
574
*Red text indicates no response was expected in a cell or a formula-based calculation is incorrect; no points
deducted.

Now assume that during 2023, Karane decides to buy a competitor's assets
for a purchase price of $1,350,000. Compute the maximum 2023 cost
recovery, including §179 expense and bonus depreciation. Karane purchased
the following assets for the lump-sum purchase price:
Note: Round your final answers to the nearest whole dollar amount.
Asset Cost Date Placed in Service
Inventory $ 220,000 09/15/2023
Office furniture 230,000 09/15/2023
Machinery 250,000 09/15/2023
Patent 198,000 09/15/2023
Goodwill 2,000 09/15/2023
Building 430,000 09/15/2023
Land 20,000 09/15/2023

Assume that Karane takes the maximum section 179 expense for the
Assembly Equipment.
Total
Current Cost
Section Current
Descrip MACRS MACRS Recov
Cost 179 Bonus Amortiz
tion Basis Depreciat ery
Expense ation
ion Deduc
tion
2022
Assets
$150,000se $150,000s $36,735se 0selecte
Office $0selected $0selecte
lected elected lected d $36,73
Furnitur answer d answer
answer answer answer answer 5
e correct correct
correct correct correct correct
1,560,000s 1,080,000s 480,000sel 68,592sel 0selecte
0selected
Machi elected elected ected ected d
answer 68,592
nery answer answer answer answer answer
correct
correct incorrect correct incorrect correct
40,000sele 40,000sele 12,800sel 0selecte
Used 0selected 0selected
cted cted ected d
Delivery answer answer 12,800
answer answer answer answer
Truck correct correct
correct correct correct correct
2023
Assets
Comp
uters 400,000sel 400,000se 0selecte
0selected 0selected 0selected
and ected lected d 400,00
answer answer answer
Informat answer answer answer 0
correct incorrect incorrect
ion correct incorrect correct
System
Luxur 80,000sele 0selected 8,000sele 72,000sele 11,200sel 0selecte 19,200
y Auto cted answer cted cted ected d
answer correct answer answer answer answer
 correct correct correct correct correct
Asse 1,200,000s 1,160,000s 40,000sele 0selecte
0selected 0selected
mbly elected elected cted d 1,160,
answer answer
Equipm answer answer answer answer 000
incorrect incorrect
ent correct correct incorrect correct
700,000sel 700,000sel 2,247sele 0selecte
Stora 0selected 0selected
ected ected cted d
ge answer answer 2,247
answer answer answer answer
Building correct correct
correct correct correct correct
220,000sel 0selecte
0selected 0selected 0selected 0selected
Invent ected d
answer answer answer answer 0
ory answer answer
correct correct correct correct
correct correct
230,000sel 230,000se 0selecte
Office 0selected 0selected 0selected
ected lected d 230,00
Furnitur answer answer answer
answer answer answer 0
e correct incorrect incorrect
correct incorrect correct
250,000sel 250,000se 0selecte
0selected 0selected 0selected
Machi ected lected d 250,00
answer answer answer
nery answer answer answer 0
correct incorrect incorrect
correct incorrect correct
198,000sel 4,400sel
0selected 0selected 0selected 0selected
Paten ected ected
answer answer answer answer 4,400
t answer answer
correct correct correct correct
correct correct
44select
2,000select 0selected 0selected 0selected 0selected
Good ed
ed answer answer answer answer answer 44
will answer
correct correct correct correct correct
correct
430,000sel 430,000sel 3,221sele 0selecte
0selected 0selected
Buildi ected ected cted d
answer answer 3,221
ng answer answer answer answer
correct correct
correct correct correct correct
20,000sele 0selecte
0selected 0selected 0selected 0selected
cted d
Land answer answer answer answer 0
answer answer
correct correct correct correct
correct correct
$2,187
Totals $5,480,000 $2,240,000 $408,000 $1,912,000 $614,795 $4,444
,239
*Red text indicates no response was expected in a cell or a formula-based calculation is incorrect; no points
deducted.

While completing undergraduate schoolwork in information systems, Dallin

Bourne and Michael Banks decided to start a technology support company
called eSys Answers. During year 1, they bought the following assets and
incurred the following start-up fees:
Year 1 Assets Purchase Date Basis
Computers (5-year) October 30, Year 1$ 15,000
Office equipment (7-year)October 30, Year 1 10,000
Furniture (7-year) October 30, Year 1 3,000
Start-up costs October 30, Year 1 17,000

In April of year 2, they decided to purchase a customer list from a company

providing virtually the same services, started by fellow information systems
students preparing to graduate. The customer list cost $10,000, and the sale
was completed on April 30. During their summer break, Dallin and Michael
passed on internship opportunities in an attempt to really grow their business
into something they could do full time after graduation. In the summer, they
purchased a small van (for transportation, not considered a luxury auto) and a
pinball machine (to help attract new employees). They bought the van on
June 15, Year 2, for $15,000 and spent $3,000 getting it ready to put into
service. The pinball machine cost $4,000 and was placed in service on July 1,
Year 2.
Year 2 Assets Purchase Date Basis
Van June 15, Year 2 $ 18,000
Pinball machine (7-year) July 1, Year 2 4,000
Customer list April 30, Year 2 10,000
Assume that eSys Answers does not claim any §179 expense or bonus
depreciation. (Use MACRS Table 1, Table 2, Table 3, Table 4 and Table 5.)

a. What are the maximum cost recovery deductions for eSys Answers for Year
1 and Year 2?

eSys Answers' Year 1 cost recovery deductions are $6,414, including the expensing of the start-up
costs. eSys Answers' Year 2 cost recovery deductions are $14,754.

Year 1 Cost Recovery

Original Remaining Cost Recovery
Asset Basis Expenses Basis Quarter Rate Expense
Computer
$ 15,000 $ 15,000 4th4th 5.00% $ 750
equipment
Office
$ 10,000 $ 10,000 4th4th 3.57% $ 357
equipment
Furniture $ 3,000 $ 3,000 4th4th 3.57% $ 107
Start-up costs $ 17,000 $ 5,000 $ 12,000 N/A See $ 200
below
Start-up
immediate $ 5,000
expense
 Year 1 Cost Recovery
Original Remaining Cost Recovery
Asset Basis Expenses Basis Quarter Rate Expense
Total Cost
Recovery $ 6,414
Expense
Start-up costs Year 1
Description Amount Explanation
(1) Maximum immediate expense $ 5,000 §195
(2) Total start-up costs $
Given in problem
17,000
(3) Phase-out threshold 50,000 §195
(4) Immediate expense phase-out (2) − (3); not less
$ 0
than $0
(5) Allowable immediate expense $ 5,000 (1) − (4)
(6) Remaining start-up costs $
(2) − (5)
12,000
(7) Recovery period in months 180 15 years §195
(8) Monthly straight-line amortization 66.67 (6) ÷ (7)
(9) eSys' business months during year 1 October through
× 3
December
Year 1 straight-line amortization for
start-up costs $ 200 (8) × (9)
Year 2 Cost Recovery
Cost
Original Remaining Recovery
Asset Basis Expenses Basis Quarter Rate Expense
Computer
$ 15,000 $ 15,000 4th4th 38.00% $ 5,700
equipment
Office
$ 10,000 $ 10,000 4th4th 27.55% $ 2,755
equipment
Furniture $ 3,000 $ 3,000 4 4th 27.55%
th
$ 827
Start-up $ 17,000 $ 5,000 $ 12,000 N/A $ 66.67 $ 800
costs × 12
Delivery van $ 18,000 HY 20.00% $ 3,600
Pinball
$ 4,000 HY 14.29% $ 572
machine
Customer list $ 10,000 N/A See $ 500
below
Total Cost
Recovery
Expense $ 14,754
Description Amount Explanation
(1) Customer list (§197 intangible) $ Given in
10,000 problem
(2) Recovery period in months 180 §197(a)
(3) Monthly straight-line amortization $ 55.56 (1) ÷ (2)
(4) April through December × 9
Year 1 straight-line amortization for customer
list $ 500 (3) × (4)
 d. What is eSys Answers' basis in each of its assets at the end of Year 2?
e. eSys Answers' Year 1 cost recovery deductions are $6,414, including the expensing of the
start-up costs. eSys Answers' Year 2 cost recovery deductions are $14,754.

Year 1 Cost Recovery

Original Remaining Cost Recovery
Asset Basis Expenses Basis Quarter Rate Expense
Computer
$ 15,000 $ 15,000 4th4th 5.00% $ 750
equipment
Office
$ 10,000 $ 10,000 4th4th 3.57% $ 357
equipment
Furniture $ 3,000 $ 3,000 4th4th 3.57% $ 107
Start-up costs $ 17,000 $ 5,000 $ 12,000 N/A See $ 200
below
Start-up
immediate $ 5,000
expense
Total Cost
Recovery $ 6,414
Expense
Start-up costs Year 1
Description Amount Explanation
(1) Maximum immediate expense $ 5,000 §195
(2) Total start-up costs $
Given in problem
17,000
(3) Phase-out threshold 50,000 §195
(4) Immediate expense phase-out (2) − (3); not less
$ 0
than $0
(5) Allowable immediate expense $ 5,000 (1) − (4)
(6) Remaining start-up costs $
(2) − (5)
12,000
(7) Recovery period in months 180 15 years §195
(8) Monthly straight-line amortization 66.67 (6) ÷ (7)
(9) eSys' business months during year 1 October through
× 3
December
Year 1 straight-line amortization for
start-up costs $ 200 (8) × (9)
Year 2 Cost Recovery
Cost
Original Remaining Recovery
Asset Basis Expenses Basis Quarter Rate Expense
Computer
$ 15,000 $ 15,000 4th4th 38.00% $ 5,700
equipment
Office
$ 10,000 $ 10,000 4th4th 27.55% $ 2,755
equipment
Furniture $ 3,000 $ 3,000 4 4th 27.55%
th
$ 827
Start-up $ 17,000 $ 5,000 $ 12,000 N/A $ 66.67 $ 800
costs × 12
Delivery van $ 18,000 HY 20.00% $ 3,600
Pinball
$ 4,000 HY 14.29% $ 572
machine
Customer list $ 10,000 N/A See $ 500
 Year 2 Cost Recovery
Cost
Original Remaining Recovery
Asset Basis Expenses Basis Quarter Rate Expense
below
Total Cost
Recovery
Expense $ 14,754
Description Amount Explanation
(1) Customer list (§197 intangible) $ Given in
10,000 problem
(2) Recovery period in months 180 §197(a)
(3) Monthly straight-line amortization $ 55.56 (1) ÷ (2)
(4) April through December × 9
Year 1 straight-line amortization for customer
list $ 500 (3) × (4)

When a business mistakenly claims too little depreciation for the prior year, the business
may elect to increase future depreciation to make up the difference allowable
depreciation. False

An asset's capitalized cost basis includes the actual purchase price and all other
expenses associated with placing the asset in service. True

Depreciation is currently computed under the Accelerated Cost Recovery

System (ACRS). False

If a taxpayer places only one asset (machinery) in service during the fourth quarter of the year,
the mid-quarter convention must be used. Ignore §179 and bonus depreciation. True

The same depreciation convention that is used for an asset in the year of
acquisition also applies for that asset in the year of disposition. True
When applicable, all taxpayers may use bonus depreciation for qualifying
property. True

The convention for tax amortization is always the half-year convention.

False
Natural resources may be recovered using the greater of cost or percentage depletion
method. True

Which of the following business assets is not depreciated? Coal deposit

Which convention is the general rule for intangible property? Full-month

Dax (calendar year end taxpayer) purchased only one asset during the current year. He placed in
service equipment (7-year property) on September 10 with a basis of $40,000. Calculate the
maximum depreciation expense (ignoring §179 and bonus depreciation). (Use MACRS Table 1.)
$5,716

Frazier LLC placed in service on June 19, 2023 computer equipment (5-year property) with a
basis of $3,000,000. Assume that Frazier has sufficient income to avoid any limitations.
Calculate the maximum depreciation expense including § 179 expensing (but ignoring bonus
depreciation). (Use MACRS Table 1.) $1,160,000.

Bonnie purchased a camera (5-year property) for use in her sole proprietorship. The basis of the
camera was $3,000. Bonnie used the camera in her business 80 percent of the time and used it for
personal purposes the rest of the time during the first year. Ignoring bonus depreciation, calculate
Bonnie's depreciation expense during the first year assuming the sole proprietorship had a loss
during the year. (Use MACRS Table 1.) $480

Griff LLC purchased an office building and land during the current year for $500,000. The
purchase price was allocated as follows: $350,000 to the building and $150,000 to the land. The
property was placed in service on August 22. Calculate Griff's maximum depreciation. (Use
MACRS Table 5.) 3,371

Assume that Brittany acquires a competitor's assets on March 1stMarch 1st. The purchase price
was $250,000. Of the amount, $150,000 is allocated to tangible assets and $100,000 is allocated
to goodwill (a §197 intangible asset). What is Brittany's amortization expense for the current
year? 5,556

Dorn purchased the rights to extract turquoise on a tract of land over a five-year period. Dorn
paid $200,000 for extraction rights. A geologist estimates that Dorn will recover 10,000 pounds
of turquoise. During the current year, Dorn extracted 2,500 pounds of turquoise, which it sold for
$150,000. What is Dorn's cost depletion expense for the current year? 50,000