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Exam

Name___________________________________

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

1) On its tax return, a corporation will use the same depreciation, amortization and depletion methods used in its
financial statements issued to shareholders.
Answer: True False

2) Depreciable property includes business, investment, and personal-use assets.

Answer: True False

3) In order for an asset to be depreciated in the year of purchase, it must be placed in service before year's end.
Answer: True False

4) The basis of an asset must be reduced by the depreciation allowable.

Answer: True False

5) Land, buildings, equipment, and common stock are examples of tangible property.
Answer: True False

6) If personal-use property is converted to trade or business use, the basis for depreciation is the lesser of adjusted
basis or FMV on the date of conversion.
Answer: True False

7) Because Jim and his family enjoy camping, he bought a pickup truck last year for personal use. The truck cost
$40,000. Jim is starting a landscaping business this year and will now be using the truck in the business
full-time. Based on online searches, similar trucks are selling for $32,000. When determining his business
income, Jim will be able to calculate depreciation on the truck, using the $40,000 cost as basis.
Answer: True False

8) Under the MACRS rules, salvage value is not considered in the computation of the cost-recovery or
depreciation amount.
Answer: True False

9) Under the MACRS system, depreciation rates for real property must always use the mid-month convention in
the year of acquisition.
Answer: True False

10) A calendar-year taxpayer places in service one new piece of equipment this year on March 1. The asset cost
$600,000. For this first year, the taxpayer will base the depreciation deduction on 10 months.
Answer: True False

11) MACRS recovery property includes tangible personal and real property that is used in a trade or business.
Answer: True False

12) Under the MACRS system, automobiles and computers are classified as seven-year property.
Answer: True False

1
13) In computing MACRS depreciation in the year of disposition of personal property used in a trade or business,
the half-year convention must be applied to the amounts in the tables if the half-year convention was used in
the year the asset was placed into service.
Answer: True False

14) Intangible assets are subject to MACRS depreciation.

Answer: True False

15) Section 179 allows taxpayers to immediately expense up to $1,000,000 for 2018 of the cost of real and personal
property placed into service in a trade or business, subject to limitations.
Answer: True False

16) The Section 179 expensing election is available on an annual basis for property purchased during the year.
Answer: True False

17) Sec. 179 tax benefits are recaptured if at any time an asset is converted to personal use.
Answer: True False

18) Any Section 179 deduction that is not allowed currently due to the taxable income limitation may be carried
over and deducted in future years.
Answer: True False

19) With respect to options to accelerate depreciation deductions for new qualifying assets, a taxpayer must elect
into Sec. 179 expensing, but elect out of bonus depreciation.
Answer: True False

20) If at least 50% of the aggregate basis of all new personal property for the tax year is placed in service during the
last three months of the year, the mid-quarter convention is required.
Answer: True False

21) Tronco Inc. placed in service a truck costing $40,000 on January 15 of this year. On November 1, the company
placed in service $200,000 of construction equipment. Tronco is a calendar-year taxpayer. When calculating
MACRS depreciation, Tronco must apply the mid-quarter convention to the construction equipment, but will
use the half-year convention for the truck.
Answer: True False

22) The mid-quarter convention applies to personal and real property.

Answer: True False

23) Under the MACRS system, the same convention that applies in the year of acquisition (e.g., half-year,
mid-quarter, or mid-month) also applies in the year of disposition.
Answer: True False

24) Residential rental property is defined as property from which more than 80% of the gross rental income is rental
income from dwelling units.
Answer: True False

2
 25) The MACRS system requires that residential rental property and nonresidential real property be depreciated
using the straight-line method.
Answer: True False

26) Capital improvements to real property must be depreciated over the remaining life of the property on which the
improvements were made.
Answer: True False

27) A tenant in an office building makes improvements to the office space that are qualified improvement property
(QIP). The QIP will be depreciated over the remaining MACRS life of the building.
Answer: True False

28) The straight-line method may be elected for depreciating tangible personal property placed in service after
1986.
Answer: True False

29) The election to use ADS is made on a year-by-year, property-class by property-class basis for real and
personal property.
Answer: True False

30) If the business use of listed property is 50% or less of the total usage, the alternative depreciation system must
be used.
Answer: True False

31) If the business use of listed property decreases to 50% or less of the total usage, the property is subject to
depreciation recapture.
Answer: True False

32) Once the business use of listed property falls to 50% or below, the alternative depreciation system must be used
for the current year and all subsequent years, even if the business use percentage increases to more than 50% in
a subsequent year.
Answer: True False

33) If a new luxury automobile is used 100% for business and placed in service in 2018, the maximum MACRS
depreciation on the vehicle for 2018 is $18,000.
Answer: True False

34) When a taxpayer leases an automobile for 100% business purposes, the entire lease payment is deductible.
Answer: True False

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

35) Joan bought a business machine for $15,000. In a later year, she sold the machine for $12,800 when the total
allowable depreciation is $8,500. The depreciation actually taken on the tax returns totaled $8,000. Joan must
recognize a gain (or loss) of
A) no gain or loss. B) $6,300. C) ($3,200). D) $6,800.
Answer: B

3
36) In April 2018, Emma acquired a machine for $60,000 for use in her business. The machine is classified as 7-year
property. Emma does not expense the asset under Sec. 179 or bonus depreciation. Emma's depreciation on the
machine for 2018 is
A) $6,428. B) $60,000. C) $30,000. D) $8,574.
Answer: D

37) In May 2018, Cassie acquired a machine for $30,000 to use in her business. The machine is classified as 5-year
property. Cassie does not expense the property under Sec. 179 or bonus depreciation. Cassie's depreciation on
the machine for 2018 is
A) $3,000. B) $15,000. C) $12,000. D) $6,000.
Answer: D

38) On January 3, 2015, John acquired and placed into service business tools costing $10,000. The tools have a
3-year class life. No other assets were purchased during that year. The depreciation in 2018 for those tools is
(Sec. 179 and bonus depreciation were not applied)
A) $741. B) $3,333. C) $1,920. D) $0.
Answer: A

39) When depreciating 5-year property, the final year of depreciation will be year
A) 3. B) 4. C) 5. D) 6.
Answer: D

40) Chahana acquired and placed in service $1,165,000 of equipment on August 1, 2018 for use in her sole
proprietorship. The equipment is 5-year recovery property. No other acquisitions are made during the year.
Chahana elects to expense the maximum amount under Sec. 179, and bonus depreciation is not applied.
Chahana's total deductions for 2018 (including Sec. 179 and depreciation) are
A) $1,033,000. B) $233,000. C) $1,233,000. D) $1,165,000.
Answer: A

41) Terra Corporation, a calendar-year taxpayer, purchases and places into service machinery with a 7-year life
that costs $1,140,000. It was placed in service early in the year and was the only addition this year. Terra elects
to depreciate the maximum under Sec. 179 and does not apply bonus depreciation. Terra's taxable income for
the year before the Sec. 179 deduction is $1,700,000. What is Terra's total depreciation deduction related to this
property?
A) $1,020,006 B) $1,140,000 C) $1,028,000 D) $162,906
Answer: A

42) Fariq purchases and places in service in 2018 personal property costing $2,521,000. The taxpayer plans to apply
the Sec. 179 deduction, but not bonus depreciation. What is the maximum Sec. 179 deduction that Fariq can
deduct, ignoring any taxable income limitation?
A) $0 B) $2,500,000 C) $979,000 D) $2,521,000
Answer: C

4
43) Caitlyn purchases and places in service property costing $1,050,000 in 2018. She wants to elect the maximum
Sec. 179 deduction allowed and does not plan to apply bonus depreciation. Her business income is $900,000.
What is the amount of her allowable Sec. 179 deduction and carryover, if any?
A) 179 deduction Carryover B) 179 deduction Carryover
$1,000,000 0 $900,000 $150,000

C) 179 deduction Carryover D) 179 deduction Carryover

$900,000 $100,000 $900,000 0

Answer: C

44) Ilene owns an unincorporated manufacturing business. In 2018, she purchases and places in service $2,536,000
of qualifying five-year equipment for use in her business. Her taxable income from the business before any
depreciation deduction is $900,000. Ilene will elect out of bonus depreciation but plans to take the maximum
allowable deduction under Sec. 179. Which of the following statements is true regarding the Sec. 179 election?
A) Ilene can deduct $1,000,000 as a Sec. 179 deduction in 2018, with no carryover to next year.
B) Ilene can deduct $964,000 as a Sec. 179 deduction in 2018, with no carryover to next year.
C) Ilene can deduct $900,000 as a Sec. 179 deduction in 2018, with no carryover to next year.
D) IIene can deduct $900,000 as a Sec. 179 deduction in 2018; $64,000 may be carried over to next year.
Answer: D

45) Sophie owns an unincorporated manufacturing business. In 2018, she purchases and places in service $2,507,000
of qualifying five-year equipment for use in her business. Her taxable income from the business before any Sec.
179 deduction is $940,000. Sophie elects to expense the maximum under Sec. 179 and does not apply bonus
depreciation. What is Sophie's maximum total cost recovery deduction for 2018?
A) $940,000 B) $1,242,800 C) $1,301,400 D) $993,000
Answer: B

46) Which of the following statements regarding Sec. 179 is true?

A) If a taxpayer places in service property costing more than the Sec. 179 ceiling on the amount of property
placed in service, the excess can be carried over to subsequent years.
B) Sec. 179 carryforwards expire after five years.
C) Amounts of the Sec. 179 election in excess of the taxable income limitation are carried forward.
D) All of the above statements are true.
Answer: C

47) A client placed three new business assets into service in 2018. The client has high taxable income and would like
to maximize the deduction by using bonus depreciation. All of the following assets will qualify for bonus
depreciation except
A) computer software. B) manufacturing equipment.
C) a garage for the service vans. D) All of the assets qualify for bonus depreciation.
Answer: C

48) A client placed $2,800,000 of five-year equipment into service in January 2018. Because taxable income is more
than $10,000,000, she would like to maximize this year's depreciation deduction. The largest deduction allowed
is
A) $2,800,000. B) $1,120,000. C) $560,000. D) $1,360,000.
Answer: A

5
49) In November 2018, Kendall purchases a computer for $4,000. She does not apply Sec. 179 expensing or bonus
depreciation. The computer is the only personal property which she places in service during the year. What is
her total depreciation deduction for this year?
A) $1,000 B) $800 C) $572 D) $200
Answer: D

50) On October 2, 2018, Dave acquired and placed into service 5-year business equipment costing $70,000. No other
acquisitions were made during the year. Dave does not apply Sec. 179 expensing or bonus depreciation. The
depreciation for this year is
A) $7,000. B) $3,500. C) $14,000. D) $0.
Answer: B

51) On November 3rd of this year, Kerry acquired and placed into service 7-year business equipment costing
$80,000. In addition, on May 5th of this year, Kerry had also placed in business use 5-year recovery property
costing $15,000. Kerry did not apply Sec. 179 immediate expensing or bonus depreciation. No other assets were
purchased during the year. The depreciation for this year is
A) $13,576. B) $6,606. C) $3,606. D) $14,432.
Answer: B

52) Paul bought a computer for $15,000 for business use on March 18, 2016. This was his only purchase for that
year. Paul used the most accelerated depreciation method available, but did not elect Sec. 179 and the property
did not qualify for bonus depreciation. Paul sells the machine in 2018. The depreciation on the computer for
2018 is
A) $0. B) $1,500. C) $1,440. D) $2,880.
Answer: C

53) On April 12, 2017, Suzanne bought a computer for $20,000 for business use. This was the only purchase for that
year. Suzanne used the most accelerated depreciation method available but did not elect Sec. 179. Bonus
depreciation was not available. Suzanne sells the machine in 2018. The depreciation on the computer for 2018 is
A) $4,000. B) $6,400. C) $2,000. D) $3,200.
Answer: D

54) Harrison acquires $65,000 of 5-year property in June 2016 that is required to be depreciated using the
mid-quarter convention (because of other purchases that year). He did not elect Sec. 179 immediate expensing.
Bonus depreciation was not available. If Harrison sells the property on August 23, 2018, what is the amount of
depreciation claimed in 2018?
A) $6,500.00 B) $9,289.00 C) $7,312.50 D) $11,700.00
Answer: C

55) For real property placed in service after 1986, depreciation under the MACRS system is calculated using the
A) 200% DB method and a mid-month convention in the year of acquisition and in the year of disposition.
B) 200% DB method and a half-year convention in the year of acquisition and in the year of disposition.
C) straight-line method and a mid-month convention in the year of acquisition and in the year of
disposition.
D) straight-line method and a half-year convention in the year of acquisition and in the year of disposition.
Answer: C

6
56) On August 11, 2018, Nancy acquired and placed into service residential rental property, which cost $430,000;
the cost of the land has been excluded. Nancy annually elects the maximum allowed Sec. 179 deduction. The
total depreciation for the year is (rounded)
A) $15,636. B) $5,865. C) $4,141. D) $5,117.
Answer: B

57) William purchases nonresidential real property costing $300,000 and places it in service in March 2017. What is
Lincoln's 2018 depreciation on the property?
A) $10,908 B) $7,692 C) $6,099 D) $8,637
Answer: B

58) Atiqa took out of service and sold a residential rental property on October 31 of this year. She had originally
acquired the property in July ten years ago. The building (excluding the value of the land) cost $1,000,000. How
much is her current year depreciation deduction?
A) $18,182 B) $30,300 C) $36,360 D) $28,785
Answer: D

59) Quattro Enterprises, a calendar-year taxpayer, leases the twentieth floor of a building downtown. Due to
employment expansion, it renovated the entire office space layout without changing the overall size of the
office, spending $600,000 on these leasehold improvements. The office renovation was completed in May.
Quattro also spent $1,000,000 on new computer systems and office furniture and fixtures in May on which the
business used its entire Sec. 179 allowance for 2018. What is the maximum depreciation deduction available in
2018 for the leasehold improvements?
A) $20,000 B) $9,630 C) $600,000 D) $40,000
Answer: C

60) All of the following are true with regard to the alternative depreciation system except
A) the ADS election is available to real property on a property-by-property basis.
B) the ADS election is available to personal property on a property-by-property basis.
C) once the ADS election is made for specified property, it is irrevocable.
D) the principal type of property for which ADS is required is any tangible property which is used
predominantly outside of the United States.
Answer: B

61) If the business usage of listed property is less than or equal to 50% of its total usage, depreciation is calculated
using the
A) alternative depreciation system.
B) regular MACRS tables.
C) regular MACRS tables and a mid-month convention.
D) It may not be depreciated.
Answer: A

62) Enrico is a self-employed electrician. In May of the current year, Enrico acquired a used van (5-year property)
for $12,000. He used the van 80% for business and 20% for personal purposes. Enrico does not apply Sec. 179 or
bonus depreciation. The maximum depreciation deduction for the van is
A) $1,200. B) $6,720. C) $1,920. D) $2,400.
Answer: C

7
63) Enrico is a self-employed electrician. In May of the current year, Enrico acquired a used van (5-year property)
for $12,000. He used the van 30% for business. Bonus depreciation is not applied. The maximum depreciation
deduction for the van is
A) $1,980. B) $720. C) $360. D) $2,400.
Answer: C

64) In the current year George, a college photography professor, acquired camera equipment (5-year property) for
$1,000 and used the camera equipment 80% for teaching and creative work-related activities and the remaining
20% for personal use. The university provides camera equipment for faculty use, but George prefers his own
equipment. Assuming Sec. 179 and bonus depreciation is not applied, the maximum depreciation deduction is
A) $200. B) $800. C) $160. D) $0.
Answer: D

65) In April of 2017, Brandon acquired equipment which is five-year listed property (not an automobile) for $30,000
and used it 70% for business. Brandon did not claim Sec. 179 or bonus depreciation. In 2018, his business use of
the property dropped to 40%. Which of the following statements is true?
A) Brandon must recapture $2,100 as ordinary income.
B) The change does not affect Brandon's previous depreciation.
C) Brandon must amend the previous tax return and recompute depreciation.
D) Brandon must recapture $4,200 as ordinary income.
Answer: A

66) In February 2018, Pietra acquired a new car costing $82,000. She used the car 80% in her sole proprietorship.
Assuming Sec. 179 is not elected, Pietra's maximum depreciation deduction allowable for the car will be
A) $65,600. B) $14,400. C) $13,120. D) $8,000.
Answer: B

67) In February 2018, Dante acquired a new car costing $82,000. He used the car 80% in his sole proprietorship.
Assuming Dante does not claim Sec. 179 or bonus depreciation, Dante's maximum depreciation deduction
allowable for the car will be
A) $8,000. B) $14,400. C) $10,000. D) $13,120.
Answer: A

68) In February 2018, Pietra acquired a new automobile for $82,000 and used the automobile 80% for business. In
2019 her business use of the auto was 70%. Pietra's depreciation deduction for 2019 will be
A) $4,032. B) $11,200. C) $18,368. D) $11,480.
Answer: B

69) Arthur uses a Chevrolet Suburban (GVWR 7,500 pounds) 100% for business. He acquired and placed the vehicle
in service in his business in January of the current year. The vehicle cost $65,000. The maximum deduction
allowed this year is
A) $13,000. B) $65,000. C) $18,000. D) $25,000.
Answer: B

70) On January l, Grace leases and places into service an automobile with a FMV of $61,000. The business use of the
automobile is 60%. The "inclusion amount" for the initial year of the lease from the IRS tables is $30. The annual
lease payments are $11,000. What are the tax consequences of this lease?
A) deduction for lease payments of $6,600 B) deduction for lease payments of $6,570
C) deduction for lease payment of $6,630 D) deduction for lease payments of $6,582
Answer: D

8
ESSAY. Write your answer in the space provided or on a separate sheet of paper.

71) Everest Corp. acquires a machine (seven-year property) on January 10, 2018 at a cost of $2,512,000. Everest makes
the election to expense the maximum amount under Sec. 179, and bonus depreciation is not claimed.
a. Assume that the taxable income from trade or business is $1,500,000.
(1) What is the amount of the Sec. 179 expensing deduction for the current year?
(2) What is the amount of the Sec. 179 carryover to the next tax year?
(3) What is the amount of depreciation allowed?
b. Assume instead that the taxable income from trade or business is $800,000.
(1) What is the amount of the Sec. 179 expensing deduction for the current year?
(2) What is the amount of the Sec. 179 carryover to the next tax year?
(3) What is the amount of depreciation allowed this year?
Answer: a. (1)Sec. 179 ceiling: $1,000,000
Minus: Equipment cost exceeding $2,500,000 ( 12,000)
Allowable 179 deduction $988,000
Taxable income for the year $1,500,000
Sec. 179 expense (lesser of two preceding amounts) $988,000

(2) None. There is no carryover because there was no taxable income limitation.

(3) Basis for depreciation:

Cost $2,512,000
Sec. 179 deduction ( 988,000)
Minus: Basis to depreciate $1,524,000 Depreciation
($1,524,000 × 0.1429) $217,780
Sec. 179 expense allowed 988,000
Total deductions $1,205,780

b. (1) Sec. 179 ceiling: $1,000,000

Minus: Equipment cost exceeding $2,500,000 ( 12,000)
Equals amount over threshold $988,000
Taxable income for the year $800,000
Sec. 179 expense (lesser of two preceding amounts) $800,000

(2) $988,000 allowable - 800,000 currently deductible = $ 88,000 carryover.

(3) Basis for depreciation:

Cost $2,512,000
Sec. 179 potential deduction (including amount carried over) (988,000)
Minus: Basis to depreciate $1,524,000
Depreciation ($1,524,000,000 × 0.1429) $217,780
Sec. 179 expense allowed 800,000
Total deductions $1,017,780

9
72) In August 2018, Tianshu acquires and places into service 7-year business equipment for $70,000. This is the only
asset that she purchased during the year; her taxable income from her trade or business is $23,000. Tianshu
elects out of bonus depreciation, and she decides to limit her Sec. 179 election to the maximum amount
currently deductible in her business for the current year. What is her maximum cost recovery (Sec. 179 and
depreciation) deduction for 2018?
Answer: Sec. 179 immediate expensing (limited to income) $23,000
MACRS depreciation:
($70,000 - $23,000) = $47,000 × .1429 = 6,716
Total depreciation $29,716

73) On June 30, 2018, Temika purchased office furniture and fixtures (7-year property) costing $800,000 and
technology equipment (5-year property) with a cost of $450,000. She uses Sec. 179, but she does not claim bonus
depreciation. Her business income is $1,190,000 without considering Sec. 179. How should she allocate the Sec.
179 election in order to maximize her total cost recovery deductions (depreciation and Sec. 179) for 2018?
Answer: If Temika assigns the Sec. 179 deduction first to the office furniture, then to the computers:

Office furniture - Sec. 179 $800,000

Tech equipment- Sec. 179 (1,000,000 -800,000) 200,000
Tech equipment-depreciation [.2 × (450,000 -200,000)] 50,000
Total cost recovery $1,050,000

If Temika assigns the Sec. 179 deduction first to the technology equipment, then to the furniture:

Tech equipment - Sec. 179 $450,000

Office Furniture (1,000,000 - 450,000) 550,000
Depreciation on office furniture
[(800,000 - 550,000) × .1429] 35,725
Total cost recovery $1,035,725

Temika should allocate the Sec. 179 deduction first to the office furniture to maximize her cost recovery
deductions.

74) Mehmet, a calendar-year taxpayer, acquires 5-year tangible personal property in 2018 and does not use Sec.
179 or bonus depreciation. Mehmet places the property in service on the following schedule:

Date placed in service Acquisition Cost

January 15 $50,000
May 25 $100,000
November 8 $200,000

What is the total depreciation for 2016?

Answer: Placed in Service MACRS Depreciation
January 15 $50,000 × .35 = $17,500
May 25 $100,000 × .25 = $25,000
November 8 $200,000 × .05 = $10,000
$52,500

More than 40% of the assets are placed in service in the last quarter of the year so the mid-quarter convention
must be used. (Tables 2, 3, 5 in Appendix C)

10
75) Greta, a calendar-year taxpayer, acquires 5-year tangible personal property in 2018 and places the property in
service on the following schedule:

Date placed in service Acquisition Cost

January 15 $ 7,000
May 25 $10,000
November 8 $1,008,000

Greta elects to expense the maximum under Sec. 179, and selects the property placed into service on November 8. The
property is not eligible for bonus depreciation. Her business's taxable income before Sec. 179 is $790,000. What is the
total cost recovery deduction (depreciation and Sec. 179) for 2018?
Answer: Placed in Service Section 179 MACRS Depreciation
January 15 $7,000 × .20 = $1,400
May 25 $10,000 × .20 = $2,000
November 8 $1,000,000 $8,000 × .20 = $ 1,600
$1,000,000 + $5,000 = $1,005,000

Because Sec. 179 expensing is applied to the November 8 addition, the mid-quarter convention does not apply.

76) During the year 2018, a calendar-year taxpayer, Marvelous Munchies, a chain of specialty food shops,
purchased equipment as follows:

Date Asset Cost

March 3 Refrigerators 600,000
October 9 Equipment 2,200,000

Assume the property is all 5-year property. What is the maximum depreciation that may be deducted for the
assets this year, 2018, assuming Sec. 179 expensing and bonus depreciation are not claimed?
Answer: The mid-quarter convention must be used because $2,200,000/$2,800,000 or 66 2/3% of the assets were
purchased in the last quarter of the year.

$600,000 × .35 = $210,000

$2,200,000 × .05 = 110,000
Total $320,000
(Tables 2 and 5 in Appendix C)

77) On May 1, 2008, Empire Properties Corp., a calendar-year taxpayer, purchased an apartment building for
$1,000,000, of which $400,000 was allocable to the land. The corporation sold the property this year on September 23,
2018.
a. What was the corporation's depreciation for the building in 2008, using statutory percentages under MACRS?
b. What was the corporation's depreciation for the building in 2018, using statutory percentages under MACRS?
Answer: a. $600,000 × .02273 = $13,638. p. C-7. Table 7 in Appendix C.
b. $600,000 × .03636 × 8.5/12 = $15,453. p. C-7. Table 7 in Appendix C.

78) On May 1, 2012, Empire Properties Corp., a calendar-year taxpayer, purchased an office building for $1,000,000, of
which $400,000 was allocable to the land. The corporation sold the property this year on September 23, 2018.
a. What was the corporation's depreciation for the building in 2012, using statutory percentages under MACRS?
b. What was the corporation's depreciation for the building in 2018, using statutory percentages under MACRS?
Answer: a. $600,000 × .01605 = $9,630. p. C-9. Table 9 in Appendix C.
b. $600,000 × .02564 × 8.5/12 = $10,897. p. C-9. Table 9 in Appendix C.

11
 79) In January of 2018, Brett purchased a Porsche for $100,000 to be used in his business. Brett drove the car 83
percent of the time for business. What is the maximum amount that Brett may deduct in 2018?
Answer: $18,000 × .83 = $14,940.

80) Jack purchases land which he plans on developing as a golf course. The land costs $20,000,000 and the cost of
clearing the land, earthmoving, constructing hazards, bunkers and greens, and installing irrigation systems will
cost an additional $6,000,000. What tax issues should Jack consider?
Answer: Are the costs of constructing the course considered depreciable land improvements or are they
considered part of the cost of land, and not depreciable?

81) Bert, a self-employed attorney, is considering either purchasing or leasing a $80,000 automobile for use in his
business. What are the issues he should consider in making his decision?
Answer: Bert should be aware of the fact that in addition to being considered listed property and, therefore,
subject to some limitations when it comes to depreciation methods, automobiles are also subject to the
luxury automobile depreciation limits. Depreciation on automobiles used more than 50% of the time for
trade or business is the lesser of MACRS depreciation or a specific statutory ceiling. Depreciation on
automobiles used 50% or less in trade or business is the lesser of ADS straight-line depreciation or the
specific statutory ceiling. On the other hand, lease payments are fully deductible (subject to usage
percentages). However, an "inclusion amount" obtained from an IRS table must be included in gross
income.

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

82) If a company acquires goodwill in connection with the acquisition of a business, the goodwill is amortizable
over a 60-month period.
Answer: True False

83) Amounts paid in connection with the acquisition of a business which represent a covenant not to compete are
amortizable over the covenant's remaining life.
Answer: True False

84) Unless an election is made to expense research and experimental expenditures or to defer and amortize the
expenditures, these costs must be capitalized.
Answer: True False

85) Most taxpayers elect to expense R&E expenditures because of the immediate tax benefit.
Answer: True False

86) Off-the-shelf computer software that is purchased for use in the taxpayer's trade or business is amortized over
36 months, or it can be immediately expensed under a Sec. 179 election.
Answer: True False

12
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

87) On January 1, 2018, Charlie Corporation acquires all of the net assets of Rocky Corporation for $2,000,000. The
following intangible assets are included in the purchase agreement:

Assets Acquisition Cost

Goodwill and going concern value $105,000
Licenses $ 45,000
Patents $ 60,000
Covenant not to compete for five years $120,000

What is the total amount of amortization allowed in 2018?

A) $31,000 B) $22,000 C) $38,000 D) $15,000
Answer: B

88) On January 1 of the current year, Dentux Corp. purchases a patent from another corporation for $600,000. The
patent has a remaining life of 10 years. The patent is the only asset purchased from that corporation. Also on
January 1, Dentux purchases all of the assets of Fenton Corp. Included in the Fenton assets acquired is a patent
worth $300,000 that has a 10-year remaining life. What is the allowable amortization deduction on the two
patents?
A) $160,000 B) $60,000 C) $90,000 D) $80,000
Answer: D

89) In accounting for research and experimental expenditures incurred in 2018, all of the following alternatives are
available with the exception of
A) defer and amortize R&E costs as a ratable deduction over a period of 60 months or more.
B) expense R&E costs in the year paid or incurred.
C) expense R&E costs in the year in which a product or process becomes marketable.
D) capitalize and write off R&E costs only when the research project is abandoned or is worthless.
Answer: C

90) Costs that qualify as research and experimental expenditures include all of the following except
A) costs incurred in developing product improvements.
B) management studies.
C) costs of obtaining a patent such as attorney fees.
D) depreciation of laboratory equipment.
Answer: B

13
 91) This year Bauer Corporation incurs the following costs in development of new products:

Laboratory supplies $ 55,000

Laboratory equipment purchased 50,000
(5-year recovery property)
Salaries (lab personnel) 90,000
Utilities 20,000
Total $215,000

No benefits are realized from the research expenditures until next year. The corporation does not claim Sec. 179
or bonus depreciation on any of its assets. If Bauer Corporation elects to expense the research expenditures, the
deduction is
A) $10,000 this year and $175,000 next year. B) $215,000 this year.
C) $175,000 this year. D) $175,000 next year.
Answer: C

92) Galaxy Corporation purchases specialty software from a software development firm for use in its business as of
January 1 of the current year at a cost of $90,000. No hardware was acquired. How much of the cost can Galaxy
deduct this year?
A) $15,000 B) $90,000 C) $18,000 D) $30,000
Answer: D

ESSAY. Write your answer in the space provided or on a separate sheet of paper.

93) Stellar Corporation purchased all of the assets of Bellavia Company as of January 1 this year for $1 million.
Included in the assets acquired are the following intangible assets:

Asset Useful Life Cost

Patent 10 year $120,000
Covenant not to complete 3 years 30,000
Goodwill Indefinite 300,000

What is Stellar's maximum amortization deduction for the year?

Answer: The assets are Sec. 197 acquisition-related intangibles so regardless of their legal or economic lives, they must
be amortized over 15 years.

Patent $120,000/15 $8,000

Covenant not to compete $30,000/15 2,000
Goodwill $300,000/15 20,000
Total amortization deduction $30,000

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

94) Taxpayers are entitled to a depletion deduction if they have an economic interest in the natural resource
property.
Answer: True False

95) A taxpayer owns an economic interest in an oil and gas property. She is allowed to deduct the smaller of cost
depletion or percentage depletion.
Answer: True False

14
 96) Intangible drilling and development costs (IDCs) may be deducted as an expense or may be capitalized.
Answer: True False

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

97) In calculating depletion of natural resources each period,

A) percentage depletion must be used.
B) the greater of cost depletion or percentage depletion must be used.
C) cost depletion must be used.
D) the smaller of cost depletion or percentage depletion must be used.
Answer: B

98) Jimmy acquires an oil and gas property interest for $600,000. Jimmy expects to recover 200,000 barrels of oil.
Intangible drilling and development costs are $160,000 and are charged to expense. Other expenses are $40,000.
During the year, 25,000 barrels of oil are sold for $800,000. Jimmy's depletion deduction is
A) $120,000. B) $75,000. C) $600,000. D) $160,000.
Answer: A

ESSAY. Write your answer in the space provided or on a separate sheet of paper.

99) Why would a taxpayer elect to capitalize and amortize intangible drilling costs (IDCs) rather than expense such
costs?
Answer: An election to expense IDCs reduces pre-depletion taxable income and thus results in a smaller
percentage depletion deduction. Capitalization and amortization of such costs would generally result in a
higher pre-depletion taxable income, which would result in a higher percentage depletion deduction if it
was anticipated that this limitation would apply. Otherwise, it would be more beneficial to expense the
IDCs since the higher of percentage or cost depletion is utilized.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

100) Under what circumstances might a taxpayer elect the alternative depreciation system for new equipment
acquired this year?
A) A taxpayer has significant charitable contribution carryovers that will expire after this year.
B) A taxpayer has significant NOL carryovers.
C) A taxpayer is undertaking a major R&E project which will result in an usually low marginal tax rate for
the next few years.
D) All of the above.
Answer: D

101) The client is a corporation which uses high-tech equipment to manufacture its product. Because of the high
level of wear and tear due to long production runs and frequent technology changes, the client usually replaces
the equipment every two years. According to IRS guidance, the MACRS life of the equipment is five years. In
order to accelerate depreciation deductions, which tax depreciation option should the client elect?
A) MACRS with a straight-line election B) alternative depreciation system (ADS)
C) units-of-production method D) regular MACRS treatment
Answer: C

102) A purchaser of the assets of a business must allocate the purchase price to the individual assets in accordance
with the written agreement between the purchaser and the seller. Which of the following assets would be least
preferred for purposes of allocating value from the purchaser point of view?
A) office building B) inventory C) goodwill D) equipment
Answer: A

15
ESSAY. Write your answer in the space provided or on a separate sheet of paper.

103) Why would a taxpayer elect to use the alternative depreciation system rather than the MACRS rules?
Answer: Use of the alternative depreciation system would be preferred if the taxpayer anticipates losses over the
next few years, has substantial business credit carryovers or is in an unusually low tax bracket in the
current year. Use of alternative depreciation would result in lower depreciation charges when the
marginal tax rate is lower than expected in future years. With the election of the alternative depreciation
system, the tax savings from the depreciation deductions in the higher marginal tax rate year will be
increased.

104) Discuss the options available regarding treatment of an amount paid in excess of the FMV of an acquired
company's net assets in a business combination.
Answer: Any amount paid in excess of the FMV of the acquired company's net assets may be treated as a payment
for goodwill, a payment for a covenant not to compete, and/or a payment for some other type of
intangible asset. The sales agreement should specify the amount of the purchase price allocated to each
type of asset. Under current tax law, a wide variety of intangible assets are subject to amortization.
Within reason, the purchaser should attempt to have greater amounts allocated to those assets that will
provide large current depreciation or amortization deductions. Since intangibles are given a 15-year life,
there will be a tendency to allocate more of the purchase price to tangible personal property.

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

105) Kenrick is sole proprietor of K Enterprises. He acquired new computer equipment and office furniture and
fixtures for use in his business this year. As a sole proprietor, he can detail the depreciation by reporting directly
on Schedule C of Form 1040. (Profit or Loss from Business).
Answer: True False

106) Maria, a sole proprietor, has several items of office furniture and equipment which are depreciable. All were
acquired before this year. She is not required to report her depreciation deduction on Form 4562.
Answer: True False

16
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