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Test bank Income Tax CHAPTER 8: DEPRECIATION, COST RECOVERY, AMORTIZATION, AND DEPLETION 1. Property which is classified as personalty may be depreciated. a. True b. False ANSWER: True 2. The ba... sis of cost recovery property must be reduced by at least the cost recovery allowable. a. True b. False ANSWER: True RATIONALE: The basis of cost recovery property must be reduced by the cost recovery allowed but not less than the cost recovery allowable. 3. Antiques may be eligible for cost recovery if they are used in a trade or business. a. True b. False ANSWER: False 4. The key date for calculating cost recovery is the date the asset is placed in service. a. True b. False ANSWER: True RATIONALE: The key date for calculating cost recovery is the date the asset is placed in service, not the purchase date. 5. Land improvements are generally not eligible for cost recovery. a. True b. False ANSWER: False RATIONALE: Land improvements are 15-year class property. 6. The cost recovery basis for property converted from personal use to business use may be the fair market value of the property at the time of the conversion. a. True b. False ANSWER: True RATIONALE: This would occur for the loss basis if the fair market value is less than the adjusted basis of the property. 7. The maximum cost recovery method for all personal property under MACRS is 150% declining balance. a. True b. False ANSWER: False RATIONALE: MACRS uses both 200% and 150% declining balance depending on the class of the property. 8. The cost recovery period for 3-year class property is 4 years. a. True b. False ANSWER: True 9. All personal property placed in service in 2013 and used in a trade or business qualifies for additional first-year depreciation. a. True b. False ANSWER: False RATIONALE: Only new property placed in service in 2013 qualifies for additional first-year depreciation. 10.If more than 40% of the value of property, other than real property, is placed in service during the last quarter, all of the property placed in service in the second quarter will be allowed 7.5 months of cost recovery. a. True b. False ANSWER: True 11.Under MACRS, if the mid-quarter convention is applicable, all property sold is treated as being sold at the mid-point of the quarter in which it is placed in service. a. True b. False ANSWER: False RATIONALE: All property sold is treated as being sold at the mid-point of the quarter in which it is sold. 12.The factor for determining the cost recovery for eligible real estate under MACRS, in the year of disposition, is taken from the month of the disposition. a. True b. False ANSWER: False RATIONALE: The factor is taken from the month the real estate is placed in service. 13.Residential rental real estate includes property where 80% or more of the net rental revenues are from nontransient dwelling units. a. True b. False ANSWER: False RATIONALE: The test is 80% or more of gross rental revenues. 14.Motel buildings have a cost recovery period of 27.5 years. a. True b. False ANSWER: False RATIONALE: Motel buildings are classified as nonresidential real estate with a recovery period of 39 years. 15.Taxpayers may elect to use the straight-line method under MACRS for personalty. a. True b. False ANSWER: True 16.Under the MACRS straight-line election for personalty, only the half-year convention is applicable. a. True b. False ANSWER: False RATIONALE: The mid-quarter convention is applicable under the MACRS straight-line election for personalty. 17.The cost recovery method for new farm equipment placed in service during 2014 is 200% declining balance. a. True b. False ANSWER: False RATIONALE: The cost recovery method is 150% declining balance. 18.In a farming business, MACRS straight-line cost recovery is required for all fruit bearing trees. a. True b. False ANSWER: True 19.In a farming business, if the uniform capitalization rules are not used, cost is recovered using the ADS straight-line method. a. True b. False ANSWER: True 20.When lessor owned leasehold improvements are abandoned because of the termination of the lease, a loss can be taken for the unrecovered basis. a. True b. False ANSWER: True 21.In 2013, the costs of qualified leasehold improvements qualify for additional first-year depreciation. a. True b. False ANSWER: True 22. For personal property placed in service in 2014, the § 179 maximum deduction is limited to $25,000. a. True b. False ANSWER: True 23.The § 179 deduction can exceed $25,000 in 2014 if the taxpayer had a § 179 amount which exceeded the taxable income limitation in the prior year. a. True b. False ANSWER: False RATIONALE: The § 179 amount eligible for expensing in a carryforward year is limited to the lesser of (1) the statutory dollar amount ($25,000 in 2014) reduced by the cost of § 179 property placed in service in excess of $200,000 in the carryforward year or (2) the business income limitation in the carryforward year. 24.Any § 179 expense amount that is carried forward is subject to the business income limitation in the carryforward year. a. True b. False ANSWER: True 25.Taxable income for purposes of § 179 limited expensing is computed by including the MACRS deduction. a. True b. False ANSWER: True RATIONALE: MACRS depreciation is a deduction in computing taxable income for purposes of the § 179 limitations. 26.The basis of an asset on which $20,000 has been expensed under § 179 will be reduced by $20,000, even if $20,000 cannot be expensed in the current year because of the taxable income limitation. a. True b. False ANSWER: True 27.Property used for the production of income is not eligible for § 179 expensing. a. True b. False ANSWER: True 28.The statutory dollar cost recovery limits under § 280F does apply to all automobiles. a. True b. False ANSWER: False RATIONALE: The statutory cost recovery limits under § 280F apply only to automobiles which meet the definition of a passenger automobile (e.g., do not apply to a taxi). 29.The § 179 limit for a sports utility vehicle with a GVW of 7,000 pounds will not apply if the sports utility vehicle is used as a taxi. a. True b. False ANSWER: False RATIONALE: The § 179 limit of $25,000 applies if the sports utility vehicle is used in a trade or business. 30.Once the more-than-50% business usage test is passed for listed property, it does matter if the business usage for the property drops to 50% or less during the recovery period. a. True b. False ANSWER: True RATIONALE: If the business usage declines to 50% or less, the straight-line method must be used and the property is subject to cost recovery recapture. 31.If a new car that is used predominantly in business is placed in service in 2014, the statutory dollar cost recovery limit under § 280F will depend on whether the taxpayer takes MACRS or straightline depreciation. a. True b. False ANSWER: False RATIONALE: The statutory cost recovery limits apply regardless of whether MACRS or straight-line apply. 32.If an automobile is placed in service in 2014, the limitation for cost recovery in 2016 will be based on the cost recovery limits for the year 2014. a. True b. False ANSWER: True RATIONALE: The limits will be based on the limits for automobiles placed in service in 2014. 33.The statutory dollar cost recovery limits under § 280F for passenger automobiles are changed if midquarter cost recovery is used. a. True b. False ANSWER: False RATIONALE: The § 280F limits apply to all passenger automobiles, regardless of the MACRS convention used. 34.If a used $35,000 automobile used 100% for business in the first year (2014) fails the 50% business usage test in the second year, no cost recovery will be recaptured. a. True b. False ANSWER: True RATIONALE: The total cost recovery deduction for the first year would be $3,160 (§ 280F limit) which is less than $7,000 ($35,000 × 20%). The cost recovery in the first year using straightline would be $3,160 (§ 280F limit) which is less than $3,500 ($35,000 × 10%). Therefore, there is no cost recovery recapture. 35.The inclusion amount for a leased automobile is adjusted by a business usage percentage. a. True b. False ANSWER: True RATIONALE: The inclusion amount for a leased automobile is adjusted for business use. 36.All listed property is subject to the substantiation requirements of § 274. a. True b. False ANSWER: True 37.If a taxpayer uses regular MACRS for all property, an alternative minimum tax adjustment is made with respect to the depreciation on all property, regardless of the class life. a. True b. False ANSWER: False RATIONALE: No adjustment is required on 15 and 20-year class property because they use 150% declining-balance depreciation. 38.MACRS depreciation is used to compute earnings and profits. a. True b. False ANSWER: False RATIONALE: ADS straight-line depreciation is used to compute earnings and profits. 39.Under the alternative depreciation system (ADS), the half-year convention must be used for personalty. a. True b. False ANSWER: False RATIONALE: The half-year and mid-quarter conventions apply. 40.A taxpayer may elect to use the alternative depreciation system (ADS) to compute depreciation for earnings and profits. a. True b. False ANSWER: True 41.An election to use straight-line under ADS is made on an asset-by-asset basis for property other than eligible real estate. a. True b. False ANSWER: False RATIONALE: The election is made on a class-by-class basis for property other than eligible real property. 42. For real property, the ADS convention is the mid-month convention. a. True b. False ANSWER: True 43.The cost of a covenant not to complete for 10 years incurred in connection with the acquisition of a business is amortized over 10 years. a. True b. False ANSWER: False RATIONALE: A covenant not to compete is amortized over a statutory 15 years. 44.Goodwill associated with the acquisition of a business cannot be amortized. a. True b. False ANSWER: False RATIONALE: Such goodwill is a § 197 intangible and is amortized over a 15year period. 45.A purchased trademark is a § 197 intangible. a. True b. False ANSWER: True 46.If startup expenses total $53,000 in 2014, $51,000 is amortized over 180 months. a. True b. False ANSWER: True RATIONALE: A portion of the expenses ($2,000) can be deducted immediately (a $5,000 maximum less the amount of startup expenses in excess of $50,000; $5,000 less $3,000 equals $2,000). The balance ($51,000) will be amortized over 180 months. 47.The amortization period in 2014 for $58,000 of startup expenses is 180 months. a. True b. False ANSWER: True 48.Cost depletion is determined by multiplying the depletion cost per unit by the number of units sold. a. True b. False ANSWER: True RATIONALE: Cost depletion is determined by multiplying the depletion cost per unit by the number of units sold (not produced). 49.Percentage depletion enables the taxpayer to recover more than the cost of an asset. a. True b. False ANSWER: True RATIONALE: Percentage depletion can be taken even though the basis in the asset has been reduced to zero by depletion deductions. 50.Intangible drilling costs must be capitalized and written off through depletion. a. True b. False ANSWER: False RATIONALE: The taxpayer may elect to expense the intangible drilling costs [Show More]

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