Exam 7: Property Acquisitions and Cost Recovery Deductions

Environmental clean-up costs are generally deductible in the year incurred.

Follen Company is a calendar year taxpayer. On September 1, Follen signed a 24-month lease on 3,800 square feet of commercial office space. Follen paid a $2,580 fee to the real estate agent who located the space and negotiated the lease. It also paid $10,925 to rewire the space to conform to its computing and other electrical requirements. The rewiring qualifies as five-year recovery property. Compute Follen's first-year cost recovery deductions relating to the lease space.

Ingol Inc. was organized on June 1 and began business on September 13. Ingol elected a calendar year for tax purposes. The corporation incurred $60,300 of legal and other professional fees attributable to its formation. How much of these costs can Ingol deduct on its first tax return?

Four years ago, Bettis Inc. paid a $5 million lump-sum price to purchase a business. Bettis allocated $600,000 of the price to goodwill. Which of the following statements is true?

Terrance Inc., a calendar year taxpayer, purchased equipment for $2,765,000 and placed it in service on March 4, 2010. The equipment was seven-year recovery property and was the only depreciable asset that Terrance purchased during 2010. a. Compute Terrance's tax depreciation with respect to the equipment for 2010 and 2011. b. Compute Terrance's adjusted basis in the equipment in December 31, 2011. c. How would your answer to a. change if Terrance placed the equipment in service on November 18 instead of March 4?

Marz Inc. made a $75,000 cash expenditure this year (year 0). Compute the after-tax cost if Marz must capitalize the expenditure and amortize it ratably over three years, beginning in year 0. Marz has a 30% marginal tax rate and uses a 7% discount rate.