Exam 8: Depreciation Cost Recovery Amortization and Depletion

On June 1 of the current year,Tab converted a machine from personal use to rental property.At the time of the conversion,the machine was worth $90,000.Five years ago Tab purchased the machine for $120,000.The machine is still encumbered by a $50,000 mortgage.What is the basis of the machine for cost recovery?

Augie purchased one new asset during the year (five-year property)on November 10,2016,at a cost of $650,000.She would like to use the § 179 election and will also take additional first-year depreciation,if available.The income from the business before the cost recovery deduction and the § 179 deduction was $600,000.Determine the total cost recovery deduction with respect to the asset for 2016.

Property used for the production of income is not eligible for § 179 expensing.

Under the alternative depreciation system (ADS),the half-year convention must be used for personalty.

On March 3,2016,Sally purchased and placed in service a building costing $12,000,000.The building has 10 floors.The bottom three floors are rented out to businesses.The top seven floors are residential apartments.The gross rents from the businesses are $60,000 and the gross rents from the apartments are $110,000.Determine Sally's cost recovery for the building in 2016.

Audra acquires the following new five-year class property in 2016: Audra elects § 179 treatment for Asset C.Audra's taxable income from her business would not create a limitation for purposes of the § 179 deduction.Audra claims the full available additional first-year depreciation deduction.Determine her total cost recovery deduction (including the § 179 deduction)for the year.

On January 15,2016,Vern purchased the rights to a mineral interest for $3,500,000.At that time it was estimated that the recoverable units would be 500,000.During the year,40,000 units were mined and 25,000 units were sold for $800,000.Vern incurred expenses during 2016 of $500,000.The percentage depletion rate is 22%.Determine Vern's depletion deduction for 2016.

Discuss the tax implications of a seller allocating the selling price to goodwill or a covenant not to compete.

For personal property placed in service in 2016,the § 179 maximum deduction is limited to $500,000.

Discuss the criteria used to determine whether a building is residential or nonresidential realty.Also explain the tax consequences resulting from this determination if the property is placed in service in 2016.

For a new car that is used predominantly in business,the "luxury auto" limit depends on whether the taxpayer takes MACRS or straight-line depreciation.

Carlos purchased an apartment building on November 16,2016,for $3,000,000.Determine the cost recovery for 2016.

Antiques may be eligible for cost recovery if they are used in a trade or business.

Grape Corporation purchased a machine in December of the current year.This was the only asset purchased during the current year.The machine was placed in service in January of the following year.No assets were purchased in the following year.Grape Corporation's cost recovery would begin:

Barry purchased a used business asset (seven-year property)on September 30,2016,at a cost of $200,000.This is the only asset he purchased during the year.Barry did not elect to expense any of the asset under § 179,did not take additional first-year depreciation (if available),and did not elect straight-line cost recovery.Barry sold the asset on July 17,2017.Determine the cost recovery deduction for 2017.

Nora purchased a new automobile on July 20,2015,for $29,000.The car was used 60% for business and 40% for personal use.In 2016,the car was used 30% for business and 70% for personal use.Nora elects not to take additional first-year depreciation.Determine the cost recovery recapture and the cost recovery deduction for 2016.

Property which is classified as personalty may be depreciated.

Pat purchased a used five-year class asset on March 15,2016,for $60,000.He did not elect § 179 expensing.Determine the cost recovery deduction for 2016 for earnings and profits purposes.

A taxpayer may elect to use the alternative depreciation system (ADS)to compute depreciation for earnings and profits.

All listed property is subject to the substantiation requirements of § 274.