Exam 8: Depreciation, cost Recovery, amortization, and Depletion

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 2017.

On January 15,2017,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 2017 of $500,000.The percentage depletion rate is 22%.Determine Vern's depletion deduction for 2017.

On June 1,2017,James places in service a new automobile that cost $40,000.The car is used 60% for business and 40% for personal use.(Assume this percentage is maintained for the life of the car.) James does not take additional first-year depreciation.Determine the cost recovery deduction for 2017.

Pat purchased a used five-year class asset on March 15,2017,for $60,000.He did not elect § 179 expensing.Determine the cost recovery deduction for 2017 for earnings and profits purposes.

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.

Barry purchased a used business asset (seven-year property) on September 30,2017,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,and did not elect straight-line cost recovery.Barry sold the asset on July 17,2018.Determine the cost recovery deduction for 2018.

On June 1,2017,Gabriella purchased a computer and peripheral equipment (five-year property) for $25,000.She used the assets 40% for business,50% for the production of income,and 10% for personal use.These are the only assets Gabriella purchased during the current year.Determine her total cost recovery deduction for the current year.

Jim acquires a new seven-year class asset on September 20,2017,for $80,000.He placed the asset in service on October 5,2017.He does not elect to expense any of the asset under § 179 or elect straight-line,cost recovery.He takes additional first-year depreciation.He sells the asset on August 25,2018.This is the only asset he acquires in 2017.Determine Jim's cost recovery in 2017 and 2018.

Percentage depletion enables the taxpayer to recover more than the cost of an asset in the form of tax deductions.

Bhaskar purchased a new factory building and land on September 10,2017,for $3,700,000.($500,000 of the purchase price was allocated to the land.) He elected the alternative depreciation system (ADS).Determine the cost recovery deduction for 2018.

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:

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

Any § 179 expense amount that is carried forward is subject to the business income limitation in the carryforward year.

Once the more-than-50% business usage test is passed for listed property,it still matters if the business usage for the property drops to 50% or less during the recovery period.

Taxpayers may elect to use the straight-line method under MACRS for personalty.

Joe purchased a new five-year class asset on June 1,2017.The asset is listed property (not an automobile).It was used 55% for business and 45% for the production of income.The asset cost $1,000,000.Joe made the § 179 election.Joe's taxable income would not create a limitation for purposes of the § 179 deduction.Joe does not take additional first-year depreciation.Determine Joe's total cost recovery (including the § 179 deduction) for the year.

Motel buildings have a cost recovery period of 27.5 years.

An election to use straight-line under ADS is made on an asset-by-asset basis for property other than eligible real estate.

Rod paid $1,950,000 for a new warehouse on April 14,2017.He sold the warehouse on September 29,2022.Determine the cost recovery deduction for 2017 and 2022.

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