Exam 8: Depreciation, Cost Recovery, Amortization, and Depletion

Indigo Company acquires a new machine (5-year MACRS property) on February 2, 2018 at a cost of $100,000. On November 18, 2018, Indigo also acquires office equipment (7-year MACRS property) at a cost of $50,000. Indigo does not make a § 179 expense election and chooses not to take additional first-year depreciation. What is Indigo's total MACRS deduction for 2018?

On May 5 of the current tax year, Byrne purchased a patent that qualifies as a § 197 intangible. The cost of the patent was $207,000 and Byrne is a calendar-year taxpayer. In the current tax year, how much of the patent's cost may Byrne amortize?

The basis of cost recovery property must be reduced by at least the cost recovery allowable.

Alice purchased office furniture on September 20, 2017, for $100,000. On October 10, 2017, she purchased business computers for $80,000. Alice placed all of the assets in service on January 15, 2018. Alice did not elect to expense any of the assets under § 179, did not elect straight-line cost recovery, and did not take additional first-year depreciation. Determine the cost recovery deduction for the business assets for 2018.

On July 10, 2018, Ariff places in service a new sports utility vehicle that cost $70,000 and weighed 6,300 pounds. The SUV is used 100% for business. Determine Ariff's maximum deduction for 2018, assuming Ariff's § 179 business income is $110,000. Ariff does not take additional first-year depreciation.

On June 1, 2018, 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.

On July 15, 2018, Mavis paid $275,000 for improvements on a commercial building she owns. Determine the maximum total cost recovery from the improvements in 2018.

Intangible drilling costs must be capitalized and recovered through depletion.

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.

Polly purchased a new hotel on July 20, 2018, for $6,000,000. On January 20, 2025, the building was sold. Determine the cost recovery deduction for the year of the sale.

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.

Bonnie purchased a new business asset (five-year property) on March 10, 2018, at a cost of $30,000. She also purchased a new business asset (seven-year property) on November 20, 2018, at a cost of $13,000. Bonnie did not elect to expense either of the assets under § 179, nor did she elect straight-line cost recovery. Bonnie takes additional first-year depreciation. Determine the cost recovery deduction for 2018 for these assets.

Discuss the tax consequences of listed property being used for the production of income compared to being used in a trade or business.

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 2018.

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

George purchases used seven-year class property at a cost of $200,000 on April 20, 2018. Determine George's cost recovery deduction for 2018 for alternative minimum tax purposes, assuming George does not elect § 179 and does not take additional first-year depreciation.

The luxury auto cost recovery limits applies to all automobiles.

MACRS depreciation is used to compute earnings and profits.

Assets that do not decline in value on a predictable basis are not eligible for cost recovery under MACRS.