# Tax Ch 2

### 46 terms by hneagle1

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### True

The MACRS depreciation tables automatically switch to the straight-line method when it exceeds the declining balance method.
True
False

### c

Daschle LLC completed some research and development during June of the current year. The related costs were \$60,000. If Daschle wants to capitalize and amortize the costs as quickly as possible, what is the total amortization expense Daschle may deduct during the current year?
a) \$0
b) \$6,500
c) \$7,000
d) \$12,000
e) None of these

### True

Real property is always depreciated using the straight-line method.
True
False

### False

In general, major integrated oil and gas producers may take the greater of cost or percentage depletion.
True
False

### d

Lax, LLC purchased only one asset during the current year. It placed in service computer equipment (5-year property) on August 26 with a basis of \$20,000. Calculate the maximum depreciation expense for the current year (ignoring §179 and bonus depreciation):
a) \$2,000
b) \$2,858
c) \$3,000
d) \$4,000
e) None of these

### e

Which of the following is not usually included in an asset's tax basis?
a) Purchase price
b) Sales tax
c) Shipping
d) Installation costs
e) All of these are included in an asset's tax basis

### True

Cost depletion is available to all natural resource producers.
True
False

### a

Simmons LLC purchased an office building and land several years ago for \$250,000. The purchase price was allocated as follows: \$200,000 to the building and \$50,000 to the land. The property was placed in service on October 2. If the property is disposed of on February 27 during the 10th year, calculate Simmons' maximum depreciation in the 10th year:
a) \$641
b) \$909
c) \$5,128
d) \$7,346
e) None of these

### b

Wheeler LLC purchased two assets during the current year. It placed in service computer equipment (5-year property) on November 16 with a basis of \$15,000 and furniture (7-year property) on April 20 with a basis of \$11,000. Calculate the maximum depreciation expense, rounding to a whole number (ignoring §179 and bonus depreciation):
a) \$1,285
b) \$2,714
c) \$4,572
d) \$5,200
e) None of these

### d

Lucky Strike Mine (LLC) purchased a silver deposit for \$1,500,000. It estimated it would extract 500,000 ounces of silver from the deposit. Lucky Strike mined the silver and sold it reporting gross receipts of \$1.8 million, \$2.5 million, and \$2 million for years 1 through 3, respectively. During years 1 - 3, Lucky Strike reported net income (loss) from the silver deposit activity in the amount of (\$100,000), \$400,000, and \$100,000, respectively. In years 1 - 3, Lucky Strike actually extracted 300,000 ounces of silver as follows:

Ounces extracted per year:
year 1 50,000
year 2 150,000
year 3 100,000

What is Lucky Strike's depletion expense for year 2 if the applicable percentage depletion for silver is 15 percent?
a) \$200,000
b) \$375,000
c) \$400,000
d) \$450,000
e) None of these

### a

Poplock LLC purchased a warehouse and land during the current year for \$350,000. The purchase price was allocated as follows: \$275,000 to the building and \$75,000 to the land. The property was placed in service on August 12. Calculate Poplock's maximum depreciation for this first year, rounded to the nearest whole number:
a) \$2,648
b) \$3,371
c) \$3,751
d) \$4,774
e) None of these

### False

Taxpayers may use historical data to determine the recovery period for tax depreciation.
True
False

### c

Suvi, Inc. purchased two assets during the current year. It placed in service computer equipment (5-year property) on August 10 with a basis of \$20,000 and machinery (7-year property) on November 18 with a basis of \$10,000. Calculate the maximum depreciation expense, rounded to a whole number (ignoring §179 and bonus depreciation):
a) \$857
b) \$3,357
c) \$5,429
d) \$6,000
e) None of these

### b

Which depreciation convention is the general rule for tangible personal property?
a) Full-month
b) Half-year
c) Mid-month
d) Mid-quarter
e) None of these are conventions for tangible personal property

### c

Tax depreciation is currently calculated under what system?
a) Sum of the years digits
b) Accelerated cost recovery system
c) Modified accelerated cost recovery system
d) Straight line system
e) None of these

### False

All taxpayers may use the §179 immediate expensing election on certain property.
True
False

### a

Beth's business purchased only one asset during the current year. It placed in service machinery (7-year property) on December 1 with a basis of \$50,000. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation):
a) \$1,785
b) \$2,500
c) \$7,145
d) \$10,000
e) None of these

### True

Depletion is the method taxpayers use to recover their capital investment in natural resources.
True
False

### True

Businesses deduct percentage depletion when they sell the natural resource and they deduct cost depletion in the year they produce or extract the natural resource.
True
False

### True

Occasionally bonus depreciation is used as a stimulus tool by tax policy makers.
True
False

### True

Significant limits are placed on the depreciation of luxury automobiles.
True
False

### a

Which of the following depreciation conventions are not used under MACRS?
a) Full-month
b) Half-year
c) Mid-month
d) Mid-quarter
e) All of these are used under MACRS

### b

Tasha LLC purchased furniture (7-year property) on April 20 with a basis of \$20,000 and used the mid-quarter convention. During the current year, which is the fourth year Tasha LLC owned the property, the property was disposed of on December 15. Calculate the maximum depreciation expense, rounding to a whole number:
a) \$898
b) \$2,095
c) \$2,461
d) \$2,394
e) None of these

### c

How is the recovery period of an asset determined?
a) Estimated useful life
b) Treasury regulation
c) Revenue Procedure 87 - 56
d) Revenue Ruling 87 - 56
e) None of these

### b

The MACRS recovery period for automobiles and computers is:
a) 3 years
b) 5 years
c) 7 years
d) 10 years
e) None of these

### True

Like financial accounting, most business property must be capitalized for tax purposes.
True
False

### True

The 200 percent or double declining balance method is allowable for five and seven year property.
True
False

### True

Property expensed under the §179 immediate expensing election is not included in the 40 percent test to determine whether the mid-quarter convention must be used.
True
False

### b

Santa Fe purchased the rights to extract turquoise on a tract of land over a five-year period. Santa Fe paid \$300,000 for extraction rights. A geologist estimates that Santa Fe will recover 5,000 pounds of turquoise. During the current year, Santa Fe extracted 1,500 pounds of turquoise, which it sold for \$200,000. What is Santa Fe's cost depletion expense for the current year?
a) \$60,000
b) \$90,000
c) \$110,000
d) \$300,000
e) None of these

### b

Tom Tom LLC purchased a rental house and land during the current year for \$150,000. The purchase price was allocated as follows: \$100,000 to the building and \$50,000 to the land. The property was placed in service on May 22. Calculate Tom Tom's maximum depreciation for this first year:
a) \$1,605
b) \$2,273
c) \$2,408
d) \$3,410
e) None of these

### False

If a taxpayer places only one asset (a building) in service during the fourth quarter of the year, the mid-quarter convention must be used.
True
False

### True

Real property is always depreciated using the straight-line method.
True
False

### True

The mid-month convention applies to real property in the year of acquisition and disposition.
True
False

### False

If the business use percentage for listed property falls below 50 percent, the only adjustment is all future depreciation must be calculated under the straight-line method.
True
False

### False

Taxpayers use the half-year convention for all assets.
True
False

### False

If a business mistakenly claims too little depreciation, the business must only reduce the asset's basis by the depreciation actually taken rather than the amount of the allowable depreciation.
True
False

### False

The manner in which a business amortizes a patent or copyright is the same whether the business directly purchases the patent or copyright or whether it self-creates the intangible.
True
False

### True

If a machine (seven-year property) being depreciated using the half-year convention is disposed of during the seventh year, a taxpayer must multiply the appropriate depreciation percentage from the MACRS table percentage by 50 percent to calculate the depreciation expense properly.
True
False

### True

Business assets that tend to be used for both business and personal purposes are referred to as listed property.
True
False

### c

Jasmine started a new business in the current year. She incurred \$10,000 of start-up costs. How much of the start-up costs can be immediately expensed for the year?
a) \$0
b) \$2,500
c) \$5,000
d) \$10,000
e) None of these

### False

Taxpayers may always expense a portion of start-up costs and organizational expenditures.
True
False

### False

The §179 immediate expensing election phases out based upon a taxpayer's taxable income.
True
False

### True

The method for tax amortization is always the straight-line method.
True
False

### False

All assets subject to amortization have the same recovery period.
True
False

### b

Sairra, LLC purchased only one asset during the current year. It placed in service furniture (7-year property) on April 16 with a basis of \$25,000. Calculate the maximum depreciation expense for the current year, rounding to a whole number (ignoring §179 and bonus depreciation):
a) \$1,786
b) \$3,573
c) \$4,463
d) \$5,000
e) None of these

### a

Arlington LLC purchased an automobile for \$40,000 on July 5th of 2012. What is Arlington's depreciation expense for 2012 if its business use percentage is 75 percent (ignore any possible bonus depreciation)?
a) \$2,295
b) \$3,060
c) \$6,000
d) \$8,000
e) None of these

Example: