Tax Questions - EXAM 1

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b

When does un-recaptured §1250 gains apply?

a) When the taxpayer makes the election.
b) It applies only when non-corporate taxpayers sell depreciable real property at a gain.
c) It applies when §1245 recapture trumps §1250 recapture.
d) It applies only when real property purchased before 1986 is sold at a gain.
e) None of these.

True

A taxpayer that receives boot in a like-kind exchange resulting in a gain recognizes as gain the lesser of the fair market value of the boot received or the gain realized.
True
False

c

The sale of machinery at a loss that was used in a trade or business and held for more than one year results in the following type of loss?

a) Capital.
b) Ordinary.
c) §1231.
d) §1245.
e) None of these.

True

All tax gains and losses are ultimately characterized as either ordinary or capital.
True
False

True

For a like-kind exchange, realized gain is deferred if the exchange is solely for like-kind property.
True
False

b

Brad sold a rental house that he owned for $250,000. Brad bought the rental house five years ago for $225,000 and has claimed $50,000 of depreciation expense. What is the amount and character of Brad's gain or loss?

a) $25,000 ordinary and $50,000 un-recaptured §1250 gain.
b) $25,000 §1231 gain and $50,000 un-recaptured §1250 gain.
c) $75,000 ordinary gain.
d) $75,000 capital gain.
e) None of these.

a

Which of the following is true regarding disallowed losses between related taxpayers?

a) The tax laws essentially treat related parties as the same taxpayer.
b) The holding period of the related party begins over.
c) The related party always receives a carryover basis.
d) The seller's realized loss is deferred until the buyer sells the assets.
e) None of these.

True

Un-recaptured §1250 gains apply only to individuals.
True
False

True

Accounts receivable and inventory are examples of ordinary assets.
True
False

True

An installment sale is any sale where at least a portion of the sales proceeds is recognized in a subsequent taxable year.
True
False

c

Which of the following is not true regarding §1239?

a) It only applies to related taxpayers.
b) It only applies to gains on sales of depreciable property.
c) It only applies to gains on sales of non-residential real property.
d) It does not apply to losses.
e) None of these.

d

Which of the following results in an ordinary gain or loss?

a) Sale of a machine at a gain.
b) Sale of stock held for investment.
c) Sale of a §1231 asset.
d) Sale of inventory.
e) None of these.

b

Why does §1250 recapture no longer apply?

a) Congress repealed the §.
b) The Tax Reform Act of 1986 changed the depreciation of real property to the straight-line method.
c) §1245 recapture trumps §1250 recapture.
d) Because unrecaptured §1250 gains now apply to all taxpayers instead.
e) None of these.

False

§1231 assets include all assets used in a trade or business.
True
False

c

Which of the following may qualify as an installment sale?

a) Sale of inventory at a gain.
b) Sale of securities.
c) Sale of asset used in a business at a gain.
d) Land sold at a loss.
e) All of these are true.

b

Which of the following is not used in the calculation of the amount realized:

a) Cash.
b) Adjusted basis.
c) Fair market value of other property received.
d) Buyer's assumption of liabilities.
e) All of these.

True

The §1231 lookback rule recharacterizes §1231 gains if §1231 losses have created ordinary losses in the last 5 years.
True
False

a

Which of the following sections recaptures or recharacterizes only corporate taxpayer's gains?

a) §291.
b) §1239.
c) §1245.
d) Unrecaptured §1250 gains.
e) None of these.

a

Alpha sold machinery to Beta, a related entity, which it used in its business for $40,000. Beta used the machinery in its business. Alpha bought the equipment a few years ago for $50,000 and has claimed $30,000 of depreciation expense. What is the amount and character of Alpha's gain?

a) $20,000 ordinary income under §1239.
b) $10,000 ordinary gain and $10,000 §1231 gain.
c) $20,000 ordinary gain.
d) $20,000 capital gain.
e) None of these.

c

Which of the following transactions results solely in §1245 gain?

a) Sale of machinery held for less than one year.
b) Sale of machinery held for more than one year and where the gain realized exceeds the accumulated deprecation.
c) Sale of machinery held for more than one year and where the accumulated deprecation exceeds the gain realized.
d) Sale of land held for more than one year and where the amount realized exceeds the adjusted basis.
e) None of these.

c

Which of the following gains does not result solely in an ordinary gain or loss?

a) Sale of equipment held for less than a year.
b) Sale of inventory.
c) Sale of equipment where the gain realized exceeds the accumulated depreciation.
d) Sale of equipment where the accumulated depreciation exceeds the gain realized.
e) None of these.

True

Unrecaptured §1250 gain is taxed at a maximum rate of 25 percent.
True
False

c

Pelosi Corporation sold a parcel of land valued at $300,000. Its basis in the land was $250,000. For the land, Pelosi received $150,000 in cash in the current year and a note providing Pelosi with $150,000 in the subsequent year. What is Pelosi's recognized gain in the current and subsequent year, respectively?

a) $0, $50,000.
b) $10,000, $40,000.
c) $25,000, $25,000.
d) $50,000, $0.
e) None of these.

c

Which of the following is not an involuntary conversion?

a) Destruction caused by a hurricane.
b) Imminent domain.
c) A foreclosure.
d) Fire damage.
e) All of these are involuntary conversions.

b

Foreaker LLC sold a piece of land that it uses in its business for $52,000. Foreaker bought the land two years ago for $42,500. What is the amount and character of Foreaker's gain?

a) $9,500 §1221.
b) $9,500 §1231.
c) $9,500 §1245.
d) $9,500 §1250.
e) None of these.

False

For an installment sale, the gross profit percentage is the gain recognized divided by the gain realized.
True
False

c

Butte sold a machine to a machine dealer for $50,000. Butte bought the machine for $55,000 several years ago and has claimed $12,500 of depreciation expense on the machine. What is the amount and character of Butte's gain or loss?

a) $7,500 §1231 loss.
b) $7,500 §1231 gain.
c) $7,500 ordinary gain.
d) $7,500 capital gain.
e) None of these.

False

The amount realized is the sale proceeds less the adjusted basis.
True
False

False

§1239 recharacterizes 50 percent of the gain on sales to a related party as ordinary income.
True
False

b

Which of the following is not true regarding installment sales?

a) Only gains are eligible for installment sale reporting.
b) Depreciation recapture is deferred in an installment sale.
c) The gross profit percentage is needed to determine the annual gain recognized.
d) Stock sales are ineligible for installment sale treatment.
e) None of these.

False

Only accelerated depreciation is recaptured for §1245 assets.
True
False

False

A loss realized for property destroyed in a hurricane is deferred under the involuntary conversion rules.
True
False

a

Which of the following is not true regarding an asset's adjusted basis?

a) Tax adjusted basis is usually greater than book adjusted basis.
b) Tax adjusted basis is usually less than book adjusted basis.
c) Adjusted basis is cost basis less cost recovery deductions.
d) Tax adjusted basis may change over time.

True

Generally, the amount realized is everything of value received in a sale less selling expenses.
True
False

b

Arlington LLC traded machinery used in its business to a machinery dealer for some new machinery. Arlington originally purchased the machinery for $60,000 and it had an adjusted basis of $28,000 at the time of the exchange. The new machinery had a fair market value of $35,000. Arlington also received $2,000 of office equipment in the transaction. What is Arlington's gain or loss recognized on the exchange?

a) $0.
b) $2,000.
c) $7,000.
d) $9,000.
e) None of these.

True

The gain or loss realized is the amount realized less the adjusted basis.
True
False

False

Residential real property is not like-kind with non-residential real property.
True
False

False

A simultaneous exchange must take place for a transaction to qualify as a like-kind exchange.
True
False

True

Taxpayers can recognize a taxable gain even though an asset's real economic value has declined.
True
False

True

A taxpayer that receives boot in a like-kind exchange resulting in a gain recognizes as gain the lesser of the fair market value of the boot received or the gain realized.
True
False

False

A parcel of land is always a capital asset.
True
False

False

An asset's tax adjusted basis is usually greater than its book adjusted basis.
True
False

True

In a deferred like-kind exchange the like-kind property to be received must be identified within 45 days and acquired within 180 days from the initial exchange.
True
False

True

After application of the lookback rule, §1231 gains become capital while §1231 losses become ordinary.
True
False

True

For corporations, §291 recaptures 20 percent of the lesser of depreciation taken or the realized gain as ordinary income.
True
False

b

Which one of the following is not a requirement of a deferred like-kind exchange?

a) The like-kind property to be received must be identified within 45 days.
b) The exchange must be completed within the taxable year.
c) The like-kind property must be received within 180 days.
d) A third party intermediary is often used to facilitate the exchange.
e) All of these.

False

Depreciation recapture changes both the amount and character of a gain.
True
False

b

Which of the following realized gains results in a recognized gain?

a) Farm machinery traded for farm machinery.
b) Sale to a related party.
c) Involuntary conversion.
d) Iowa cropland exchanged for a Minnesota warehouse.

True

The adjusted basis is the cost basis less cost recovery deductions.
True
False

a

How long does a taxpayer have to identify replacement property in a like-kind exchange?

a) The like-kind property to be received must be identified within 45 days.
b) The like-kind property to be received must be identified by the earlier of 45 days or the last day of the taxpayer's taxable year.
c) The like-kind property to be received must be identified within 180 days.
d) There is no deadline for the identification of replacement property.
e) All of these.

False

The §1231 lookback rule applies whether there is a net gain or loss.
True
False

a

Leesburg sold a machine for $2,200 on November 10th of the current year. The machine was purchased for $2,600. Leesburg had taken $1,200 of depreciation deductions. What is Leesburg's gain or loss realized on the machine?

a) $800 gain.
b) $1,000 gain.
c) $1,200 loss.
d) $1,400 loss.
e) None of these.

b

Bozeman sold equipment that it uses in its business for $80,000. Bozeman bought the equipment two years ago for $75,000 and has claimed $20,000 of depreciation expense. What is the amount and character of Bozeman's gain or loss?

a) $25,000 §1231 gain.
b) $20,000 ordinary gain, and $5,000 §1231 gain.
c) $5,000 ordinary gain, and $20,000 §1231 gain.
d) $25,000 capital gain.
e) None of these.

b

Winchester LLC sold the following business assets during the current year: (1) automobile, $30,000 cost basis, $12,000 depreciation, proceeds $20,000; (2) machinery, $25,000 cost basis, $20,000 depreciation, proceeds $10,000; (3) furniture, $15,000 cost basis, $10,000 depreciation, proceeds $4,000; (4) computer equipment, $25,000 cost basis, $6,000 depreciation, proceeds $10,000; (5) Winchester had unrecaptured §1231 losses of $3,000 in the prior 5 years. What is the amount and character of Winchester's gains and losses before the 1231 netting process?

a) $3,000 ordinary loss, $0 §1231 loss.
b) $7,000 ordinary gain, $10,000 §1231 loss.
c) $7,000 ordinary loss, $4,000 §1231 gain.
d) $1,000 ordinary gain, $4,000 §1231 loss.
e) None of these.

true

The domestic manufacturing deduction cannot exceed 50 percent of the wages paid to employees engaged in domestic manufacturing activities during the year.
• True
• False

c

Mike started a calendar year business on September 1st of this year by paying 12 months' rent on his shop at $1,000 per month. What is the maximum amount of rent that Mike can deduct this year under each type of accounting method?
a) $12,000 under the cash method and $12,000 under the accrual method
b)$4,000 under the cash method and $12,000 under the accrual method
c)$12,000 under the cash method and $4,000 under the accrual method
d)$4,000 under the cash method and $4,000 under the accrual method
e)$4,000 under the cash method and zero under the accrual method

b

Colbert operates a catering service on the accrual method. In November of year 1, Colbert received a payment of $9,000 for 18 months of catering services to be rendered from December 1st of year 1 through May 31st year 3. When must Colbert recognize the income if his accounting methods are selected to minimize income recognition?
a) $500 is recognized in year 1, $6,000 in year 2, and $2,500 in year 3.
b) $500 is recognized in year 1 and $8,500 in year 2.
c) $9,000 is recognized in year 3.
d) $2,500 is recognized in year 1 and $6,500 in year 2.
e) $9,000 is recognized in year 1.

False

The domestic manufacturing deduction is a deduction for the incremental cost of manufacturing tangible assets in the United States.
• True
• False

False

All taxpayers must account for taxable income using a calendar year.
• True
• False

e

Joe is a self employed electrician who operates his business on the accrual method. This year, Joe purchased a shop for his business and at year end he received a bill for $4,500 of property taxes on his shop. Joe didn't pay the taxes until after year end. Which of the following is a true statement?
a) If he elects to treat the taxes as a recurring item, Joe can accrue and deduct $4,500 of taxes on the shop this year.
b) The taxes are a payment liability.
c) The taxes would not be deductible if Joe's business was on the cash method.
d) Unless Joe makes an election, the taxes are not deductible this year.
e) All of these are true.

d

Dick pays insurance premiums for his employees. What type of insurance premium is not deductible as compensation paid to the employee?

a) Health insurance with benefits payable to the employee.
b) Whole life insurance with benefits payable to the employee's dependents.
c) Group term life insurance with benefits payable to the employee's dependents.
d) key man life insurance with benefits payable to Dick.
e) All of these are deductible by Dick.

$6,300

George operates a business that generated adjusted gross income of $250,000 and taxable income of $170,000 this year (before the domestic manufacturing deduction). Included in income was $70,000 of qualified production activities income. George paid $60,000 of wages to employees engaged in domestic manufacturing. What domestic manufacturing deduction will George be eligible to claim this year?

$5,400
$6,300
$7,200
$15,300
$22,500

b

Beth operates a plumbing firm. In August of last year, she signed a contract to provide plumbing services for a renovation. Beth began the work that August and finished the work in December of last year. However, Beth didn't bill the client until January of this year and she didn't receive the payment until March when she received payment in full. When should Beth recognize income under the accrual method of accounting?

a) In August of last year
b) In December of last year
c) In January of this year
d) In March of this year
e) In April of this year

True

The test for whether an expenditure is reasonable in amount is whether the expenditure was for an "arm's length" amount.

True
False

e

Which of the following is a true statement about a request for a change in accounting method?

a) Some requests are automatically granted.
b) Most requests require the permission of the Commissioner.
c) Many requests require payment of a fee and a good business purpose for the change.
d) Form 3115 is required to be filed with a request for change in accounting method.
e) All of these are true.

False

Reasonable in amount means that expenditures can be exorbitant as long as the activity is motivated by profit.

True
False

c

Which of the following is a true statement about the domestic manufacturing deduction?
a) This deduction is determined by the amount of goods manufactured in the United States for export abroad.
b) The deduction is calculated as a percentage of the cost of goods manufactured in the United States.
c) This deduction represents a subsidy to taxpayers who manufacture or construct goods in the United States.
d) The domestic manufacturing deduction is not affected by the cost of labor.
e) All of these are true.

a

Qualified production activities income is defined as follows for purposes of the domestic manufacturing deduction.
a) net income from selling or leasing property the taxpayer manufactured in the United States.
b) revenue from selling or leasing property the taxpayer manufactured in the United States.
c) revenue from selling or leasing property the taxpayer manufactured in the United States but the revenue was less that 50 percent of qualifying wages used in the production.
d) 6 percent of revenue from selling or leasing property the taxpayer manufactured in the United States.
e) None of these.

True

Uniform capitalization of indirect inventory costs is required for most large taxpayers.
True
False

True

A fiscal tax year can end on the last day of any month other than December.
True
False

True

The all-events test for income determines the period in which income will be recognized for tax purposes.
True
False

b

According to the Internal Revenue Code §162, deductible business expenses must be one of the following?
a) incurred for the production of investment income
b) ordinary and necessary
c) minimized
d) appropriate and measurable
e) personal and justifiable

True

The domestic manufacturing deduction cannot exceed 50 percent of the wages paid to employees engaged in domestic manufacturing activities during the year.
True
False

False

The full-inclusion method requires cash basis taxpayers to include prepayments for goods or services into realized income.
True
False

e

Which of the following business expense deductions is most likely to be unreasonable in amount?
a) Compensation paid to the taxpayer's spouse in excess of salary payments to other employees.
b) Amounts paid to a subsidiary corporation for services where the amount is in excess of the cost of comparable services by competing corporations.
c) Cost of entertaining a former client when there is no possibility of any future benefits from a relation with that client.
d) None of these is likely to be unreasonable in amount.
e) Compensation paid to the taxpayer's spouse in excess of salary payments to other employees, amounts paid to a subsidiary corporation for services where the amount is in excess of the cost of comparable services by competing corporations, and cost of entertaining a former client when there is no possibility of any future benefits from a relation with that client are all likely to be considered unreasonable in amount.

True

The Internal Revenue Code authorizes deductions for trade or business activities if the expenditure is "ordinary and necessary".
True
False

True

Business activities are distinguished from personal activities in that business activities are motivated by the pursuit of profits.
True
False

c

Big Homes Corporation is an accrual method calendar year taxpayer that manufactures and sells modular homes. This year for the first time Big Homes was forced to offer a rebate on the purchase of new homes. At year end, Big Homes had paid $12,000 in rebates and was liable for an additional $7,500 in rebates to buyers. What amount of the rebates, if any, can Big Homes deduct this year?
a) $12,000 because rebates are payment liabilities.
b) $19,500 because Big Homes is an accrual method taxpayer.
c) $19,500 if this amount is not material, Big Homes expects to continue the practice of offering rebates in future years, and Big Homes expects to pay the accrued rebates before filing their tax return for this year.
d) $12,000 because the $7,500 liability is not fixed and determinable.
e) Big Homes is not entitled to a deduction because rebates are against public policy.

False

The phase "ordinary and necessary" has been defined to mean that an expense must be essential and indispensable to the conduct of a business.
True
False

True

When a taxpayer borrows money and invests the loan proceeds in municipal bonds, the interest paid by the taxpayer on the debt will not be deductible.
True
False

c

Which of the following is a true statement?
a) Meals are never deductible as a business expense.
b) An employer can only deduct half of any meals provided to employees.
c) The cost of business meals must be reasonable.
d) A taxpayer can only deduct a meal for a client if business is discussed during the meal.
e) None of these is true.

b

Which of the following is a true statement about accounting for business activities?
a) An overall accounting method can only be adopted with the permission of the Commissioner.
b) An overall accounting method is initially adopted on the first return filed for the business.
c) The cash method can only be adopted by individual taxpayers.
d) The accrual method can only be adopted by corporate taxpayers.
e) None of these is true.

True

The 12-month rule allows taxpayers to deduct the entire amount of certain prepaid business expenses.
True
False

d

Jim operates his business on the accrual method and this year he received $4,000 for services that he intends to provide to his clients next year. Under what circumstances can Jim defer the recognition of the $4,000 of income until next year?
a) Jim can defer the recognition of the income if he absolutely promises not to provide the services until next year.
b) Jim must defer the recognition of the income until the income is earned.
c) Jim can defer the recognition of the income if he has requested that the client not pay for the services until the services are provided.
d) Jim can elect to defer the recognition of the income if the income is not recognized for financial accounting purposes.
e) Jim can never defer the recognition of the prepayments of income.

True

Sole proprietorships must use the same tax year as the proprietor of the business.
True
False

d

The IRS would most likely apply the arm's length transaction test to determine which of the following?
a) whether an expenditure is related to a business activity
b) whether an expenditure will be likely to produce income
c) timeliness of an expenditure
d) reasonableness of an expenditure
e) All of these

d

Ronald is a cash method taxpayer who made the following expenditures this year. Which expenditure is completely deductible in this period as a business expense?
a) $4,000 for rent on his office that covers the next 24 months.
b) $3,000 for a new watch for the mayor to keep "good relations" with city hall.
c) $2,500 for professional hockey tickets distributed to a customer to generate "goodwill" for his business.
d) $55 to collect an account receivable from a customer who has failed to pay for services rendered.
e) None of these is completely deductible.

True

Qualified production activity income for calculating the domestic manufacturing deduction is limited to taxable income for a business or modified AGI for an individual.
True
False

True

A business generally adopts a fiscal or calendar year by using that year end on the first tax return for the business.
True
False

a

Which of the following types of expenditures is not subject to capitalization under the UNICAP rules?
a) selling expenditures.
b) cost of manufacturing labor.
c) compensation of managers who supervise production.
d) cost of raw materials.
e) All of these are subject to capitalization under the UNICAP rules.

a

Clyde operates a sole proprietorship using the cash method. This year, Clyde made the following expenditures:

$480 to US Bank for 12 months of interest accruing on a business loan from September 1st of this year through August 31st of next year
$600 for 12 months of property insurance beginning on July 1 of this year.

What is the maximum amount Clyde can deduct this year?
a) $760
b) $600
c) $480
d) $160
e) $360

d

When does the all-events test under the accrual method require the recognition of income from the sale of goods?
a) when the title of the goods passes to the buyer.
b) when the business receives payment.
c) when payment is due from the buyer.
d) the earliest of the above three dates.
e) None of these.

b

Brad operates a storage business on the accrual method. On July 1 Brad paid $48,000 for rent on his storage warehouse and $18,000 for insurance on the contents of the warehouse. The rent and insurance covers the next 12 months. What is Brad's deduction for the rent and insurance?
a) $48,000 for the rent and $18,000 for the insurance.
b) $24,000 for the rent and $18,000 for the insurance.
c) $24,000 for the rent and $9,000 for the insurance.
d) $48,000 for the rent and $9,000 for the insurance.
e) None of these is true.

a

Ajax Computer Company is an accrual method calendar year taxpayer. Ajax has never advertised in the national media prior to this year. In November of this year, however, Ajax paid $1 million for television advertising time during a "super" sporting event scheduled to take place in early February of next year. In addition, in November of this year the company paid $500,000 for advertising time during a professional golf tournament in April of next year. What amount of these payments, if any, can Ajax deduct this year?
a) $1 million.
b) $500,000.
c) $1.5 million.
d) $1.5 million only if the professional golf tournament is played before April 15.
e) No deduction can be claimed this year.

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

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