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Exam 2: Property Acquisition and Cost Recovery

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Question 1

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During August of the prior year, Julio purchased an apartment building that he used as a rental property. The basis was $1,400,000. Calculate the maximum depreciation expense during the current year.

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$50,904
Explanation: The asset...

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Question 2

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Geithner LLC patented a process it developed in the current year. The patent is expected to create benefits for Geithner over a 10-year period. The patent was issued on April 15^th and the legal costs associated with the patent were $43,000. In addition, Geithner had unamortized research expenditures of $15,000 related to the process. What is the total amortization expense Geithner may deduct during the current year?

A) $2,417
B) $2,174
C) $4,108
D) $4,350
E) None of these

F) B) and C)
G) A) and E)

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Question 3

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Putin Corporation began business on September 23^rd of the current year. It incurred $40,000 of start-up costs and $60,000 of organizational expenditures. How much total amortization may be deducted in the first year, rounded to the nearest whole number?

Jaussi purchased a computer several years ago for $2,200 and used it for personal purposes. On November 10^th of the current year, when the fair market value of the computer was $800, Jaussi converted it to business use. What is Jaussi's tax basis for the computer?

PC Mine purchased a platinum deposit for $3,500,000. It estimated it would extract 17,000 ounces of platinum from the deposit. PC mined the platinum and sold it reporting gross receipts of $500,000 and $8 million for years 1 and 2, respectively. During years 1 and 2, PC reported net income (loss) from the platinum deposit activity in the amount of ($100,000) and $3,800,000, respectively. In years 1 and 2, PC actually extracted 2,000 and 8,000 ounces of platinum. What is PC's depletion expense for years 1 and 2 if the applicable percentage depletion for platinum is 22 percent, rounded to the nearest whole number?

Which of the following would be considered an improvement rather than a routine maintenance?

Tax cost recovery methods include depreciation, amortization, and depletion.

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.

Taxpayers may use historical data to determine the recovery period for tax depreciation. Taxpayers use the recovery periods outlined in Revenue Procedure 87-56.

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

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: What is Lucky Strike's depletion expense for year 2 if the applicable percentage depletion for silver is 15 percent? $\begin{array} { | c | c | c | } \hline { \text { Ounces extracted per year } } \\\hline \text { Year 1 } & \text { Year 2 } & \text { Year 3 } \\50,000 & 150,000 & 100,000 \\\hline\end{array}$

Kristine sold two assets on March 20^th of the current year. The first was machinery with an original basis of $51,000, currently in the fourth year of depreciation, and under the half-year convention. The second was furniture with an original basis of $16,000 placed in service during the fourth quarter, currently in the third year of depreciation, and under the mid-quarter convention. What is Kristine's depreciation expense for the current year, rounded to the nearest whole number?

Lax, LLC purchased only one asset during the current year (a full 12-month tax year) . Lax 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) :

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

Assume that Brittany acquires a competitor's assets on September 30^th of year 1 for $350,000. Of that amount, $300,000 is allocated to tangible assets and $50,000 is allocated equally to two §197 intangible assets (goodwill and a 1-year non-compete agreement) . Given, that the non-compete agreement expires on September 30^th of year 2, what is Brittany's amortization expense for the second year, rounded to the nearest whole number?

Boxer LLC has acquired various types of assets recently used 100% in its trade or business. Below is a list of assets acquired during 2015 and 2016: Boxer did not elect §179 expense and elected out of bonus depreciation in 2015, but would like to elect §179 expense for 2016 (assume that taxable income is sufficient). Calculate Boxer's maximum depreciation expense for 2016, rounded to the nearest whole number (ignore bonus depreciation for 2016). If necessary, use the 2015 luxury automobile limitation amount for 2016 and assume that the 2015 §179 limits are identical to 2016. $\begin{array} { | l | r | l | l | } \hline \text { Asset } & \begin{array} { r } \text { Cost } \\\text { Basis }\end{array} & \text { Comrention } & \begin{array} { l } \text { Date Placed in } \\\text { Senrice }\end{array} \\\hline \text { Machinery } & 25,000 & \text { Half year } & \begin{array} { l } \text { January 24, } \\2015\end{array} \\\hline \text { Warehouse } & 800,000 & \text { Mid month } & \text { August 1, 2015 } \\\hline \text { Furniture } & 100,000 & & \text { October 5, 2016 } \\\hline \begin{array} { l } \text { Computer } \\\text { equipment }\end{array} & 65,000 & & \text { October 10, 2016 } \\\hline \begin{array} { l } \text { Office } \\\text { equipment }\end{array} & 34,000 & & \begin{array} { l } \text { September 28, } \\2016\end{array} \\\hline \text { Automobile } & 35,000 & & \text { July 15, 2016 } \\\hline \text { Office building } & 800,000 & & \begin{array} { l } \text { September 24, } \\2016\end{array} \\\hline\end{array}$

The §179 immediate expensing election phases out based upon the amount of tangible personal property a taxpayer places in service during the year.

An office building was purchased on December 9^th several years ago for $2,500,000. The purchase price was allocated as follows: building $1,900,000, landscaping $100,000, and land $500,000. During the current year, the 10^th year, the building was sold on March 10^th. Calculate the maximum depreciation expense for the real property during the current year, rounded to the nearest whole number.

The MACRS recovery period for automobiles and computers is:

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.