Posted: December 20th, 2021

South-Western Federal Taxation 2014 chapter 8

Ch08 DISCUSSION QUESTIONS1. LO.1 Discuss whether property that is classified as personal use is subject to cost recovery.2. LO.1 Discuss the difference between personal property and personal use property.3. LO.1 Discuss whether land improvements are eligible for cost recovery.4. LO.2 At the beginning of the current year, Henry purchased a ski resort for $10 million.Henry does not own the land on which the resort is located. The Federal government owns the land, and Henry has the right to operate the resort on the land pursuant to Special Use Permits, which are terminable at will by the Federal government, andTerm Special Use Permits, which allow the land to be used for a fixed number of years.In preparing the income tax return for the current year, Henry properly allocated $2 million of the purchase price to the costs of constructing mountain roads, slopes, and trails. Since the acquisition, Henry has spent an additional $1 million on maintaining the mountain roads, slopes, and trails. Identify the relevant tax issues for Henry.5. LO.2 Discuss whether the date an asset is placed in service is important in determining whether the mid-quarter convention applies for personalty.6. LO.2 Identify the three factors reflected in the MACRS tables when the amount of cost recovery is determined.7. LO.2 Discuss the computation of cost recovery in the year an asset is placed in service when the mid-quarter convention is being used.8. LO.2 Discuss what property qualifies for additional first-year depreciation.9. LO.2 Discuss the computation of cost recovery in the year of sale of an asset when the mid-quarter convention is being used.10. LO.2 Discuss the definition of residential rental real estate.11. LO.2 Robert purchased and placed in service $100,000 of seven-year class assets onAugust 10 of the current year. He also purchased and placed in service $500,000 of fiveyear class assets on November 15 of the current year. He elects not to take additional first-year depreciation. If Robert elects to use the MACRS straight-line method of cost recovery on the seven-year class assets, discuss the calculation of cost recovery for the five-year class assets.12. LO.2 Discuss the general cost recovery method and period for new farm machinery placed in service in 2013.13. LO.2 Discuss whether § 179 is applicable when an election is made not to have the uniform capitalization rules apply to a farming operation.14. LO.2 Jim owns a very large ranch. A large part of his business is the production and raising of breeding cattle. Jim understands that under MACRS, he is entitled to cost recovery on breeding cattle. Identify the relevant tax issues for Jim with respect to taking cost recovery on his self-produced breeding cattle.15. LO.2 Discuss the cost recovery periods and methods to be used on leasehold improvement property owned by the lessor.16. LO.2 Discuss the cost recovery periods and methods to be used on leasehold improvement property owned by the lessee.17. LO.3 Discuss whether § 179 expensing may be taken on qualified property used in a transaction entered into for profit.18. LO.3 Discuss when § 179 expense must be recaptured.19. LO.3 Explain how the § 179 limited expensing deduction affects the computation ofMACRS cost recovery.20. LO.3 Discuss the treatment of a § 179 expensing carryforward.21. LO.3 Discuss the definition of taxable income as it is used in limiting the § 179 expensing amount.22. LO.2, 3 A professional consulting business sells professional tools and equipment and provides associated services, such as repair and maintenance, to its customer base. The company’s employees include technicians, who are required to provide and maintain their own tools and equipment for performing the repairs and maintenance work. The company will reimburse a technician for amounts spent to purchase tools and equipment eligible for a § 179 deduction up to a set amount each year. Any costs for tools and equipment that exceed the set amount will not be reimbursed. John is a technician for the company. During the current year, he purchased equipment that qualifies for the § 179 deduction. John paid $50,000 for the equipment and was reimbursed the set amount of $40,000. Identify the relevant tax issues for John with respect to § 179 and the computation of his taxable income.23. LO.3, 4 Discuss the implications of an automobile used in a trade or business having a gross vehicle weight (GVW) exceeding 6,000 pounds.24. LO.4 Discuss how the limits on cost recovery apply to listed property.25. LO.4 Discuss the tax consequences if the business use percentage of listed property falls to 50% or lower after the year the property is placed in service.26. LO.7 Explain the amortization period of a § 197 intangible if the actual useful life is less than 15 years.27. LO.7 Harold and Bart own 75% of the stock of Orange Motors. The other 25% of the stock is owned by Jeb. Orange Motors entered into an agreement with Harold and Bart to acquire all of their stock in Orange Motors. In addition, Harold and Bart signed a noncompete agreement with Orange Motors. Under the terms of the noncompete agreement, Orange will pay Harold and Bart $15,000 each per year for four years. Identify the relevant tax issues for Orange Motors.28. LO.7 Discuss the amortization of startup expenditures.29. LO.7 In May 2013, George began searching for a trade or business to acquire. In anticipation of finding a suitable aquisition, George hired an investment banker to evaluate three potential businesses. He also hired a law firm to begin drafting regulatory approval documents for a target company. Eventually, George decided to purchase all of the assets of Blue Corporation. Blue Corporation and George entered into an acquisition agreement on December 1, 2013. Identify the relevant tax issues for George.30. LO.8 Discuss how the cost of mineral rights enters into the calculation of cost depletion.PROBLEMS31. LO.1, 2 On November 4, 2011, Blue Company acquired an asset (27.5-year residential real property) for $200,000 for use in its business. In 2011 and 2012, respectively, Blue took $642 and $5,128 of cost recovery. These amounts were incorrect because Blue applied the wrong percentages (i.e., those for 39-year rather than 27.5-year). Blue should have taken $910 and $7,272 cost recovery in 2011 and 2012, respectively. On January 1, 2013, the asset was sold for $180,000. Calculate the gain or loss on the sale of the asset in 2013.32. LO.1, 2 José purchased a house for $300,000 in 2010. He used the house as his personal residence. In March 2013, when the fair market value of the house was $400,000, he converted the house to rental property. What is José’s cost recovery for 2013?33. LO.2 Orange Corporation acquired new office furniture on August 15, 2013, for $130,000. Orange did not elect immediate expensing under § 179. Orange takes additional first-year depreciation. Determine Orange’s cost recovery for 2013.34. LO.2 Weston acquires a new office machine (seven-year class asset) on November 2, 2013, for $75,000. This is the only asset Weston acquired during the year. He does not elect immediate expensing under § 179. He does take additional first-year depreciation.On September 15, 2014, Weston sells the machine.a. Determine Weston’s cost recovery for 2013.b. Determine Weston’s cost recovery for 2014.35. LO.2 Juan acquires a new five-year class asset on March 14, 2013, for $200,000. This is the only asset Juan acquired during the year. He does not elect immediate expensing under § 179. He elects not to take additional first-year depreciation. On July 15, 2014,Juan sells the asset.a. Determine Juan’s cost recovery for 2013.b. Determine Juan’s cost recovery for 2014.36. LO.2 Debra acquired the following new assets during 2013:Date Asset CostApril 11 Furniture $40,000July 28 Trucks 40,000November 3 Computers 70,000Determine the cost recovery for the current year. Debra does not elect immediate expensing under § 179. She does take additional first-year depreciation.37. LO.2 On August 2, 2013, Wendy purchased a new office building for $3.8 million. OnOctober 1, 2013, she began to rent out office space in the building. On July 15, 2017,Wendy sold the office building.a. Determine Wendy’s cost recovery for 2013.b. Determine Wendy’s cost recovery for 2017.38. LO.2 On April 3, 2013, Terry purchased and placed in service a building. The building cost $2 million. An appraisal determined that 25% of the total cost was attributed to the value of the land. The bottom floor of the building is leased to a retail business for $32,000. The other floors of the building are rental apartments with an annual rent of $160,000. Determine Terry’s cost recovery for 2013.39. LO.2 On May 5, 2013, Christy purchased and placed in service a hotel. The hotel cost $10.8 million. Calculate Christy’s cost recovery for 2013 and for 2023.40. LO.2 Janice acquired an apartment building on June 4, 2013, for $1.6 million. The value of the land is $300,000. Janice sold the apartment building on November 29, 2019.a. Determine Janice’s cost recovery for 2013.b. Determine Janice’s cost recovery for 2019.41. LO.2 On April 20, 2013, Ralph purchased used equipment to be used in his farming business. The cost of the equipment is $150,000. Ralph does not elect immediate expensing under § 179; nor does he elect not to have the uniform capitalization rules apply. Compute Ralph’s cost recovery for 2013.42. LO.2 During March 2013, Sam constructed new agricultural fences on his farm. The cost of the fencing was $80,000. Sam does not elect immediate expensing under § 179, but an election not to have the uniform capitalization rules apply is in effect. ComputeSam’s cost recovery for 2013 assuming that Sam wants to maximize his cost recovery.43. LO.2 As a condition of leasing a 10-year-old warehouse, Martha had to make capital improvements to the interior of the building to accommodate the lessee. These improvements cost Martha $300,000. The improvements were completed, and the 10- year lease commenced on October 28, 2013. Martha does take additional first-year depreciation. Determine Martha’s cost recovery for 2013 with respect to the leasehold improvement.44. LO.2 On January 1, 2006, Jim leased a building to be used in his business as an office building. The lease will terminate on December 31, 2013. On February 2, 2007, Jim made a capital improvement to the exterior of the building. The cost of the leasehold improvement to Jim was $80,000. Jim has no legal rights in the capital improvement after the termination of the lease. Determine Jim’s loss in 2013, if any, with respect to the leasehold improvement as a result of the termination of the lease.45. LO.2, 3, 9 Lori, who is single, purchased five-year class property for $200,000 and seven-year class property for $400,000 on May 20, 2013. Lori expects the taxable income derived from her business (without regard to the amount expensed under § 179) to be about $800,000. Lori wants to elect immediate § 179 expensing, but she doesn’t know which asset she should expense under § 179. She elects not to take additional first-year depreciation.a. Determine Lori’s total deduction if the § 179 expense is first taken with respect to the five-year class asset.b. Determine Lori’s total deduction if the § 179 expense is first taken with respect to the seven-year class asset.c. What is your advice to Lori?46. LO.2, 3 Olga is the proprietor of a small business. In 2013, the business income, before consideration of any cost recovery or § 179 deduction, is $250,000. Olga spends $600,000 on new seven-year class assets and elects to take the § 179 deduction on them.She elects not to take additional first-year depreciation. Olga’s cost recovery deduction for 2013, except for the cost recovery with respect to the new seven-year assets, is $95,000. Determine Olga’s total cost recovery for 2013 with respect to the seven-year assets and the amount of any § 179 carryforward.47. LO.2, 3, 9 On June 5, 2013, Dan purchased and placed in service a seven-year class asset costing $550,000. Determine the maximum deduction Dan can take on this asset.48. LO.3, 4 John Johnson is considering acquiring an automobile at the beginning of 2013 that he will use 100% of the time as a taxi. The purchase price of the automobile is $35,000. John has heard of cost recovery limits on automobiles and wants to know how much of the $35,000 he can deduct in the first year. Write a letter to John in which you present your calculations. Also prepare a memo for the tax files. John’s address is 100Morningside, Clinton, MS 39058.49. LO.2, 4 On October 15, 2013, Jon purchased and placed in service a used car. The purchase price was $25,000. This was the only business use asset Jon acquired in 2013. He used the car 80% of the time for business and 20% for personal use. Jon used the statutory percentage method of cost recovery. Calculate the total deduction Jon may take for 2013 with respect to the car.50. LO.4 On June 5, 2013, Leo purchased and placed in service a new car that cost $20,000. The business use percentage for the car is always 100%. He does take additional first-year depreciation. Compute Leo’s cost recovery deduction in 2013 and 2014.51. LO.2, 3, 4 On March 15, 2013, Helen purchased and placed in service a new Escalade.The purchase price was $62,000, and the vehicle had a rating of 6,500 GVW. The vehicle was used 100% for business.a. Calculate the maximum total deduction Helen may take with respect to the vehicle in 2013.b. How would your answer change if Helen elected not to take additional first-year depreciation?52. LO.2, 4 On May 28, 2013, Mary purchased and placed in service a new $20,000 car.The car was used 60% for business, 20% for production of income, and 20% for personal use in 2013. In 2014, the usage changed to 40% for business, 30% for production of income, and 30% for personal use. Mary did not elect immediate expensing under § 179. She elects not to take additional first-year depreciation. Compute the cost recovery and any cost recovery recapture in 2014.53. LO.2, 4, 9 Sally purchased a new computer (five-year property) on June 1, 2013, for $4,000. Sally could use the computer 100% of the time in her business, or she could allow her family to use the computer as well. Sally estimates that if her family uses the computer, the business use will be 45% and the personal use will be 55%. Determine the tax cost to Sally, in the year of acquisition, of allowing her family to use the computer.Assume that Sally would not elect § 179 limited expensing and that her marginal tax rate is 28%. She elects not to take additional first-year depreciation.54. LO.2, 4, 9 Dennis Harding is considering acquiring a new automobile that he will use100% for business. The purchase price of the automobile would be $48,500. If Dennis leased the car for five years, the lease payments would be $375 per month. Dennis will acquire the car on January 1, 2013. The inclusion dollar amounts from the IRS table for the next five years are $19, $42, $63, $75, and $87. Dennis wants to know the effect on his adjusted gross income of purchasing versus leasing the car for the next five years. He elects not to take additional first-year depreciation. Write a letter to Dennis, and present your calculations. Also prepare a memo for the tax files. His address is 150 Avenue I,Memphis, TN 38112.55. LO.2, 5 In 2013, Muhammad purchased a new computer for $16,000. The computer is used 100% for business. Muhammad did not make a § 179 election with respect to the computer. He elects not to take additional first-year depreciation. If Muhammad uses the statutory percentage method, determine his cost recovery deduction for 2013 for computing taxable income and for computing his alternative minimum tax.56. LO.2, 5, 9 Jamie purchased $100,000 of new office furniture for her business in June of the current year. Jamie understands that if she elects to use ADS to compute her regular income tax, there will be no difference between the cost recovery for computing the regular income tax and the AMT. Jamie wants to know the regular income tax cost, after three years, of using ADS rather than MACRS. Assume that Jamie does not elect § 179 limited expensing and that her marginal tax rate is 28%. She elects not to take additional first-year depreciation.57. LO.2, 7, 9 Mike Saxon is negotiating the purchase of a business. The final purchase price has been agreed upon, but the allocation of the purchase price to the assets is still being discussed. Appraisals on a warehouse range from $1.2 million to $1.5 million. If a value of $1.2 million is used for the warehouse, the remainder of the purchase price, $800,000, will be allocated to goodwill. If $1.5 million is allocated to the warehouse, goodwill will be $500,000. Mike wants to know what effect each alternative will have on cost recovery and amortization during the first year. Under the agreement, Mike will take over the business on January 1 of next year. Write a letter to Mike in which you present your calculations and recommendation. Also prepare a memo for the tax files.Mike’s address is 200 Rolling Hills Drive, Shavertown, PA 18708.58. LO.7 Oleander Corporation, a calendar year entity, begins business on March 1, 2013.The corporation has startup expenditures of $64,000. If Oleander elects § 195 treatment, determine the total amount of startup expenditures that it may deduct in 2013.59. LO.7 Martha was considering starting a new business. During her preliminary investigations, she incurred the following expenditures:Salaries $22,000Travel 18,000Interest on short-term note 4,000Professional fees 13,000Martha begins the business on July 1 of the current year. If Martha elects § 195 treatment, determine her startup expenditure deduction for the current year.60. LO.8 Wes acquired a mineral interest during the year for $10 million. A geological survey estimated that 250,000 tons of the mineral remained in the deposit. During the year,80,000 tons were mined, and 45,000 tons were sold for $12 million. Other expenses amounted to $5 million. Assuming that the mineral depletion rate is 22%, calculateWes’s lowest taxable income.61. LO.8, 9 Chris purchased an oil interest for $2 million. Recoverable barrels were estimated to be 500,000. During the year, 120,000 barrels were sold for $3.84 million, regular expenses (including cost recovery) were $1.24 million, and IDC were $1 million. CalculateChris’s taxable income under the expensing and capitalization methods of handling IDC.

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