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Chapter 8 Depreciation, Cost Recovery, Amortization, And Depletion
Research Problems
Research Problem 1. Your client, Dave’s Sport Shop, sells sports equipment and clothing in three retail outlets in New York City. During 2016, the CFO decided that keeping track of inventory using a combination of QuickBooks and Excel was not an efficient way to manage the stores’ inventories. So Dave’s purchased an inventory management system for $9,000 that allowed the entity to keep track of inventory, as well as automate ordering and purchasing, without replacing QuickBooks for its accounting function.
The CFO would like to know whether the cost of the inventory management program can be expensed in the year of purchase. Write a letter to the CFO, Cassandra
Martin, that addresses the tax treatment of purchased software. Cassandra’s mailing address is 867 Broadway, New York, NY 10003.
Research Problem 2. In 2012, Jed James began planting a vineyard. The costs of the land preparation, labor, rootstock, and planting were capitalized. The land preparation costs do not include any nondepreciable land costs. In 2016, when the plants became viable, Jed placed the vineyard in service. Jed wants to know whether he can claim a deduction under § 179 on his 2016 income tax return for the 2012 costs for planting the vineyard.
Research Problem 3. Juan owns a business that acquires exotic automobiles that are high-tech, state-of-the-art vehicles with unique design features or equipment. The exotic automobiles are not licensed or set up to be used on the road. Rather, the cars are used exclusively for car shows or related promotional photography. With respect to the exotic automobiles, Juan would like to know whether he can take a cost recovery deduction on his Federal income tax return.
Research Problem 4. Locate a financial calculator program that assesses the wisdom of buying versus leasing a new car. Install the program on your computer, and become familiar with it. Use the program to work through Problem 50 in this chapter.
Research Problem 5. Changes to depreciation systems often are discussed by policymakers and observers of the tax system. Outline the terms and policy objectives of one of the changes currently proposed by the Treasury, a member of Congress, or a tax policy think tank.
Roger CPA Review Questions
1. Quanti Co., a calendar year taxpayer, purchased small tools for $5,000 on December
21, 2016, representing the company’s only purchase of tangible personal property that took place during 2016. On its 2016 tax return, how many months of MACRS depreciation may Quanti Co. claim on the tools?
a. One-and-a-half months
b. One month
c. Six months
d. None
2. Which of the following is correct about depreciation under Federal tax law?
I. The recovery period is longer than the useful life of the asset.
II. There are different recovery periods for new and used property.
III. Salvage values are ignored.
a. I and II only
b. II only
c. III only
d. I, II, and III
3. Joe purchased a van on February 1, 2016, for use in his business, Crew Airport
Transport. The van was purchased for $30,000, has an estimated useful life of 10 years, and has a salvage value of $2,000. No other assets were put into service that year. What is Joe’s MACRS depreciation for the van in 2016?
a. $2,567
b. $6,000
c. $10,500
d. $10,267
4. Dolly purchased and placed into service qualifying depreciable property in 2016 at a total cost of $2,250,000. Dolly has elected to take the § 179 deduction. What is
Dolly’s § 179 deduction for 2016?
a. $0
b. $260,000
c. $500,000
d. $1,750,000
5. In 2016, Christa purchased and placed into service five-year assets at a total cost of $2,250,000. If Christa elects both the § 179 deduction and additional first-year bonus depreciation, but does not elect the straight-line method, what is Christa’s depreciation expense for tax purposes for the year, assuming a half-year convention?
a. $260,000
b. $500,000
c. $1,250,000
d. $1,454,000