Chapter 8 Depreciation, Cost Recovery, Amortization, And Depletion

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Problems
31. LO.1, 2 On November 4, 2014, Blue Company acquired an asset (27.5-year residential real property) for $200,000 for use in its business. In 2014 and 2015, respectively,
Blue took $642 and $5,128 of cost recovery. These amounts were incorrect;
Blue applied the wrong percentages (i.e., those for 39-year rather than 27.5-year assets).
Blue should have taken $910 and $7,272 cost recovery in 2014 and 2015, respectively.
On January 1, 2016, the asset was sold for $180,000. Calculate the gain or loss on the sale of the asset for that year.
32. LO.1, 2 Jos_e purchased a house for $300,000 in 2013. He used the house as his personal residence. In March 2016, when the fair market value of the house was $400,000, he converted the house to rental property. What is Jos_e’s cost recovery for 2016?
33. LO.2 Orange Corporation acquired new office furniture on August 15, 2016, for $130,000. Orange does not elect immediate expensing under § 179. Orange claims any available additional first-year depreciation. Determine Orange’s cost recovery for 2016.
34. LO.2 Weston acquires a new office machine (7-year class asset) on November 2, 2015, for $75,000. This is the only asset Weston acquired during the year.
He does not elect immediate expensing under § 179. He claims the maximum additional first-year depreciation deduction. On September 15, 2016, Weston sells the machine.
a. Determine Weston’s cost recovery for 2015.
b. Determine Weston’s cost recovery for 2016.
35. LO.2 Juan acquires a new 5-year class asset on March 14, 2016, for $200,000. This is the only asset Juan acquired during the year. He does not elect immediate expensing under § 179. He does not claim any available additional first-year depreciation.
On July 15, 2017, Juan sells the asset.
a. Determine Juan’s cost recovery for 2016.
b. Determine Juan’s cost recovery for 2017.
36. LO.2 Debra acquired the following new assets during 2016.
Date Asset Cost
April 11 Furniture $40,000
July 28 Trucks 40,000
November 3 Computers 70,000
Determine Debra’s cost recovery deductions for the current year. Debra does not elect immediate expensing under § 179. She does not claim any available additional first-year depreciation.
37. LO.2 On August 2, 2016, Wendy purchased a new office building for $3.8 million.
On October 1, 2016, she began to rent out office space in the building. On
July 15, 2020, Wendy sold the office building.
a. Determine Wendy’s cost recovery deduction for 2016.
b. Determine Wendy’s cost recovery deduction for 2020.
38. LO.2 On April 3, 2016, Terry purchased and placed in service a building that 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 deduction for 2016.
39. LO.2 On May 5, 2016, Christy purchased and placed in service a hotel. The hotel cost $10.8 million. Calculate Christy’s cost recovery deductions for 2016 and for 2026.
40. LO.2 Janice acquired an apartment building on June 4, 2016, for $1.6 million. The value of the land is $300,000. Janice sold the apartment building on November
29, 2022.
a. Determine Janice’s cost recovery deduction for 2016.
b. Determine Janice’s cost recovery deduction for 2022.
41. LO.2, 3, 9 Lori, who is single, purchased 5-year class property for $200,000 and 7-year class property for $400,000 on May 20, 2016. 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 does not claim any available additional first-year depreciation.
a. Determine Lori’s total deduction if the § 179 expense is first taken with respect to the 5-year class asset.
b. Determine Lori’s total deduction if the § 179 expense is first taken with respect to the 7-year class asset.
c. What is your advice to Lori?
d. Assume that Lori is in the 25% marginal tax bracket and that she uses § 179 on the 7-year asset. Determine the present value of the tax savings from the depreciation deductions for both assets. See Appendix G for present value factors, and assume a 6% discount rate.
e. Assume the same facts as in part (d), except that Lori decides not to use § 179 on either asset. What is the present value of the tax savings generated by using the § 179 deduction on the 7-year asset?
42. LO.2, 3 Olga is the proprietor of a small business. In 2016, the business’s income, before consideration of any cost recovery or § 179 deduction, is $250,000.
Olga spends $600,000 on new 7-year class assets and elects to take the § 179 deduction on them. She does not claim any available additional first-year depreciation.
Olga’s cost recovery deduction for 2016, except for the cost recovery with respect to the new 7-year assets, is $95,000. Determine Olga’s total cost recovery for
2016 with respect to the 7-year class assets and the amount of any § 179 carryforward.
43. LO.2, 3, 9 On June 5, 2015, Dan purchased and placed in service a 7-year class asset costing $550,000. Determine the maximum deductions that Dan can claim with respect to this asset in 2015 and 2016.
44. LO.3, 4 Jabari Johnson is considering acquiring an automobile at the beginning of
2016 that he will use 100% of the time as a taxi. The purchase price of the automobile is $35,000. Johnson 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 Jabari in which you present your calculations. Also prepare a memo for the tax files, summarizing your analysis. Johnson’s address is 100 Morningside,
Clinton, MS 39058.
45. LO.2, 4 On October 15, 2016, 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 2016. He used the car 80% of the time for business and 20% for personal use. Jon used the MACRS statutory percentage method. Calculate the total deduction
Jon may take for 2016 with respect to the car.
46. LO.4 On June 5, 2015, Leo purchased and placed in service a new car that cost $20,000. The business use percentage for the car is always 100%. Leo claims any available additional first-year depreciation. Compute Leo’s cost recovery deductions for 2015 and 2016.
47. LO.2, 3, 4 On March 15, 2016, 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. Calculate the maximum total depreciation deduction that Helen may take with respect to the vehicle in 2016.
48. LO.2, 4 On May 28, 2016, 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 2016. In 2017, 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 did not claim any available additional first-year depreciation. Compute
Mary’s cost recovery deduction and any cost recovery recapture in 2017.
49. LO.2, 4, 9 Sally purchased a new computer (5-year property) on June 1, 2016, 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 does not claim any available additional first-year depreciation.
50. LO.2, 4, 9 Dennis Harding is considering acquiring a new automobile that he will use 100% 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, 2016. The inclusion dollar amounts from the IRS table for the next five years are $47, $103, $153, $183, and $210.
Dennis wants to know the effect on his adjusted gross income of purchasing versus leasing the car for the next five years. He does not claim any available 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.