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Chapter 8 Depreciation, Cost Recovery, Amortization, And Depletion
51. LO.2, 5 In 2016, 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 does not claim any available additional first-year depreciation.
If Muhammad uses the MACRS statutory percentage method, determine his cost recovery deduction for 2016 for computing taxable income and for computing his alternative minimum tax.
52. 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.
a. Jamie wants to know the present value of the tax cost, after three years, of using
ADS rather than MACRS. Assume that Jamie does not elect § 179 expensing, she does not claim any additional first-year depreciation, and her marginal tax rate is
28%. See Appendix G for present value factors, and assume a 6% discount rate.
b. What is the present value of the tax savings/costs that result over the life of the asset if Jamie uses MACRS rather than ADS?
53. 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.
54. LO.7 Oleander Corporation, a calendar year entity, begins business on March 1, 2016.
The corporation incurs startup expenditures of $64,000. If Oleander elects § 195 treatment, determine the total amount of startup expenditures that it may deduct in 2016.
55. LO.7 Martha was considering starting a new business. During her preliminary investigations related to the new venture, she incurred the following expenditures.
Salaries $22,000
Travel 18,000
Interest on short-term note 4,000
Professional fees 13,000
Martha begins the business on July 1 of the current year. If Martha elects § 195 treatment, determine her startup expenditure deduction for the current year.
56. 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 related expenses amounted to $5 million. Assuming that the mineral depletion rate is 22%, calculate Wes’s lowest taxable income, after any depletion deductions.
Cumulative Problems
57. Janice Morgan, age 24, is single and has no dependents. She is a freelance writer.
In January 2015, Janice opened her own office located at 2751 Waldham Road, Pleasant
Hill, NM 88135. She called her business Writers Anonymous. Janice is a cash basis taxpayer.
She lives at 132 Stone Avenue, Pleasant Hill, NM 88135. Her Social Security number is 123-45-6789. Janice’s parents continue to provide health insurance for her under their policy. Janice wants to contribute to the Presidential Election Campaign Fund.
During 2015, Janice reported the following income and expense items connected with her business.
Income from sale of articles $85,000
Rent 16,500
Utilities 7,900
Supplies 1,800
Insurance 5,000
Travel (including meals of $1,200) 3,500
Janice purchased and placed in service the following fixed assets for her business.
Janice wants to elect immediate expensing under § 179.
• Furniture and fixtures (new) costing $21,000 on January 10.
• Computer equipment (new) costing $12,400 on July 28.
Janice’s itemized deductions include:
State income tax $3,000
Home mortgage interest paid to First Bank 6,000
Property taxes on home 1,500
Charitable contributions 1,200
Janice did not keep a record of the sales tax she paid. The pertinent amount from the sales tax table is $437.
Janice reports interest income of $4,000 on certificates of deposit at Second Bank.
Janice makes estimated tax payments of $3,000 for 2015.
Compute Janice Morgan’s 2015 Federal income tax payable (or refund due). If you use tax forms for your computations, you will need Forms 1040 and 4562 and
Schedules A, B, and C. Suggested software: H&R BLOCK Tax Software.
58. John Smith, age 31, is single and has no dependents. At the beginning of 2016,
John started his own excavation business and named it Earth Movers. John lives at 1045
Center Street, Lindon, UT, and his business is located at 381 State Street, Lindon, UT.
The ZIP Code for both addresses is 84042. John’s Social Security number is 111-11-1111, and the business identification number is 11-1111111. John is a cash basis taxpayer.
During 2016, John reports the following items in connection with his business.
Fee income for services rendered $912,000
Building rental expense 36,000
Office furniture and equipment rental expense 9,000
Office supplies 2,500
Utilities 4,000
Salary for secretary 34,000
Salary for equipment operators 42,000
Payroll taxes 7,000
Fuel and oil for the equipment 21,000
Purchase of three new front-end loaders on January 15, 2016, for $550,000. 550,000
Purchase of a new dump truck on January 18, 2016 80,000
Tax Return Problem
Tax Computation Problem
During 2016, John recorded the following additional items.
Interest income from First National Bank $10,000
Dividends from ExxonMobil 9,500
Quarterly estimated tax payments 11,500
John makes the election under § 179 on the three front-end loaders purchased in
January. John claims any available additional first-year depreciation.
On October 8, 2016, John inherited IBM stock from his Aunt Mildred. John had been her favorite nephew. According to the data provided by the executor of Aunt
Mildred’s estate, the stock was valued for estate tax purposes at $110,000. John is considering selling the IBM stock for $125,000 on December 29, 2016, and using $75,000 of the proceeds to purchase an Acura ZDX. He would use the car 100% for business. John wants to know what effect these transactions would have on his
2016 adjusted gross income.
Write a letter to John in which you present your calculations, and prepare a memo for the tax files. Ignore any Federal self-employment tax implications.