Tax Lesson 21 - Tax Deduction for Depreciation

1. Look at the Form 1040 you prepared for Jim Samuels. What is the amount on Form 1040, Line 37?

A. $ 20,484.
B. $ 20,519.
C. $ 19,069. 
D. $ 18,949.

2. Look at the Form 1040 you prepared for Jim Samuels. What is the amount on Form 1040, Line 73a?

A. $ 946.
B. $ 923.
C. $ 538. 
D. $ 316.

3. Depreciation is an annual income tax deduction that allows you to

A. Recover the cost or other basis of certain property over the time you use the property.
B. Get a special tax credit for performing acts of kindness.
C. A special tax cut on your tax return.
D. Receive a credit only if you own luxury property.

4. Property that can be depreciated is property for which you can recover the cost over a period of time due to

A. Normal wear and tear of property.
B. Deterioration of property.
C. Obsolete property.
D. Any of the above.

5. You can depreciate most types of tangible and intangible property. This property usually has a useful life and is used up. The following property is not allowed to be depreciated.

A. A building
B. Machinery
C. Patents
D. Land

6. To take a deduction for depreciation, the property that you depreciate must be used in your business or income-producing activity. Which of the following is correct regarding your property?

A. The property must have a determinable useful life.
B. The property must be expected to last more than one year.
C. The property must be used in your business or income producing activity.
D. All of the above

7. You can only depreciate a property that you can retain ownership in. This means you have

A. The legal title.
B. The legal obligation to pay for it.
C. The duty to pay any taxes on the property.
D. All of the above

8. To claim depreciation on property, you must use it in your business or income-producing activity. The income that is produced from your property

A. Can be either for profit or non-profit.
B. Must be taxable income.
C. Must be income from self employment.
D. Any of the above

9. Normally, containers for the products you sell are part of inventory and you normally can not depreciate them. However, you can depreciate containers used to ship your products if

A. They have a useful life longer than one year.
B. They qualify as property used in your business.
C. Title to the containers does not pass to the buyer.
D.  All of the above.

10. Even if all the requirements are met to depreciate a property, you can not depreciate

A. A computer that you expect to use for the next 2 years.
B. Equipment in the normal operation of your business.
C. Property placed in service and disposed of in the same year.
D. A horse used in a ranch for herding cattle because animals cannot be depreciated.

11. A building contractor who specializes in constructing office buildings bought a truck in tax year 2007 that had to be modified to lift materials to second-story levels. The installation of the lifting equipment was completed and the building contractor accepted delivery of the modified truck on January 25 of the 2008 tax year. The truck is considered to be placed in service

A. When it was first acquired by the building contractor.
B. On the date it was ready and available to perform the function for which it was purchased.
C. Never. Since he didn't place it in service when he acquired it and therefore he is not able to depreciate the property.
D. Never because he should have bought a truck ready to be used for its intended purpose as there is no need to modify an equipment when there is equipment already with the features needed for immediate use.

12. If you held property for personal use and later used it in your business or income-producing activity, your depreciable basis is the lesser of the fair market value (FMV) of the property on the date of the change in use or

A. Your original cost or other basis adjusted by the increase in the cost of any permanent improvements or additions and other costs that must be added to basis.
B. Your original cost or other basis adjusted by the decrease in any deductions you claim for casualty and theft losses and other items that reduced your basis. 
C. A or B above.
D. None of the above.

13. If you improve your depreciable property, you must

A. Start over and since the property has a new useful life you must list it again.
B. Treat the improvement as a separate depreciable property.
C. Must continue to depreciate the improved property as if the improvement didn't take place and not take into account the improvement until the property is retired or disposed of.
D. Must stop depreciating the improved property because depreciating improved property is not allowed at anytime.

14. Generally, you adopt a method of accounting for depreciation for the rest of the property's depreciable life by

A. Using a permissible method of determining depreciation when you file your first tax return.
B. Using the same impermissible method of determining depreciation in two or more consecutive filed tax returns.
C. Properly documenting your decision and keeping it in writing for at least 4 years.
D. Either A or B above.

15. By electing this method of depreciation you can choose to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. What is the method?

A. Section 179 deduction
B. Section 1250 deduction
C. Section 1245 deduction
D. Straight line method.

16. If you do not claim the depreciation you are entitled to deduct

A. You cannot change your accounting method to claim the correct amount of depreciation.
B. You must reduce the basis of the property by the full amount of depreciation you were entitled to deduct.
C. You must reduce your basis by any amount deducted from which you received a tax benefit.
D. You can file an amended return to claim the depreciation you are entitled to deduct.

17. You can elect the Section 179 deduction for

A. Property you lease to others (if you are a noncorporate lessor).
B. Air conditioning or heating units.
C. Property used by government units or foreign persons or entities, except property used under a lease with a term of less than 6 months.
D. None of the above.

18. If you buy qualifying property with cash and a trade-in its cost for purposes of the section 179 deduction includes the cash you paid and the trade-in value of the property.

True False

19. Jeff owns a rental home that he has been renting out since 1980. If he puts an addition on the home and places the addition in service this year, he

A. Would use GDS depreciation to figure the deduction for the addition.
B. Would use MCRS to figure the depreciation deduction on the new value of the property.
C. Would use MCRS to figure the depreciation deduction for the addition.
D. Would change the depreciation amount and the property's useful life only if the value of the property increases.

20. To help you figure your deduction under MCRS, the IRS has established percentage tables that incorporate the applicable convention and depreciation method.

True False