Topic 20 - Tax Deductions for Depreciation

1. Look at the Form 1040 you prepared for Jim Samuels. What is the amount on Form 1040, Line 22?

A. $20,484.
B. $21,317.
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 27?

A. $946.
B. $923.
C. $1,506.
D. $316.

3. The maximum section 179 expense you can elect to deduct for property you placed in service in tax year 2009 is:

A. $800,000.
B. $250,000.
C. $100,000.
D. $1,050,000.

4. Bob purchased a building and land to use in his business for a price of $1,000,000. The land was value at $300,000 (included in the price). He then incurred $90,000 to replace the roof of the building. The city replaced the sewage lines to his business and assessed Bob $20,000.  What is Bob's basis for depreciation?

A. $1,100,000.
B. $810,000.
C. $800,000.
D. $720,000.

5. Henry exchanged an apartment building with a adjusted basis of $750,000 for another apartment building. Both properties have a fair market value of $2,000,000. In addition, Henry paid legal fees of $10,000 for the exchange transaction. What is the basis for depreciation of Henry's acquisition?

A. $2,000,000.
B. $750,000.
C. $2,010,000.
D. $760,000.

6. James bought and placed in service computer equipment in 2009. He paid $15,000 cash and received a $3,000 trade-in allowance for his old computer equipment. James had an adjusted basis of $4,000 in the old computer equipment. He used both the old and new computer equipment 90% for business and 10% for personal purposes. His allowable section 179 deduction is:

A. $16,200.
B. $13,500.
C. $12,600.
D. $15,000.

7. In 2009, Judy placed in service a machine that cost $207,000. If she placed no other section 179 property in service during the year, how much is her section 179 maximum deduction allowed?

A. $207,000.
B. $250,000.
C. $100,000.
D. $800,000.

8. Mike purchased a building lot in 2006 for $25,000 and constructed his primary residence there for an additional $175,000. In 2009 Mike moved to a different city, but kept the house he constructed in 2006 and converted it to a rental property. On the date Mike made this change the fair market value of the converted property was $225,000. For depreciation purposes, what is Mike's basis in this rental property?

A. $150,000.
B. $175,000.
C. $200,000.
D. $225,000.

9. Arlene traded her old computer that she used in her business, for a new computer priced at $5,000 that she will also use in her business. In addition to her old computer, Arlene paid $4,000 cash for the new computer. Her old computer was worth $2,000 and had an adjusted basis of $500. What is Arlene's basis for depreciation in the new computer?

A. $2,000.
B. $3,000.
C. $4,500.
D. $1,000.

10. John purchased a new gasoline-electric hybrid automobile on July 2, 2008, for $18,000. He also claimed a $2,000 clean-fuel vehicle deduction on his 2008 tax return for that vehicle. In 2008, John used this automobile only for personal purposes. On January 1, 2009, he began using the hybrid automobile exclusively for business purposes. The fair market value of the automobile on that day was $17,000. What is the automobile's depreciable basis as of January 1, 2009?

A. $15,000.
B. $16,000.
C. $17,050.
D. $18,000.

11. Pat Snow bought a truck weighing 8,000 lbs. She uses the truck to make deliveries in her candy business. She bought the truck on July 1, 2008 at a cost of $25,000. What is the first year's depreciation under the MACRS rules using the following table?

A. $3,060.
B. $5,000.
C. $3,572.50.
D. $2,500.

12. The D&L Partnership bought a truck for $28,000 and a trailer for $4,000 on January 10, 2006, to be used in the business. D&L Partnership uses the straight-line method and a 5-year life to recover its cost for tangible property. In 2006 and 2007, D&L Partnership took depreciation of $6,400 and $4,600 respectively. In January 2008, D&L Partnership discovered that it under-claimed depreciation of $1,800 on its tax return for 2007. What can D&L do to recover the $1,800?

A. Claim $8,200 depreciation in 2008.
B. Make a pro-rata adjustment to the basis of the equipment.
C. Amend the tax return for 2007.
D. It can't be recovered.

13. The K&L Partnership owned the following tangible property. Which one in not considered listed property?

A. An automobile.
B. A cellular telephone.
C. A computer used for personal use 40% of the time.
D. A truck weighing 17,000 lbs designed to carry cargo.

14. Mike and Joe are equal partners in the Dandy Partnership. On January 1, 2008, the partnership, in a like-kind exchange, exchanged a building (adjusted basis $150,000) used for business for another building (adjusted basis $150,000) used for business. The new building had a mortgage of $25,000, which the Dandy Corporation assumed, and unpaid real estate taxes of $2,600 which the Dandy Corporation paid but was not reimbursed. What is the adjusted basis of the new building and what is the amount of depreciation assuming a 20-year life under the straight-line method?

A. Adjusted Basis $150,000    Depreciation $7,500.
B. Adjusted Basis $152,600    Depreciation $7,630.
C. Adjusted Basis $175,000    Depreciation $8,750.
D. Adjusted Basis $177,600    Depreciation $8,880.

15. James is a 50% partner in the A&M Partnership. The partnership bought a truck for $24,000 in January 2006. James also owns a printing business that he operates part-time. In January 2006 he bought a color copier for $1,200. Both the truck and the copier quality for Section 179 deduction, which was taken in 2006. At the end of 2008, the truck and the copier were converted to personal use. The truck has a 5-year life and the copier has a 3-year life. What amount should be recaptured as ordinary income if James used straight-line depreciation on all of the equipment he purchased?

A. $14,800.
B. $2,400.
C. $25,200.
D. $0.

16. As of December 31, 2009, John is a 50% shareholder of XYZ, Inc., an S Corporation, as well as a 75% shareholder of ABC, Inc., also an S Corporation. Both companies are calendar year taxpayers. Because of profitable years, each company elected to use the maximum depreciation deduction allowable under IRS Code Section 179 for the year. Assuming that each election was valid, what is the maximum amount of Section 179 deductions which can be passed through to John?

A. $250,000.
B. $312,500.
C. $800,000.
D. None. Depreciation is not a pass through item.

17. Mary is the sole shareholder of A Company, Inc. (an S Corporation), as well as a 50% shareholder in B Company, Inc., also an S Corporation. During the 2009 tax year, both companies acquired qualified assets in order to take the IRS Code Section 179 election for the full allowable amount. Prior to the 2010 tax year, the companies had accumulated Section 179 deductions in the following amounts:

What is the amount of Section 179 deduction Mary can take for 2009?

A. $255,000.
B. $217,500.
C. $250,000.
D. Nothing, because accumulated Section 179 deductions previously taken exceed the combined cumulative amount allowable of $800,000.

18. 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.

19. 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.

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

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