Topic 20 - Tax Deduction 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       

21. 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.

22. 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.

23. 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

24. 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.

25. 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.

26. A building contractor who specializes in constructing office buildings bought a truck in tax year 2008 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 2009 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.

27. 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.

28. 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.

29. 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.

30. 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.

31. 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.

32. 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.

33. 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

34. Jeff owns a rental home that he has been renting out since 1981. 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.

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

True False