Question: Gates, Inc., purchases a painting by a

> Kris starts a new business in 2017. She purchases 7-year MACRS property costing $12,000. Her business income before any cost-recovery deductions is $8,000. Kris does not want to claim bonus depreciation. a. What is the maximum cost-recovery deduction

> Larry purchases machinery for his business (7-year MACRS property) on April 1, at a cost of $547,000. On June 1, he spends $84,000 for equipment (5-year MACRS property). Larry does not want to claim bonus depreciation. a. What is the maximum deduction

> The Browser Company purchases a computer in December 2017 for $12,000. This is the only depreciable personal property acquired during the year. Browser elects not to claim bonus depreciation and does not elect to expense the asset but wants to claim th

> The Browser Company purchases a computer in August 2017 for $12,000. Browser elects not to claim bonus depreciation and does not elect to expense the asset but wants to claim the maximum depreciation. In May 2020, the company sells the computer. Calcu

> Assume that in problem 37, the United Express Company sells a truck that cost $50,000 in 2017 for $15,000 in June 2020. Assume that none of the truck was expensed in 2017. Compute the adjusted basis of the truck and the gain or loss from the sale. Data

> On October 1 of the current year, Lee Corporation enters negotiations with Kay Corporation to acquire a patent. The patent has 10 years remaining on its legal life. a. If Lee Corporation purchases the patent for $36,000, how much amortization expense ma

> On April 18, 2017, Petros buys all the assets of Brigid's Muffler Shop. Included in the purchase price of $295,000 is a payment of $20,000 to Brigid not to open a competing shop in the state for a period of 5 years. Brigid's assets at the date of sale

> On June 2, 2017, Lokar Corporation purchases a patent for $68,000 from the inventor of a new extrusion process. The patent has 12 years remaining on its legal life. Also, Lokar purchases substantially all of the assets of Barrios Corporation for $750,0

> How does the legislative grace concept help identify amounts that qualify for deduction?

> How is the wherewithal-to-pay concept different from the ability-to-pay concept?

> Isidro purchases an interest in an oil-producing property for $100,000 on November 3. His geologist estimates 15,000 barrels of oil are recoverable. The entity sells 1,000 barrels for $20,000 during November and December of the year of acquisition. As

> On July 4 of the current year, Lawrence invests $240,000 in a mineral property. He estimates that he will recover 800,000 units of the mineral from the deposit. During the current year, Lawrence recovers and sells 100,000 units of the mineral for $3.50

> On May 15, 2016, Lurlene buys a used automobile for $17,000. She drives it, 9,000 miles for business and 3,000 miles for personal trips during the year. What is Lurlene’s maximum cost recovery for 2016?

> On June 1, 2016, Kirsten buys an automobile for $60,000. Her mileage log for the year reveals the following: 20,000 miles for business purposes; 7,000 miles for personal reasons; and 3,000 miles commuting to and from work. What is Kirsten's maximum cos

> On March 1, 2017, Babar Inc., pays $1,200,000 for a store building, moves into the building and begins business on April 1. Babar properly allocates $1,000,000 of its cost to the building and $200,000 to the land. On May 21, 2017, it installs $533,000-

> Anton purchases a building on May 4, 2000, at a cost of $270,000. The land is properly allocated $30,000 of the cost. Anton sells the building on October 18, 2017, for $270,000. What is his gain or loss on the sale if he uses the regular MACRS system

> Refer to problem 52. Guadalupe sells the building on October 26, 2017. What is her 2017 depreciation deduction if she purchased the building on a. June 30, 1992? b. June 30, 1994? Data from Problem 52: Guadalupe purchases an office building to use in

> Guadalupe purchases an office building to use in her business at a cost of $520,000. She properly allocates $20,000 of the cost to the land and $500,000 to the building. Assuming that Guadalupe would like to deduct the maximum depreciation on the build

> Stan purchases machinery costing $100,000 for use in his business in 2017. The machinery is 7-year MACRS property and has an ADS life of 12 years. Complete a depreciation schedule using the regular MACRS method and ADS (straight-line method) depreciati

> Determine whether Frank or Dorothy, Frank’s friend, is taxed on the income of each of the following situations: a. Frank owns 8% bonds with a $10,000 face value. The bonds pay interest annually on June 30. On September 30, Frank makes a bona fide gift

> In July 2017, Surecut Sawmills buys office furniture for $570,000. Assume that Surecut elects not to claim bonus depreciation. a. Compare cost-recovery deductions using maximum, minimum, and intermediate methods over the recovery period of the equipment

> Why does the doctrine of constructive receipt apply only to cash basis taxpayers?

> In June 2017, Copper Kettle, Inc., purchases duplicating equipment for $541,000. a. Compare cost recovery deductions using maximum, minimum, and intermediate methods over the recovery period of the equipment. b. Explain why Copper Kettle, Inc., would

> The Gladys Corporation buys office equipment costing $658,000 on May 12, 2017. In 2020, new and improved models of the equipment make it obsolete, and Gladys sells the old equipment for $34,000 on December 27, 2020. a. What is Gladys Corporation's gai

> Harold purchases the following business assets on the dates indicated: Date Recovery Asset Purchased Cost Period Photocopy equipment 2/14/17 $ 50,000 5 Dump

> Chen Corporation purchases the following business assets during the current year: Assuming that Chen elects not to claim bonus depreciation, what is the maximum current year cost-recovery deduction on the assets purchased? (Hint: Maximize the Section 17

> Baker, Inc., purchases office furniture (7-year MACRS property) costing $521,000 and a computer system (5-year MACRS property) costing $521,000 in 2017. Assuming that Baker elects not to claim bonus depreciation, what is the maximum cost-recovery deduct

> Rograin Corporation purchases turning lathes costing $1,073,000 and buses costing $975,000 in June of the current year. The lathes are 7-year MACRS property, and the buses are 5-year MACRS property. Rograin does not want to claim bonus depreciation. a.

> Dikembe purchases 1,000 breeding hogs for $1,084,000 in April 2017. a. What is his maximum 2017 cost-recovery deduction for the hogs? b. Dikembe's farming operation incurs a net loss this year and probably will next year before taking the cost recover

> The United Express Company begins business in August 2017 by purchasing the assets listed in the table below. If United Express elects not to claim bonus depreciation, calculate the maximum MACRS depreciation on the assets. Asset Trucks Tractor unit

> In each of the following cases determine who is taxed on the income: a. For $200, Lee purchases an old car that is badly in need of repair. He works on the car for 3 months and spends $300 on parts to restore it. Lee's son Jason needs $2,000 to pay his

> Determine the correct IRS percentage table, recovery period, and applicable convention for each of the following assets: a. Helicopter b. 68-unit apartment building c. The new Wings Field baseball stadium in Buffalo d. Automobile e. Commercial office bui

> For each asset in problem 34, determine the correct IRS percentage table, recovery period, and applicable convention. a. Pool table b. Safe c. Photocopying machines d. Pickup truck e. Electronic video games f. Brewing tanks for the bar's microbrewery

> What is capital gain income? How is it different from ordinary income?

> Who is responsible for collecting sales and excise taxes? Who actually pays the tax?

> Determine the class life, MACRS recovery period, and ADS recovery period of each of the following assets acquired for a sports bar: a. Pool table b. Safe c. Photocopying machines d. Pickup truck e. Electronic video games f. Brewing tanks for the bar's

> Determine the class life, MACRS recovery period, and ADS recovery period of each of the following assets: a. Barge b. Computer c. Automobile d. Breeding sheep e. Breeding horses f. Barn g. Office furniture h. Land improvements

> In each of the following situations, determine the depreciable basis of each asset. a. Melissa purchases furniture and fixtures from the estate of the owner of a business for $45,000. She plans to use these assets in her business. b. Quang purchased a c

> In each of the following situations, determine the depreciable basis of the asset: a. Rudy inherits his father's pickup truck. The truck is immediately placed in service in Rudy's delivery business. The fair market value of the truck at the date of Rud

> Jennifer owns a 40% interest in the Thomas Partnership. She also owns and operates an architectural consulting business. During the current year, the partnership purchases $516,000-worth of property qualifying under Section 179 and elects to expense $5

> Brad is a shareholder and full-time employee of an S corporation. During 2017, he earns a $50,000 salary from the S corporation and is allocated $12,000 as his share of its net operating loss. In addition, Brad owns a limited partnership interest from

> How much taxable should each of the following taxpayers report? a. Kimo builds custom surfboards. During the current year, his total revenues are $90,000, and he incurs $30,000 in expenses. Included in the $30,000 is a $10,000 payment to Kimo’s five-

> During 2017, Belk Corporation purchases $70,000-worth of equipment for use in its business. Belk's current taxable income before considering the Section 179 deduction is $26,000. Assume that Belk elects not to claim bonus depreciation. a. What is Belk's

> In 2017, Theo purchases $16,000 of Section 179 property for use in his delivery business. During 2017, he has $12,000 in taxable income from his business. Assume that Theo elects not to claim bonus depreciation. a. What is Theo's maximum Section 179 de

> In 2017, Terrell, Inc., purchases machinery costing $2,058,000. Its 2017 taxable income before considering the Section 179 deduction is $490,000. Assume that Terrell elects not to claim bonus depreciation. a. What is Terrell's maximum Section 179 deduc

> Jason is transferred to another city to work and is unable to sell his house. He rents out the house until it is sold. Determine the possible tax consequences of each issue that you identify.

> What is the effect of the capital recovery concept on income recognition?

> GM Corporation purchases equipment costing $18,000 and wants to claim the maximum deduction possible for this expenditure. Identify the tax issue(s) posed by the facts presented. Determine the possible tax consequences of each issue that you identify.

> During 2017, Schottenheim Corporation buys laptop computers and desktop computers to use in its general sales offices. Schottenheim buys laptops for $42,000 on March 29, additional laptops for $18,000 on September 26, and the desktop computers for $540,

> Bailey Construction Company purchases a bulldozer on December 20, 2017. An ice storm delays delivery until December 24. Because of the holidays, the equipment is not used until January 2. Identify the tax issue(s) posed by the facts presented. Identif

> Your client, Stone Mining Company, comes to you with a tax planning idea. This year's mining revenues are disappointing, but the company is very optimistic that next year's mining revenues will increase dramatically. To avoid concern among shareholders

> In December, Hilga sells her German language translation business to Chia-Ching. The sales agreement includes a provision that for an extra $6,000, Hilga will not open another German language translation business in the area for two years. Chia-Ching p

> How is the taxation of an alimony payment different from the taxation of a child support payment?

> Your client purchases land that has been severely eroded. He plans to fill the holes caused by the erosion with waste material. Prepare a memorandum discussing any cost recovery deductions that can be claimed on this property.

> Search the Internet for articles relating to the amortization of intangible assets. Trace the process you used to find the article (search engine or tax directory used). Summarize the information found in your research.

> Articles on tax topics are often useful in understanding the income tax law. CPA firms and other organizations publish tax articles on the Internet. Using a search engine or one of the tax directory sites provided in Exhibit 16-6, find an article that d

> Dawkins Logging Company buys 400 acres of forest land for $50,000. The purchase price is allocated as follows: $10,000 to the land and the remaining $40,000 to the timber. At the time of purchase, there was an estimated 400,000 board feet of timber on

> Oliver Company obtains a patent by paying $15,000 on June 21 of this year. Identify the tax issue(s) posed by the facts presented. Determine the possible tax consequences of each issue that you identify.

> What are the two basic methods of accounting that may be used by taxpayers? How do the two basic methods differ?

> Joy opened a shop to sell concrete yard ornaments in 2013. She converted a building in front of her residence into a store. The fair market value of the building when she opened the store was $50,000. The land, her house, and the store building cost $10

> Steem Advertising Corporation acquires 100 laptop computers in 2016 for its account executives to use. Steem pays $300,000 for the computers and bundled software. You are the newly hired CPA and you expect to advise Steem on tax issues regarding tax ye

> In general, which types of property may be expensed under Section 179, and what is the current maximum limit on the deduction?

> Which types of property are allowed a deduction for depletion?

> Darcy borrowed $4,000 in 2014 from her employer to purchase a new computer. She repays $1,000 of the loan plus 6% interest on the unpaid balance in 2014, 2015, and 2016. After closing a big deal in 2017, she receives the original loan agreement stamped

> What limitations are placed on the maximum amount to be expensed under Section 179?

> What was the purpose of changing from the facts and circumstances depreciation method to the ACRS method?

> What is the depreciable basis of an asset? What role does depreciable basis play in determining the annual cost recovery on a depreciable asset?

> What types of capital expenditures are not deductible over time (i.e., their cost is recovered upon disposition of the asset)?

> Which two tests must be met to claim a periodic recovery deduction on a capital expenditure?

> How does the allowable capital recovery period affect the potential return on the investment in an asset?

> Why is the tax benefit rule necessary? That is, which concept drives the need for this construct? Explain.

> How are the costs of intangible assets recovered?

> Which income tax concepts might taxpayers who take depletion deductions be violating?

> How is cost depletion different from percentage depletion?

> Two Sisters is a partnership that owns and operates a farm. During the current year, the partnership raised and harvested hay at a cost of $20,000. It then traded half the hay for quarter horse breeding stock---young horses worth $30,000. Two Sisters fed

> When a taxpayer purchases an automobile for use in a trade or business, what limits are placed on the cost recovery on the automobile?

> Why are restrictions placed on the cost recovery of listed property?

> Why might a taxpayer elect to depreciate assets using the Alternative Depreciation System (ADS)?

> What is the Alternative Depreciation System? How is it different from a straight-line election under MACRS?

> Why is the calculation of depreciation using MACRS generally considered easier and more efficient than the calculation using the facts and circumstances method?

> What acquisition- and disposition-year conventions are used in MACRS and to what types of property does each of the conventions apply?

> What is the purpose of the acquisition- and disposition-year convention?

> What is the difference between a taxable entity and a conduit entity?

> In general, taxpayers want to depreciate property as rapidly as possible. Under what circumstances might a taxpayer not want to use accelerated depreciation? How can this be done under MACRS?

> Is the Section 179 election to expense an incentive to all businesses to invest in qualifying property?

> Mitch travels extensively in his job as an executive vice president of Arthur Consulting Company. During the current year, he used frequent flier miles that he had obtained during his business travel to take his family on a vacation to Europe. The norm

> Fiona is a professional bass violinist with the St. Paul Symphony Orchestra. In February of the current year, she purchases at auction for $200,000 an eighteenth-century bass violin built by the renowned Asa Santavar. Fiona is thrilled by her acquisiti

> The tax law provides four methods of cost recovery for assets: (1) immediate deduction of the total cost when paid or incurred; (2) deferral of cost until property is sold or otherwise disposed of; (3) deduction based on a percentage of income from the

> Luther, 72, is a lifelong bachelor who has been very successful in his business and investment endeavors. He realizes that he should begin to do some tax planning for his death. Although he intends to leave the bulk of his $200,000,000 estate to the No

> Your client, Dale, is the president and sole stockholder of a steel fabrication company. He has been planning to buy a new piece of equipment for $500,000. He is upset to learn that the $500,000 cost would have to be depreciated over seven years. He c

> Barbara wanted to go into the long-distance trucking business. She bought a used tractor and trailer for $102,000. However, the trailer wasn't suitable for Barbara's needs, so she sold it for $24,000 and purchased the trailer she needed for $30,000. W

> Refer to problem 53. Alex uses the automobile for 3 years and then sells it. During this period, he properly deducts a total of $3,600 in depreciation. What is Alex's gain or loss on the automobile if he sells it for a. $4,000? b. $23,000? c. $9,000?

> Alex begins using his automobile for business purposes in his new job. The automobile cost $25,000 and has a fair market value of $9,000 on the date of conversion to business use. a. What is Alex's initial basis in the automobile? Explain. b. What is A

> Mikel's daughter, Liudmila, is planning to go to law school in the fall. Mikel has promised her that he will pay her tuition, fees, and book costs. Mikel has 1,000 shares of Konrad Corporation stock that he bought four years ago for $50 per share plus

> The controller of Newform Oil Company has come to you for advice. Newform recently cleared a forested area and began drilling an oil well on the site. The well is a gusher, and Newform's geologists estimate that it will produce for at least 10 years. En

> Florence's daughter, Eunice, needs $5,000 to start a business. Florence agrees to give her the money but will have to sell some securities to raise that much cash. Florence has 1,200 shares of Tom Corporation common stock, which is selling for $5 per s

> Quapaw Construction Company enters into an agreement with Paine County to resurface 30 miles of highway. The contract is for $600,000. Quapaw estimates its total cost of the project to be $500,000. During the current year, Quapaw completes 18 miles of

> Stockton pays $10,000 for 1,000 shares of Megacron, Inc., common stock on the day his niece Chama is born. Stockton's plan is to give the stock to Chama when she is ready to go to college. Eighteen years later, Chama is ready to leave for Eastern Priva

> For his birthday, Moose gives his son, Babe, a valuable basketball card. Moose paid $100 for the card 12 years earlier. On Babe's birthday, the card is valued in a basketball card guidebook at $90. What is Babe's basis in the card? Explain. a. Assume

> Calculate the basis for gain and basis for loss and the taxable gain or deductible loss for the following gifts which are received and sold in the current year: Donor's Adjusted Basis $100,000 100,000 100,000 FMV at Time of Gift $400,000 80,000 30,0