62. Mark the correct answer. Section 197 intangibles:
63. EIM partnership has a seasonal business as an advertising firm for sellers of ski equipment and is owned by
three individuals with calendar year-ends. Which of the following options does EIM have in choosing a tax
year?
A. EIM can choose any month-end as the end of its tax year.
64. Which of the following is not true of personal service corporations (PSCs)?
A. One of the exceptions to the requirement that a PSC have a calendar year-end occurs when the PSC chooses
65. Amy is a calendar year taxpayer reporting on the cash basis. Please indicate which of the following income
or expense items should not be included in her 2011 tax return.
A. On April 15, 2012, she makes a deductible contribution to an IRA for 2011.
66. Which of the following taxpayers is absolutely required to report on a calendar year-end basis?
A. Individuals
67. Which of the following is true about the MACRS depreciation system?
68. Aaron has a successful business with $50,000 of income in 2011. He purchased one new asset in 2011, a
new machine that is 7-year MACRS property, with a cost of $7,000. Of the options available for allocating the
cost of the asset over time, for tax purposes, what is the largest write-off Aaron can obtain in 2011?
69. Big Bill Construction is owned equally by three smaller construction companies. Two of the construction
companies have a tax year-end on November 30 and the third has a tax year-end on June 30. What year-end
date would Big Bill adopt?
70. Which one of the following entities cannot use the cash method for tax purposes?
71. ABC Corp bought a production machine on January 1, 2010 for $30,000. The company elected out of
Section 179 expensing and elected out of claiming bonus depreciation in 2010, and is depreciating the machine
using the MACRS accelerated depreciation tables for 5-year property. What is the 2011 depreciation (year 2)
deduction for the machine?
72. Which one of the following is true about Modified Accelerated Cost Recovery System (MACRS)?
A. A building is depreciated using 200 percent declining balance depreciation.
73. Steve Corp bought a $925,000 apartment building in 2010. $100,000 of the building cost is allocated to the
value of the land. What is the maximum amount of depreciation that the company can claim in 2011 (year 2)
for the building?
74. Which one of the following may not be depreciated using an accelerated method?
75. Which one of the following is a Section 197 intangible?
76. Mary sells to her father, Robert, her shares in AA Corp for $55,000. The shares cost Mary $80,000. How
much loss may Mary claim from the sale?
77. On September 1, 2011, David purchased manufacturing equipment for use in his business. The equipment
cost $13,000, has an estimated useful life of 7 years. No election to expense or use bonus depreciation is made.
a.
Calculate the amount of depreciation on the manufacturing equipment for 2011 using conventional (financial accounting, not MACRS)
straight-line depreciation.
b.
Calculate the amount of depreciation on the manufacturing equipment for 2011 using the straight-line MACRS optional method.
c.
Calculate the amount of depreciation on the manufacturing equipment for 2011 using the accelerated MACRS method.
78. Joyce purchased a passenger automobile on March 2, 2011. She paid $12,000 for the automobile and can
support business use of 90 percent. Calculate the amount of depreciation on the automobile for 2011 using the
accelerated MACRS method (if available), assuming Joyce does not make the election to expense or take bonus
depreciation.
79. Patrick purchased a used passenger automobile on June 1, 2011. He paid $17,000 for the automobile.
During 2011, he uses the automobile 80 percent of the time for business. Patrick wishes to claim the maximum
amount of depreciation possible.
a.
Calculate Patrick’s depreciation expense on the automobile for 2011.
b.
Calculate Patrick’s depreciation expense on the automobile for 2012, assuming the same 80 percent business use.
a.
$2,448, which is the lesser of ($3,060 ´ 80%) or $2,720, ($17,000 ´ 20%) ´ 80%.
b.
$3,920, which is the lesser of ($4,900 (maximum) ´ 80%) or $4,352, ($17,000 ´ 32% ´ 80%).
80. Eva purchased office equipment (7-year property) for use in her business. She paid $126,000 for the
equipment on July 1, 2011. Eva did not purchase any other property during the year. For 2011, her business had
net income of $26,000, before depreciation and before considering the election to expense.
a.
What is the maximum amount that Eva can elect to expense in 2011 under Section 179?
b.
What is the total depreciation (regular depreciation and the amount allowed as a 2011 deduction under the election to expense) on the
office equipment for 2011, assuming Eva uses the accelerated method under MACRS and claims the maximum amount allowable under
the election to expense?
c.
Assuming that Eva elected to expense the equipment in 2011 and that her business has net income in 2012 of $200,000, before
depreciation and before considering the election to expense, what is Eva’s total depreciation deduction (regular depreciation and the
amount allowed under the election to expense) for the equipment for 2012?
a.
b.
c.
81. Polly is a cash basis taxpayer with the following transactions during the year:
Cash received from sales of products
$85,000
Cash paid for expenses (except rent and interest)
30,000
Rent paid on a leased building for 4 months beginning December 1
12,000
Prepaid interest on a bank loan, paid on December 1, for the next 3 months
6,000
Four months’ rent received on a leased building, on October 1
8,000
Calculate Polly’s income from her business for this calendar year.
Sales income
$__________
Rental income
__________
Total income
$__________
Expenses other than rent and interest
$__________
Rent
__________
Interest
__________
Total expenses
__________
Net income
$
$85,000
8,000
$93,000
$30,000
3,000
2,000
$35,000
$58,000
82. On July 2, 2011, Scott purchased a commercial building. The cost basis assigned to the building is
$600,000. Scott also owns a residential apartment building he purchased on June 15, 2010 with a cost basis of
$400,000.
a.
Calculate Scott’s total depreciation deduction for the buildings for 2011, using the Modified Accelerated Cost Recovery System.
b.
Calculate Scott’s total depreciation deduction for the buildings for 2012, using the Modified Accelerated Cost Recovery System.
c.
83. On July 15, 2011, H. P. purchases a personal computer for his home. The computer cost $3,000. H. P. uses
the computer 55 percent of the time in his business, 20 percent of the time for managing his investments and the
remaining 25 percent of the time for various personal uses. Calculate H. P.’s maximum depreciation deduction
for 2011 for the computer, assuming he does not make the election to expense or take bonus depreciation.
84. ABC Corporation is owned 30 percent by Andy, 30 percent by Barry, 20 percent by Charlie, and 20 percent
by Uptown Corporation. Uptown Corporation is owned 90 percent by Charlie and 10 percent by an unrelated
party. Barry and Charlie are brothers. Answer each of the following questions about ABC under the
constructive ownership rules of Section 267.
a.
What is Andy’s ownership percentage?
b.
What is Barry’s ownership percentage?
c.
What is Charlie’s ownership percentage?
d.
If Andy sells property to ABC for a $6,000 loss, what amount of that loss can be recognized for tax purposes (before any annual
limitations)?
a.
b.
c.
85. Scott purchases a small business from Lew on July 1, 2011. He paid the following amounts for the business:
Land
$100,000
Commercial building
200,000
Furniture and equipment
80,000
Going-concern value
50,000
Workforce in place
25,000
Total
$455,000
a.
Commercial (nonresidential) ($600,000 ´ 1.177%)
$ 7,062
b.
Commercial (nonresidential) ($600,000 ´ 2.564%)
$15,384
Residential ($400,000 ´ 3.636%)
14,544
a.
How much of the $455,000 purchase price is for Section 197 intangible assets?
b.
What amount can Scott deduct on his 2011 tax return as Section 197 intangible amortization?
86. Bev is the sole owner of Bev & Associates, an accrual basis corporation. In 2011, Bev & Associates has a
bad year and Bev lends the corporation $50,000 to meet expenses. The corporation accrues interest expense of
$5,000 on the loan from Bev, but does not pay the interest to her in cash.
How much of the $5,000 in accrued interest expense can Bev & Associates deduct on its 2011 corporate tax
return? Explain.
87. Quince Corporation changes its year-end from a fiscal year-end to a calendar year-end. The corporation has
taxable income of $30,000 for its 3-month short period beginning October 1, 2011 and ending December 31,
2011. Calculate the corporation’s tax for the short period.
88. BONG Corporation is owned 25 percent by Brian, 30 percent by Orville, 20 percent by Nate, and 25 percent
by Glug Corporation. Glug Corporation is owned 80 percent by Brian and 20 percent by Nate. Brian and Orville
are brothers. Answer each of the following questions about BONG under the constructive ownership rules of
Section 267.
a.
What is Brian’s ownership percentage?
b.
If Nate sells property to BONG for a $7,500 loss, what amount of that loss can be recognized for tax purposes (before any annual
limitations)?
a.
89. On August 21, 2011, Jay purchased a commercial building. The cost basis assigned to the building is
$800,000. Jay also owns a residential apartment building he purchased on June 15, 2010 with a cost basis of
$500,000.
a.
Calculate Jay’s total depreciation deduction for the buildings for 2011, using MACRS.
b.
Calculate Jay’s total depreciation deduction for the apartment building for 2012, using MACRS.
90. Lanyard purchased office equipment (7-year property) for use in his business. He paid $150,000 for the
equipment on July 1, 2011. Lanyard did not purchase any other property during the year. For 2011, his business
had net income of $350,000, before depreciation and before considering the election to expense.
a.
What is the maximum amount that Lanyard can deduct in 2011 under the election to expense?
b.
What is the total depreciation (regular depreciation and the amount allowed under the election to expense) on the office equipment for
2011, assuming Lanyard uses the accelerated method under MACRS and claims the maximum amount allowable under the election to
expense?
c.
What is Lanyard’s total depreciation deduction for 2012 on the 2011 purchase of equipment?
91. Shellie purchased a passenger automobile on March 2, 2011. She paid $14,000 for the automobile and can
support business use of 90 percent. Calculate the amount of depreciation on the automobile for 2011 using the
accelerated MACRS method (if available), assuming Shellie does not make the election to expense.
Residential ($500,000 ´ 3.636%)
18,180
Total depreciation
92. If a taxpayer purchases land worth $200,000 with an office building valued at $100,000 on it, how are the
two depreciated for tax purposes?
Land:
Office building:
93. To be depreciated, must an asset actually lose value each year?
94. Please give the depreciable lives for 2011 tax purposes for these assets:
Automobiles
Business furniture
Computers
Residential real estate
Commercial real estate
Land
Purchased goodwill
95. Explain the use of the half-year convention for MACRS depreciation for assets other than real estate and the
exception to the half-year convention rule.
96. Calculate the following amounts:
a. The first year of depreciation on a residential rental building costing $100,000, purchased on August 30:
b. The first year of depreciation on an auto used 100 percent in business, costing $30,000, purchased in May,
2011. (No bonus depreciation deducted).
c. The second year of depreciation on a computer costing $8,000, purchased May 2010.
d. The third year of depreciation on business furniture costing $1,000, purchased in July 2009, using the
midyear convention and accelerated depreciation.
97. Betty purchases a used $12,000 car in 2011, to use exclusively in her business.
a. What will the standard MACRS depreciation schedule be for the first 6 years the auto is depreciated?
Year 1:
Year 2:
Year 3:
Year 4:
Year 5:
Year 6:
b: If Betty holds the car until it is fully depreciated, and uses straight-line depreciation, how many years will
this take?
98. Perry develops a successful advertising business that he subsequently sells to his competitor, Carl, for
$108,000. He retires in the same town where he has always lived and done business. Carl insists that Perry sign
a covenant not to compete.The advertising business has no tangible assets; Carl receives only the name of the
business, the client lists and whatever going-concern value there is. How should Carl treat the $108,000 cost of
the advertising business he purchased?
99. If a cash basis business owner pays 6 months of rent expense in advance during the last month of the tax
year, how is this treated on the tax return? What is the reason tax law requires this treatment?
100. What is the purpose of the “required tax payment” by partnerships or S corporations with a different fiscal
year-end than that of the partners or shareholders?