Question & Answer

Suppose you asked your favorite AI query tool “How much tax depreciation could a taxpayer deduct on a computer acquired in January 2024 for $100,000?” and the AI tool provided the following response:

Diamond Mountain was originally thought to be one of the few places in North America to contain diamonds, so Diamond Mountain Inc. (DM) purchased the land for $1,000,000. Later, DM discovered that the only diamonds on the mountain had been planted there and the land was worthless for mining. DM engineers discovered a new survey technology and discovered a silver deposit estimated at 5,000 pounds on Diamond Mountain. DM immediately bought new drilling equipment and began mining the silver. 

In years 1-3 following the opening of the mine, DM had net (gross) income of $200,000 ($700,000), $400,000 ($1,100,000), and $600,000 ($1,450,000), respectively. Mining amounts for each year were as follows: 750 pounds (year 1), 1,450 pounds (year 2), and 1,800 pounds (year 3). At the end of year 2, engineers used the new technology (which had been improving over time) and estimated there were still an estimated 6,000 pounds of silver deposits.

DM also began a research and experimentation project with the hopes of gaining a patent for its new survey technology. Diamond Mountain Inc. chose to capitalize research and experimentation expenditures and to amortize the costs over 60 months or until it obtained a patent on its technology. In March of year 1, DM spent $95,000 on research and experimentation. DM spent another $75,000 in February of year 2 for research and experimentation. DM realizes benefits from the research and experimentation expenditures when the costs are incurred. In September of year 2, DM paid $20,000 of legal fees and was granted the patent in October of year 2 (the entire process of obtaining a patent was unusually fast). The patent's life is 20 years.

While completing undergraduate schoolwork in information systems, Dallin Bourne and Michael Banks decided to start a technology support company called eSys Answers. During year 1, they bought the following assets and incurred the following start-up fees:

Karane Enterprises, a calendar-year manufacturer based in College Station, Texas, began business in 2023. In the process of setting up the business, Karane has acquired various types of assets. Below is a list of assets acquired during 2023:

Last Chance Mine (LCM) purchased a coal deposit for $750,000. It estimated it would extract 12,000 tons of coal from the deposit. LCM mined the coal and sold it, reporting gross receipts of $1 million, $3 million, and $2 million for years 1 through 3, respectively. During years 1 – 3, LCM reported net income (loss) from the coal deposit activity in the amount of ($20,000), $500,000, and $450,000, respectively. In years 1 – 3, LCM extracted 13,000 tons of coal as follows:  

DepletionTons extracted per year

(1) 

Tons of Coal (2) 

Basis (2)/(1) Rate Year 1 Year 2 Year 3

12,000 $750,000 $62.50 2,000 7,200 3,800

a. What is LCM’s cost depletion for years 1, 2, and 3?

b. What is LCM’s percentage depletion for each year (the applicable percentage for coal is 10 percent)? 

c. Using the cost and percentage depletion computations from parts (a) and (b), what is LCM’s actual depletion expense for each year?

] Bethany incurred $20,000 in research and experimental costs for developing a specialized product during July 2024. Bethany went through a lot of trouble and spent $10,000 in legal fees to receive a patent for the product in August 2026. Bethany expects the patent to have a remaining useful life of 10 years.

a. What amount of research and experimental expenses for 2024, 2025, and 2026 may Bethany deduct?

b. How much patent amortization expense would Bethany deduct 2026?

Nicole organized a new corporation. The corporation began business on April 1 of year 1. She made the following expenditures associated with getting the corporation started:

Expense Date Amount

Attorney fees for articles of incorporation February 10 $32,000

March 1 – March 30 wages March 30 $4,500 

March 1 – March 30 rent March 30 $2,000

Stock issuance costs April 1 $20,000

April 1 – May 30 wages May 30 $12,000 

a. What is the total amount of the start-up costs and organizational expenditures for Nicole’s corporation?

b. What amount of the start-up costs and organizational expenditures may the corporation immediately expense in year 1 (excluding the portion of the expenditures that are amortized over 180 months)?

c. What amount can the corporation deduct as amortization expense for the organizational expenditures and for the start-up costs for year 1 [not including the amount determined in part (b)]?

d. What would be the total allowable organizational expenditures if Nicole started a sole proprietorship instead of a corporation?

Juliette formed a new business to sell sporting goods this year. The business opened its doors to customers on June 1. Determine the amount of start-up costs Juliette can immediately expense (not including the portion of the expenditures that are amortized over 180 months) this year in the following alternative scenarios.

a. She incurred start-up costs of $2,000.

b. She incurred start-up costs of $45,000.

c. She incurred start-up costs of $53,500.

d. She incurred start-up costs of $63,000.

e. How would you answer parts (a) through (d) if she formed a partnership or a corporation and she incurred the same amount of organizational expenditures rather than start-up costs (how much of the organizational expenditures would be immediately deductible)?

After several profitable years running her business, Ingrid decided to acquire the assets of a small competing business. On May 1 of year 1, Ingrid acquired the competing business for $300,000. Ingrid allocated $50,000 of the purchase price to goodwill. Ingrid’s business reports its taxable income on a calendar-year basis. 

a. How much amortization expense on the goodwill can Ingrid deduct in year 1, year 2, and year 3?

b. In lieu of the original facts, assume that Ingrid purchased only a phone list with a useful life of 5 years for $10,000. How much amortization expense on the phone list can Ingrid deduct in year 1, year 2, and year 3?

] Paul Vote purchased the following assets this year (ignore §179 expensing and bonus depreciation when answering the questions below):

Asset Purchase Date Basis

Machinery May 12 $23,500 

Computers August 13 $20,000 

Warehouse December 13 $180,000 

a. What is Paul’s allowable MACRS depreciation for the property?

b. What is Paul’s allowable alternative minimum tax (AMT) depreciation for the property? You will need to find the AMT depreciation tables to compute the depreciation.

Burbank Corporation (calendar-year-end) acquired the following property this year:

Asset Placed in Service Basis

Used copier November 12 $7,800

New computer equipment June 6 14,000

Furniture July 15 32,000

New delivery truck October 28 19,000

Luxury auto January 31 70,000

  Total $142,800

Burbank acquired the copier in a tax-deferred transaction when the shareholder contributed the copier to the business in exchange for stock.

a) Assuming no bonus or §179 expense, what is Burbank’s maximum cost recovery deduction for this year?

b) Assuming Burbank would like to maximize its cost recovery deductions by electing bonus and §179 expense, which assets should Burbank immediately expense? 

c) What is Burbank’s maximum cost recovery deduction this year assuming it elects §179 expense and claims bonus depreciation?

Tamika Meer purchased a new car for use in her business during 2024 for $75,000. The auto was the only business asset she purchased during the year, and her business was very profitable. Calculate Tamika’s maximum depreciation deductions for the automobile in 2024 and 2025 under the following scenarios:

a. Tamika does not want to take §179 expense and she elects out of bonus depreciation.

b. Tamika wants to maximize her 2024 depreciation using bonus depreciation.

Lina purchased a new car for use in her business during 2024. The auto was the only business asset she purchased during the year, and her business was extremely profitable. Calculate her maximum depreciation deductions (including §179 expense unless stated otherwise) for the automobile in 2024 and 2025 (Lina doesn’t want to take bonus depreciation for 2024) in the following alternative scenarios (assuming half-year convention for all): 

a. The vehicle cost $35,000, and business use is 100 percent (ignore §179 expense).

b. The vehicle cost $80,000, and business use is 100 percent.

c. The vehicle cost $80,000, and she used it 80 percent for business.

d. The vehicle cost $80,000, and she used it 80 percent for business. She sold it on March 1 of year 2.

e. The vehicle cost $80,000, and she used it 20 percent for business.

f. The vehicle cost $80,000 and is an SUV that weighed 6,500 pounds. Business use was 100 percent.

] Assume that Ernesto purchased a digital camera on July 10 of year 1 for $3,000. In year 1, 80 percent of his camera usage was for his business and 20 percent was for his personal photography activities. This was the only asset he placed in service during year 1. Ignoring any potential §179 expense and bonus depreciation, answer the questions for each of the following alternative scenarios:

a. What is Ernesto’s depreciation deduction for the camera in year 1?

b. What would be Ernesto’s depreciation deduction for the camera in year 2 if his year 2 usage were 75 percent business and 25 percent for personal use?

c. What would be Ernesto’s depreciation deduction for the camera in year 2 if his year 2 usage were 45 percent business and 55 percent for personal use?

Phil owns a ranch business and uses four-wheelers to do much of his work. Occasionally, though, he and his boys will go for a ride together as a family activity. During year 1, Phil put 765 miles on the four-wheeler that he bought on January 15 for $6,500. Of the miles driven, only 175 miles were for personal use. Assume four-wheelers qualify to be depreciated according to the five-year MACRS schedule and the four-wheeler was the only asset Phil purchased this year. 

a. Calculate the allowable depreciation for year 1 (ignore the §179 expense and bonus depreciation).

b. Calculate the allowable depreciation for year 2 if total miles were 930 and personal-use miles were 400 (ignore the §179 expense and bonus depreciation).

Acorn Construction (calendar-year-end C corporation) has had rapid expansion during the last half of the current year due to the housing market’s recovery. The company has record income and would like to maximize its cost recovery deduction for the current year. Acorn provided the following information:

Assume that Sivart Corporation has 2024 taxable income of $1,750,000 for purposes of computing the §179 expense and acquired several assets during the year. Assume the delivery truck does not qualify for bonus depreciation.

Woolard Supplies (a sole proprietorship) has taxable income in 2024 of $240,000 before any depreciation deductions (§179, bonus, or MACRS) and placed some office furniture into service during the year. The furniture does not qualify for bonus depreciation.

Chaz Corporation has taxable income in 2024 of $1,312,000 for purposes of computing the §179 expense and acquired the following assets during the year:

Assume that ACW Corporation has 2024 taxable income of $1,500,000 for purposes of computing the §179 expense. The company acquired the following assets during 2024 (assume no bonus depreciation):

Dain’s Diamond Bit Drilling purchased the following assets this year. Assume its taxable income for the year was $53,000 for purposes of computing the §179 expense (assume no bonus depreciation). 

Assume that Timberline Corporation has 2024 taxable income of $240,000 for purposes of computing the §179 expense. It acquired the following assets in 2024:

Assume TDW Corporation’s (calendar-year-end) has 2024 taxable income of $950,000 for purposes of computing the §179 expense. The company acquired the following assets during 2024:

AMP Corporation (calendar-year-end) has 2024 taxable income of $1,900,000 for purposes of computing the §179 expense. During 2024, AMP acquired the following assets:

Harris Corp. is a technology start-up and is in its second year of operations. The company didn’t purchase any assets this year but purchased the following assets in 2023: