Question & Answer

Convers Corporation (calendar-year-end) acquired the following assets during the current tax year:  

Evergreen Corporation (calendar-year-end) acquired the following assets during the current year:  

On November 10 of year 1, Javier purchased a building, including the land it was on, to assemble his new equipment. The total cost of the purchase was $1,200,000; $300,000 was allocated to the basis of the land, and the remaining $900,000 was allocated to the basis of the building. 

a. Using MACRS, what is Javier’s depreciation deduction on the building for years 1 through 3?

b. What would be the year 3 depreciation deduction if the building was sold on August 1 of year 3?

c. Answer the question in part (a), except assume the building was purchased and placed in service on March 3 instead of November 10.

d. Answer the question in part (a), except assume that the building is residential property.

e. What would be the depreciation for 2024, 2025, and 2026 if the property were nonresidential property purchased and placed in service November 10, 2007 (assume the same original basis)?

Way Corporation disposed of the following tangible personal property assets in the current year. Assume that the delivery truck is not a luxury auto. Calculate Way Corporation’s 2024 depreciation deduction (ignore §179 expense and bonus depreciation for this problem). 

Padma needs a new truck to help her expand Padma’s Plumbing Palace. Business has been booming, and Padma would like to accelerate her tax deductions as much as possible (ignore §179 expense and bonus depreciation for this problem). On April 1, Padma purchased a new delivery van for $25,000. It is now September 26 and Padma, already in need of another vehicle, has found a deal on buying a truck for $22,000 (all fees included). The dealer tells her if she doesn’t buy the truck (Option 1), it will be gone tomorrow. There is an auction (Option 2) scheduled for October 5 where Padma believes she can get a similar truck for $21,500, but there is also a $500 auction fee. Padma makes no other asset acquisitions during the year. 

a. Which option allows Padma to generate more depreciation deductions this year (the vehicles are not considered to be luxury autos)?

b. Assume the original facts, except that the delivery van was placed in service one day earlier on March 31 rather than April 1. Which option generates more depreciation deduction?

At the beginning of the year, Anna began a calendar-year business and placed in service the following assets during the year: 

DLW Corporation acquired and placed in service the following assets during the year: 

At the beginning of the year, Poplock began a calendar-year, dog-boarding business called Griff’s Palace. Poplock bought and placed in service the following assets during the year: 

Wanting to finalize a sale before year-end, on December 29, WR Outfitters sold to Bob a warehouse and the land for $125,000. The appraised fair market value of the warehouse was $75,000, and the appraised value of the land was $100,000. 

a. What is Bob’s basis in the warehouse and in the land?

b. What would be Bob’s basis in the warehouse and in the land if the appraised value of the warehouse is $50,000 and the appraised value of the land is $125,000?

c. Which appraisal would Bob likely prefer?

Gary inherited a Maine summer cabin on 10 acres from his grandmother. His grandparents originally purchased the property for $500 in 1951 and built the cabin at a cost of $10,000 in 1966. His grandfather died in 1981, and when his grandmother recently passed away, the property was appraised at $500,000 for the land and $700,000 for the cabin. Because Gary doesn’t currently live in New England, he decided that it would be best to put the property to use as a rental. What is Gary’s basis in the land and in the cabin?

] Meg O’Brien received a gift of some small-scale jewelry manufacturing equipment that her father had used for personal purposes for many years. Her father originally purchased the equipment for $1,500. Because the equipment is out of production and no longer available, the property is currently worth $4,000. Meg has decided to begin a new jewelry manufacturing trade or business. What is her depreciable basis for depreciating the equipment?

Dennis contributed business assets to a new business in exchange for stock in the company. The exchange did not qualify as a tax-deferred exchange. The fair market value of these assets was $287,000 on the contribution date. Dennis’s original basis in the assets he contributed was $143,000, and the accumulated depreciation on the assets was $78,000.

a. What is the business’s basis in the assets it received from Dennis? 

b. What would be the business’s basis if the transaction qualified as a tax-deferred exchange?

In January, Prahbu purchased for $90,000 a new machine for use in an existing production line of his manufacturing business. Assume that the machine is a unit of property and is not a material or supply. Prahbu pays $2,500 to install the machine, and after the machine is installed, he pays $1,300 to perform a critical test on the machine to ensure that it will operate in accordance with quality standards. On November 1, the critical test is complete, and Prahbu places the machine in service on the production line. On December 3, Prahbu pays another $3,300 to perform periodic quality control testing after the machine is placed in service. How much will Prahbu be required to capitalize as the cost of the machine?

Emily purchased a building to store inventory for her business. The purchase price was $760,000. Emily also paid legal fees of $300 to acquire the building. In March, Emily incurred $2,000 to repair minor leaks in the roof (from storm damage earlier in the month) and $5,000 to make the interior suitable for her finished goods. What is Emily’s cost basis in the new building? 

Jose purchased a delivery van for his business through an online auction. His winning bid for the van was $24,500. In addition, Jose incurred the following expenses before using the van: shipping costs of $650; paint to match the other fleet vehicles at a cost of $1,000; registration costs of $3,200, which included $3,000 of sales tax and an annual registration fee of $200; wash and detailing for $50; and an engine tune-up for $250. What is Jose’s cost basis for the delivery van?

Explain why percentage depletion has been referred to as a government subsidy.

Compare and contrast the cost and percentage depletion methods for recovering the costs of natural resources. What are the similarities and differences between the two methods?

Compare and contrast the recovery periods of §197 intangibles, organizational expenditures, start-up costs, and research and experimentation expenses.

Explain the amortization convention applicable to intangible assets. 

Discuss the method used to determine the amount of organizational expenditures or start-up costs that may be immediately expensed in the year a taxpayer begins business.

Compare and contrast the similarities and differences between organizational expenditures and start-up costs for tax purposes.

Compare and contrast the tax and financial accounting treatment of goodwill. Are taxpayers allowed to deduct amounts associated with self-created goodwill?

What is a §197 intangible? How do taxpayers recover the costs of these intangibles? How do taxpayers recover the cost of a §197 intangible that expires (such as a covenant not to compete)?

Compare and contrast how a Land Rover SUV and a Mercedes-Benz sedan are treated under the luxury auto rules. Also include a discussion of the similarities and differences in available §179 expense. 

Discuss why Congress limits the amount of depreciation deduction businesses may claim on certain automobiles.