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Exam 5: Business Deductions

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Question 21

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On June 1, 2017, Irene places in service a new automobile that cost $21,000.The car is used 70% for business and 30% for personal use.(Assume this percentage is maintained for the life of the car.) She does not take additional first-year depreciation.Determine the cost recovery deduction for 2018.

A) $3,160
B) $3,290
C) $3,570
D) $6,720
E) None of the above

F) B) and C)
G) A) and B)

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Question 22

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Last year, Green Corporation incurred the following expenditures in the development of a new plant process: $\begin{array} { l r } \text { Salaries } & \$ 250,000 \\\text { Materials } & 90,000 \\\text { Utilities } & 20,000 \\\text { Quality control testing costs } & 40,000 \\\text { Management study costs } & 5,000 \\\text { Depreciation of equipment } & 18,000\end{array}$ ? During the current year, benefits from the project began being realized in May.If Green Corporation elects a 60 month deferral and amortization period, determine the amount of the deduction for the current year.

A) $48,000
B) $50,400
C) $54,667
D) $57,067
E) None of the above

F) A) and B)
G) C) and E)

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Question 23

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James purchased a new business asset (three-year personalty) on July 23, 2017, at a cost of $40,000.James takes additional first-year depreciation but does not elect Section 179 expense on the asset.Determine the cost recovery deduction for 2017.

Diane purchased a factory building on April 15, 1993, for $5,000,000.She sells the factory building on February 2, 2017.Determine the cost recovery deduction for the year of the sale.

For purposes of the § 267 loss disallowance provision, a taxpayer's aunt is a related party.

The § 179 limit for a sports utility vehicle with a GVW of 7,000 pounds will not apply if the sports utility vehicle is used as a taxi.

The portion of a shareholder-employee's salary that is classified as unreasonable has no effect on the amount of a shareholder-employee's gross income, but results in an increase in the taxable income of the corporation.

The maximum cost recovery method for all personal property under MACRS is 150% declining balance.

The cost recovery basis for property converted from personal use to business use may be the fair market value of the property at the time of the conversion.

Regarding research and experimental expenditures, which of the following are not qualified expenditures?

For real property, the ADS convention is the mid-month convention.

On January 15, 2017, Vern purchased the rights to a mineral interest for $3,500,000.At that time it was estimated that the recoverable units would be 500,000.During the year, 40,000 units were mined and 25,000 units were sold for $800,000.Vern incurred expenses during 2017 of $500,000.The percentage depletion rate is 22%.Determine Vern's depletion deduction for 2017.

The cost of a covenant not to complete for 10 years incurred in connection with the acquisition of a business is amortized over 10 years.

On June 1, 2017, James places in service a new automobile that cost $40,000.The car is used 60% for business and 40% for personal use.(Assume this percentage is maintained for the life of the car.) James does not take additional first-year depreciation.Determine the cost recovery deduction for 2017.

Bonnie purchased a new business asset (five-year property) on March 10, 2017, at a cost of $30,000.She also purchased a new business asset (seven-year property) on November 20, 2017, at a cost of $13,000.Bonnie did not elect to expense either of the assets under § 179, nor did she elect straight-line cost recovery.Bonnie takes additional first-year depreciation.Determine the cost recovery deduction for 2017 for these assets.

Goodwill associated with the acquisition of a business cannot be amortized.

The amount of the addition to the reserve for bad debts for an accrual method taxpayer is allowed as a deduction for tax purposes, but is not allowed for a cash method taxpayer.

Tom operates an illegal drug-running operation and incurred the following expenses: $\begin{array} { l r } \text { Salaries } & \$ 75,000 \\\text { Illegal kickbacks } & 20,000 \\\text { Bribes to border guards } & 25,000 \\\text { Cost of goods sold } & 160,000 \\\text { Rent } & 8,000 \\\text { Interest } & 10,000 \\\text { Insurance on furniture and fixtures } & 6,000 \\\text { Utilities and telephone } & 20,000\end{array}$ Which of the above amounts reduces his taxable income?

A used $35,000 automobile that is used 100% for business is placed in service in 2017.If the automobile fails the 50% business usage test in the second year, no cost recovery will be recaptured.

Land improvements are generally not eligible for cost recovery.