MACRS
Which statement about MACRS depreciation is correct?
A) Depreciation begins when an asset is purchased, regardless of when it is used.
B) Depreciation begins when an asset is placed in service, regardless of when it was purchased.
C) Depreciation begins when an asset is paid for, provided it is used during the same year.
D) Depreciation begins in the year following the asset's acquisition.
B) Depreciation begins when an asset is placed in service, regardless of when it was purchased.
Which statement most accurately describes the limitations of Section 179 and bonus depreciation?
A) Both deductions may exceed taxable business income, but only section 179 is subject to a dollar limitation.
B) Both deductions are subject to dollar limitations, but only bonus depreciation may exceed taxable business income.
C) Section 179 is subject to dollar and business-income limitations, while bonus depreciation is generally not subject to either.
D) Section 179 is subject to a business-income limitation, while bonus depreciation is subject to a dollar limitation.
C) Section 179 is subject to dollar and business-income limitations, while bonus depreciation is generally not subject to either.
What is the tax rule called when inherited property receives a basis equal to its FMV at the date of death?"
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A business sells equipment that it has used in operations for three years at a gain. The equipment has been depreciated during its useful life.
Which statement regarding §1245 depreciation recapture is correct?
A) The entire recognized gain is treated as ordinary income, regardless of the depreciation previously claimed.
B) The recognized gain is treated as §1231 gain, unless the asset was fully depreciated before its sale.
C) The lesser of the recognized gain or depreciation previously claimed is treated as ordinary income.
D) The lesser of the recognized gain or depreciation previously claimed is treated as long-term capital gain.
C) The lesser of the recognized gain or depreciation previously claimed is treated as ordinary income.
A taxpayer exchanges business property in a transaction that qualifies for tax deferral under 1031.
Which statement regarding the exchange is correct?
A) The taxpayer recognizes no gain or loss because the exchange does not result in an economic gain or loss.
B) The taxpayer may realize a gain or loss but defer recognition because the investment continues in qualifying replacement property.
C) The taxpayer must recognize any realized gain but may defer losses until the replacement property is sold.
D) The taxpayer may defer realized gains only when the replacement property's fair market value exceeds the adjusted basis of the original property.
B) The taxpayer may realize a gain or loss but defer recognition because the investment continues in qualifying replacement property.
When would TPP use the mid quarter convention
More than 40% of the year's tangible personal property basis is placed in service during the fourth quarter.
Which statement regarding §179 and bonus depreciation is INCORRECT?
A) Both deductions may apply to qualifying new or used business equipment.
B) Both deductions may be claimed on qualifying property with a recovery period of 20 years or less.
C) Both deductions allow taxpayers to carry forward unused amounts when taxable business income is insufficient.
D) Both deductions may allow taxpayers to recover the entire cost of qualifying property in the year it is placed in service.
C) Both deductions allow taxpayers to carry forward unused amounts when taxable business income is insufficient.
Amy receives property as a gift from her father. Her father's adjusted basis in the property was $75,000, but its fair market value at the time of the gift was $50,000.
Amy later sells the property for $62,000.
What is Amy's recognized gain or loss on the sale?
$0
Since the selling price falls between the donor's adjusted basis ($75,000) and the FMV at the date of the gift ($50,000), Amy recognizes neither a gain nor a loss.
A business purchased equipment for $150,000 and claimed $65,000 in depreciation deductions. After holding the equipment for four years, the business sells it for $175,000.
Calculate the amount of ordinary income under section 1245 and the remaining 1231 gain.
Adjusted basis:
$150,000 − $65,000 = $85,000
Realized gain:
$175,000 − $85,000 = $90,000
1245 depreciation recapture:
Lesser of $90,000 gain or $65,000 depreciation = $65,000 ordinary income
Remaining 1231 gain:
$90,000 − $65,000 = $25,000 §1231 gain
Amy owns a commercial building with an adjusted basis of $180,000 and a fair market value of $260,000.
She exchanges the building for another qualifying commercial property worth $230,000 and receives $30,000 in cash.
Calculate the realized gain, recognized gain, deferred gain, and adjusted basis of the replacement property.
Realized gain:
$260,000 − $180,000 = $80,000
Recognized gain:
Lesser of $80,000 realized gain or $30,000 boot received = $30,000
Deferred gain:
$80,000 − $30,000 = $50,000
Replacement property's basis:
$230,000 − $50,000 = $180,000
A company purchases a 5-year MACRS asset for $120,000 and places it in service during the second quarter of 2026. The mid-quarter convention applies.
Assuming 200% declining balance and no special depreciation deductions, calculate first-year depreciation.
$120,000 × 40% × 7.5/12 = $30,000
A business places $4,390,000 of qualifying equipment in service during 2026. The business has $2,100,000 in taxable business income before the §179 deduction.
Calculate the maximum §179 deduction allowed in 2026 and the amount carried forward to future years.
Phaseout:
$4,390,000 − $4,090,000 = $300,000
Maximum §179 after phaseout:
$2,560,000 − $300,000 = $2,260,000
Business income limitation: $2,100,000
§179 Deduction: $2,100,000
§179 Carryforward: $160,000
Vasthi purchased land for personal use for $95,000. Several years later, she converted the land to business use when its fair market value was $135,000.
Three years after the conversion, Vasthi sold the land for $160,000.
What is Vasthi's recognized gain or loss on the sale?
Because the property appreciated in value before conversion, Vasthi uses her original cost basis to calculate the gain.
$160,000 − $95,000 = $65,000 gain
A business sells a commercial building that it has held for several years and depreciated using the straight-line method.
Which statement regarding the taxation of the gain is correct?
A) The portion of the gain attributable to depreciation is treated as ordinary income, while the remaining gain may qualify for preferential capital gains rates.
B) The portion of the gain attributable to depreciation may be subject to a maximum 25% tax rate, while the remaining gain may qualify for preferential capital gains rates.
C) The portion of the gain attributable to depreciation may qualify for preferential capital gains rates, while the remaining gain is taxed at ordinary income rates.
D) The portion of the gain exceeding accumulated depreciation may be subject to a maximum 25% tax rate, while the remaining gain is taxed at ordinary income rates.
B) The portion of the gain attributable to depreciation may be subject to a maximum 25% tax rate, while the remaining gain may qualify for preferential capital gains rates.
A taxpayer exchanges investment real estate in a qualifying like-kind exchange. Which statement regarding the timing requirements is correct?
A) The taxpayer must identify replacement property within 45 days and complete the exchange within 180 days, both measured from the date the original property is transferred.
B) The taxpayer must identify replacement property within 45 days of transferring the original property and complete the exchange within 180 days of identifying the replacement property.
C) The taxpayer must identify replacement property within 180 days and complete the exchange within 45 days, both measured from the date the original property is transferred.
D) The taxpayer must identify replacement property within 45 days and complete the exchange within 180 days, but the deadlines may be extended if the replacement property has been identified.
A) The taxpayer must identify replacement property within 45 days and complete the exchange within 180 days, both measured from the date the original property is transferred.
A taxpayer purchases a vehicle used 70% for business during 2026. In 2027, business use decreases to 45%.
What depreciation method must the taxpayer use in 2027, and why?
Straight-line depreciation, because business use no longer exceeds 50%.
A taxpayer starts a new business in 2026 and incurs $53,000 in qualifying startup costs. The business officially begins operations on April 1, 2026.
Assuming the taxpayer elects to deduct the maximum amount allowed, calculate the total startup cost deduction for 2026.
Step 1: Calculate immediate deduction.
$53,000 − $50,000 = $3,000 phaseout
$5,000 − $3,000 = $2,000 immediate deduction
Step 2: Calculate amortization.
$53,000 − $2,000 = $51,000
$51,000 ÷ 180 × 10 months = $2,833.33
Step 3: Total deduction.
$2,000 + $2,833.33 = $4,833.33
Meris receives property as a gift from her father. Her father's adjusted basis in the property was $120,000, but its fair market value at the time of the gift was $85,000.
Meris later sells the property in three independent scenarios:
A) She sells the property for $145,000.
B) She sells the property for $100,000.
C) She sells the property for $65,000.
Calculate the recognized gain or loss in each scenario.
A) $25,000 gain
$145,000 − $120,000 = $25,000
B) $0 gain or loss
The selling price falls between the donor's adjusted basis and the FMV at the date of the gift.
C) $20,000 loss
$65,000 − $85,000 = ($20,000)
A business reports a net §1231 gain of $85,000 in 2026. During the previous six years, the business reported net §1231 losses of $40,000 in 2020, $10,000 in 2021, $30,000 in 2023, and $25,000 in 2025. The business also reported net §1231 gains of $20,000 in 2022 and $15,000 in 2024. Assuming the prior gains were applied against earlier unrecaptured §1231 losses under the five-year lookback rule, calculate how much of the 2026 gain is treated as ordinary income and how much qualifies as long-term capital gain.
$65,000
Ordinary income
$20,000
Long-term capital gain
Vasthi owns a warehouse used in her business with an adjusted basis of $325,000. During 2026, the warehouse is completely destroyed by a hurricane.
Her insurance company pays her $500,000 for the destroyed property.
Within the required replacement period, Vasthi purchases a qualifying replacement warehouse for $440,000.
Step 1: Realized Gain
$500,000 − $325,000 = $175,000
Step 2: Recognized Gain
$500,000 − $440,000 = $60,000
Step 3: Deferred Gain
$175,000 − $60,000 = $115,000
Step 4: Adjusted Basis of Replacement Property
$440,000 − $115,000 = $325,000
A company places several depreciable assets in service during 2026. Which statement regarding MACRS conventions is INCORRECT?
A) The half-year convention generally applies to tangible personal property unless the mid-quarter convention is required.
B) The mid-quarter convention may apply to property placed in service before the fourth quarter, even if less than 40% of the year's total depreciable property was placed in service during the fourth quarter.
C) The mid-month convention generally applies to real property regardless of which month the property is placed in service.
D) The mid-quarter convention applies only to tangible personal property placed in service during the fourth quarter when the 40% threshold is exceeded.
D) The mid-quarter convention applies only to tangible personal property placed in service during the fourth quarter when the 40% threshold is exceeded.
A mining company purchases a mineral deposit and begins claiming cost depletion. After several years of extraction, a geological survey reveals that the estimated remaining recoverable minerals have changed.
Which statement regarding cost depletion is correct?
A) The company must recalculate depletion using the original cost and revised total estimated reserves, applying the new rate to all years.
B) The company must calculate a new depletion rate using the remaining adjusted basis and revised estimated recoverable reserves, applying the new rate prospectively.
C) The company must calculate a new depletion rate using the original cost and revised remaining reserves, applying the new rate only to future years.
D) The company must calculate a new depletion rate using the remaining adjusted basis and original estimated reserves, applying the new rate prospectively.
B) The company must calculate a new depletion rate using the remaining adjusted basis and revised estimated recoverable reserves, applying the new rate prospectively.
A taxpayer receives property through inheritance, another property as a gift, and converts a third property from personal use to business use.
Which statement regarding the basis of these properties is INCORRECT?
A) Inherited property generally receives a basis equal to its FMV at the date of death, even if that value is lower than the decedent's adjusted basis.
B) Gifted property generally retains the donor's adjusted basis for calculating gains, but may use the FMV at the date of the gift when calculating losses.
C) Property converted from personal use to business use generally retains its original adjusted basis for calculating gains, but may use its lower FMV at conversion when calculating losses.
D) Property received as a gift generally uses the donor's adjusted basis for calculating gains and losses, unless its FMV at the date of the gift exceeds the donor's adjusted basis.
D) Property received as a gift generally uses the donor's adjusted basis for calculating gains and losses, unless its FMV at the date of the gift exceeds the donor's adjusted basis.
A business purchased equipment for $250,000 and claimed $90,000 in depreciation deductions. After holding the equipment for six years, the business sells it for $310,000.
During the previous five years, the business had $35,000 in unrecaptured net §1231 losses.
Assume the business has no other §1231 gains or losses during the current year.
Calculate the total recognized gain and determine how much is treated as ordinary income versus long-term capital gain.
Step 1: Calculate adjusted basis
$250,000 − $90,000 = $160,000
Step 2: Calculate total recognized gain
$310,000 − $160,000 = $150,000
Step 3: Calculate §1245 recapture
Lesser of:
Recognized gain: $150,000
Depreciation taken: $90,000
§1245 ordinary income: $90,000
Remaining §1231 gain:
$150,000 − $90,000 = $60,000
Step 4: Apply the five-year lookback rule
Unrecaptured §1231 losses: $35,000
Additional ordinary income: $35,000
Remaining long-term capital gain:
$60,000 − $35,000 = $25,000
Meris purchased business equipment for $300,000 and claimed $100,000 in depreciation. After holding the equipment for five years, she sells it for $450,000 through an installment sale. The buyer agrees to pay $90,000 in 2026, $150,000 in 2027, $120,000 in 2028, and $90,000 in 2029. Assuming no interest, selling expenses, or other §1231 activity, calculate the ordinary income from depreciation recapture in 2026, the gross profit percentage, and the total gain recognized in each year from 2026 through 2029.
Total realized gain: $250,000
Depreciation recapture: $100,000 ordinary income in 2026
Gross profit percentage: ($250,000 − $100,000) ÷ $450,000 = 33.33%
Total gain recognized:
2026: $130,000
2027: $50,000
2028: $40,000
2029: $30,000