Chapter 9 Property Acquisition and Cost Recovery

1. [LO 1] Explain the reasoning why the tax laws require the cost of certain assets to be capitalized and recovered over time rather than immediately expensed.

2. [LO 1] Explain the differences and similarities between personal property, real property, intangible property, and natural resources. Also, provide an example of each type of asset.

3. [LO 1] Explain the similarities and dissimilarities between depreciation, amortization, and depletion. Describe the cost recovery method used for each of the four asset types (personal property, real property, intangible property, and natural resources).

4. [LO 1] Is an asset’s initial or cost basis simply its purchase price? Explain.

5. [LO 1] Compare and contrast the basis of property acquired via purchase, conversion from personal use to business or rental use, a nontaxable exchange, gift, and inheritance.

6. [LO 1] Explain why the expenses incurred to get an asset in place and operable should be included in the asset’s basis.

7. [LO 1] Graber Corporation runs a long-haul trucking business. Graber incurs the following expenses: replacement tires, oil changes, and a transmission overhaul. Which of these expenditures may be deducted currently and which must be capitalized? Explain.

8. [LO 2] MACRS depreciation requires the use of a recovery period, method, and convention to depreciate tangible personal property assets. Briefly explain why each is important to the calculation.

9. [LO 2] Can a taxpayer with very little current year income choose to not claim any depreciation expense for the current year and thus save depreciation deductions for the future when the taxpayer expects to be more profitable?

10. [LO 2] [Planning] What depreciation methods are available for tangible personal property? Explain the characteristics of a business likely to adopt each method.

11. [LO 2] If a business places several different assets in service during the year, must it use the same depreciation method for all assets? If not, what restrictions apply to the business’s choices of depreciation methods?

12. [LO 2] Describe how you would determine the MACRS recovery period for an asset if you did not already know it.

13. [LO 2] [Research] Compare and contrast the recovery periods used by MACRS and those used under generally accepted accounting principles (GAAP).

14. [LO 2] What are the two depreciation conventions that apply to tangible personal property under MACRS? Explain why Congress provides two methods.

15. [LO 2] A business buys two identical tangible personal property assets for the same identical price. It buys one at the beginning of the year and one at the end of year. Under what conditions would the taxpayer’s depreciation on each asset be exactly the same? Under what conditions would it be different?

16. [LO 2] AAA, Inc., acquired a machine in year 1. In May of year 3, it sold the asset. Can AAA find its year 3 depreciation percentage for the machine on the MACRS table? If not, what adjustment must AAA make to its full year depreciation percentage to determine its year 3 depreciation?

17. [LO 2] There are two recovery period classifications for real property. What reasons might Congress have to allow residential real estate a shorter recovery period than nonresidential real property?

18. [LO 2] Discuss why Congress has instructed taxpayers that real property be depreciated using the mid-month convention as opposed to the half-year or mid-quarter conventions used for tangible personal property.