Question: Discuss why Congress limits the amount of

> In January, Prahbu purchases a new machine for use in an existing production line of his manufacturing business for $90,000. 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 aft

> Ralph invited a potential client to dinner and the theatre. Ralph paid $250 for the dinner and $220 for the theatre tickets in advance. They first went to dinner and then they went to the theatre. a. What amount can Ralph deduct if, prior to the dinner,

> Emily purchased a building to store inventory for her business. The purchase price was $760,000. Beyond this, Emily incurred the following necessary expenses to get the building ready for use: $2,000 to repair minor leaks in the roof, $5,000 to make the

> 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

> Last Chance Mine (LC) purchased a coal deposit for $750,000. It estimated it would extract 12,000 tons of coal from the deposit. LC mined the coal and sold it, reporting gross receipts of $1 million, $3 million, and $2 million for years 1 through 3, resp

> Bethany incurred $20,000 in research and experimental costs for developing a specialized product during July of year 1. Bethany went through a lot of trouble and spent $10,000 in legal fees to receive a patent for the product in August of year 3. Bethany

> 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: a. What is the total amount of the start-up costs and organizational expenditure

> 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 amortiz

> 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.

> Paul Vote purchased the following assets this year (ignore §179 expensing and bonus depreciation when answering the questions below): a. What is Paul’s allowable MACRS depreciation expense for the property? b. What is Paul&a

> Burbank Corporation (calendar-year end) acquired the following property this year: a. Assuming no bonus or §179 expense, what is Burbank’s maximum cost recovery for this year? b. Assuming Burbank would like to maximize its c

> Lina purchased a new car for use in her business during 2016. 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 state

> Indicate the amount (if any) that Josh can deduct as ordinary and necessary business deductions in each of the following expenditures and explain your solution. a. Josh borrowed $50,000 from the First State Bank using his business assets as collateral.

> Assume that Ernesto purchased a laptop computer on July 10 of year 1 for $3,000. In year 1, 80 percent of his computer usage was for his business and 20 percent was for computer gaming with his friends. This was the only asset he placed in service during

> Phil owns a ranch business and uses 4-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 4-Wheeler that he bought on January 15 for $6,500. Of

> 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 their cost recovery, as

> Assume that Sivart Corporation has 2016 taxable income of $750,000 before the §179 expense and acquired the following assets during 2016: a. What is the maximum amount of §179 expense Sivart may deduct for 2016? b. What is the max

> Woo lard Inc. has taxable income in 2016 of $150,000 before any depreciation deductions (§179, bonus, or MACRS) and acquired the following assets during the year: a. If Woo lard elects $50,000 of §179, what is Woo lardâ&#128

> Chaz Corporation has taxable income in 2016 of $312,000 before the §179 expense and acquired the following assets during the year: What is the maximum total depreciation expense that Chaz may deduct in 2016? Placed in Asset Service Basis

> Assume that ACW Corporation has 2016 taxable income of $1,000,000 before the §179 expenses, acquired the following assets during 2016 (assume no bonus depreciation): a. What is the maximum amount of §179 expense ACW may deduct for

> Dain’s Diamond Bit Drilling purchased the following assets this year. Assume its taxable income for the year was $53,000 before deducting any §179 expense (assume no bonus depreciation). a. What is the maximum amount of &Ac

> Assume that Timberline Corporation has 2016 taxable income of $240,000 before the §179 expense. a. What is the maximum amount of §179 expense Timberline may deduct for 2016? What is Timberline’s §179

> Assume that TDW Corporation (calendar year end) has 2016 taxable income of $650,000 before the §179 expenses, acquired the following assets during 2016: a. What is the maximum amount of §179 expense TDW may deduct for 2016? b. Wha

> Erin is considering switching her business from the cash method to the accrual method at the beginning of next year (year 1). Determine the amount and timing of her §481 adjustment assuming the IRS grants Erin’s request in the following alternative scena

> AMP Corporation (calendar year end) has 2016 taxable income of $900,000 before the §179 expense. During 2016, AMP acquired the following assets: a. What is the maximum amount of §179 expense AMP may deduct for 2016? b. What is the

> Carl purchased an apartment complex for $1.1 million on March 17 of year 1. $300,000 of the purchase price was attributable to the land the complex sits on. He also installed new furniture into half of the units at a cost of $60,000. a. What is Carl’s a

> 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

> 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?

> What depreciation methods are available for tangible personal property? Explain the characteristics of a business likely to adopt each method.

> 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?

> 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.

> 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.

> Explain why the expenses incurred to get an asset in place and operable should be included in the asset’s basis.

> 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.

> Nancy operates a business that uses the accrual method of accounting. In December, Nancy asked her brother, Hank, to provide her business with consulting advice. Hank billed Nancy for $5,000 of consulting services in year 0 (a reasonable amount), but Nan

> Is an asset’s initial or cost basis simply its purchase price? Explain.

> 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).

> Explain the differences and similarities between personal property, real property, intangible property, and natural resources. Also, provide an example of each type of asset.

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

> 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.

> Dustin has a contract to provide services to Dado Enterprises. In November of year 0, Dustin billed Dado $10,000 for the services he rendered during the year. Dado is an accrual-method proprietorship that is owned and operated by Dustin’s father. a. Wha

> 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.

> Are taxpayers allowed to claim depreciation expense on assets they use for both business and personal purposes? What are the tax consequences if the business use drops from above 50 percent in one year to below 50 percent in the next?

> Describe assets that are considered to be listed property. Why do you think the Internal Revenue Service requires them to be “listed”?

> Why might a business elect only the §179 expense it can deduct in the current year rather than claiming the full amount available?

> What strategies will help a business maximize its current depreciation deductions (including §179)? Why might a taxpayer choose not to maximize its current depreciation deductions?

> Compare and contrast the types of businesses that would benefit from and those that would not benefit from the §179 expense.

> Explain the two limitations placed on the §179 deduction. How are they similar? How are they different?

> This year William provided $4,200 of services to a large client on credit. Unfortunately, this client has recently encountered financial difficulties and has been unable to pay William for the services. Moreover, William does not expect to collect for hi

> Discuss why a small business might be able to deduct a greater percentage of the assets it places in service during the year than a larger business.

> Compare and contrast the differences between computing depreciation expense for tangible personal property and depreciation expense for real property under both the regular tax and alternative tax systems.

> If a taxpayer has owned a building for 10 years and decides that it should make significant improvements to the building, what is the recovery period for the improvements?

> 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.

> 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?

> 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

> 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?

> What are the two depreciation conventions that apply to tangible personal property under MACRS? Explain why Congress provides two methods.

> Compare and contrast the recovery periods used by MACRS and those used under generally accepted accounting principles (GAAP).

> Describe how you would determine the MACRS recovery period for an asset if you did not already know it.

> BCS Corporation is a calendar-year, accrual-method taxpayer. BCS was formed and started its business activities on January 1, year 0. It reported the following information for year 0. Indicate BCS’s deductible amount for year 0 in each of the following a

> Back in Boston, Steve has been busy creating and managing his new company, Teton Mountaineering (TM), which is based out of a small town in Wyoming. In the process of doing so, TM has acquired various types of assets. Below is a list of assets acquired d

> 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

> While completing undergraduate school work in information systems, Dallin Bourne and Michael Banks decided to start a business called ISys Answers which was a technology support company. During year 1, they bought the following assets and incurred the fo

> This year Amy purchased $2,000 of equipment for use in her business. However, the machine was damaged in a traffic accident while Amy was transporting the equipment to her business. Note that because Amy did not place the equipment into service during th

> Andrew is considering starting a business of constructing and selling prefabricated greenhouses. There are three very different methods to constructing these greenhouses, and each method results in different revenue and cost projections. Below, Andrew ha

> Renee manufactured and sold a “gadget,” a specialized asset used by auto manufacturers that qualifies for the domestic production activities deduction. Renee incurred $15,000 in direct expenses in the project which includes $2,000 of wages Renee paid to

> Assume Sarah is a cash-method calendar-year taxpayer, and she is considering making the following cash payments related to her business. Calculate the after-tax cost of each payment assuming she has a 25 percent marginal tax rate. a. $2,000 payment for

> Heather paid $15,000 to join a country club in order to meet potential clients. This year she paid $4,300 in greens fees when golfing with clients. Under what circumstances, if any, can Heather deduct the $15,000 cost of country club dues and the costs o

> Ryan is self-employed. This year Ryan used his personal auto for several long business trips. Ryan paid $1,500 for gasoline on these trips. His depreciation on the car if he was using it fully for business purposes would be $3,000. During the year, he dr

> Adam elects the accrual method of accounting for his business. What amount of deductions does Adam recognize in year 0 for the following transactions? a. Adam guarantees that he will refund the cost of any goods sold to a client if the goods fail within

> Travis is a professional landscaper. He provides his clients with a one-year (12-month) warranty for retaining walls he installs. In June of year 1, Travis installed a wall for an important client, Sheila. In early November, Sheila informed Travis that t

> This year (year 0) Elizabeth agreed to a three-year service contract with an engineering consulting firm to improve efficiency in her factory. The contract requires Elizabeth to pay the consulting firm $1,500 for each instance that Elizabeth requests its

> Kimberly is a self-employed taxpayer. She recently spent $1,000 for airfare to travel to Italy. What amount of the airfare is deductible in each of the following alternative scenarios? a. Her trip was entirely for personal purposes. b. On the trip, she

> Rebecca is a calendar year taxpayer who operates a business. She made the following business-related expenditures in December of year 0. Indicate the amount of these payments that she may deduct in year 0 under both the cash method of accounting and the

> Jeremy is a calendar-year taxpayer who sometimes leases his business equipment to local organizations. He recorded the following receipts this year. Indicate the extent to which these payments are taxable income to Jeremy this year if Jeremy is (1) a cas

> Nicole is a calendar-year taxpayer who accounts for her business using the cash method. On average, Nicole sends out bills for about $12,000 of her services at the first of each month. The bills are due by the end of the month, and typically 70 percent o

> In July of this year Stephen started a proprietorship called ECR (which stands for electric car repair). ECR uses the cash method of accounting and Stephen has produced the following financial information for this year. Fill out a draft of the front page

> Explain why a taxpayer might choose one tax year end over another if given a choice.

> What is the difference between a full tax year and a short tax year? Describe circumstances in which a business may have a short tax year.

> How do casualty loss deductions differ when a business asset is completely destroyed as opposed to the destruction of a personal-use asset?

> Explain the difference between calculating a loss deduction for a business asset that was partially damaged in an accident and a loss deduction for a business asset that was stolen or completely destroyed in an accident.

> Describe the limits placed on the domestic production activities deduction and explain the apparent reason for each limitation.

> Describe the calculation of the domestic production activities deduction.

> Explain why the domestic production activities deduction is sometimes described as an “artificial” expense and the apparent rationale for this deduction. How might a business begin to determine the domestic portion of revenues and expenses for products t

> In very general terms, how is the alternative minimum tax system different from the regular income tax system? How is it similar?

> Clyde lives and operates a sole proprietorship in Dallas, Texas. This year Clyde found it necessary to travel to Fort Worth (about 25 miles away) for legitimate business reasons. Is Clyde’s trip likely to qualify as “away from home,” and why would this d

> What expenses are deductible when a taxpayer combines both business and personal activities on a trip? How do the rules for international travel differ from the rules for domestic travel?

> Jenny uses her car for both business and personal purposes. She purchased the auto this year and drove 11,000 miles on business trips and 9,000 miles for personal transportation. Describe how Jenny will determine the amount of deductible expenses associa

> Tim employs three sales representatives who often take clients to dinner and provide entertainment in order to increase sales. This year Tim reimbursed the representatives $2,500 for the cost of meals and $8,250 for the cost of entertaining clients. Desc

> Jimmy is a sole proprietor of a small dry-cleaning business. This month Jimmy paid for his groceries by writing checks from the checking account dedicated to the dry-cleaning business. Why do you suppose Jimmy is using his business checking account rathe

> Jerry is a self-employed rock star and this year he expended $1,000 on special “flashy” clothes and outfits. Jerry would like to deduct the cost of these clothes as work-related because the clothes are not acceptable to Jerry’s sense of fashion. Under wh

> Provide an example of an expense associated with the production of tax-exempt income, and explain what might happen if Congress repealed the prohibition against deducting expenses incurred to produce tax-exempt income.

> What kinds of deductions are prohibited as a matter of public policy? Why might Congress deem it important to disallow deductions for expenditures against public policy?