MODULE 33 TAXES: 'INDIVIDUAL
payers below a certain income level from the limitations
imposed by the passive activity rules.
77. (d) The requirement is to determine the correct
statement regarding an individual taxpayer's passive losses
relating to rental real estate activities that cannot be cur-
rently deducted. Generally. losses from passive activities
can only be used to offset income from passive activities. If
there is insufficient passive activity income to absorb pas-
sive activity losses, the unused losses are carried forward
indefinitely or until the property is disposed of in a taxable
I1lmsaction. Answers (a) and (c) are incorrect because un-
used passive losses are never carried back to prior taxable
years. Answer (b) is incorrect because there is no maximum
carryforward period.
I.F. Depreciation, Depletion, and Amortization
78. (a) The requirement is to determine the maximum
amount of Sec. 179 expense election that Aviation Corp.
will be allowed to deduct for 2009, and the maximum
amount of expense election that it can carry over to 2010.
Sec. 179 permits a taxpayer to elect to treat up to $250,000
(for 2009) of the cost of qualifying depreciable personal
property as an expense rather than as a capital expenditure.
However, the $250,000 maximum is reduced dollar-for-
dollar by the cost of qualifying property placed in service
during the taxable year that exceeds $800,000. Here, the
maximum amount that can be expensed is $250,000 -
($820,000 - $800,000) = $230,000 for 2009. However, this
amount is further limited as a deduction for 2009 to A via-
tion's taxable income of $195,000 before the Sec. 179 ex-
pense deduction. The remainder ($230,000 - $195,000 =
$35,000) that is not currently deductible because of the tax-
able income limitation can be carried over and will be de-
ductible subject to the taxable income limitation in 2010.
79. (c) The requirement is to determine which condi- ,
tions must be satisfied to enable a taxpayer to expense the
cost of new or used tangible depreciable personal property
under Sec. 179. Taxpayers may elect to expense up to
$250,000 of the cost of new or used tangibledepreciable
personal property placed in service during the taxable year.
To qualify, the property must be acquired by purchase from
an unrelated party for use in the taxpayer's active trade or
business. The maximum cost that can be expensed of
$250,000 is reduced dollar-for-dollar by the cost of
qualifying property that is placed in service during the year
that exceeds $800,000. Additionally, the amount that can be
expensed is further limited to the aggregate taxable income
derived from the active conduct of.any trade or business of
the taxpayer.
80. (a) The requirement is to determine the MACRS
deduction for the furniture and fixtures placed in service
during 2009. The furniture and fixtures qualify as seven-
year property and under MACRS will be depreciated using
the 200% declining balance method. Normally, a half-year
convention applies to the year of acquisition. However, the
rnidquarter convention must be used if more than 40% of all
personal property is placed in service during the last quarter
of the taxpayer's taxable year. Since this was Krol's only
acquisition of personal property and the property was placed
in service during the last quarter of Krol' s calendar year, the
midquarter convention must be used. Under this convention,
property is treated as placed in service during the middle of
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the quarter in which placed in service. Since the furniture
and fixtures were placed in service in November, the amount
of allowable MACRS depreciation is limited to $56,000 x
217 x 118 = $2,000.
81. (b) The requirement is to determine Sullivan's
MACRS deduction for the apartment building in 2009. The
MACRS deduction for residential real property placed in
service during 2009 must be determined using the mid-
month convention (i.e., property is treated as placed in ser-
vice at the midpoint of the month placed in service) and the
straight-line method of depreciation over a 27.5-year recov-
ery period. Here, the $360,00D cost must first be reduced by
the $30,000 allocated to the land, to arrive at a basis for de-
preciation of $330,000. Since the building was placed in
service on June 29, the mid-month convention results in 6.5
months of depreciation for 2009. The MACRS deduction
for 2009 is [$330,000 x (6.5 months)/(27.5 x 12 months)] =
$6,500.
82. (c) The requirement is to determine the depreciation
convention that must be used when a calendar-year tax-
payer's only acquisition of equipment during the year occurs
during November. Generally, a half-year convention applies
to depreciable personal property, and a mid-month conven-
tion applies to depreciable real property. Under the half-
year convention, a half-year of depreciation is allowed for
the year in which property is placed in service, regardless of
when the property is placed in service during'the year, and a
half-year of depreciation is allowed for the year in which the
property is disposed of. However, a taxpayer must instead
use a midquarter convention if more than 40% of all depre-
ciable personal property acquired during the year is placed
in service during the last quarter of the taxable year. Under
this convention, property is treated as placed in service (or
disposed of) in the middle of the quarter in which placed in
service (or disposed of). Since Data Corp. is a calendar-year
taxpayer and its only acquisition of depreciable personal
property was placed in service during October (i.e., the last
quarter of its taxable year), it must use the midquarter
convention, and will only be allowed a half-quarter of de-
preciation of its office equipment for 2009.
83. (b) The requirement is to determine the correct
statement regarding the modified accelerated cost recovery
system (MACRS) of depreciation for property placed in
service after 1986. Under MACRS, salvage value is com-
pletely ignored for purposes of computing the depreciation
deduction, which results in the recovery of the entire cost of
depreciable property. Answer (a) is incorrect because used
tangible depreciable property is depreciated under MACRS.
Answer (c) is incorrect because the cost of some depreciable
realty must be depreciated using the straight-line method.
Answer (d) is incorrect because the cost of some depreciable
realty is included in the ten-year (e.g., single purpose agri-
cultural and horticultural structures) and twenty-year (e.g.,
farm buildings) classes.
84. (a) The requirement is to determine the correct
statement regarding the half-year convention under the gen-
eral MACRS method. Under the half-year convention that
generally applies to depreciable personal property, one-half
of the first year's depreciation is allowed in the year in
which the property is placed in service, regardless of when
the property is placed in service during the year, and a half-
year's depreciation is allowed for the year in which the