IRS Enrolled Agent - SEE Part 2: Businesses (SEE-2) practice questions

Marlowe Fabrication LLC, a calendar-year business, buys and places in service a single new metal lathe (7-year MACRS property) for 100,000 dollars on 3 March 2024. It is the only asset bought that year, so the mid-quarter convention does not apply. The firm elects out of both Section 179 and bonus depreciation and uses the standard 200 percent declining balance method with the half-year convention. What is its first-year MACRS depreciation deduction on the lathe?

• A14,290 dollars, using the 14.29 percent first-year rate that the MACRS table sets for 7-year recovery property under the half-year convention.check_circle Correct
• B20,000 dollars, using the 20.00 percent first-year rate that applies to 5-year recovery property under the half-year convention.
• C7,145 dollars, by taking the 14.29 percent 7-year rate and then halving it again because the asset was held for only part of the year.
• D28,580 dollars, by applying the 200 percent declining balance rate of two divided by seven to the full 100,000 dollar basis with no convention adjustment.

Why A is correct: A metal lathe is 7-year MACRS property, and the half-year-convention table gives a 14.29 percent first-year rate, so 100,000 multiplied by 14.29 percent equals 14,290 dollars.

Why B is wrong: Applying the 5-year first-year rate of 20 percent is a common slip when the recovery period is misread, but a metal lathe is 7-year property, so the correct first-year rate is 14.29 percent, not 20 percent.

Why C is wrong: Halving the table percentage is tempting if the candidate thinks the half-year convention must be applied on top of the rate, but the published 14.29 percent rate already builds in the half-year convention, so applying a second half is double-counting.

Why D is wrong: Computing two divided by seven of basis (28.58 percent) looks like the declining balance method, but it ignores the half-year convention that halves the first-year deduction, which the 14.29 percent table rate already reflects.

Cedarpoint Joinery Inc, a calendar-year C corporation, places in service 3,300,000 dollars of qualifying new Section 179 property during 2024 and has taxable income from the business well above any expense it could claim. For 2024 the Section 179 dollar limit is 1,220,000 dollars and the investment phase-out begins once qualifying property placed in service exceeds 3,050,000 dollars. What is the maximum Section 179 deduction Cedarpoint may elect for 2024?

• A1,220,000 dollars, because taxable income exceeds the limit and the firm therefore takes the full indexed dollar cap with no reduction.
• B970,000 dollars, because the limit is reduced by the 250,000 dollars of qualifying property placed in service above the 3,050,000 dollar phase-out threshold.check_circle Correct
• C0 dollars, because total qualifying property of 3,300,000 dollars exceeds the 3,050,000 dollar threshold, which disqualifies the corporation from any Section 179 election.
• D1,205,000 dollars, by reducing the 1,220,000 dollar limit by 15,000 dollars representing 6 percent of the property placed in service over the threshold.

Why A is wrong: Taking the full 1,220,000 dollar cap ignores the investment-based phase-out, which reduces the limit dollar for dollar once property placed in service passes 3,050,000 dollars, so the full cap is not available here.

Why B is correct: Property of 3,300,000 dollars exceeds the 3,050,000 dollar threshold by 250,000 dollars, and the 1,220,000 dollar limit drops dollar for dollar by that excess, giving 1,220,000 minus 250,000, or 970,000 dollars.

Why C is wrong: Treating the threshold as a hard cliff is a common error, but crossing it only reduces the limit by the excess; the deduction reaches zero only when the excess equals or passes the dollar limit, which it does not here.

Why D is wrong: Reducing the limit by a percentage of the excess misstates the rule, which subtracts the full excess amount dollar for dollar, not a fraction of it, so 970,000 dollars is correct rather than 1,205,000 dollars.

Brightwater Logistics LLC, a calendar-year partnership, buys a new 5-year MACRS delivery van for 80,000 dollars and places it in service on 12 June 2024. The partnership makes no Section 179 election but claims the bonus depreciation allowed for property placed in service in 2024, then computes regular MACRS on the remaining basis using the 20.00 percent first-year rate for 5-year property. The 2024 bonus rate is 60 percent. What is the total first-year depreciation deduction on the van?

• A48,000 dollars, taking only the 60 percent bonus allowance on the 80,000 dollar basis and stopping there.
• B64,000 dollars, by applying an 80 percent bonus rate to the 80,000 dollar basis as the allowance for property placed in service in 2024.
• C54,400 dollars, by taking 60 percent bonus of 48,000 dollars plus 20 percent of the remaining 32,000 dollar basis, which is 6,400 dollars.check_circle Correct
• D16,000 dollars, by taking 20 percent MACRS on the full 80,000 dollar basis and adding no bonus depreciation.

Why A is wrong: Stopping at the 48,000 dollar bonus amount is tempting, but after bonus the taxpayer still applies regular MACRS to the remaining 32,000 dollar basis, which adds a further deduction the candidate has omitted.

Why B is wrong: Using an 80 percent bonus rate reflects the 2023 percentage, not 2024; the bonus rate steps down to 60 percent for property placed in service in 2024, so 64,000 dollars overstates the deduction.

Why C is correct: Bonus depreciation of 60 percent on 80,000 dollars is 48,000 dollars, leaving a 32,000 dollar basis on which the 20 percent first-year MACRS rate gives 6,400 dollars, for a total of 54,400 dollars.

Why D is wrong: Computing 20 percent MACRS on the whole basis ignores the bonus election the partnership made, which is claimed first and reduces basis before regular MACRS, so 16,000 dollars understates the first-year deduction.