Duncan’s Diamond Bit Drilling Corporation (Duncan) purchased the following assets in 2021. Assume its taxable income was $60,000 for purposes of computing the §179 expense (assume no bonus depreciation).

Asset		Purchase Date	Original Basis
Drill Bits (5-year property)		January 25	$100,000
Drill Bits (5-year property)		July 25	120,000
Commercial Building		April 22	240,000

Land April 22 40,000

a) What is the maximum amount of §179 expense Duncan may deduct for 2021?

b) What is Duncan’s maximum depreciation deduction for 2021 (including §179 but ignoring bonus depreciation)?

c) Assume the facts are the same as (a) and (b). Duncan does not purchase any additional assets in 2021 and does not sell any of the assets that it purchased in 2021. What is Duncan’s depreciation deduction in 2022?

d) Assume the facts are the same as (a) and (b). Duncan sells the land and commercial building on October 31, 2022 for $320,000. $50,000 of the sale price is allocated to the land. (1) What is Duncan’s depreciation deduction in 2022 (including depreciation on the building)? (2) What is the realized gain on the sale of the land and building?

e) Assume the facts are the same as (a) and (b), except that Duncan does not elect any amount under §179 and does not elect out of bonus depreciation (Duncan takes the maximum amount of bonus depreciation allowed). What is Duncan’s maximum depreciation deduction in 2021?

Problem 2

Duke’s Diamond Bit Drilling Corporation (Duke) purchased the following assets in 2021. Assume its taxable income was $3,000,000 for purposes of computing the §179 expense (assume no bonus depreciation).

Asset		Purchase Date	Original Basis
Equipment (7-year property)		November 25	$2,800,000
Drill Bits (5-year property)		July 25	120,000
Commercial Building		April 22	240,000

Land April 22 40,000

f) What is the maximum amount of §179 expense Duke may deduct for 2021?

g) What is Duke’s maximum depreciation deduction for 2021 (including §179 but ignoring bonus depreciation)?

h) If the November equipment’s basis was $3,800,000, what is the maximum amount of §179 expense Duncan may deduct for 2021?

i) Assume the facts are the same as (f) and (g). Duke sells the July drill bits on April 4, 2022 for $110,000. (1) What is Duke’s depreciation deduction in 2022 (including depreciation on the July drill bits)? (2) What is the realized and recognized gain on the sale of July drill brits?

Problem 3

Moped, Inc. (a C corporation) manufactures and distributes high-tech biking gadgets. It has decided to streamline some of its operations so that it will be able to be more productive and efficient. Because of this decision it has entered into several transactions during the year.

Required:

Part 1:

Determine the gain/loss realized and recognized in the current year for each of these events. Also determine whether the gain/loss recognized is §1231, capital, or ordinary.

1. a. Moped Inc. sold a machine that it used to make computerized gadgets for $26,200 cash. It originally bought the machine for $19,200 three years ago and has taken $8,000 depreciation.
2. b. Moped Inc. held stock in ABC Corp. which had a value of $12,000 at the beginning of the year. That same stock had a value of $15,230 at the end of the year.
3. c. Moped In sold some of its inventory for $7,000 cash. This inventory had a basis of $5,000.
4. d. Moped Inc. disposed of an office building with a fair market value of $75,000 for another office building with a fair market value of $55,000 and $20,000 in cash. It originally bought the office building seven years ago for $62,000 and has taken $15,000 in depreciation.
5. e. Moped Inc. sold land it held for investment for $28,000. It originally bought the land for $32,000.
6. f. Moped Inc. sold another machine for a note receivable in four annual installments of $12,000. The first payment was received in the current year. It originally bought the machine two years ago for $32,000 and had claimed $9,000 in depreciation expense against the machine.
7. g. Moped Inc. sold stock it held for eight years for $2,750. It originally purchased the stock for $1,950.
8. h. Moped Inc. sold another machine for $7,300. It originally purchased this machine six months ago for $9,000 and has claimed $830 in depreciation expense against the asset.

Part 2:

From the recognized gains/losses determined in part 1, determine the net §1231 gain/loss and the net ordinary gain/loss Moped will recognize on its tax return. Moped, Inc. also has $2,000 of unrecaptured §1231 losses from previous years. Clearly show your work and label your answer. Clearly show the amount and character of gain recognized on each asset.