(BQ) Part 2 book Income tax fundamentals has contents: Accounting periods and methods and depreciation; capital gains and losses; withholding, estimated payments, and payroll taxes; partnership taxation; the corporate income tax; tax administration and tax planning.
Chapter Accounting Periods and Methods and Depreciation LEARNING OBJECTIVES After completing this chapter, you should be able to: LO 7.1 Determine the different accounting periods and methods allowed for tax purposes LO 7.2 Understand the concept of depreciation and be able to calculate depreciation expense using the MACRS tables LO 7.3 Identify when a Section 179 election to expense the cost of property may be used LO 7.4 Apply the limitations placed on depreciation of ‘‘listed property’’ and ‘‘luxury automobiles.’’ LO 7.5 Understand the tax treatment for goodwill and certain other intangibles LO 7.6 Determine whether parties are considered related for tax purposes, and classify the tax treatment of certain relatedparty transactions Overview Taxpayers operating a business, whether professional, rental, manufacturing, or another activity, should have an understanding of the accounting periods (calendar, fiscal, or short-period tax years) and accounting methods (cash, accrual, or hybrid methods) allowed This chapter begins by addressing how and when individual, partnership, and corporate taxpayers should report taxable income The calculation of depreciation of business assets is also an important issue for most businesses The Modified Accelerated Cost Recovery System (MACRS) is the tax depreciation method currently in use under U.S tax law There are many special depreciation provisions which are discussed in this chapter including bonus depreciation, the election to expense (Section 179), and the limitations on ‘‘listed property’’ and ‘‘luxury’’ automobiles The chapter covers the tax treatment of goodwill, going-concern value, covenants not to compete, franchises, trademarks, and other intangibles Also covered is the limitation on the deduction of losses realized in certain related-party transactions 7-1 Copyright 2010 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 7-2 Chapter Accounting Periods and Methods and Depreciation SECTION 7.1 ACCOUNTING PERIODS Individual Tax Years Almost all individuals file tax returns using a calendar year accounting period Individuals reporting tax income on a fiscal year other than a calendar year are extremely rare since the tax system is set up to accommodate calendar-year taxpayers However, there are no restrictions on an individual taking a tax year other than a calendar year The choice to file on a fiscal year basis must be made with an initial tax return, and books and records must be kept on that basis An individual may also request IRS approval to change to a fiscal year if certain conditions are met Partnership and Corporation Tax Years Many individual tax returns include the pass-through of income from partnerships, S corporations, and personal service corporations The income or loss from partnerships and S corporations is passed through on Schedule K-1 to the owners and taxed in the owners’ personal tax returns Partnerships and S corporations are not taxable entities, only reporting entities Similarly, wages are passed through to doctors, lawyers, accountants, and other professionals from personal service corporations owned by them Many individuals carry on businesses in partnership or corporate entities which comprise a large part of the income shown in their tax returns Other individuals make investments, including the operation of real estate rental activities, in these entities Because the pass-through of income and loss from partnerships and corporations plays such a large role in the taxation of many individuals, it is important to understand the rules governing the allowed accounting periods for these entities Partnerships and corporations had a great deal of freedom in selecting a tax year in the past However, Congress decided that this freedom often resulted in an inappropriate deferral of taxable income For example, if an individual taxpayer has a calendar tax year and receives income from a partnership with a tax year ending September 30, the taxpayer is able to defer months of partnership income for an indefinite period of time Therefore, the tax law was changed to include provisions that specify the required tax year for many partnerships and corporations, reducing the opportunities for deferring income The first set of provisions controlling the selection of tax years applies to partnerships They provide, generally, that a partnership must adopt the same tax year as that of the partners owning a majority interest (greater than 50 percent) in partnership profits and capital If a majority of the partners not have the same tax year, the partnership is required to adopt the tax year of all of its principal partners (partners with at least a percent interest in profits or capital) If the principal partners have different tax years, the partnership, generally, is required to use the least aggregate deferral method (see a standard tax service for this calculation) As a general rule, S corporations, which allow a pass-through of income and loss to individual shareholders in a manner similar to partnerships, must adopt a calendar year under similar rules EXAMPLE EFG Partnership is owned equally by three partners, Elm Corporation, Fig Corporation, and Grape Corporation The partners have the following tax year-ends: Partner Tax Year-End Elm Corporation Fig Corporation Grape Corporation September 30 September 30 December 31 Copyright 2010 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Section 7.1 Accounting Periods 7-3 Since partners owning a majority interest (Elm and Fig) have a September 30 year-end, the partnership, generally, must also adopt a September 30 year-end ◆ Partnerships and S corporations may elect to adopt a fiscal tax year different from the one prescribed by the rules above, if one of the following conditions is met: A business purpose for the fiscal year can be demonstrated, or The partnership or S corporation’s fiscal year does not result in a deferral period of more than months or more than the deferral period in existence before the change to the new fiscal year, whichever is shorter, and the partnership or S corporation agrees to make the annual ‘‘required tax payment.’’ Partnerships and S corporations generally not pay taxes The ‘‘required tax payment’’ is essentially a non-interest-earning deposit with the IRS The amount of the deposit is increased or decreased annually with additional payments or refunds This adjusted deposit provides the IRS with a cash flow approximately equal to the partners’ or S corporation shareholders’ deferred taxes as a result of using a fiscal year different from the one prescribed by law The deposit is required to be made by May 15 of the following year The only business purpose the IRS will recognize for the adoption of a fiscal tax year other than a calendar year for individuals, partnerships, or S corporations is the need to conform to a natural business year, based on the cyclical nature of income or inventory levels Normally, only seasonal businesses have natural business years EXAMPLE Sue owns a ski resort that has a natural business cycle from November to April each year The IRS would probably allow Sue to change her tax year to the fiscal year ended April 30 for the business purpose of corresponding to the natural business cycle ◆ The deferral period is the period from the end of the partnership’s or S corporation’s fiscal year to the end of the calendar year The estimated taxes are computed by multiplying the estimated deferral period taxable income by the highest individual tax rate plus percent, or 36 percent (35 percent maximum individual tax rate ỵ percent) for 2010 To estimate the deferral period taxable income, the taxpayer uses the average monthly income for the immediately preceding fiscal tax year (the base year) EXAMPLE Guava Associates is a partnership with a 3-month deferral period and taxable income of $60,000 for its prior fiscal tax year ended September 30 Guava’s average monthly income is $5,000 ($60,000/12 months), and the partnership’s estimated taxable income for the deferral period would be $15,000 ($5,000  months) To determine Guava’s estimated tax for the deferral period, the estimated taxable income would be multiplied by the highest individual tax rate plus percent The estimated tax for the deferral period would then be reduced by the amount of the required tax payment made by Guava for the previous year to arrive at Guava’s required tax payment for the current year The required tax payment is due on May 15 of the calendar year following the calendar year in which the partnership’s tax year ends ◆ EXAMPLE Lilac, Inc., is an S corporation with an October 31 year-end For the fiscal year ended October 31, 2010, Lilac, Inc., had taxable income of $240,000, and had made a required tax payment of $3,000 for the previous year For the fiscal year ending October 31, 2010, Lilac, Inc., Copyright 2010 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 7-4 Chapter Accounting Periods and Methods and Depreciation must make a required tax payment of $11,400 by May 15, 2011, as calculated below Estimated taxable income for the deferral period Estimated taxes for the deferral period Required tax payment $40,000 ¼ [($240,000/12 months)  months] $14,400 ¼ [$40,000 36% (max rate ỵ 1%)] $11,400 ẳ ($14,400$3,000) A personal service corporation is a corporation whose shareholder-employees (any employee who owns stock either directly or indirectly) provide personal services, such as medical, accounting, legal, actuarial, or consulting services, for the corporation’s patients or clients Personal service corporations generally must adopt a calendar year-end However, they may adopt or retain a fiscal year if one of the following requirements can be met: A business purpose for the fiscal tax year can be demonstrated, or The fiscal tax year results in a deferral period of no more than months or the deferral period of the tax year being changed, whichever is shorter, and (1) the corporation pays the shareholder-employees’ salaries for the deferral period at least proportionate to the salaries received for the most recent fiscal year, or (2) the corporation limits its deduction for shareholder employees’ salaries as described in the next paragraph EXAMPLE Jacaranda Corporation is a personal service corporation which paid its owner, Michael, a salary of $96,000 for the corporation’s fiscal year ended September 30, 2010 The corporation can continue to use its fiscal year and deduct all of Michael’s salary, providing that Michael receives salary during the period October through December 31, 2010, of at least $24,000 (3/12  $96,000) ◆ If the shareholder-employees not receive at least the required amount of salary for the deferral period, the corporation may, under certain conditions, retain its fiscal tax year In such a case, the deduction for salary expense for the fiscal year that includes the deferral period will be limited based on a required formula Once taxpayers have adopted a calendar or fiscal tax year, they must continue to use the same tax period unless approval for a change is granted by the IRS Short Period Taxable Income If taxpayers have a short year other than their first or last year of operations, they are required to annualize their taxable income to calculate the tax for the short period The tax liability is calculated for the annualized period and allocated back to the short period EXAMPLE Omoto Corporation obtains permission to change from a calendar year to a tax year ending August 31 For the short period, January through August 31, 2010, the corporation’s taxable income was $40,000 Omoto Corporation’s tax for the short period is calculated as follows: Step 1: Annualize the income Step 2: Tax on annualized income Step 3: Short period tax $40,000  12/8 ¼ $60,000 15%  $50,000 ¼ $ 7,500 25%  $10,000 ¼ 2,500 $10,000  8/12 $10,000 ¼ $ 6,667 ◆ Copyright 2010 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Section 7.2 Accounting Methods 7-5 The calculation of short-year taxable income for individuals requires special adjustments For example, deductions must be itemized for the short period, and the standard deduction is not allowed Exemptions also must be prorated for the short period As a general rule, individual taxpayers rarely change tax years Self-Study Problem 7.1 Juniper Corporation has taxable income of $48,000 for the short period ended on October 31, 2010 Calculate Juniper Corporation’s short-period tax for the period January through October 31, 2010 (The corporate tax rates are presented in Chapter 1.) $ _ ACCOUNTING METHODS SECTION 7.2 The tax law requires taxpayers to report taxable income using the method of accounting regularly used by the taxpayer in keeping his or her books, providing the method clearly reflects the taxpayer’s income The cash receipts and disbursements (cash) method, the accrual method, and the hybrid method are accounting methods specifically recognized in the tax law The cash receipts and disbursements method of accounting is used by most individuals for their overall method of accounting Generally wages, interest and dividend income, capital gains, and personal deductions are accounted for on the cash basis for individuals Individuals may choose to account for a particular business, such as a sole proprietorship reported on Schedule C, using the accrual or hybrid method of accounting If a taxpayer has two businesses, a different method of accounting may be used for each The choice of a tax accounting method is a general rule which will be overridden by tax laws for some items of income and expense For example, individuals reporting on a cash basis may deduct IRAs or pension contributions which are paid in cash in the year following the deduction, the income from savings bonds may be included in taxable income even though it is not received in cash, and prepaid interest may not be allowed as a deduction in the year paid The cash receipts and disbursements method results in the recognition of income when it is actually or constructively received; deductions are recognized in the year of payment Taxpayers on the accrual basis generally recognize income when it is earned, regardless of when it is received, and generally recognize deductions when they are incurred, regardless of when they are paid Cash basis taxpayers may not use the cash method for all expenses Tax provisions require cash basis taxpayers to use the accrual basis for prepayments of interest and rent Interest and rent expense cannot be deducted when they are prepaid Conversely, accrual basis taxpayers who receive certain types of prepaid income, such as rent in advance, must generally recognize the income on the cash basis EXAMPLE On December 1, 2010, Carol entered into a lease on a building for use in her business for $2,000 per month Under the lease terms, Carol pays months’ rent ($12,000) in advance on December Carol may deduct only month’s rent ($2,000) for the calendar year ended December 31, 2010, even though she is a cash basis taxpayer The taxpayer receiving the rent must report all $12,000 as income even if he or she is an accrual basis taxpayer ◆ The accrual method of accounting requires that income be recognized when (1) all events have occurred which fix the right to receive the income, and (2) the amount of Copyright 2010 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 7-6 Chapter Accounting Periods and Methods and Depreciation income can be estimated with reasonable accuracy An expense is deductible in the year in which all events have occurred that determine a liability exists and the amount can be estimated with reasonable accuracy Also, ‘‘economic performance’’ must occur before an accrual basis deduction can be claimed Economic performance means that all activities related to the incurrence of the liability have been performed For example, economic performance occurs for the purchase of services when the taxpayer uses the services A hybrid method of accounting involves the use of both the cash and accrual methods of accounting The tax law permits the use of a hybrid method, providing the taxpayer’s income is clearly reflected by the method An example of a hybrid method is the use of the accrual method for cost of products sold by the business and the use of the cash method for income and other expenses Taxpayers make an election to use an accounting method when they file an initial tax return and use that method To change methods, taxpayers must obtain permission from the IRS The cash method allows a certain amount of flexibility in tax planning Payment of business expenses may be accelerated before year-end to generate additional deductions, if desired In addition, billings for services may be postponed at yearend so payment won’t be received and included in income until the following year Some itemized deductions such as property taxes, state income taxes, and charitable contributions may also be paid before year-end for an immediate deduction Self-Study Problem 7.2A Melaleuca, Inc., is an accrual basis taxpayer with the following transactions during the calendar tax year: Accrual business income (except rent and interest) $63,000 Accrual business expenses (except rent) 42,000 Three months’ rent received on a leased building on November of this year 9,000 Prepaid interest for year received on a note on July of the current year 12,000 Six months’ rent paid on December for business property 7,200 Calculate Melaleuca, Inc.’s, net income for this year $ Restrictions on the Use of the Cash Method The tax law contains certain restrictions on use of the cash method of accounting Regular corporations, partnerships that have a regular corporation as a partner, and tax-exempt trusts with unrelated business income are generally prohibited from using the cash method However, this requirement does not apply to farming businesses, qualified personal service corporations, and entities with average annual gross receipts of $5,000,000 or less EXAMPLE Orange Associates is a manufacturer of panty hose with gross receipts of $25,000,000 Orange is a partnership which has Lemon Corporation as one of its partners Orange would not be allowed to use the cash method of accounting for tax purposes ◆ Copyright 2010 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Section 7.3 Depreciation 7-7 Self-Study Problem 7.2B Indicate whether or not each of the following entities may use the cash method for tax purposes during 2010 Yes or No A corporation engaged in orange farming _ A dentist with a personal service corporation A corporate car dealer with sales of $8,000,000 per year _ _ A corporation engaged in certified public accounting _ The IRS will pay informants cash rewards based on the value of the information they furnish and the amount recovered from the target of the investigation The official IRS form for snitching is Form 211, ‘‘Application for Reward for Original Information.’’ Informants may receive up to 30 percent of what the IRS eventually collects as a result of the information provided DEPRECIATION SECTION 7.3 Since many assets are used in the production of income over a number of years, income is not properly measured if the entire cost of these assets is deducted when the assets are purchased Depreciation is the accounting process of allocating and deducting the cost of an asset over a period of years The term depreciation does not necessarily mean physical deterioration or loss of value of the asset In fact, in some cases the value of the asset may increase while it is being depreciated Certain assets, such as land, cannot be depreciated for tax purposes These assets remain on the taxpayer’s records at their original cost It is important to distinguish maintenance expenses from depreciation Depreciation expense is the deduction of a portion of the original cost of the asset, whereas maintenance expenses are those expenditures incurred to keep the asset in good operating order For example, a taxpayer who purchases a truck for use in his business depreciates the cost of the truck over a period of years Maintenance costs such as tires and repairs are deducted in the year they are incurred The simplest method of depreciation is the straight-line method Use of the straightline method results in an equal portion of the cost being deducted in each period of the asset’s life Straight-line depreciation expense is calculated by dividing the cost by the asset’s estimated useful life The formula is: Cost ¼ Depreciation for the period Estimated useful life EXAMPLE Wilson purchases an asset for use in his business The asset cost $14,400 on October 1, 20X1, and has a 3-year (36-month) useful life Depreciation is calculated as follows: $14,400 ¼ $400 per month 36 months Copyright 2010 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 7-8 Chapter Accounting Periods and Methods and Depreciation The depreciation for each year is displayed in the following table: Year Months Rate X1 $400 X2 12 400 X3 12 400 X4 400 Total depreciation deduction Depreciation Deduction $ 1,200 4,800 4,800 3,600 $14,400 At the end of 36 months, the asset has a basis of ◆ The calculation of depreciation expense for tax purposes involves certain conventions and limitations which are not reflected in the previous example The example is intended to illustrate the concept of depreciation expense as an allocation of the cost of an asset over the asset’s estimated useful life If more information is needed about depreciation, see any standard financial accounting textbook The regular straight-line depreciation method described above may be used for financial accounting purposes and for calculating tax depreciation expense on assets acquired before 1981 The tax depreciation rules for assets acquired after 1980 are described in the following sections Self-Study Problem 7.3 On March 1, 20X1, Jack purchases office equipment for use in his business The equipment cost $3,500 and has a 5-year (60-month) estimated useful life Calculate the depreciation expense for the following years, assuming the regular straight-line depreciation method (used for financial accounting purposes or for pre-1981 assets) is used Year 20X1 20X2 20X3 20X4 20X5 20X6 Total SECTION 7.4 Depreciation Deduction $ $ $ $ $ $ $ MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS) For tax years after 1980, modifications in the tax law were made to encourage capital investment As a major part of this tax law change, the Accelerated Cost Recovery System (ACRS) was enacted and later modified in 1986 to become the current tax depreciation system referred to as the Modified Accelerated Cost Recovery System (MACRS) The current system allows taxpayers who invest in capital assets to write off an asset’s cost over a period designated in the tax law and to use an accelerated method for depreciation of assets other than real estate The minimum number of years over which the cost of an asset may be Copyright 2010 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Section 7.4 Modified Accelerated Cost Recovery System (MACRS) 7-9 TABLE 7.1 Recovery Period Recovery Method Assets 3-year 200% declining balance ADR midpoint life of years or less, excluding cars and light trucks 5-year 200% declining balance ADR midpoint life of more than years but less than 10 years, cars and light trucks, qualified technological equipment, certain energy property, R&D property, computers, and certain equipment 7-year 200% declining balance ADR midpoint life of 10 years or more but less than 16 years and property without an ADR life (e.g., most business furniture and certain equipment) 10-year 200% declining balance ADR midpoint life of 16 years or more but less than 20 years, including trees and vines 15-year 27.5-year 150% declining balance 150% declining balance Straight-line ADR midpoint life of 20 years or more but less than 25 years, including treatment plants ADR midpoint life of 25 years or more, other than real property with an ADR life of 27.5 years or longer and municipal sewers Residential rental real estate, elevators, and escalators 39-year Straight-line Other real property purchased generally on or after May 13, 1993 (previously 31.5-year straight-line) 20-year deducted (the recovery period) depends on the type of the property and the year in which the property was acquired The recovery periods are based on asset depreciation ranges (ADR) as published by the IRS A schedule of the recovery periods for assets acquired after 1986 is presented in Table 7.1 The recovery period classification for assets acquired after 1980, but before 1987, differs from the recovery period classification presented in Table 7.1 Under the MACRS system, taxpayers calculate the depreciation of an asset using a table which contains a percentage rate for each year of the property’s recovery period The yearly rate is applied to the cost of the asset The cost of the property to which the rate is applied is not reduced for prior years’ depreciation For personal property (all property except real estate) acquired after 1986, the percentages in Table 7.2 on the next page apply For depreciable property acquired after 1980, but before 1987, a separate table of rates applies EXAMPLE Assume a taxpayer acquires an asset (5-year class property) in 2010 with a cost basis of $15,000 and uses accelerated depreciation under MACRS The depreciation expense deduction for each year of the asset’s life is calculated (using the percentages in Table 7.2) as follows: Year Percent 2010 2011 2012 2013 2014 2015 Totals 20.00 32.00 19.20 11.52 11.52 5.76 100.00% Cost       $15,000 15,000 15,000 15,000 15,000 15,000 Deduction ¼ ¼ ¼ ¼ ¼ ¼ $ 3,000 4,800 2,880 1,728 1,728 864 $15,000 ◆ In the above example, note that even though the asset is 5-year class property, the cost is written off over a period of tax years This is due to the convention under MACRS which Copyright 2010 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 7-10 Chapter Accounting Periods and Methods and Depreciation TABLE 7.2 Accelerated Depreciation for Personal Property Assuming Half-Year Convention (For Property Placed in Service after December 31, 1986) Recovery 3-year 5-year 7-year 10-year 15-year 20-year Year (200% DB) (200% DB) (200% DB) (200% DB) (150% DB) (150% DB) 33.33 20.00 14.29 10.00 5.00 3.750 44.45 32.00 24.49 18.00 9.50 7.219 14.81* 19.20 17.49 14.40 8.55 6.677 7.41 11.52* 12.49 11.52 7.70 6.177 11.52 8.93* 9.22 6.93 5.713 .5.76 8.92 7.37 6.23 5.285 8.93 6.55* 5.90* 4.888 4.46 6.55 5.90 4.522 6.56 5.91 4.462* 10 6.55 5.90 4.461 11 3.28 5.91 4.462 12 .5.90 4.461 13 .5.91 4.462 14 .5.90 4.461 15 .5.91 4.462 16 .2.95 4.461 17 4.462 18 4.461 19 4.462 20 4.461 21 2.231 * Switch to straight-line depreciation provides for months of depreciation during the year the asset is first acquired and months of depreciation during the year the asset is sold or disposed of This convention is referred to as the half-year convention since only one-half year of depreciation is allowed in both the year of acquisition and the year of disposition, regardless of the actual acquisition and disposition dates The half-year convention is built into the rates in Table 7.2 For property (other than real estate) acquired after 1986, a taxpayer may elect to use straight-line depreciation instead of the accelerated depreciation rates under MACRS The taxpayer must use the straight-line MACRS tables for assets for which a straight-line election has been made The annual percentage rates to be applied to the cost of an asset for which a straight-line election under MACRS has been made are presented in Table 7.3 EXAMPLE On April 1, 2010, Lori purchased and placed in service a computer for use in her business The computer cost $18,000 and Lori elects to use straight-line depreciation over years instead of accelerated depreciation under MACRS The annual deduction for depreciation over the life of the computer is calculated below (the percentages are taken from Table 7.3) Year Percent 2010 2011 2012 2013 2014 2015 10.00 20.00 20.00 20.00 20.00 10.00 Totals 100.00% Cost       $18,000 18,000 18,000 18,000 18,000 18,000 Deduction ¼ ¼ ¼ ¼ ¼ ¼ $ 1,800 3,600 3,600 3,600 3,600 1,800 $18,000 Copyright 2010 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it S-74 Solutions to Self-Study Problems Copyright 2010 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Solutions to Self-Study Problems 01/01/10 S-75 Aspen Corporation 01/01/10 183,000 285,000 285,000 80,000 205,000 205,000 90,000 82,000 8,000 11,000 5,000 196,000 9,000 0 Copyright 2010 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it S-76 Solutions to Self-Study Problems 80,000 80,000 80,000 x x x x x x x x 9,000 10,000 10,000 Copyright 2010 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Solutions to Self-Study Problems S-77 19,000 Copyright 2010 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it S-78 Solutions to Self-Study Problems 35,000 Initial Return 10,000 10,000 125,000 5,000 120,000 18,000 183,000 24,000 140,000 19,000 183,000 19,000 19,000 19,000 9,000 10,000 19,000 19,000 Copyright 2010 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Solutions to Self-Study Problems S-79 9,000 10,000 10,000 Asper Corporation Janet Nall 100 Copyright 2010 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it S-80 Solutions to Self-Study Problems Copyright 2010 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it I-1 Index A Accelerated Cost Recovery System, §7.4 Accelerated Death Benefits, §2.6 Accident and Health Insurance, §2.9 Accounting Methods accrual method, §7.2 cash receipts and disbursements method, §7.2 changes in accounting method, §7.2 hybrid method, §7.2 prepaid interest, §7.2 prepaid rent, §7.2 Accounting Periods annual accounting periods, §7.1 annualization of income, §7.1 changes in accounting period, §7.1 election of accounting period, §7.1 short periods, §7.1 Accrual Method, see Accounting Methods Accumulated Earnings Tax, §11.8 ACRS, §7.4 Adjusted Basis, §8.3 Adjusted Gross Income, §1.3 Adoption Expenses, §6.6 Alimony installment payments of property settlements, §2.3 payments, §2.3 periodic payments, §2.3 Alternative Minimum Tax corporate, §11.9 individual, §6.8 American Opportunity Credit, §6.4 Amount Realized, §8.3 mortgage assumed, §8.3 Annual Accounting Period, see Accounting Periods Annualization of Income, §7.1 Annuities employee annuities, §2.5 exclusion ratio, §2.5 Appeals Process, §12.2 Apportionment of Real Estate Taxes Between Buyer and Seller, see Property Taxes Audit Process, §12.2 Automobile Expenses commuting expense, §4.3 depreciation, §7.4, §7.5, §7.6, §7.7 medical expense, §5.1 moving expense, §4.11 standard mileage method, §4.3 Awards, see Prizes and Awards B Backup Withholding, §9.1 Bad Debts business vs nonbusiness, §3.3 specific charge-off method, §3.3 Boot, see Like-Kind Exchanges Business Bad Debts, see Bad Debts Business Gifts, §4.9 substantiation requirements, §4.9 Business Meals, §4.5 C Capital Asset, §1.9, §8.1 Capital Gains and Losses adjusted basis, §1.9, §8.3 amount realized, §1.9, §8.3 capital asset, §1.9, §8.1 corporations, §11.2 holding period, §8.2 long-term capital gain, §1.8, §8.4 short-term capital gain, §8.2 Capital Loss, §1.8, §8.5 Cash Basis Accounting, see Accounting Methods Casualty and Theft Losses amount of loss, §5.5 casualty defined, §5.5 complete destruction, §5.5 disaster area losses, §5.5 insurance recovery, §5.5, §8.8 reimbursement, §5.5 theft losses, §5.5 Changes in Accounting Method, see Accounting Methods Changes in Accounting Period, see Accounting Periods Charitable Contributions capital gain property, §5.4 carryover of excess contribution, §5.4, §11.3 contribution of service, §5.4 corporations, §11.3 limitations, §5.4, §11.3 ordinary income, §5.4 Child and Dependent Care Credit allowable credit, §6.3 Child Support, §2.3 Child Tax Credit, §6.1 Combined Business and Pleasure Travel, §4.2 Community Property, §6.10 Commuting Expenses, §4.3 disallowance, §4.3 second job exception, §4.3 temporary assignments, §4.3 Contributions, see Charitable Contributions Corporate Alternative Minimum Tax, §11.9 Corporate Tax Rates, §11.1 Corporations accumulated earnings tax, §11.8 capital gains and losses, §11.2 charitable contributions, §11.3 dividends received deduction, §11.3 estimated tax, §11.5 formation, §11.7 organizational expenditures, §11.3 personal holding company tax, §11.8 schedule M-1, §11.4 Subchapter S, §11.6 tax rates, §11.1 Credits, see Tax Credits D Deductions for Adjusted Gross Income, §1.3, Chapter Deductions from Adjusted Gross Income, see Itemized Deductions Dependency Exemptions, see Personal and Dependency Exemptions Dependent Care Credit, §6.3 Deposits, see Tax Deposits Depreciation, §7.3 through §7.7 Accelerated Cost Recovery System, §7.4 bonus, §7.3 election to expense, §7.5 listed property, §7.6 luxury automobiles, §7.7 Modified Accelerated Cost Recovery System, §7.4 Discriminant Function System, §12.2 Dividend Income, §2.2 Dividends, qualifying, §2.2 Dividends Received Deduction for Corporations, §11.3 Dues, Subscriptions, and Publications, §4.7 Copyright 2010 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it I-2 Index E Earned Income Credit, §6.2 Economic Considerations of the U.S Tax System, §1.1 Educational Expenses deduction, §4.6 maintaining or improving existing skills, §4.6 travel and transportation, §4.6 Educational Savings Accounts, §5.8 Electronic Filing, §1.10 Employee Expenses, see specific item Employee Fringe Benefits, §2.14 Employer-Provided Spending Accounts, §2.14 Energy Credits, §6.7 Entertainment Expenses business meals, §4.5 entertainment facilities, §4.5 itemized deductions, §4.5 Estimated Payments, §9.2, §11.5 Estimated Tax corporations, §11.5 individual taxpayers, §9.2 Exchange, see Like-Kind Exchanges Exclusions from Gross Income, §2.1, Table 2.2 accident and health insurance, §2.9 annuities, §2.5 child support, §2.3 employee fringe benefits, §2.14 gifts and inheritances, §2.7 life insurance, §2.6 meals and lodging, §2.10 prizes and awards, §2.4 scholarships, §2.8 Exemptions, see Personal and Dependency Exemptions F FICA Tax, §9.3 Filing Requirements corporations, §11.5 individual taxpayers, §1.4 self-employed taxpayers, §9.2 and §9.6 Filing Status head of household, §1.5 married, filing jointly, §1.5 married, filing separately, §1.5 qualifying widow(er), §1.5 single, §1.5 surviving spouse, §1.5 First In, First Out, see Inventory Methods Fiscal Year, §7.1 Fixing-up Expenses, see Sale of a Personal Residence Foreign Tax Credit, §6.5 Formation of Corporations, §11.7 Forms and Schedules, §1.2 miscellaneous deductions, §5.6 overall limitation, §5.7 taxes, §5.2 Fringe Benefits, §2.14 FUTA Tax, §9.7 G Gifts and Inheritances, §2.7 Gross Income exclusions, §2.1, Table 2.2 inclusions, §2.1, Table 2.1 H Health Insurance, see Accident and Health Insurance Health Savings Accounts, §5.1 Higher Education Expenses, §5.10 History of U.S Tax System, §1.1 Hobby Losses, §4.12 Holding Period capital gains and losses, §8.2 Homebuyer, First time, Credit §6 Overview HOPE Tax Credit, §6.4 Household Employer, §9.8 H.R 10 Plan, see Keogh Plan I Income Tax Expense, §5.2 Individual Alternative Minimum Tax, §6.8 Individual Retirement Accounts, §3.6 Inheritances, see Gifts and Inheritances Installment Sales, §8.9 Insurance accident insurance, §2.9 group term life, §2.14 health insurance, §2.9 life insurance, §2.6 medical insurance, §5.1 Intangibles, §7.8 Interest, IRS, §12.3 Interest Exclusion municipal bond interest, §2.11 Interest Expense, §5.3 prepaid interest, §5.3 and §7.2 Internal Revenue Service, §12.1 Internet, §1.10 Inventory Methods determination of inventory cost, §3.4 FIFO, §3.4 LIFO, §3.4 Investment Expenses interest expense, §5.3 miscellaneous expenses, §5.6 Investment Interest Expense, §5.3 Involuntary Conversions, §8.11 IRS Site, §1.9 Itemized Deductions, §1.3, Chapter casualty and theft losses, §5.5 charitable contributions, §5.4 hobby losses, §5.9 interest, §5.3 medical expenses, §5.1 J Job-Hunting Expenses, §5.6 K Keogh Plan, §3.7 ‘‘Kiddie Tax,’’ §6.9 L Last In, First Out, see Inventory Methods Life Insurance, §2.6 Lifetime Learning Credit, §6.4 Like-Kind Exchanges basis of property received, §8.10 boot, §8.10 definition of like-kind property, §8.10 exchange, §8.10 holding period, §8.10 mandatory, §8.10 Limited Liability Company, §10.8 Listed Property, §7.6 luxury automobiles, §7.7 Lodging, see Meals and Lodging Luxury Automobiles, §7.7 M MACRS, §7.4 Making Work Pay Credit, §1.5 Married filing jointly, §1.5 same sex, §1.5 Meals and Lodging, §2.10 Medical Expenses capital expenditures, §5.1 insurance premiums, §5.1 medicine/drugs, §5.1 transportation, §5.1 Medicine and Drugs, see Medical Expenses Miscellaneous Deductions, §4.1, §5.6 investment expenses, §5.6 job-hunting expenses, §5.6 tax return preparation fees, §5.6 Modified Accelerated Cost Recovery System, §7.4 Moving Expenses allowed expenses, §4.11 distance test, §4.11 Municipal Bond Interest, §2.11 N Nanny Tax, §9.8 Net Operating Losses, §3.5 Nonbusiness Bad Debts, see Bad Debts O Office in the Home, §4.4 Organizational Expenditures, §11.3 Copyright 2010 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Index P Partnership Taxation at risk, §10.7 current distributions, §10.4 defined, §10.1 formation, §10.2 guaranteed payments, §10.4 income reporting, §10.3 tax years, §10.5 transactions between partners and partnership, §10.6 Passive Losses, §3.2 Payroll Taxes FICA tax, §9.3 Form 940, §9.7 Form 941, §9.5 FUTA, §9.7 payroll tax deposit, §9.4 reporting requirements, §9.5 withholding methods, §9.1 W-2s, §9.5 Penalties, §12.3, §12.5 Personal and Dependency Exemptions citizenship or residency, §1.6 divorced parents, §1.6 full-time student requirement, §1.6 gross income test, §1.6 joint return test, §1.6 member of household, §1.6 multiple support agreement, §1.6 relationship test, §1.6 support requirement, §1.6 Personal Holding Company Tax, §11.8 Personal Property Tax Expense, §5.2 Personal Residence, see Sale of a Personal Residence Personal Service Corporations, §7.1, §11.1 Prepaid Expenses prepaid interest, §5.3, §7.2 prepaid rent, §7.2 Prepaid Interest, see Prepaid Expenses Prizes and Awards, §2.4 scholarships, §2.8 Property Taxes, §5.2 Publications, see Dues, Subscriptions, and Publications Q Qualified Retirement Plans, §3.8 Qualified Tuition Programs, §5.10 R Recapture Potential depreciation, §8.7 Related Parties, §7.9 Rental Expense, §3.1, see also Prepaid Expenses Rental Income, §3.1 prepaid rent, §7.2 Reporting Entities, §1.2 Reporting Requirements, see also Filing Requirements information returns, §9.5 payroll taxes, §9.4, §9.5 Retirement Plans, §3.8 Rollovers, §3.9 Roth IRAs, §3.6 S S Corporations, §11.6 Safe-Deposit Box, §5.6 Safety Equipment, §4.8 Sale sale or exchange (defined), §8.1 Sale of a Personal Residence, §8.12 Schedule C, §4.10 Schedule M-1, §11.4 Scholarships, §2.8 Section 267, §7.9 Section 401(k) Plans, §3.8 Section 529 Plans, §5.8 Section 1231 Gains and Losses, §8.6 Section 1245 Recapture, §8.7 Section 1250 Recapture, §8.7 Self-Employed Taxpayers estimated tax payments, §9.2 self-employment tax, §9.6 Self-Employment Tax, see Self-Employed Taxpayers Short Periods, see Accounting Periods Social Considerations of the U.S Tax System, §1.1 Social Security Benefits, §2.12 Special Clothing, see Uniforms and Special Clothing Special Deductions for Corporations, §11.3 Standard Deduction, §1.7 Schedule L, §5.2 Statute of Limitations, §12.4 Subscriptions, see Dues, Subscriptions, and Publications Substantiation Requirements business gifts, §4.9 entertainment expenses, §4.9 theft losses, §5.5 travel, §4.2 T Taxable Entities, §1.2 Tax Credits adoption credit, §6.6 American Opportunity credit, §6.4 child and dependent care credit, §6.3 child tax credit, §6.1 earned income credit, §6.2 energy credits, §6.7 I-3 foreign tax credit, §6.5 home buyer credit, §6.7 HOPE tax credit, §6.4 lifetime learning credit, §6.4 Tax Deposits, §9.4 Tax Expense income taxes, §5.2 personal property taxes, §5.2 property taxes, §5.2 Tax Forms and Schedules, §1.2 Tax Formula for Individuals adjusted gross income, §1.3 deductions for adjusted gross income, §1.3 gross income, §1.3 itemized deductions, §1.3 Tax Planning, §12.7 Tax Preference Items, §6.8, §11.9 Tax Return Preparation Fees, §5.6 Taxpayer Bill of Rights, §12.6 Taxpayer Compliance Measurement Program, §12.2 Temporary Living Expenses, see Moving Expenses Theft Losses, see Casualty and Theft Losses Tip Reporting, §9.1 Tools, §4.8 Transportation Expense actual cost method, §4.3 automobile expense, §4.3 commuting, §4.3 medical, §5.1 standard mileage method, §4.3 Travel Expenses away from home requirement, §4.2 combined business and pleasure, §4.2 educational, §4.6 moving, §4.11 overnight, §4.2 reimbursement, §4.2 temporary assignment, §4.2 U Unearned Income of Minor Children, §6.9 Unemployment, §2.13 Uniforms and Special Clothing, §4.8 Union Dues, §5.6 V Vacation Homes, §3.1 Viatical Settlements, §2.6 W Withholding Methods, §9.1 interest, §9.1 pensions, §9.1 W-2s, §9.5 Copyright 2010 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it I-4 Index Copyright 2010 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it L-1 List of Forms Form 940 Employer’s Annual Federal Unemployment (FUTA) Tax Return 9-27, S-53 Form 941 Employer’s QUARTERLY Federal Tax Return 9-15, S-49 Form 1040 U.S Individual Income Tax Return 2-47, 3-45, 3-53, 4-55, 4-59, 5-47, 5-53, 6-47, 6-53, 7-45, 8-53, 8-61, 9-49, D-7 Form 1040A U.S Individual Income Tax Return 1-43, 2-43 Form 1040-ES Payment Voucher Form 1040EZ Income Tax Return for Single and Joint Filers with No Dependents Form 1065 U.S Return of Partnership Income Form 1098 Mortgage Interest Statement 5-43 Form 1099-B Proceeds From Broker and Barter Exchange Transactions 8-50 Form 1099-MISC Miscellaneous Income 9-44 Form 1099-INT Interest Income Form 1099-DIV Dividends and Distributions Form 1120 U.S Corporation Income Tax Return Form 1120S U.S Income Tax Return for an S Corporation Form 2106 Employee Business Expenses Form 2441 Child and Dependent Care Expenses 6-7, 6-51, D-21, S-29 Form 3903 Moving Expenses 4-27, 4-49, 4-57, S-19 Form 4562 Depreciation and Amortization 7-17, 7-37, 7-41, S-37 Form 4684 Casualties and Thefts 5-21, 5-39, 5-57, S-23 Form 4797 Sales of Business Property 8-17, 8-43, S-45 Form 6251 Alternative Minimum Tax—Individuals 6-23, 6-57, S-33 Form 6252 Installment Sale Income 8-25, 8-45, 8-69 Form 8027 Employer’s Annual Information Return of Tip Income and Allocated Tips Form 8582 Passive Activity Loss Limitations Form 8814 Parents’ Election to Report Child’s Interest and Dividends Form 8829 Expenses for Business Use of Your Home Form 8839 Qualified Adoption Expenses Form W-2 Wage and Tax Statement Form W-4 Employee’s Withholding Allowance Certificate 9-10, 9-43, S-48 1-41 10-7, 10-27, S-59 2-40, 9-19, S-50 2-40 11-9, 11-35, S-69 11-19, 11-41, S-75 4-9, 4-39, S-15 9-9, 9-41 3-13, 3-39, 3-57, S-11 6-27, D-23 4-65 6-17, S-31 1-38, 1-39, 9-18, 9-44, S-50 9-3, 9-37, 9-39 Copyright 2010 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it L-2 List of Forms Copyright 2010 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it L-3 List of Schedules Schedule A Itemized Deductions 5-49, 5-55, 6-49, 6-55, 7-47, 8-55, 8-63, 9-51, D-9, S-21 Schedule B Interest and Ordinary Dividends 2-7, 2-33, 4-61, 5-50, 5-56, 6-56, 7-48, 8-56, 8-64, D-10, S-5 Schedule C Profit or Loss from Business 3-47, 4-35, 4-45, 4-63, 7-39, 9-53, D-11, S-17 Schedule D Capital Gains and Losses 3-49, 7-49, 8-13, 8-41, 8-57, 8-65, 9-55, D-13, S-41 Schedule E Supplemental Income and Loss Schedule EIC Earned Income Credit Schedule H Household Employment Taxes Schedules K-1 Partner’s Share of Income, Deductions, Credits, etc Shareholder’s Share of Income, Deductions, Credits, etc 3-7, 3-51, 3-55, D-17, S-9 6-39 9-33, S-55 10-13, 10-33, 10-35, S-64 11-23, 11-45, S-79 Schedule M Making Work Pay and Government Retiree Credits 1-15, 3-52, 5-52, 8-59, 1-45, 3-58, 5-58, 8-67, 2-46, 4-58, 6-52, 9-59, 2-49, 4-66, 7-50, D-24 Schedule SE Self-Employment Tax 9-21, 9-23, 9-47, 9-57, D-19, S-51 Copyright 2010 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it L-4 List of Schedules Copyright 2010 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it ... Year(s) 2 39 40 2. 461 2. 247 2. 564 2. 564 0.107 0. 321 2. 033 2. 564 0.535 1.819 2. 564 0.749 1.605 2. 564 0.963 1.391 2. 564 1.177 1.177 2. 564 1.391 0.963 2. 564 1.605 0.749 2. 564 1.819 0.535 0. 321 0.107 2. 564... 5-year 7-year 10-year 15-year 20 -year 16.67 10.00 7.14 5.00 3.33 2. 50 2 3 2 5 2 7 2 10 2 15 2 20 33.33 20 .00 14 .29 10.00 6.67 5.00 11 16 21 16.67 10.00 7.14 5.00 3.33 2. 50 * The official table contains... life is calculated (using the percentages in Table 7 .2) as follows: Year Percent 20 10 20 11 20 12 2013 20 14 20 15 Totals 20 .00 32. 00 19 .20 11. 52 11. 52 5.76 100.00% Cost       $15,000 15,000 15,000