Case Study:

Emma recently started her own small business, a bakery specializing in artisanal cakes and pastries. As she sets up her business, she encounters various aspects related to property basis, cost recovery, and depreciation methods. Let's delve into her scenario:

Emma's Bakery: Emma purchased a commercial property to establish her bakery. The property required significant renovations to meet health and safety standards and to create a welcoming environment for her customers. Additionally, she invested in various equipment such as ovens, mixers, display cases, and refrigerators.

Emma financed a portion of the property acquisition and equipment purchases through a business loan. She also received some equipment as gifts from friends and family to support her venture.

Furthermore, Emma plans to offer a loyalty program where customers can earn points for each purchase, redeemable for discounts on future orders. She intends to use a portion of her property as a space for customer appreciation events and workshops.

QUESTIONS

Property Basis and Acquisition

$1.$ What constitutes the initial basis of the commercial property Emma purchased for her bakery?

o A$)$ Purchase price only

o B$)$ Purchase price plus renovation costs

o C$)$ Purchase price minus renovation costs

o D$)$ Renovation costs only

$2.$ Emma received some equipment as gifts. How should she determine the basis of this gifted equipment for tax purposes?

o A$)$ Fair market value at the time of the gift

o B$)$ Original purchase price paid by the donor

o C$)$ Zero, since it was a gift

o D$)$ Lesser of the donor$$s adjusted basis or the fair market value at the time of the gift

$3.$ If Emma financed a portion of her property acquisition with a business loan, how does this affect her property basis?

o A$)$ The loan amount is added to the property basis

o B$)$ The loan amount is subtracted from the property basis

o C$)$ The property basis is unaffected by the loan

o D$)$ Only the interest on the loan affects the property basis

Cost Recovery and Depreciation Methods

$4.$ What depreciation method is typically used for nonresidential real property like Emma's commercial bakery property?

o A$)$ Straight$-$line method over $27\mathrm{.}5$ years

o B$)$ Straight$-$line method over $39$ years

o C$)$ Double declining balance method over $27\mathrm{.}5$ years

o D$)$ Double declining balance method over $39$ years

$5.$ Which of the following depreciation methods would Emma most likely use for her ovens and mixers?

o A$)$ Straight$-$line method

o B$)$ Sum$-$of$-$the$-$years'$-$digits method

o C$)$ Modified Accelerated Cost Recovery System $($MACRS$)$

o D$)$ Units$-$of$-$production method

$6.$ Under MACRS, what is the depreciation recovery period for most of Emma's bakery equipment $($e$.$g$.,$ ovens, mixers$)?$

o A$)5$ years

o B$)7$ years

o C$)10$ years

o D$)15$ years

$7.$ Emma spent $$10,000$ on renovations to meet health and safety standards. How should these costs be treated for depreciation purposes?

o A$)$ Expensed immediately

o B$)$ Added to the basis of the property and depreciated over $39$ years

o C$)$ Added to the basis of the property and depreciated over $27\mathrm{.}5$ years

o D$)$ Depreciated separately over $5$ years

Special Considerations

$8.$ If Emma uses part of her property for customer appreciation events and workshops, how does this affect her depreciation calculations?

o A$)$ The entire property is depreciated over $27\mathrm{.}5$ years

o B$)$ The portion used for events and workshops is depreciated over a different period

o C$)$ Depreciation is unaffected by the property's use

o D$)$ Only the event and workshop space is depreciated

$9.$ Emma plans to offer a loyalty program. How should she account for the cost of the discounts provided through this program?

o A$)$ As a current expense in the period the discounts are given

o B$)$ As a prepaid expense amortized over the program's duration

o C$)$ Added to the property basis and depreciated

o D$)$ Not deductible for tax purposes

Financing and Interest

$10.$ How should Emma treat the interest paid on the business loan used to finance the property and equipment purchases?

o A$)$ Added to the basis of the property and depreciated

o B$)$ Capitalized and amortized over the life of the loan

o C$)$ Expensed as incurred

o D$)$ Not deductible for tax purposes

$11.$ What is the impact on depreciation if Emma receives a tax deduction for the interest paid on her business loan?

o A$)$ It reduces the basis of the property

o B$)$ It has no impact on depreciation

o C$)$ It increases the basis of the property

o D$)$ Depreciation is recalculated each year based on the interest deduction

Equipment and Improvements

$12.$ How should Emma depreciate the display cases and refrigerators she purchased?

o A$)$ Over $3$ years using the straight$-$line method

o B$)$ Over $5$ years using MACRS

o C$)$ Over $7$ years using MACRS

o D$)$ Over $10$ years using MACRS

$13.$ If Emma installs new lighting fixtures in her bakery, how should these costs be treated for depreciation?

o A$)$ Expensed immediately

o B$)$ Added to the basis of the property and depreciated over $39$