11 Cost Recovery

Question 1

Describe the business use test for listed property.

Answer 1

Business use must exceed 50% of total use.
Business use is limited to use in the trade or for the convenience of the employer.
Failure to meet business use means cost recovery is limited to straight line.
Note: Business and investment use can be depreciated.

Question 2

Define “listed property.”

Answer 2

Assets, such as computers and vehicles (but not cell phones), that are commonly used for business and personal purposes.

Question 3

What types of assets are eligible for Section 179 expensing?

Answer 3

Section 179 may be used on any of the following:
* Tangible personalty
* Energy-efficiency improvements to lighting, heating, cooling, ventilation, and hot water systems of nonresidential buildings.
* Roofs, heating and air conditioning, fire protection, and security systems added to nonresidential real property if done after the taxpayer first places it in service.
* Off-the-shelf computer software.
* Qualified improvement property (QIP).

Question 4

What is the depreciation method for personalty under the Modified Accelerated Cost Recovery System (MACRS)?

Answer 4

The depreciation method is the double declining balance.

Question 5

What is the depreciation method for realty under the Modified Accelerated Cost Recovery System (MACRS)?

Answer 5

The depreciation method is straight line.

Question 6

What is the general convention for personalty under the Modified Accelerated Cost Recovery System (MACRS)?

Answer 6

The general convention is midyear.

Question 7

What is the general convention for realty under the Modified Accelerated Cost Recovery System (MACRS)?

Answer 7

The general convention is mid-month.

Question 8

What is the class life for realty?

Answer 8

39 years for nonresidential; 27.5 years for residential

Question 9

Under what circumstances must a convention other than the midyear convention be used for all personalty?

Answer 9

A midquarter convention is used for all personalty if more than 40% of personalty is purchased in the last quarter of the year.

Question 10

What is included when calculating the total cost recovery deduction?

Answer 10

Total cost recovery deduction = Section 179 expense + Bonus depreciation + Regular depreciation

Question 11

Describe the Section 179 deduction.

Answer 11

An election to immediately expense new and used depreciable business property, rather than capitalizing and depreciating it.

Question 12

What is real property?

Answer 12

Land, which is not depreciated, and buildings, depreciated on a straight-line basis applying the mid-month convention.

Question 13

Describe tangible personal property.

Answer 13

Assets, other than real property, depreciated using double-declining balance (DDB) with a switch to straight-line, except for municipal properties depreciated using 150% declining balance, generally applying the half-year convention but, in certain circumstances, applying the mid-quarter convention.

Question 14

Describe the mid-month convention.

Answer 14

Real property is depreciated from the middle of the month in which it is placed into service until the middle of the month in which it is removed from service.

Question 15

Describe the mid-year convention.

Answer 15

Generally applied to tangible personal property under which it is depreciated for ½ year in the year of acquisition and ½ year in the year of disposal.

Question 16

Describe qualified improvement property and how is it depreciated.

Answer 16

Qualified improvement property (i.e., an improvement to the interior portion of nonresidential real property after the building has been placed in service), is recovered over a 15-year recovery period using the straight-line method and half-year convention (unless the mid-quarter convention applies).

Question 17

True or False: Leasehold improvements made by a lessee generally must be recovered over the lease term.

Answer 17

False. The cost of leasehold improvements made by a lessee generally must be recovered over the MACRS recovery period of the underlying property without regard to the lease term. Upon the expiration of the lease, any unrecovered adjusted basis in abandoned leasehold improvements is treated as a loss.

Question 18

True or False: Section 179 may be used on an asset with 40% business use.

Answer 18

False: Property eligible for the Section 179 deduction must be acquired by purchase from an unrelated party for use in an active trade or business or property predominantly used for business (> 50%).

Question 19

What type of asset doe snot qualify for Section 179 expensing?

Answer 19

Property not qualifying for Section 179 election
* Intangible property
* Realty (other than those listed above that qualify)
* Property acquired by purchase from a related party
* Property used in an income-producing activity, such as rental property

Question 20

A self-employed taxpayer had net business income of $65,000 in Year 4 before the deductions for $25,000 bonus depreciation, $9,500 MACRS depreciation, and $52,000 Section 179. What is the total Section 179 that is currently deductible?

Answer 20

A taxpayer’s Section 179 deduction is limited to the business income without the deduction for Section 179. The Section 179 deduction is limited to $30,500 ($65,000 net income – $25,000 bonus depreciation – $9,500 MACRS).
The remaining $21,500 ($52,000 – $30,500) can be carried forward indefinitely and expensed in future years when there is sufficient business income

Question 21

True or False: Bonus depreciation applies to qualified new or used assets.

Answer 21

True: Bonus depreciation applies to qualified new or used assets. Bonus depreciation applies unless the taxpayer elects out.