11.01 Cost Recovery Flashcards
How is depreciation calculated using the straight-line method?
Annual depreciation = Cost / MACRS life
How is depreciation calculated using the 150% declining balance method?
Annual depreciation = Carrying Value x (1.5 / MACRS life)
(Note: CV = Cost - Accumulated Depreciation)
How is depreciation calculated using the 200% declining balance method?
Annual depreciation = Carrying Value x (2 / MACRS life)
(Note: CV = Cost - Accumulated Depreciation)
What is the modified accelerated cost recovery system (MACRS)?
For tax purposes, cost recovery for depreciable assets is computed under a uniform method using class life periods and conventions referred to as MACRS. This system generally allows for a shorter asset life than the one used for financial accounting purposes. In addition, MACRS uses accelerated depreciation methods for personal property, such as the 200% (AKA double) and 150% declining balance methods.
MACRS is used for property placed into service after what year?
1986
In what 3 significant ways does MACRS differ from GAAP?
The cost of the asset is deducted over a stated recovery period that is often shorter than the estimated useful life of the asset in most cases.
The recovery period for new and used property is identical.
Salvage values are ignored.
What assets are depreciable?
Only property used in business activities and incoming-producing activities is depreciable.
Land is not depreciable whether used in a business or not. Property used for personal purposes (e.g., personal computer and residence) and investment assets such as stocks and bonds are not depreciable.
To depreciate an asset, what does MACRS require a taxpayer to use?
MACRS requires a taxpayer to use established: depreciation method, recovery period (life), and depreciation convention.
What is a depreciation convention?
Because all property is not acquired at the beginning of the year, depreciation conventions (e.g. mid-year, mid-quarter, mid-month) are used to determine the first and last year’s depreciation.
When does the mid-quarter convention apply?
The mid-quarter convention applies when >40% of the total cost of depreciable personalty is acquired during the last 3 months of the tax year.
True or false: Salvage value is ignored in computing MACRS depreciation.
True. The MACRS deduction is always computed using the asset’s original cost (i.e. salvage value is ignored).
What are the depreciation rules for tangible realty?
Residential rental property - 27.5 years
Nonresidential rental property - 39 years
Land is not depreciable; Straight-line method (MACRS) is used; Salvage value is ignored; Min-month convention is required.
What are the depreciation rules for personal property (non-realty)?
Small tools - 3 years
Automobiles, Information system hardware - 5 years
Equipment, Furniture & fixtures - 7 years
Double declining balance method is used. Half-year convention is used (unless the criteria for the mid-quarter convention are met)
What are the two alternatives to MACRS?
The taxpayer can elect two alternatives to MACRS:
1. Straight-line can be used for personalty over the MACRS life of the asset. The same MACRS lives and conventions are retained for this method.
2. The alternative depreciation system (ADS) provides for straight-line over an extended life. ADS uses the same conventions as MACRS. The taxpayer must elect it for the same class of property.
What happens when a taxpayer makes a Section 179 election?
The IRC permits business taxpayers to make a Section 179 election to immediately expense certain new and used depreciable business property instead of capitalizing and depreciating the asset using MACRS.
