Ch 08

Question 1

Accelerated cost recovery system (ACRS)

Answer 1

A method in which the cost of tangible property is recovered (depreciated) over a prescribed period of time. This depreciation approach disregards salvage value, imposes a period of cost recovery that depends upon the classification of the asset into one of various recovery periods, and prescribes the applicable percentage of cost that can be deducted each year. ? 168.

Question 2

Additional first-year depreciation

Answer 2

See fifty percent additional first-year depreciation and one hundred percent additional first-year depreciation.

Question 3

Alternative depreciation system (ADS)

Answer 3

A cost recovery system that produces a smaller deduction than would be calculated under ACRS or MACRS. The alternative system must be used in certain instances and can be elected in other instances. ? 168(g).

Question 4

Amortization

Answer 4

The tax deduction for the cost or other basis of an intangible asset over the asset’s estimated useful life. Examples of amortizable intangibles include patents, copyrights, and leasehold interests. Most purchased intangible assests (e.g., goodwill) can be amortized for income tax purposes over a 15-year period.

Question 5

Cost depletion

Answer 5

Depletion that is calculated based on the adjusted basis of the asset. The adjusted basis is divided by the expected recoverable units to determine the depletion per unit. The depletion per unit is multiplied by the units sold during the tax year to calculate cost depletion.

Question 6

Cost recovery

Answer 6

The portion of the cost of an asset written off under ACRS (or MACRS), which replaced the depreciation system as a method for writing off the cost of an asset for most assets placed in service after 1980 (after 1986 for MACRS). ? 168.

Question 7

Depletion

Answer 7

The process by which the cost or other basis of a natural resource (e.g., an oil or gas interest) is recovered upon extraction and sale of the resource. The two ways to determine the depletion allowance are the cost and percentage (or statutory) methods. Under cost depletion, each unit of production sold is assigned a portion of the cost or other basis of the interest. This is determined by dividing the cost or other basis by the total units expected to be recovered. Under percentage (or statutory) depletion, the tax law provides a special percentage factor for different types of minerals and other natural resources. This percentage is multiplied by the gross income from the interest to arrive at the depletion allowance. ?? 613 and 613A.

Question 8

Depreciation

Answer 8

The deduction for the cost or other basis of a tangible asset over the asset’s estimated useful life.

Question 9

Half-year convention

Answer 9

A cost recovery convention that assumes that all property is placed in service at mid-year and thus provides for a half-year’s cost recovery for that year.

Question 10

Intangible drilling and development costs (IDC)

Answer 10

Taxpayers may elect to expense or capitalize (subject to amortization) intangible drilling and development costs. However, ordinary income recapture provisions apply to oil and gas properties on a sale or other disposition if the expense method is elected. ?? 263(c) and 1254(a).

Question 11

Listed property

Answer 11

Property that includes (1) any passenger automobile; (2) any other property used as a means of transportation; (3) any property of a type generally used for purposes of entertainment, recreation, or amusement; (4) any computer or peripheral equipment (with an exception for exclusive business use); (5) any cellular telephone (or other similar telecommunications equipment); and (6) any other property of a type specified in the Regulations. If listed property is predominantly used for business, the taxpayer is allowed to use the statutory percentage method of cost recovery. Otherwise, the straight-line cost recovery method must be used. ? 280F.

Question 12

Mid-month convention

Answer 12

A cost recovery convention that assumes that property is placed in service in the middle of the month that it is actually placed in service.

Question 13

Mid-quarter convention

Answer 13

A cost recovery convention that assumes that property placed in service during the year is placed in service at the middle of the quarter in which it is actually placed in service. The mid-quarter convention applies if more than 40 percent of the value of property (other than eligible real estate) is placed in service during the last quarter of the year.

Question 14

Modified accelerated cost recovery system (MACRS)

Answer 14

A method in which the cost of tangible property is recovered over a prescribed period of time. Enacted by the Economic Recovery Tax Act (ERTA) of 1981 and substantially modified by the Tax Reform Act (TRA) of 1986 (the modified system is referred to as MACRS), the approach disregards salvage value, imposes a period of cost recovery that depends upon the classification of the asset into one of various recovery periods, and prescribes the applicable percentage of cost that can be deducted each year. ? 168.

Question 15

Percentage depletion

Answer 15

Depletion based on a statutory percentage applied to the gross income from the property. The taxpayer deducts the greater of cost depletion or percentage depletion. ? 613.

Question 16

Residential rental real estate

Answer 16

Buildings for which at least 80 percent of the gross rents are from dwelling units (e.g., an apartment building). This type of building is distinguished from nonresidential (commercial or industrial) buildings in applying the recapture of depreciation provisions. The term also is relevant in distinguishing between buildings that are eligible for a 27.5-year life versus a 39-year life for MACRS purposes. Generally, residential buildings receive preferential treatment.

Question 17

Section 179 expensing

Answer 17

The ability to deduct a capital expenditure in the year an asset is placed in service rather than over the asset’s useful life or cost recovery period. The annual ceiling on the deduction is $500,000 for 2013 ($500,000 for 2012). However, the deduction is reduced dollar for dollar when ? 179 property placed in service during the taxable year exceeds $2 million in 2013 ($2 million in 2012). A previously existing inflation adjustment for this provision has expired. Thus, in the absence of any activity on the part of Congress, for 2014, the original amounts ($25,000 and $200,000) will go into effect. In addition, the amount expensed under ? 179 cannot exceed the aggregate amount of taxable income derived from the conduct of any trade or business by the taxpayer.

Question 18

Startup expenditures

Answer 18

Expenditures paid or incurred associated with the creation of a business prior to the beginning of business. Examples of such expenditures include advertising; salaries and wages; travel and other expenses incurred in lining up prospective distributors, suppliers, or customers; and salaries and fees to executives, consultants, and professional service providers. A taxpayer may elect to immediately expense the first $5,000 (subject to phaseout) of startup expenditures and generally amortize the balance over a period of 180 months.