CH. 10 - Property Acquisition

Question 1

Cost recovery

Answer 1

the method by which a company expenses the cost of acquiring capital assets. Cost recovery can take the form of depreciation, amortization, or depletion.

Question 2

Depreciation

Answer 2

the cost recovery method to allocate the cost of tangible personal and real property over a specific time period.

Question 3

Amortization

Answer 3

the method of recovering the cost of intangible assets over a specific time period.

Question 4

Intangible assets

Answer 4

assets that do not have physical characteristics. ­Examples include goodwill, covenants not to compete, organizational expenditures, and research and experimentation expenses.

Question 5

Depletion

Answer 5

the cost recovery method to allocate the cost of natural ­resources as they are removed.

Question 6

What are example of personal property, and how is the cost recovered?

Answer 6

All tangible assets other than real property. (Ex: Tangible assets such as cars, equipment and machinery)

Depreciation

Question 7

What are examples of real property, and how is the cost recovered?

Answer 7

land and structures permanently attached to land. (although land is nondepreciable)

Depreciation

Question 8

tax basis

Answer 8

the amount of a taxpayer’s unrecovered cost of or investment in an asset; see also adjusted tax basis.

Question 9

Businesses may begin recouping the cost of purchased business assets once ________

Answer 9

they begin using the asset in their business (aka it is placed into service)

Question 10

Once a business establishes its costs in an asset, the business recovers the cost of the asset through _____________

Answer 10

cost recovery deductions such as depreciation, amortization, and depletion

Question 11

Once a business establishes its costs in an asset, the business recovers the cost of the asset through _____________

Answer 11

cost recovery deductions such as depreciation, amortization, and depletion.

Question 12

Adjusted tax basis/adjusted basis

Answer 12

an asset’s carrying value for tax purposes at a given point in time, measured as the initial basis (for example, cost) plus capital improvements less depreciation or amortization. Also called adjusted tax basis.

Aka the amount of an asset’s cost that has yet to be recovered through cost recovery deductions such as depreciation.

Question 13

How can you calculate an asset’s adjusted tax basis?

Answer 13

Subtracting the accumulated depreciation (or amortization or depletion) from the asset’s initial or historical basis.

Question 14

Generally speaking, taxpayers _______ assets with useful lives over one year

Answer 14

capitalize

Question 15

What is the exception to capitalizing assets with useful lives of over one year?

Answer 15

Taxpayers can immediately deduct low-cost personal property items that are used in their business. Low cost is defined as:

If the taxpayer has a certified, audited financial statement, they can deduct amounts paid for personal property up to $5000 per invoice or item. If they do not have a financial statement, they can deduct up to $2500 per invoice or item

Question 16

When a business acquires multiple assets for one purchase price, the tax law requires the business to __________

Answer 16

determine a cost basis for each separate asset. For example, if land and a building are purchased together, the land and the building would be considered separate assets.

Question 17

When a business incurs additional costs associated with an asset after the asset has been placed into service, are these costs imediately deducted or are they capitalized?

Answer 17

In general, it depends on whether the expenditure constitutes routine maitenance or whether it results in a “betterment, restoration, or new or different use for the property.”

Taxpayers can immediately deduct the cost if they meet the routine maintenance rules.

Question 18

True or false: taxpayers can immediately deduct the additional costs of an asset that is considered routine maintenance.

Answer 18

True

Question 19

If an asset is used for personal purposes and is later converted to business (or rental) use, the basis for cost recovery purposes is ___________

Answer 19

the lesser of (1) the cost basis of the asset or (2) the fair market value of the asset on the date of conversion to business use.

Question 20

Modified Accelerated Cost Recovery System (MACRS)

Answer 20

the current tax depreciation system for tangible personal and real property. Depreciation under MACRS is calculated by finding the depreciation method, the recovery period, and the applicable convention.

Question 21

Recovery period

Answer 21

a length of time prescribed by statute in which ­business property is depreciated or amortized.

Aka the “depreciable life” of the asset

Question 22

To compute MACRS depreciation for an asset, the business needs to know:

Answer 22

-The asset’s deprecable basis
-The date in which it was placed into service
-The depreciation method
-The asset’s recovery period
The applicable depreciation convention

Question 23

True or false: personal property and personal use property mean the same thing

Answer 23

False; personal prepoerty denotes any property that is not real property while personal-use property is any property used for personal purposes.

Question 24

MACRS provides _____ acceptable methods for depreciating personal property. What are they, and which one is the default method?

Answer 24

3
200 % (double) declining balance
150% declining balance
Straightline

200 % (double) declining balance is the default

Question 25

True or false–a business can choose different depreciation methods for similar assets placed into use the same year.

Answer 25

False; for example, if a business buys several pieces of machinery the same year, they all must use the same method. However, the business can choose different methods for similar assets purchased in different years.

Question 26

In financial accounting, an assets recovery period (aka depreciable life) is based on ___________. For tax purposes, an asset’s recovery period is ___________

Answer 26

The taxpayer-determined estimated useful life; predetermined by the IRS.

Question 27

What are the recovery period for most common business assets as specified by the IRS?

Answer 27

-Cars, light general-purpose trucks, computers, and peripheral equipment: 5 years
-Office furniture, fixtures, and equipment: 7 years
-Qualified improvement property (straight-line method): 15 years

Question 28

What does the depreciation convention specify?

Answer 28

It specifies the portion of a full-years depreciation the business can deduct for an asset in the year the asset is first placed into service and in the year the asset was sold.

Question 29

Half-year convention

Answer 29

a depreciation convention that allows owners of tangible personal property to take one-half of a year’s worth of depreciation in the year of purchase and in the year of disposition regardless of when the asset was actually placed in service or sold.

Question 30

Mid-quarter convention

Answer 30

a depreciation convention for tangible personal property that allows for one-half of a quarter’s worth of depreciation in the quarter of purchase and in the quarter of disposition. This convention must be used when more than 40 percent of tangible personal property is placed into service in the fourth quarter of the tax year.

Question 31

For personal property, taxpayers must either use the ________ convention or the _________ convention

Answer 31

The half-year convention or the mid-quarter convention

Question 32

What are the key facts of the half-year convention?

Answer 32

-One-half of a year’s depreciation is allowed in the first and last years of the asset’s life
-The IRS depreciation tables automatically account for the half-year convention in the acquisition calendar
-If an asset is disposed of before it is fully depreciated, only one-half of the table’s applicable depreciation percentage is allowed in the year of disposition.

Question 33

Businesses must use mid-quarter convention when more than _________% of their total ____________ that they place into service during the year is placed in service during the ______ quarter.

Answer 33

Businesses must use mid-quarter convention when more than 40% of their total tangible personal property that they place into service during the year is placed in service during the fourth quarter.

Question 34

True or false: if the mid-quarter convention applies, businesses must use the convention for all tangible personal property placed into service during the year–even assets placed in service in quarters other than the fourth quarter.

Answer 34

True!

Question 35

How should a business calculate depreciation for the year of disposition on an asset

Answer 35

The business first calculates depreciation for the entire year as if he peropty had not been disposed of. Then the business applies the half-year convention by multiplying the full-year’s depreciation by 50% (one-half of a years depreciation).

Question 36

True or false: if a business acquires and disposes of an asset in the same tax year, it is allowed to claim depreciation on the asset.

Answer 36

False; it is not.

Question 37

What are the key facts of the mid-quarter convention?

Answer 37

-The mid-quarter convention is required when more than 40% of personal property is placed into service during the fourth quarter of the tax year.
-Each quarter has its own depreciation table. Once the mid-quarter convention applies, the taxpayer must continue to use it over the asset’s entire recovery period
-If an asset is disposed of before it is fully depreciated, use the formula given to determine the allowable depreciation for the year of disposition.

Question 38

For depreciation purposes, real property is classified as….

Answer 38

land, residential rental property, or nonresidential property.

Question 39

What is the recovery period for real property?

Answer 39

-Residental: 27.5 years
-Nonresidental property placed in service on or after May 13, 1993: 39 years
Non residental property placed in service after December 31, 1986 but before May 13, 1993: 31.5 years

Question 40

If a building is substantially improved (ie expanded) at some point after the initial purchase, the building addition is treated as…..

Answer 40

A new asset with the same recovery period as the original building.

Question 41

All depreciable real property is depreciated for tax purposes using the _________ method

Answer 41

straight-line method

Question 42

All real property is depreciated using the _________ convention

Answer 42

mid-month convention

Question 43

Mid-month convention

Answer 43

a convention that allows owners of real property to take one-half of a month’s depreciation during the month when the property was placed in service and in the month it was disposed of.

Question 44

What is the formula for mid-month deprecitaion for the year of disposition?

Answer 44

Full year’s depreciation x (month in which asset was disposed of - .5)/12

Question 45

§179 expense

Answer 45

an incentive for small businesses that allows them to immediately expense a certain amount of tangible personal property placed in service during the year.

Under 179, businesses may elect to immediately expense up to $1,080,000 of qualified property during 2022

Question 46

True or false; the maximum amount of §179 expense a business may elect to claim goes up to 1,080,000 without a phase out.

Answer 46

False; under the phase-out limitation, businesses must reduce the 1,080,000 maximum available expense dollar-for-dollar for the amount of qualified property placed in service during 2022 over a 2,700,000 threshold.

Aka if a business places $3,780,000 (2.7m over the threshold of $1.8M) or more of tangible personal property into service during 2022, it’s maximum available 179 expense for the year is $0.

Question 47

A businesses deductible 179 expense is limited to the taxpayers…

Answer 47

business income after deducting all expenses (including regular and bonus depreciation) except the 179 expense.

Question 48

What are the key facts of §179 expenses?

Answer 48

-$1,080,000 of tangible personal property can be immediately expensed in 2022
-Businesses are eligible for teh full amount of the expense when tangible personal peroperty placed in serivce is less than $2,700,000. Beginning at 2.7M, the 179 expense is phased out, dollar-for-dollar. When assets placed in serivce reach $3,780,000, no 179 expense can be taken.
-179 expenses are also limited to a business’s taxable income before the 179 expense. 179 expenses cannot create losses.

Question 49

Bonus depreciation

Answer 49

additional depreciation allowed in the acquisition year for tangible personal property with a recovery period of 20 years or less.

Question 50

True or false: businesses may elect to opt out of bonus depreciation.

Answer 50

False; bonus depreciation is mandatory for all businesses that qualify. However, businesses can elect out of bonus depreciation for all of their five-year class property but still calaim bonus depreciation for all of their seven-year property acqusitions.

Question 51

What are the bonus depreciation percentages?

Answer 51

Placed in service:
Sep 28, 2017-December 31, 2022: 100%
2023: 80%
2024: 60%
2025: 40%
2026: 20%
2017 and after: none

Question 52

To qualify for bonus depreciation, property must….

Answer 52

1. Be new or used property (as long as the property has not been previously used by the taxpayer within the past 5 years)
2. must generally have a regular depreciation life of 20 years or less

Question 53

What are the key facts of listed property?

Answer 53

-When an asset is used for both personal and business use, calculate the business-use percentage
-If the business-use percentage is above 50%, the allowable depreciation is limited to the business-use percentage
-If a listed property’s business-use percentage ever falls to or below 50%, depreciation for all previous years is retroactively restated using the MACRS straight-line method

Question 54

Listed property

Answer 54

business assets that are often used for personal ­purposes. Depreciation on listed property is limited to the business-use portion of the asset.

Question 55

When the business-use percentage for a listed property asset is less than 50%, the business must compute depreciation for the asset using ____________

Answer 55

the MACRS straight-line method

Question 56

What are the key facts regarding luxury vehicles?

Answer 56

-Depreciation on automobiles weighing less than 6,000 lbs is subject to luxury auto provisions
-Luxury automobiles have a maximum depreciation limit for each year
-Listed property rules are also applicable to luxury automobiles

Question 57

Luxury vehicles

Answer 57

automobiles on which the amount of annual depreciation expense is limited because the cost of the automobile exceeds a certain threshold. The definition excludes vehicles with gross vehicle weight exceeding 6,000 pounds.

Question 58

Research and experimentation (R&E) costs

Answer 58

expenses for research including costs of research laboratories (salaries, materials, and other related expenses). Taxpayers amortize research and development costs over not less than 60 months from the time benefits are first derived from the research.

Question 59

Covenants not to compete

Answer 59

a contractual promise to refrain from ­conducting business or professional activities similar to those of ­another party.

Question 60

For tax purposes, an intangible asset can be placed into what categories?

Answer 60

1. 197 Purchase intangibles
2. Organizational expenditures and start-u costs
3. Research and experimentation costs
4. Patents & copyrights

Question 61

Businesses amortize all intangible assets using the ________ method for both financial accounting and tax purposes

Answer 61

straight-line method

Question 62

What are the key facts of 197 Intangible Assets

Answer 62

-Purchased intangibles are amortized over a period of 180 months, regardless of their explicitly states lives
-The full-month convention applies to amortization assets

Question 63

§197 intangibles

Answer 63

intangible assets that are purchased that must be ­amortized over 180 months regardless of their actual useful lives.

Question 64

Full-month convention

Answer 64

a convention that allows owners of intangibles to deduct an entire month’s amortization in the month of purchase and month of disposition.

Question 65

Organizational expenditures

Answer 65

expenses that are (1) connected directly to the creation of a corporation or partnership, (2) chargeable to a capital account, and (3) generally amortized over 180 months (limited immediate expensing may be available).

Question 66

What are the key facts of organizational expenditures and start-up costs?

Answer 66

-Taxpayers may immediately expense up to $5,000 of organization expenditures and $5,000 of start-up costs
-The immediate expense rule has a dollar-for-dollar phase out rule that begins are $50,000 for organizational expenditures and for start-up costs. Thus, when organizational expenditures or start-up costs exceed $55,000, there is no immediate expensing

Question 67

Start-up costs

Answer 67

expenses that would be classified as business expenses except that the expenses are incurred before the business begins. These costs are generally capitalized and amortized over 180 months, but ­limited immediate expensing may be available.

Question 68

Cost depletion

Answer 68

the method of recovering the cost of a natural resource that allows a taxpayer to estimate or determine the number of units that remain in the resource at the beginning of the year and allocate a pro rata share of the remaining basis to each unit of the resource that is extracted or sold during the year.

Question 69

True or false: regarding depletion, taxpayers may expense the larger of cost or depletion

Answer 69

True!

Question 70

Percentage depletion

Answer 70

a method of recovering the cost of a natural ­resource that allows a taxpayer to recover or expense an amount based on a statutorily determined percentage.