CH 11.1 COST RECOVERY

Question 1

WHAT IS COST RECOVERY?

Answer 1

COST RECOVERY OF CERTAIN ASSETS (USED FOR TRADE OR BUSINESS) IS PERMITTED FOR TAX PURPOSES THROUGH DEPRECIATION.

Question 2

WHAT ARE THE DEPRECIABLE CONVENTIONS?

Answer 2

DEPRECIABLE CONVENTIONS ARE USED TO DETERMINE THE FIRST AND LAST YEARS DEPRECIATION.

FYI - SALVALGE VALUE IS IGNORED

FOR DOUBLE DECLINING BALANCE: CARRYING COST x (2/MACRS LIFE) x CONVENTION

Question 3

WHAT IS THE RECOVERY PERIOD AND DEPRECIATION METHOD FOR REAL PROPERTY?

Answer 3

SEE SCREENSHOT

Question 4

WHAT IS THE RECOVERY PERIOD AND DEPRECIATION METHOD FOR PERSONAL PROPERTY?

Answer 4

SEE SCREENSHOT
FYI* USING THE MACRS TABLE IN THE YEAR OF DISPOSAL, THE PERCENTAGE FROM THE TABLES MUST BE MULTIPLIED BY 6/12

Question 5

HOW IS THE MIDQUARTER CONVENTION COMPUTED?

Answer 5

IF MORE THAN 40% OF PERSONAL PROPERTY IS AQUIRED IN THE 4TH QUARTER THE ENTIRE LOT USES THE MIDQUARTER CONVENTION,

CARRYING VALUE X (200%/RECOVERY PERIOD) X MONTHS ALLOWED*

*MONTHS ALLOWED: THE EQUIPMENT IS CONSIDERED TO HAVE BEEN PLACED INTO SERVICE IN THE MIDDLE OF THE QUARTER. (E.G., EQUIPEMENT PURCHASED IN MAY BELONGS IN THE 2ND QUARTER, SO FOR THE 2ND QUARTER 1.5 MONTHS APPLY + 3RD AND 4TH QUARTER “6 MONTHS” THEREFORE, THE MONTHS ALLOWED FOR AN EQUIPMENT PURCHASED IN MAY IS 7.5

Question 6

HOW DO YOU USE THE MACRS TABLES TO COMPUTE DEPRECIATION?

Answer 6

FOR MID MONTH CONVENTION FOR THE FIRST YEAR YOU TAKE THE CARRYING VALUE AND MULTIPLY IT BY THE PERCENTAGE. ON THE DATE OF SALE THE PERCENTAGE FROM THE TABLE IS MULTIPLIED BY THE CONVENTION. (E.G., IF SOLD ON MAY THE CONVENTION IS 4.5/12)

FOR HALF YEAR CONVENTIONS: THE MACRS TABLE AUTOMATICALLY REFECTS THE HALF-YEAR IN THE YEAR OF PURCHASE HOWEVER, IN THE YEAR OF DISPOSAL, THE PERCENTAGE FROM THE TABLES MUST BE MULTIPLIED BY THE CONVENTION (I.E., 6/12)

FOR MID QUARTER CONVENTIONS: THE MACRS TABLE AUTOMATICALLY REFECTS THE MID QUARTER IN THE YEAR OF PURCHASE HOWEVER, THERE ARE FOUR TABLES, ONE FOR EACH QUARTER. USE THE TABLE THAT CORRESPONDS TO THE QUARTER THE ASSET WAS PLACED IN SERVICE. ON THE DATE OF SALE THE PERCENTAGE FROM THE TABLE APPLICABLE TO THE QUARTER IN WHICH THE ASSET WAS PLACED IS MULTIPLIED BY THE CONVENTION (E.G., 1.5, 4.5, 7.5, 10.5 DIVIDED BY 12)

FYI WITH LISTED PROPERTY YOU CAN USE THE TABLES HOWEVER YOU MUST ADJUST FOR THE BUSINESS %

Question 7

WHAT IS THE SECION 179 ELECTION?

Answer 7

TANGIBLE PERSONALTY USED FOR BUSINESS

*YOUR ALLOWED TO DEDUCT 1,160,000 IN 2023, HOWEVER ANYTHING EXCEEDING THE THRESHOLD (2,890,000 IN 2023) IS PHASED OUT DOLLAR FOR DOLLAR

*THE 179 IS ULTIMATELY LIMITED TO TAXABLE INCOME BEFORE ANY 179 DEDUCTION. (I.E., YOU CAN DEDUCT ONLY UP TO YOUR TAXABLE INCOME BEFORE THE 790 DEDUCTION)

(I.E., NET INCOME - BONUS - MACRS = AMOUNT OF SECTION 179 DEDUCTION ALLOWED)

*ANYTHING REMAINING OF SECTION 179 IS CARRIED FORWARD INDEFINETELY.

THE TOTAL DEDUCTION FOR THE FIRST YEAR IS THE 179 AND THE CURRENT DEPRECAITION.

*THE ASSETS BASIS IS REDUCED BY THE 179 DEDUCTION AND THE REMAINING BASIS IS DEPRECIATED USING THE APPLICABLE MACRS METHOD AND CONVENTION.

*PROPERTY ALLOWED AND NOT ALLOWED - SEE SCREENSHOT

> *WHEN ELECTING SECTION 179 CONSIDERATION SHOULD BE GIVEN TO WHICH CLASS OF ASSETS IS USED IN ORDER TO MAXIMIZE THE TAXPAYER’S DEDUCTION. (LOWEST FIRST-YEAR RECOVERY PERCENTAGE WILL MAXIMIZE THE CURRENT TAX BENEFIT OF THE DEPRECIATION EXPENSE)
“14.29% FOR 7 YEAR VS 20% FOR 5 YEAR - YOU WOULD PICK THE 7 YEAR”

Question 8

WHAT IS THE ADDITIONAL FIRST YEAR DEPRECIATION (BONUS DEPRECIATION)

Answer 8

ANOTHER TOOL THE GOVERNMENT USES TO STIMULATE BUSINESS INVESTMENTS ECT. FOR 2023 THE BONUS DEPRECIATION PERCENTAGE IS 80%

BONUS DEPRECIATION APPLIES TO TANGIBLE PERSONALTY WITH MACRS LIFE OF 20 YEARS OR LESS, SOFTWARE, AND QUALIFIED IMPROVEMENT PROPERTY

BONUS DEPRECIATION APPLIES UNLESS THE TAXPAYERS ELECTS OUT.

* THE ORDER OF DEPRECIATION IS 179, BONUS, THEN MACRS

BONUS DEPRECIATION = ADJUSTED BASIS x BONUS PERCENTAGE

Question 9

WHAT IS LISTED PROPERTY?

Answer 9

-DEPRECIABLE PROPERTY THAT IS USED FOR BOTH PERSONAL AND BUSINESS USE.

-LISTED PROPERTY MUST BE GREATER THAN 50% TO USE MACRS RULES (I.E., PREDOMINATELY USED FOR BUSINESS) OTHER WISE WE WOULD USE ALTERNATIVE DEPRECIATION SYSTEM (I.E., STRAIGHTLINE X BUSINESS USE PERCENTAGE)
FYI - CONVENTION METHOD USED ON THE FIRST AND LAST MONTH

-VEHICLES ARE COMMONLY USED

(CARRYING VALUE X 2/MACRS LIFE X BUSINESS AND INVESTMENT USAGE)
FYI - CONVENTION METHOD USED ON THE FIRST AND LAST MONTH

-INVESTMENT USE IS NOT CONSIDERED FOR MEETING THE 50% TEST, ALTHOUGH IT IS CONSIDERED WHEN COMPUTING COST RECOVERY.

-IF BONUS DEPRECIATION IS ELECTED THE MAXIMUM AMOUNT IS 8K WHICH IS ADDED TO THE LIMITS.

-THE LIMITS ALSO INCLUDE ANY AMOUNT EXPENSED UNDER 179

• THE DEPRECIATION EXPENSE IS LIMITED TO LESSER OF THE MACRS COST RECOVERY OR THE MACRS LIMITATION