Chapter 6: Depreciation

Question 1

What are the two main differences between GAAP depreciation and MACRS depreciation?

Answer 1

1. The recovery period for new and used property is identical
2. Salvage values are ignored

Question 2

What are the recovery periods for Section 1250 (real) property?

Answer 2

27.5 years for residential rental property

39 years for most other buildings

Question 3

How is Section 1250 (real) property depreciated?

Answer 3

Section 1250 property is depreciated using the straight-line method and the mid-month convention

Question 4

What is the mid-month convention?

Answer 4

Real property is depreciated for only 1/2 the month when placed into service and 1/2 the month when disposed.

Basically means that real estate bought and sold is treated as being bought or sold in the middle of the month

Question 5

What are the recovery periods for Section 1245 (tangible personal) property?

Answer 5

3 years = small tools, off the shelf software

5 years = automobiles, light trucks. copiers, computers, and printers

7 years = most other personal property, equipment, office furniture, desks

10 years = barges, tugs, vessels, water transportation equipment

15 years = municipal wastewater treatment plants

20 years = municipal sewer and farm buildings

Question 6

How is Section 1245 (tangible personal) property depreciated?

Answer 6

Depreciated using double declining balance EXCEPT for over the counter software (uses straight line with no half year convention)

Uses the half year or mid quarter convention

Question 7

What is the half year convention? What is the mid-quarter convention? When is the mid-quarter convention required?

Answer 7

The half year convention assumes all purchases and sales of tangible personal property take place in the middle of the year.

The mid-quarter convention assumes all purchases that took place took place in the middle of the quarter they were purchased.

It is required if at least 40% of all assets purchased were purchased in the final three months of the year.

Question 8

What is the Section 179 election?

Answer 8

Election to immediately expense certain new and used depreciable property used in a business rather than capitalize and depreciate.

Question 9

What property is eligible for the Section 179 deduction?

Answer 9

All property must be acquired from an unrelated party for use in an active trade or business

• Tangible personal property (Section 1245)
• Off the shelf computer software
• Qualified real property
  
  • Qualified improvement property (interior only, nonresidential)
  • Roof, heating, ventilation, air-conditional. fire protection, alarm systems, security systems AFTER the building was placed in service (nonresidential only)

Question 10

When can a Section 179 deduction NOT be taken?

Answer 10

• If the property was gained by a purchase from a related party
• If a net loss exists or taking the deduction would create a net loss
  
  • Disallowed amounts can be carried forward
• Not generally avaiable on intangibles or real property

Question 11

When is bonus depreciation taken?

Answer 11

AFTER the Section deduction is claimed