Chapter 6 - Depreciation Flashcards
what is the modified accelerated cost recovery system (MACRS)?
federal tax law uses a method of depreciation which differs from GAAP depreciation in three significant ways:
1-the cost of the asset is deducted over a stated recovery period that is shorter than the estimated useful life of the asset in most cases that would be used by the company so therefore for tax purposes depreciation per year would be higher.
2-the recovery period for new and used property is identical (treated the same)
3-salvage values are ignored
what is the recovery period for section 1250 assets or “real property”?
**real property is anything that is not personal. like land and anything that is affixed to land like a building, on the exam it generally talking about buildings.
- 27.5 years for residential rental property (only if you are helping like apartment housing etc. basically if you live in it )
- 39 years for most other buildings (business buildings and investment realty/property)
- ***land is not depreciated
- ***salvage value of building is ignored
- ***straight line method is used (MACRS) ONLY
- ***mid month convention; only depreciate the real property for 1/2 the month when placed into service and 1/2 in the month of disposal
the method of depreciation that must be used is straight line, and the business must use the mid month convention, which means that all real estate bought and sold during a particular month are treated as having been bought and sold in the middle of the month.
what is mid month convention?
means whatever month you purchased the building less the land price is calculated for depreciation as if it was bought in the middle of that month. like if you bought it at the beginning of November it is treated as if you bought it November 15.
what is the MACRS depreciation schedule for tangible personal property (non realty) section 1245?
- 3 years for small tools software
- 5 years for automobiles, light trucks, copiers, computers & printers
- 7 years for most other personal property, equipment, office furniture, desks
- 10 years for barges, tugs, vessels, water transportation equipment
- 15 years for municipal wastewater treatment plants and assets used in cement production
- 20 years municipal sewer and farm buildings
what depreciation methods are required for tangible personal property under MACRS?
- double declining balance is used for 3,5,7,10 year property; then switch to straight line when it results in a greater deduction**straight line may be elected instead of double declining balance
- 150% declining balance (15, 20 year property)
- *salvage value is ignored
- half year convention means in the year of purchase you only depreciate the item half the year then the next year(s) you depreciate it for the entire year and in the last year you depreciate it the other half year
- mid quarter convention
- ***if acquire at least 40% of its assets in the final 3 months of the year, it is assumed that every asset purchased occurred at the mid-point of that particular quarter in which it was purchased
how are purchases and sales normally handled?
by using the half year convention so transactions are treated as taking place in the middle of the year.this is applied to the first year only.
when does the mid quarter convention have to be applied?
when a business acquires 40% or more of their personal property in the final quarter of the year and items are treated as having been purchased int he middle of the quarter in which they were purchased, instead of the middle of the year.
what is a section 179 deduction?
businesses may elect to immediately expense certain NEW and USED depreciable property instead of capitalizing and depreciating it.
what is the criteria for a 179 deduction election?
- can immediately expense depreciable business property rather than capitalize it
- not allowed if a net loss exists or if taking the depreciation expense would create a net loss
- the property must be acquired by purchase from an unrelated party for use in an active trade or business
- conress is still deciding whether to keep the amount at $500,000 or reduce it $25,000 or somewhere in between
what is the criteria for 179 deduction if the maximum is 500,000?
- the maximum expense amount is $500,000 and the phase out begins at $2,000,000 and section 179 is not available if total purchases are over 2,500,000
- expense maximum up to $500,000
- reduced dollar for dollar by excess of purchases over $2,000,000.00
- not available if purchases exceed $2,500,000.00
what is the criteria for 179 deduction if the maximum is 25,000?
- if the maximum expense amount is $25,000 and the phase out begins at $200,000; not available if over 225,000
- expense maximum is up to $25,000
- reduced dollar for dollar by excess of purchases over $200,000
- not available if purchases exceed $225,000
what is not eligible for the 179 deduction election?
real property or intangibles
what can be treated as section 179 property deduction election?
qualified depreciable real property but the property must be acquired for use in an active trade or business or qualified leasehold improvement property, restaurant property, or retail improvement property.
what is the additional first year depreciation (bonus depreciation)
-for qualified NEW assets (tangible 1245 property with a MACRS life of 20 years or less) placed in service 50% bonus depreciation is available (after reduction for any section 179 elections). the regular first year depreciation is then taken on the remaining asset basis.
what are section 197 intangibles?
- qualifying intangibles include (not self created) acquired goodwill, franchises, trademarks and customer based intangibles.
- covenants not to compete, patents, and copyrights qualify only if acquired in connection with the acquisition of a trade or business.
