Chapter 8 – Depreciation Flashcards
A depreciation deduction is allowed for tax purposes if the 4 following conditions are met.
1- property is used for business purposes
2- ownership interest in the property
3- there’s basis in the property
4- there’s a limited useful life
__________ is never depreciable.
Land
The amount of deduction in the first year of depreciating property.
accounting convention
A mathematical formula that determines how much of an asset’s cost is deductible in a given year.
the recovery method
The time over which an asset is depreciated.
recovery period
______________ is the initial value/cost of property plus any capital improvements made since the property was purchased.
asset basis
This decreases the asset’s basis.
depreciation
A recovery method used for real property, where the basis is divided by the useful life of the asset.
straight line
The recovery method used for personal property where a fixed percentage is multiplied by the adjusted basis each year.
declining-balance
When an asset becomes economically useless due to changes in technology, law, economic conditions, or rapid deterioration.
obsolescence
If an asset becomes obsolete, how is the remaining undepreciated life of the asset handled?
You depreciate the remaining life of the asset all at once
The fastest tax depreciation method.
Modify Accelerated Cost Recovery System
The year an asset is placed in service is important because it determines….
which recovery period and which recovery method will be used for the asset.
What is the shortest recovery time period for personal property under MACRS?
3 years
What is the recovery period for cars, computers, and copiers?
5 years
What is the recovery period for office furniture, fixtures, and equipment?
7 years
What is the recovery period for residential property?
27.5 years
What is the recovery period for non-residential property?
39 years
What is half-year convention?
When half of the years depreciation on your “personal property” is allowed for the first year.
Under MACRS, the double declining balance method is really used on…
personal property.
Half month of depreciation.
mid-month
What is not taking into account when calculating tax depreciation?
Salvage value
What is the recovery period, recovery method, and convention of the following?
The asset was machinery and place into service in August
7 years
half-year convention
declining balance
What is the recovery period, recovery method and convention of the following?
The asset was machinery and was placed in service in October.
7 years
mid-quarter convention
declining balance
What is the recovery period, recovery method and convention of the following?
The asset was a building and was placed in service in March.
39 years
mid-month convention
straight line
A special cost recovery rule that allows taxpayers too expense the full cost of certain depreciable property in the year the property was placed in service.
section 179
Under Section 179, the property that is being depreciated must be __________________ property and not for ________________________.
tangible personal
the production of income
Furniture yea; but furniture inside of a rental property… Hell no!
What are some “listed property” items that qualify under Section 179?
- Your personal vehicle or any other prop to use for transportation.
- Recreational property (yacht, DVD player)
- Computers (unless you only us it a business location)
Section 179 expensing is not allow if the listed property is used less than ____% of the time for a business.
50%
Name an asset that’s amortized and not depreciated?
Intangible assets (e.g. Goodwill, patents, copyrights, covenants)
Amortization uses what type of recovery method?
straight-line
Is there a dollar limit on the amount of property that may be expensed under Section 179 expensing rule?
Yes
In order for you to be considered a material participant, you have to have more than ______ hours of participation in the business.
500 hours
What are the three types of income categories?
- Active (Salary and bonus)
- Portfolio (interest, dividends, capital gains, royalties, & annuities)
- Passive
Unless you are participating materially, all passive losses (losses from rental property) can only be offset by _______________.
passive income
Can losses from one passive activity offset earned income from a totally different passive activity?
Yes.
Rental property you can deduct up to $25K against ordinary income.
Although rental properties are considered passive, an individual can deduct up to $25K of their net rental losses against their ________________.
ordinary income
What are the requirements for an individual who wishes to deduct net rental losses against ordinary income?
1- Must be active participant
2- On more than 10%
3- Actually considered a rental property
The $25,000 that can be deducted for rental property is phased out based on your ______________________.
adjusted gross income.
To be classified as a rental property, the property must be rented at least ____ days out of the year.
15 days
Your personal use in a rental property cannot exceed more than ____ days or ____% of the rental days.
14 Days
10%
Repairs and maintenance expenses are (expenses/expenditures) that are necessary to maintain property already owned.
expenses
Expenses that are continuous are deductible…
in the current year.
Expenditures for a new property or to update a currently owned property and therefore depreciated…
over the life of the asset.
Cost of purchasing a building or machinery, equipment, furniture, and fixtures. (expenses/expenditures)
expenditures
Fees for obtaining a professional license. (expenses/expenditures)
expenditures
Expenses for perfecting or defending title to property or for acquiring an ownership interest in property. (expenses/expenditures)
expenditures
Business investigation or start-up costs. (expenses/expenditures)
expenditures
