Chapter 8 – Depreciation

Question 1

A depreciation deduction is allowed for tax purposes if the 4 following conditions are met.

Answer 1

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

Question 2

__________ is never depreciable.

Answer 2

Land

Question 3

The amount of deduction in the first year of depreciating property.

Answer 3

accounting convention

Question 4

A mathematical formula that determines how much of an asset’s cost is deductible in a given year.

Answer 4

the recovery method

Question 5

The time over which an asset is depreciated.

Answer 5

recovery period

Question 6

______________ is the initial value/cost of property plus any capital improvements made since the property was purchased.

Answer 6

asset basis

Question 7

This decreases the asset’s basis.

Answer 7

depreciation

Question 8

A recovery method used for real property, where the basis is divided by the useful life of the asset.

Answer 8

straight line

Question 9

The recovery method used for personal property where a fixed percentage is multiplied by the adjusted basis each year.

Answer 9

declining-balance

Question 10

When an asset becomes economically useless due to changes in technology, law, economic conditions, or rapid deterioration.

Answer 10

obsolescence

Question 11

If an asset becomes obsolete, how is the remaining undepreciated life of the asset handled?

Answer 11

You depreciate the remaining life of the asset all at once

Question 12

The fastest tax depreciation method.

Answer 12

Modify Accelerated Cost Recovery System

Question 13

The year an asset is placed in service is important because it determines….

Answer 13

which recovery period and which recovery method will be used for the asset.

Question 14

What is the shortest recovery time period for personal property under MACRS?

Answer 14

3 years

Question 15

What is the recovery period for cars, computers, and copiers?

Answer 15

5 years

Question 16

What is the recovery period for office furniture, fixtures, and equipment?

Answer 16

7 years

Question 17

What is the recovery period for residential property?

Answer 17

27.5 years

Question 18

What is the recovery period for non-residential property?

Answer 18

39 years

Question 19

What is half-year convention?

Answer 19

When half of the years depreciation on your “personal property” is allowed for the first year.

Question 20

Under MACRS, the double declining balance method is really used on…

Answer 20

personal property.

Question 21

Half month of depreciation.

Answer 21

mid-month

Question 22

What is not taking into account when calculating tax depreciation?

Answer 22

Salvage value

Question 23

What is the recovery period, recovery method, and convention of the following?

The asset was machinery and place into service in August

Answer 23

7 years
half-year convention
declining balance

Question 24

What is the recovery period, recovery method and convention of the following?

The asset was machinery and was placed in service in October.

Answer 24

7 years
mid-quarter convention
declining balance

Question 25

What is the recovery period, recovery method and convention of the following?

The asset was a building and was placed in service in March.

Answer 25

39 years
mid-month convention
straight line

Question 26

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.

Answer 26

section 179

Question 27

Under Section 179, the property that is being depreciated must be __________________ property and not for ________________________.

Answer 27

tangible personal
the production of income

Furniture yea; but furniture inside of a rental property… Hell no!

Question 28

What are some “listed property” items that qualify under Section 179?

Answer 28

1. Your personal vehicle or any other prop to use for transportation.
2. Recreational property (yacht, DVD player)
3. Computers (unless you only us it a business location)

Question 29

Section 179 expensing is not allow if the listed property is used less than ____% of the time for a business.

Answer 29

50%

Question 30

Name an asset that’s amortized and not depreciated?

Answer 30

Intangible assets (e.g. Goodwill, patents, copyrights, covenants)

Question 31

Amortization uses what type of recovery method?

Answer 31

straight-line

Question 32

Is there a dollar limit on the amount of property that may be expensed under Section 179 expensing rule?

Answer 32

Yes

Question 33

In order for you to be considered a material participant, you have to have more than ______ hours of participation in the business.

Answer 33

500 hours

Question 34

What are the three types of income categories?

Answer 34

1. Active (Salary and bonus)
2. Portfolio (interest, dividends, capital gains, royalties, & annuities)
3. Passive

Question 35

Unless you are participating materially, all passive losses (losses from rental property) can only be offset by _______________.

Answer 35

passive income

Question 36

Can losses from one passive activity offset earned income from a totally different passive activity?

Answer 36

Yes.

Rental property you can deduct up to $25K against ordinary income.

Question 37

Although rental properties are considered passive, an individual can deduct up to $25K of their net rental losses against their ________________.

Answer 37

ordinary income

Question 38

What are the requirements for an individual who wishes to deduct net rental losses against ordinary income?

Answer 38

1- Must be active participant
2- On more than 10%
3- Actually considered a rental property

Question 39

The $25,000 that can be deducted for rental property is phased out based on your ______________________.

Answer 39

adjusted gross income.

Question 40

To be classified as a rental property, the property must be rented at least ____ days out of the year.

Answer 40

15 days

Question 41

Your personal use in a rental property cannot exceed more than ____ days or ____% of the rental days.

Answer 41

14 Days

10%

Question 42

Repairs and maintenance expenses are (expenses/expenditures) that are necessary to maintain property already owned.

Answer 42

expenses

Question 43

Expenses that are continuous are deductible…

Answer 43

in the current year.

Question 44

Expenditures for a new property or to update a currently owned property and therefore depreciated…

Answer 44

over the life of the asset.

Question 45

Cost of purchasing a building or machinery, equipment, furniture, and fixtures. (expenses/expenditures)

Answer 45

expenditures

Question 46

Fees for obtaining a professional license. (expenses/expenditures)

Answer 46

expenditures

Question 47

Expenses for perfecting or defending title to property or for acquiring an ownership interest in property. (expenses/expenditures)

Answer 47

expenditures

Question 48

Business investigation or start-up costs. (expenses/expenditures)

Answer 48

expenditures