Chapter 8 In Class

Question 1

What 3 things do you need to know to depreciate an asset

Answer 1

Depreciable cost, depreciable life, and depreciable method.

Question 2

explain one half years convention.

Answer 2

no matter when in the year you buy a business machine you only get one half year’s depreciation on that asset. If you sell it you only get one half years depreciation.

Question 3

If you buy 10,000 equipment in quarter 1, 2 , & 3 and then in year 4 you buy 60,000, how much depreciation would this equipment have for tax purposes if the equipment had useful life of 5 years. Find Year 1 & Year 1. Use tax table on page 8-32

Answer 3

Year 1. 3500, 2500, 1500, 3000. Year 2. 2600, 3000, 3400, 22800

Question 4

Refer to previous problem. Would if you sold the equipment you bought in the 4th quarter in year 2 in september, How would you depreciate the asset for the full second year.

Answer 4

60,000 * .38 * (2 and a half/4) . It doesn’t matter when in the quarter you sold it. If you sell it on the last day it is still one half.

Question 5

additional first-year depreciation

Answer 5

says instead of depreciating based MACRS using the tables on 8-32, 8-33, the IRS requires you with you to expense 50% of the cost of the asset in the first year. Then you depreciate the other half based on MACRS using the tables. In the first year you depreciate half and also the first year of MACRS on the other half. So if the asset was 100,000 you would half depreciation in the first year of 50,000 + (50,000*.20) = 60,000

Question 6

Is the additional first-year depreciation required?

Answer 6

No you have the choice. You would decide depending on if you have tons of income in future years or if you half a lot of income this year. Only for newly purchased assets. Only used in year of purchase

Question 7

Expense Election Example. If you have an asset that costed 580,000 how much can you expense that year for depreciation under the expense election?

Answer 7

560,000 is the ceiling so you can expense 139,000 - (580,000-560,000) = 119,000.
139,000 and 560,000 are given to us through tax law. Then you do (580,000-119,000) * .20 = 92,200

Question 8

What are the 3 ways of depreciating an asset for tax purposes? Order is important

Answer 8

1. 179 expense rule (optional)
2. 50% bonus depreciation (optional)
3. MACRS Depreciation. (required)

Question 9

Suppose we buy asset at 580,000 and decide to use all three methods of depreciating. What is the depreciation?

Answer 9

179 expense rule
(580,000 - 560,000) = 20,000
139,000 - 20,0000 = 119,000
580,000 - 119,000 = 461,000
50% bonus depreciation
461,000 - 230,500 = 230,500
MACRS depreciation
230,500 * .20 = 46,100

Total write off is 119,000 + 230,500 + 46,100 = 395,600

Question 10

Refer to previous problem. What is the depreciable base for next year.

Answer 10

230,500

Question 11

Refer to previous problems. If you just took MACRS what would write off be

Answer 11

580,000 * .20 = 116,000

Question 12

If you bought an automobile how much depreciation can you write off. This is an automobile used in trade of business 100%. If it was used 80% in trade of business, you’d times .80 by the amount. It’s different from personalty assets from previous problems. Use table on 8-17
If it’s used

Answer 12

Year 1 11060. Year 2 4900. Year 3. 2950. Every year after it is 1775.

Question 13

If you lease an automobile can you deduct the lease payment?

Answer 13

Yes

Question 14

The previous problems were on personalty. Now we’re going into real estate

Answer 14

.

Question 15

Divided into two categories.

Answer 15

Residential rental. Commercial

Question 16

Suppose you buy a 1 mil apartment house on June 4th. How is it depreciated in year 1 & 2? Use table 8.6 on page 8-34

Answer 16

1,000,000 * .01970 = 19,700 for year 1

1,000,000 * .03636 = 33,360 for Year 2