Cost Recovery Flashcards
Define real property
land and all items permanently affixed to the land (building, paving, etc.)
Define personal property
tangible, movable property not affixed to the land (machinery, equipment, automobiles, computers, etc.)
What is included in 5-year property?
automobiles, light trucks, computers, and copiers
What is included in 7-year property?
furniture and fixtures, machinery, and equipment
How is salvage value used under MACRS?
it is ignored for both personal and real property
What is the half-year convention?
used on personal property…property placed in service or disposed of during a taxable year is treated as having been placed in service or disposed of halfway through the year (allowed 6 months of depreciation in year of acquisition/disposition regardless of the date it was acquired/disposed)
What is the mid-quarter convention?
used on personal property…when more than 40% of depreciable property has been placed in service in the 4th quarter, the half-year convention no longer applies and the mid-quarter convention is used; the property is treated as having been placed in service or disposed of halfway through the quarter
What happens if personal property is disposed of before the last year when the mid-quarter convention is being used?
the full-year MACRS rate must be multiplied by a mid-quarter ratio for the mid-quarter convention in the year of disposition
Quarter 1 = 12.5% (0.5 out of 4.0)
Quarter 2 = 37.5% (1.5 out of 4.0)
Quarter 3 = 62.5% (2.5 out of 4.0)
Quarter 4 = 87.5% (3.5 out of 4.0)
What methods are used to depreciate real property?
residential rental property (apt. building and rental home) = 27.5 year straight-line
nonresidential real property (office building and warehouse) = 39 year straight-line
What is the mid-month convention?
used on real property…straight-line depreciation is computed based on the number of months the property was in service; one half month is taken in the month the property was placed in service and one half month is taken in the month the property is disposed of
What is the Section 179 expense deduction?
this is when a taxpayer can elect to deduct as an expense in lieu of depreciation; the allowance is $1,080,000 for qualified property that is acquired from an unrelated party during the year
What are the two types of depletion?
cost depletion and percentage depletion; you have to use the method that results in the larger deduction; you must reduce the basis of your property by the depletion allowed or allowable, whichever is greater
Cost depletion (GAAP)
remaining basis of the property is divided by the remaining number of recoverable units to arrive at the unit depletion rate; the deduction for depletion is the depletion unit rate multiplied by the number of units sold (not the number of units produced) for the year
since this is calculated based on an estimate of the remaining unsold units, it will most likely need to be revised every year; you divide the basis remaining at the end of the prior year by the estimated amount of unsold units remaining at the end of the prior year
once the property is fully depleted, no further cost depletion deductions may be taken (even if not all units have sold); any remaining undepleted basis is deducted in the year that the last unit is sold
Percentage depletion (non-GAAP)
multiply a certain percentage (specified in the tax law) by gross income from the property during the tax year
it may be taken even after costs have been completely recovered and there is no cost basis
How are intangibles amortized?
straight-line over a 15 year (180 month) period starting with the month of acquisition
this goes for goodwill, licenses, franchises, and trademarks
business organization and start-up costs are permitted to expense $5,000 up front and then amortize the remainder over 180 months (the $5,000 is reduced dollar for dollar as total cost exceeds $50,000 for each item)
