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Coursera - Federal Taxation II > Cost Recovery > Flashcards

Cost Recovery Flashcards

1
Q

What are two aspects of Cost Recovery?

A
  1. Assets have a useful life greater than one year

2. assets cost must be capitalized

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2
Q

What is capitalization?

A

Cost must be shown on the balance sheet rather than as expenses - Depreciated, Amortized or Depleted over time

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3
Q

Straight Line depreciation

A

Allocate total cost equally over the useful life of the asset

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4
Q

What type of property is depreciated?

A

tangible personal and real property - other than land

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5
Q

What form of cost recovery method is used for tangible property?

A

depreciation

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6
Q

What form of cost recovery method is used for real property?

A

depreciation

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7
Q

What form of cost recovery method is used for land?

A

Cost recovery is not allowed for land because land is not “used” up

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8
Q

What type of property is amortized?

A

intangible personal property

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9
Q

What form of cost recovery method is used for intangible property?

A

amortization

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10
Q

What type of property is depletion cost recovery used for?

A

natural resources

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11
Q

What type of cost recovery method is used for natural resources?

A

depletion

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12
Q

What is the most relevant date when using a cost recovery method?

A

The date an asset is put into service NOT the date of purchase

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13
Q

How do cost recovery deductions affect basis of an asset?

A

Basis is reduced by cost recovery deductions

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14
Q

What is the formula for Adjusted Basis?

A 
Original Basis
- Accumulated cost recovery deductions
\+ Capital Improvements
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
 Adjusted Basis
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15
Q

What is the formula to determine Amount Realized?

A 
Cash Received
\+ FMV of property recieved
\+ Disposition of liablities
- Selling Expenses
--------------------------------
Amount Realized
or 
What the TP gets
- What the TP gives up
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Amount realized
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16
Q

What does “disposition of liabilities” mean?

A

Someone takes over your debts for you - a buyer takes over a loan you owe

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17
Q

What is the formula for Realize Gains/Losses?

A

Amount Realized
-Adjusted Basis
_____________
Realized Gains/Losses

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18
Q

What is the formula for Recognized Gains/Losses?

A 
Realized Gain/losses
-postponed/deferred gain/loss
-tax-free gains/losses
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Recognized Gains/Losses
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19
Q

Accumulated Depreciation

A

Sum of annual depreciation deductions that have been claimed over the life of the asset

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20
Q

In what two situations is Cost Recovery done?

A
  1. purchased a business asset
  2. extension of useful life establishes or increases basis
    (ex: buy a hard drive for a computer extends computers life)
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21
Q

How does it affect the basis of an asset if the taxpayer does NOT take cost recovery deductions?

A

Basis must be reduced if cost recovery deductions are “allowed” even if tp does not take them

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22
Q

What 4 ways can a taxpayer establish basis for cost recovery purposes?

A
  1. Buy an asset
  2. convert asset from personal to business use
  3. acquire through non-taxable exchange
  4. Inheritance
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23
Q

Realty property business property

A

land and buildings permanently affixed to the land

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24
Q

Personalty business property (personal bus.)

A

Any asset that is not realty or personal use property

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25
Q

Personal Use property

A

property held for taxpayers personal use NOT for trade or business

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26
Q

Formula for Straight-Line Depreciation

A

(cost-salvage value)/useful life

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27
Q

What does MACRS stand for?

A

Modified Accelerated Cost Recovery System

28
Q

Who determines the life of the property for MACRS?

A

IRS - tables

29
Q

What 4 things do you need to calculate MACRS?

A
  1. original basis
  2. applicable recovery period (IRS table)
  3. applicable convention
  4. applicable percentage (IRS tables)
30
Q

What are the 2 MACRS conventions?

A
  1. Half - year

2. Mid -quarter

31
Q

When is MACRS Half -Year convension used?

A
  1. tangible personalty property other than real

2. < = 40% of the assets where put into service in 4th quarter

32
Q

HY convention: How much depreciation can you take if you dispose of the asset before the end of its useful life?

A

Only 1/2 the depreciation deduction can be taken in final year

33
Q

When doe you use MACRS Mid-Quarter convention?

A
  1. tangible personal property assets other than real

2. >40% of the assets are put into service in the last quarter

34
Q

Can you switch MACRS conventions for an asset?

A

No. The asset must remain on the convention it starts on.

35
Q

What is the Convention for Realty property?

A

Mid-month convention Straight-Line depreciation

36
Q

What is the class life for Residential Property?

A

27.5 years

37
Q

What is the class life for non-residential property

A

39.0 (31.5 before 1993)

38
Q

Residential property

A

80% or more of gross rental revenues are non-transient dwelling units

39
Q

Non-residential property

A

gross rental revenues <= 80%

40
Q

Bonus depreciation

A
  1. fixed percentage (set by IRS)
  2. deductible in the first year
  3. In addition to regular depreciation
  4. automatically calculated - tp must “elect out” if they do not want it applied - can be done by asset class
41
Q

What kind of property qualifies for Bonus Depreciation?

A
  1. Property with MACRS recovery period of less <= 20 years
  2. Prior to TCJA act only new
  3. After TCJA - new or used property
42
Q

What is the percentage for Bonus Depreciation for the period of 9/28/17 - 2022?

A

100 % for both new and used property

43
Q

What kind of property qualifies for Section 179 Election?

A
  1. tangible personal property (new/used)
  2. Certain non-residential real property improvements
    * non-structural - roof, AC system, security system
    * non-elevator interior
  3. added after the structure was built
44
Q

Is Section 179 automatic or do you have to elect it?

A

elect

45
Q

In what order are MACRS, Bonus and Section 179 taken?

A 
Basis
- Section 179
\_\_\_\_\_\_\_\_\_\_\_
If new basis remains
-Bonus Depreciation
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
If new basis remains
- MACRC
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Adjusted Basis year 1
46
Q

What are two limitations to the Section 179 depreciation deduction?

A
  1. Assets placed in service limitation

2. Section 179 deduction can not create a loss

47
Q

What is the “Assets placed in service limitation”

for Section 179?

A

The eligible Section 179 is reduced if the eligible Section 179 assets placed in service are > than the Threshold amount set by the IRS

48
Q

Can the MACRS + Bonus Depreciation create a loss?

A

yes

49
Q

What is Listed Property for Cost Recovery purposes?

A

Property that can be used for bother business and personal use. (ie: van, weight requirement, computers-before 2017)

50
Q

What are the 3 depreciation rules for Listed property?

A
  1. Listed property > 50% use MACRS, Bonus, Sect 179
  2. If NOT predominantly business use straight-line
  3. If business use falls <=50% after placed in service then you must RECAPTURE excess cost recovery = as if straight line was used all along
51
Q

When do you have to recapture excess cost recovery for listed property?

A

Business use falls to <= 50% after placed in service

52
Q

What is the RECAPTURE formula for listed property?

A 
MACRS
\+Bonus
\+Sect 179
-Straight Line
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Recapture that is included in GI as ordinary income
53
Q

What is the “Luxury Auto Limitation”?

A

Luxury vehicles <= 6000 lbs and placed into service in 2018 have recovery limits (ceiling)
Luxury vehicles > limits do not apply

54
Q

What is the INCLUSION amount for Leased Vechiles?

A
  1. amount added to GI based on IRS table
    2.. 2017: applies to auto with FMV>$19,000
    2018+2019 applies with FMV>$50,000
55
Q

How does Section 197 define assets that can be amortized?

A
  1. intangible assets acquired/purchased
  2. used in taxpayers trade or business
  3. Includes: trademarks, trade names, non-compete covenants, good will, copy rights, patents and licences, going -concern value
  4. self created asses are generally NOT amortized
  5. Uses straight line depreciation
56
Q

How many years is an intangible asset amortized?

A

Most: SL over 180 months (15 years)
Purchased patents/copyrights - SL over 180 months
Internally created patents - SL over 20 years
Internally created copyright- SL over life of author +70 years

57
Q

How does Section 195 define amortization for Start-up expenses?

A
  1. investigation and operating expenses before opening the business are considered intangible assets
  2. Business can immediately expense first $5000 (phased out dollar for dollar if expenses >$50,000
  3. remaining amount amortized SL over 180 months
58
Q

What two depletion methods are compared for natural resources? Which one should you choose?

A

Take the Larger of :

  1. Cost depletion method
  2. percentage depletion method
59
Q

Depletion: What is the “ depletion amount” formula for Cost Depletion method?

A

(basis/estimated recoverable units) * #units sold =Depletion

60
Q

Depletion: What is the deduction formula for the Cost Depletion method?

A

(depletion/units)*#units sold = deduction

61
Q

What is the recovery period for depletion?

A

deduct until all units are sold

62
Q

Depletion: What is the formula for the “depletion amount” for the Percentage Method?

A

LESSER OF:
1. %(from table)*GI from resource
OR
2. 50% (100% gas and oil) * TI before depletion deduction

63
Q

Depletion: How are Intangible Drilling Costs (IDCs) handled?

A
  1. immediately expense all costs in year of expense
    OR
  2. depletion
64
Q

Depletion: Which formula do you use if you deplete IDCs?

A

Greater of Cost Method or Percentage method

65
Q

Depletion: What is the formula is used Cost Method for IDCs?

A

(basis + capitalized IDCs) + estimated recoverable units

divided by # units sold

66
Q

Depletion:What formula is used for the Percentage Method for IDCs?

A 
LESSER of:
1. % rate * GI from the resource 
OR
2. 
50% (100% oil/gas) * TI before depletion deduction
- IDC expense

Coursera - Federal Taxation II (2 decks)

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