Cost Recovery (Depreciation, Depletion, and Amortization)

Question 1

Research and experimental expenses

Answer 1

may be amortized over 60 months or longer

However, the taxpayer can choose to deduct the cost in the first year in which they are paid or incurred

Question 2

Normally the half-year convention

Answer 2

applies to depreciate personal property placed in service

Question 3

if more than 40% of the depreciable personal property is acquired in the last quarter of the year

Answer 3

the mid-quarter convention is used for all personal property acquired that year

Question 4

Percentage Depletion Rates

Answer 4

gravel, peat, sand, and pumice = 5%
Coal, lignite = 10%
gold, silver, copper, and iron, oil & gas = 15%

Question 5

Section 197 Intangibles costs

Answer 5

are qualifying assets acquired and held in connection with the conduct of a trade or business.

These include goodwill, going concern value, patents, copyrights, franchises, trademarks, trade names, covenant not to compete. Amortized over 15 years

Question 6

Geological and geophysical costs

Answer 6

have an amortization period of 2–7 years, depending on the size of the entity

Question 7

Pollution control facilities

Answer 7

may be amortized over 5 years (60 months)

Question 8

Research and experimental costs

Answer 8

have an optional write-off period of 5 to 10 years

Question 9

The 5-year class MACRS includes

Answer 9

automobiles, general-purpose light trucks, computers, and office machinery (typewriters, calculators, copiers, etc.)

Question 10

The 7-year class MACRS includes

Answer 10

heavy, special-purpose trucks, and office furniture and fixtures (desks, filing cabinets, etc.)

Question 11

For regular tax depreciation, taxpayers may use MACRS for residential rental property with a 27-1/2-year life and the mid-month convention or ADS using the straight-line method with a 40-year life and the mid-month convention Although

Answer 11

For alternative minimum tax purposes, however, depreciation is limited to the straight-line method over a period of 27-1/2 years and the mid-month convention

Question 12

How to calculate Section 1245 ordinary Income

Answer 12

Step 1: Determine adjusted basis = Purchase Price minus Accumulated Depreciation
Step 2: Determine realized gain = Sales price minus Adjusted basis
Step 3: Character of Realized Gain = Lesser of total realized gain or Accumulated Depreciation