Depreciation

Question 1

How does tax depreciation differ from GAAP (3 examples)

Answer 1

1. Recovery period shorter than estimated life
2. New & used property use same recovery period
3. Salvage value ignored

Question 2

Section 1250 property conditions

Answer 2

Real property
Residential property 27 1/2 years
Other buildings 39 years
SL (MACRS)
Mid-month convention

Question 3

Section 1245 property conditions

Answer 3

3 yr- small tools, OTC software (SL only)
5 yr- auto, light trucks, computers
7 yr- other personal prop, equipment, office furn
DDB (15/20 yr prop use 150%)
Switch to SL when results in bigger deduction
Half year convention
**If acquired 40% or more of assets in final quarter, required to use mid-quarter convention

Question 4

Section 179 depreciation

Answer 4

Election for tangible personal property
Form 4562
Not allowed if expense creates a loss
500,000 deduction, phase out begins at 2 million (500 reduced 1 for every 1 over 2 million)
N/A if total purchases exceed 2.5 million
* Must be unrelated party
* Amount disallowed under taxable income may be carried forward indefinitely

Question 5

Bonus depreciation

Answer 5

For tangible Sec 1245 property w/ MACRS life 20 yrs or less
50% of 1st year adjusted basis
Claimed after 179 deduction, but before regular depreciation exp deduction

Question 6

2 methods of depletion and the calc

Answer 6

Cost Method:
Adj basis (cost-acc deplet)
/ Est recoverable units
x units sold
= Depletion exp/yr
Percentage Method:
% x gross income = Depletion exp (% can't exceed 50)

Question 7

What is DPAD and its calc

Answer 7

Domestic Production Activities Deduction (sec. 199):
Domestic production gross receipts
- Total cost of sales allocated to DPGR
= Qualified production activities income (QPAI)
DPAD= 9% of lesser of QPAI or taxable income before this deduction
**C corps limited to taxable income
* Sole prop, p/s, S corps, LLC limited to AGI (all entities cannot exceed 50% of W2 wages that relate to domestic production)

Question 8

3 types of assets held by taxpayer

Answer 8

1. Ordinary- current business assets (hot assets)
2. 1231 assets- noncurrent business assets (held over 1 year) Used in business, sale incidental; Depreciable, land used in business, PPE
3. Capital assets- Nonbusiness assets; don’t qualify as ordinary or 1231; personal use or investment; G/W treated as cap asset; Nonbusiness bad debts write offs ALWAYS ST cap loss

Question 9

Rates for collectibles

Answer 9

28% on all G/L on Sch D

Question 10

Carrybacks for cap G/L (indv + corps)

Answer 10

Individual- Net loss 3,000 cap carryforward forever

Corp- Only offset cap gains, back 3 forward 5

Question 11

Classification of inherited assets and nonbusiness bad debts

Answer 11

Inherited assets always LT

Nonbusiness bad debt write offs always ST cap loss

Question 12

1245 depreciation recapture rules

Answer 12

Recapture a 1231 gain as ordinary income up to the amount taken for depreciation (3/5/7 yr assets)

Question 13

1250 depreciation recapture rules

Answer 13

Amount of gain up to add’t depreciation treated as ordinary (anything over add’t is unrecaptured 1250 gain taxed at 25%)
Proceeds 500
Basis (60) [DDB=540, SL=510]
Gain 440 [if held under 1 yr, whole thing is ordinary up to 540]
Ordinary 30 [held over yr DDB-SL is ordinary]
Unrecaptured 1250 gain= 410 [440-30]
Times LTCG 25% rate

Question 14

Section 291 recapture

Answer 14

For C corps, portion of gain ordinary:
Unrecaptured 1250 gain= 410
x 20% = 82 ordinary + 30 ordinary [from 1250 recapture rules] = 112 total ordinary
Proceeds   500
Basis          (60)
Gain            440
Total ordinary  (112)
1231 cap gain    328

Question 15

What are the more common depletion rates?

Answer 15

15% for copper, gold, silver, iron, and oil and gas;
10% for coal and lignite; and
5% for gravel, peat, sand, and pumice.

Question 16

The method used to depreciate partnership property is an election made by the ..

Answer 16

Partnership, and can be any method approved by the IRS