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Income Tax Planning > Depreciation, Amortization, and Depletion (Lesson 4) > Flashcards

Depreciation, Amortization, and Depletion (Lesson 4) Flashcards

1
Q

What is depreciation

A
  • is an annual income tax deduction that allows you to recover the cost or basis of certain property over the time you use the property
  • allowance for wear and tear, deterioration, or obsolescence of the property
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2
Q

To be depreciable the property must meet all of the following requirements

A
  • it must be property you own
  • must be used in your business or income producing activity
  • must have a determinable useful life
  • must be expected to last more than one year
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3
Q

Property that you cannot depreciated is

A
  • Personal property
  • Inventory
  • Land
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4
Q

Can property placed into service and disposed of in the same year able to be depreciated

A

No

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5
Q

When is a rental considered placed into service

A
  • when the property is ready and available for rent
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6
Q

Property is considered retired from service when it is permanently withdrawn from use in a trade or business or from use in the production of income because of any of the following events

A
  • property sold or exchanged
  • property is converted to personal use
  • property is abandoned
  • property is transferred to a supplies or scrap account or
  • property is destroyed
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7
Q

For the straight line method what happens if you use the property for less than a full year

A
  • prorate your depreciation deduction for the number of months in use
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8
Q

What type of depreciation method is used for patent or copyrights if you can depreciate it

A
  • Straight line method
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9
Q

What happens if a patent or copyright becomes valueless before the end of its useful life

A
  • can deduct any of its remaining cost or other basis in that year
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10
Q

Can computer software be depreciated

A
  • is considered intangible under Section 197 and cannot be depreciated if it was acquired in connection with the acquisition of assets constituting a business or a substantial part of the business
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11
Q

When is computer software not considered Section 197 property and can be depreciated

A
  • readily available for purchase by the general public
  • subject to a nonexclusive license and
  • it has not been substantially modified
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12
Q

What is the Accelerated Cost Recovery System (ACRS)

A
  • ACRS depreciation is based on recovery periods instead of useful life
  • predetermined by the IRS
  • MACRS replaced ACRS
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13
Q

Can you use MACRS to appreciate the below property

  • Property placed in service before 1987
A

No

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14
Q

Can you use MACRS to appreciate the below property

  • Intangible property
A

No

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15
Q

Can you use MACRS to appreciate the below property

  • Films, video tapes, and recordings
A

No

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16
Q

Can you use MACRS to appreciate the below property

  • Certain Corporate or Partnership property acquired in a nontaxable transfer
A

No

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17
Q

What two depreciation systems consist MACRS

A
  • General Deprecation system (GDS)
  • Alternative Depreciation System (ADS)
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18
Q

What is considered 3 year property

A
  • Tractors
  • Any race horse over 2 year old when placed in service
  • Any none race horse over 12 years old when placed in service
  • Qualified rent to own property
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19
Q

What is considered 5 year property

A
  • automobiles
  • Computers
  • office machinery
  • any property used in research and experimentations
  • breeding cattle and dairy cattle
  • appliances, carpets, furniture
  • geothermal, solar, and wind energy property
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20
Q

What is considered 7 year property

A
  • Office furniture and fixtures
  • agricultural machinery and equipment
  • Any natural gas gathering line placed in service after April 11, 2005
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21
Q

What is considered 10 year property

A
  • Vessels, barges, tugs, and similar water transportation equipment
  • any single purpose agricultural or horticultural structure
  • any tree or vine bearing fruits or nuts
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22
Q

What is considered 15 year property

A
  • Certain improvements made directly to land or added to it (Fences, roads, bridges)
  • Any retail motor fuels outlet
  • Any municipal waste water treatment plant
  • Any qualified restaurant property
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23
Q

What is considered 20 year property

A
  • Farm buildings
  • Municipal sewers not classified as 25 year property
  • initial clearing and grading land improvements for electric
24
Q

What is considered 25 year property

A

Class is water utility property which is either of the following:

  • Property that is an integral part of the gathering, treatment, or commercial distribution of water
  • Municipal sewers other than property placed in service under a binding contract in effect at all times since 6/9/1996
25
Q

What is considered 27.5 year property

A
  • Residential rental property
26
Q

What is considered 39 year property

A
  • nonresidential real property
  • Section 1250 property such as office building, store, or warehouse
27
Q

What is the year class for the below property

  • Tractors, rent to own property
A

3 year property

28
Q

What is the year class for the below property

  • Autos, computers, office equipment
A

5 year property

29
Q

What is the year class for the below property

  • Office furniture and fixtures
A

7 year property

30
Q

What is the year class for the below property

  • Rental home
A

27.5 year property

31
Q

What is the year class for the below property

  • Office Building
A

39 year property

32
Q

What convention method does Nonresidential real property use for the first year

A
  • mid month convention
33
Q

What convention method does residential rental property use for the first year

A
  • mid month convention
34
Q

What is the mid month convention method under MACRS

A
  • treat all property placed in service or disposed of during the month as placed in service or disposed of at the midpoint of the month
  • one half month of depreciation is allowed for the month property is placed in service or disposed of
35
Q

What is the mid quarter convention under MACRS

A
  • treat all property placed in service or disposed of during any quarter of the tax year as placed in service or disposed of at the midpoint of that quarter
36
Q

What is the half year convention under MACRS

A
  • treat all property placed in service or disposed of during a tax year as placed in service or disposed of at the midpoint of the year
37
Q

What are the three depreciation methods under MACRS for GDS

A
  • 200% declining balance method over a GDS recovery period
  • 150% declining balance method over a GDS recovery period
  • Straight line method over a GDS recovery period
38
Q

What is the one depreciation method under MACRS for ADS

A
  • Straight line method over an ADS recovery period
39
Q

When can GDS using 200% declining balance method be used

A
  • Non Farm 3, 5, 7, and 10 year property
40
Q

When can GDS using 150% declining balance method be used

A
  • All farm property
  • all 15 and 20 year property
  • non farm 3, 5, 7, and 10 year property
41
Q

When can GDS straight-line method be used

A
  • Nonresidential real property
  • Qualified leasehold improvement property placed in service before January 1, 2008
  • Qualified restaurant property placed in service before January 1, 2008
  • Residential rental property
  • trees or vines bearing fruit or nuts
  • water utility property
  • All 3, 5, 7, 10, 15, and 20 year property
42
Q

When can ADS straight-line method be used

A
  • listed property used 50% or less for business
  • property used predominantly outside the US
  • qualified leasehold improvement property place in service after January 1, 2008
  • qualified restaurant property place in service after January 1, 2008
  • tax exempt property
  • tax exempt bond financed property
43
Q

When does the 200% declining balance and 150% declining balance switch to straightine

A
  • when that method provides an equal or greater deduction
44
Q

What is the Section 179 deduction

A
  • can elect to immediately expense up to $1,050,000 of business tangible property placed in service during the year
45
Q

Can you use the Section 179 deduction for realty or production of income property

A

No

46
Q

The section 179 deduction is the lesser of

A
  • property placed in service (PPS)
  • taxable income or
  • threshold of $1,050,000 phased out for PPS > $2,620,000
47
Q

What is the new bonus depreciation deduction under TCJA 2017

A
  • immediate 100% first year deduction for qualified new or used equipment acquired and placed in service after 9/27/2017 and before 1/1/2023
48
Q

What is the amortization of intangible assets

A
  • Certain intangible assets are amortized over 15 years
49
Q

Which assets are subject to amortization

A
  • Goodwill
  • trademarks
  • covenants not to compete and
  • copyrights and patents used in a trade or business
50
Q

What are natural resources subject to

A

depletion

51
Q

What are the two methods of depletion

A
  • Cost depletion method
  • Percentage depletion method
52
Q

What is the cost depletion method

A
  • the asset basis is divided by the estimated total number of recoverable units of the assets and then multiplied by the number of units sold to determine the amount of the deduction for the year
53
Q

What is the percentage depletion method

A
  • a statutory percentage is applied to the gross income from the property (limited to 50% of gross income)
54
Q

When is the each of the below depreciation convestions used for property placed into service:

  • Mid Month
  • Half Year
  • Mid Quarter
A
  • Mid Month: is used for real property (Residential and non residential rental property)
  • Half year: default used for personal property
  • Mid Quarter: would be used if greater than 40% of personal property is placed into service in the last quarter
55
Q

What is the Section 179 deduction limit and what is the phase out amount

A
  • Limit is $1,050,000
  • Phaseout is section 179 amount is reduced dollar for dollar by property placed into service over $2,620,000

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