Depreciation, Amortization, and Depletion

Question 1

what are the 3 methods that could be used to recover the cost of income-producing assets?

Answer 1

1. depreciation
2. amortization
3. depletion

Question 2

for what type of assets is depreciation used?

Answer 2

tangible assets

Question 3

for what type of assets is amortization used?

Answer 3

intangible assets

Question 4

for what type of assets is depletion used?

Answer 4

natural resources

Question 5

what is the definition of depreciation?

Answer 5

depreciation is an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property

it is an allowance for the wear and tear, deterioration, or obsolescence of the property

Question 6

what is the purpose of depreciation?

Answer 6

to match the cost of a productive assets to the revenues earned from using that asset

Question 7

to be depreciable, what are the requirements for a property?

Answer 7

• must be property you own
• must be used in your business or income-producing activity
• must have a determinable life
• must be expected to last more than 1 year

Question 8

what property cannot be depreciated?

Answer 8

• property used solely for personal activities
• inventory
• cost of land
• property placed in service and disposed of in the same year
• equipment used to build capital improvements
• section 197 intangibles
• certain term interests

Question 9

when does depreciation begin?

Answer 9

when you place the depreciable property in service for use in your trade or business or for the production of income

Question 10

when does depreciation stop?

Answer 10

when the taxpayer has fully recovered his cost or other basis, or when the taxpayer retires the property from service, whichever occurs first

Question 11

what are some examples of when a property is retired from service?

Answer 11

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

Question 12

what does ACRS stand for?

Answer 12

Accelerated Cost Recovery System

Question 13

what does MACRS stand for?

Answer 13

Modified Accelerated Cost Recovery System

Question 14

what types of assets do ACRS/MACRS apply to?

Answer 14

• assets placed in service after 1980
• assets subject to wear and tear, obsolescence, etc.
• assets that have a determinable life
• assets that are tangible personalty or realty

Question 15

what is straight line depreciation?

Answer 15

a method of depreciation that allows the taxpayer to deduct the same amount of depreciation each year over the useful life of the property

Question 16

what is the formula to calculate the annual depreciation deduction using straight line depreciation?

Answer 16

(adjusted basis - salvage value) / estimated useful life

Question 17

what are the two depreciation systems for MACRS?

Answer 17

1. General Depreciation System (GDS)

2. Alternative Depreciation System (ADS)

Question 18

what does GDS stand for?

Answer 18

General Depreciation System

Question 19

what does ADS stand for?

Answer 19

Alternative Depreciation System

Question 20

what type of property is ADS used for?

Answer 20

• listed property used 50% or less in a qualified business use
• tangible property used predominantly outside the US
• tax-exempt use property
• tax-exempt bond-financed property
• all property predominantly used in a farming business
• any property imported from a foreign country for which an Executive Order is in effect

Question 21

what type of property is GDS used for?

Answer 21

3-year
5-year
7-year
27.5-year
39-year

(and others, but those are most important)

Question 22

what are some examples of 3-year property?

Answer 22

tractors

Question 23

what are some examples of 5-year property?

Answer 23

autos, computers, office equipment

Question 24

what are some examples of 7-year property?

Answer 24

office furniture, office fixtures

Question 25

what are some examples of 27.5-year property?

Answer 25

residential real rental property

Question 26

what are some examples of 39-year property?

Answer 26

office buildings (non-residential real rental property)

Question 27

what is section 179?

Answer 27

an immediate expense deduction up to $1,050,000 of business tangible property placed in service during that year

Question 28

what is the Section 179 deduction?

Answer 28

the lesser of:

• the property placed in service, or
• the taxable income, or
• threshold of $1,050,000 phased out for property placed in service greater than $2,620,000

Question 29

what is the threshold deduction and phase out for section 179?

Answer 29

threshold: $1,050,000

phase out: property placed in service valued greater than $2,620,000

Question 30

what are some examples of property subject to amortization?

Answer 30

• goodwill
• trademarks
• covenants not to compete
• copyrights and patents used in a trade or business

Question 31

what are the two types of depletion methods?

Answer 31

1. cost depletion

2. percentage depletion

Question 32

how does cost depletion work?

Answer 32

the asset basis is divided by the estimated total number of recovery units of the assets, and then multiplied by the number of units sold

this equals the deduction amount for the year

Question 33

how does percentage depletion work?

Answer 33

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

Question 34

what is the default time convention for depreciation?

Answer 34

half-year

Question 35

when is mid-month convention used?

Answer 35

for real property

Question 36

when is mid-quarter convention used?

Answer 36

if greater than 40% of personal property is placed into service in the last quarter