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CFP > Income Tax: Depreciation, Amortization, & Depletion > Flashcards

Income Tax: Depreciation, Amortization, & Depletion Flashcards

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CFP® flashcards
1
Q

What are the three methods of cost recovery and for what assets?

A

Tangible assets - Cost recovery or depreciation
Intangible assets - Amortization
Natural Resources - Depletion

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2
Q

What is depreciation?

A

Annual Income tax deduction that allows you to recover the cost or other basis of certain property over time you use the property.

It is supposed to account for the wear and tear, deterioration or obsolesence of the property.

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3
Q

What are the requirements for property to be depreciable property?

A
  • must be property you own
  • must be used in your business or income producing activity.
  • it must have a determinable useful life
  • it must be expected to last more than a year.
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4
Q

When can an asset not be depreciated?

A
  • property used solely for personal activities: can take the prorata if it used partially for business and partially for personal use.
  • property placed in service and disposed of in the same year
  • equipment used to build capital improvements
  • section 197 intangibles, you must amortize these cost
  • certain term interest
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5
Q

Can you depreciate land?

A

No, land cannot be depreciated.

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6
Q

Can inventory be depreciated?

A

No, Inventory or property you hold primary for sale to customers in the ordinary course of your business cannot be depreciated.

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7
Q

When does depreciation begin?

A

Depreciation begins when you place the depreciable property in service for use in trade or business to generate profit.

Stops when taxpayer has fully recovered his cost or other basis or when the taxpayer retires his property from service.

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8
Q

When is property considered retired from service?

A
  • 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.
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9
Q

what are the methods of depreciation?

A

Straight line method
Accelerated cost recover system
Modified accelerated cost recovery system

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10
Q

What is the straight line method?

A

Allows taxpayer to deduct the same amount of depreciation each year of the useful life of the asset.

See image for how to calculate the yearly depreciation deduction.

In the first year you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use.

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11
Q

How do you depreciate the cost of a patent or copyright?

A
  • Use the straight line method over the useful life.
  • useful life of a patent or copyright is the lesser of the life granted to it by the government or the remaining life when you acquire it.
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12
Q

When and how can you depreciate the cost of computer software?

A

Can be depreciated if:

  • it is readily available for purchase by the general public
  • it is subject to a non exclusive license.
  • it has not been substantially modified

May also qualify for section 179 deduction and special depreciation allowance

if you can depreciate, use the straight line method over a useful life of 36 months.

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13
Q

When do the Accelerated cost recovery system and modified accelerated cost recover system apply?

A
  • assets placed in service after 1980
  • assets subject to wear and tear, obsolesence, etc.
  • assets must have a determinable useful life
  • assets are tangible personalty and realty
  • MACRS is used to depreciate most property.
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14
Q

What is the accelerated cost recovery system(ACRS)?

A

-Depreciation based on recovery periods instead of useful life. periods were determined by the IRS.

Replaced by the MACRS for property placed into service after 1986.

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15
Q

What are the two systems used for the Modified Accelerated Cost Recovery System(MACRS)?

A
  1. The General Depreciation System (GDS)

2. Alternative Depreciation System (ADS)

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16
Q

For what property must the Alternative Depreciation System (ADS) be used?

*dont memorize just read

A
  • listed property used 50% or less in a qualified business use.
  • tangible property used outside of the us
  • any tax exempt use property
  • any tax exempt financed property
  • all property used predominately in a farming business and placed in service in any tax year during which an election not only apply the uniform capitlization rules to certain farming cost is effective.
  • Any property imported from a foreign country for which an executive order is in effect because the country maintains trade restrictions or engages in other discriminatory acts.
17
Q

Property Classifications and recovery periods for the general depreciation system?

A 
3 year: tractors, rent-to-own property 
*5 year: Autos, computers, office equipment. 
*7 year: office furniture and fixtures
27.5 Year: Rental Home
39 year: Office Building

*most likely to be tested.

18
Q

What is the mid month convention and what property is it used for? (MACRS)

A
  • The mid month convention is used for nonresidential real property and residential rental property.
  • under this convention you treat all property placed in service or disposed of during a month as placed in service or disposed of at the midpoint of the month. One half of a month of depreciation is allowed for this type of property.
19
Q

What is the mid quarter convention?

A
  • use this convention if the mid month convention does not apply and the total depreciable basis of MACRS property you placed in service during the last 3 months of the year are more than 40% of total depreciable bases of all MACRS property you placed in service during the entire year.
  • under this 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.
  • 1 1/2 months of depreciation is allowed for the quarter you put property in service or dispose of the property.
20
Q

What is the Half Year Convention?

A
  • Use this convention if neither the mid quarter or the mid month convention applies
  • under this convention you 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
  • only half a year of depreciation is allowed for the year the property is placed in service or disposed of.
21
Q

What are the three depreciation methods under the MACRS/GDS?

A
  1. 200% Declining balance method
  2. 150% declining balance bethod
  3. straight line depreciation method
22
Q

What is the depreciation method under the MACRS/ADS?

A

straight line method

23
Q

Depreciation example

A
24
Q

What is Section 179?

A
  • Can elect to immediately expense up to $1,080,000 of business tangible property placed in service during the year.
  • cannot use section 179 for realty or production of income property.
  • the amount expensed reduces depreciable basis, you can still recover cost of remaining basis.
25
Q

How much is the section 179 deduction?

A

Section 179 deduction is the lesser of:

  • Property Placed in service (PPS)
  • Taxable Income (TI)
  • Threshold of $1,080,000 phased out for PPS>$2,700,00e
26
Q

What is bonus depreciation?

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

27
Q

What is amortization of intangible assets?

A

Intangible assets listed below can be amortized over 15 years.

  • Goodwill
  • Trademarks
  • Covenants not to compete, and
  • Copyrights and patents used in a trade or business.
28
Q

What are the two depletion methods for natural resources?

A
  • Cost Depletion method - asset basis is divided by the estimated total number of recoverable units of the assets and then multiplied by the number of units sold (not produced) to determine the amount of the deduction for the year.
  • with the percentage depletion method -a statutory percentage is applied to gross income from the property (limited to 50% of the gross income.

CFP (27 decks)

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