M-3 - Cost Recovery

Question 1

Difference between real property and personal property?

Answer 1

Real property are things such as land and things fixed to the land, personal property is moveable.

Question 2

What type of assets are 5 year property?

Answer 2

Automobiles, light trucks, computers, copiers.

Question 3

What type of assets are 7 year property?

Answer 3

Furniture and fixtures, machinery, and other equipment.

Question 4

Is salvage value ignored under MACRS?

Answer 4

Yes

Question 5

What is the MACRS half year convention?

Answer 5

This is a depreciation method when the personal property is acquired or disposed of, you take half years worth of depreciation when the asset is purchased and when the asset is disposed. All years in between, you take the full year’s worth of depreciation.

This applies to most personal property.

Question 6

What happens when you dispose of an asset prior to the last year of it getting full depreciation? (You dispose a 7 year asset in year 6 for example)

Answer 6

When you dispose of an asset before the last year of its depreciable life, then you have to take the full MACRS rate of that year, and multiply it by 50%.

Question 7

What is the mid quarter convention?

Answer 7

This is an exception to the rule, where instead of using half year, you use the mid quarter convention.

Basically if more than 40% of personal property was placed into service during the 4th quarter of the year, this method would be used. Property is treated as having been placed in service or disposed midway through the quarter.

Question 8

What happens if you dispose of an asset before it depreciates during the mid quarter convention?

Answer 8

You need to look at what quarter the asset was disposed and you cannot take the full depreciation expense for that quarter, you can only take half of the depreciation expense for that quarter.

Question 9

What is the disposition table for the mid quarter convention? What are the percentages?

Answer 9

If disposed in the first quarter = you can only take 12.5% of the depreciation

If disposed in the second quarter = you can only take 37.5% (25% + 12.5%)

If disposed in the third quarter = you can only take 62.5% (50% + 12.5%)

If disposed in the fourth quarter = you can only take 87.5% (75% + 12.5%)

Question 10

What is the useful life of residential real property? Why?

Answer 10

27.5 years, residential property has more kids, more people, animals, so more wear and tear. Due to this, the useful life is less than non-residential property.

Question 11

What is the useful life of non-residential real property?

Answer 11

39 years

Question 12

What depreciation method does real property use and why?

Answer 12

Real property uses the mid month method and uses straight line. Basically how this works is one half of depreciation is taken for the month it is placed into service, and one half of depreciation is taken on the month it is disposed.

So for example, they provide the tables for you. so you have the year 1 and the full year amounts. The year it is disposed, if prior to the full depreciation, you need to know what month it was disposed. So if it was disposed on April, you take 3 full months and one half. 3.5/12 * the recovery period.

Question 13

What types of personal and real property qualify for 179 deduction?

Answer 13

Personal property with some limitations, and in general does not apply to real property.

Only applies to real property improvements for non-residential properties, not residential property. These include, Roofs, heating systems, ventilation, air condition, fire protection, alarm, security systems.

Question 14

What is the max annual section 179 deduction and phase out?

Answer 14

The max you can take is 1,220,000 for the year, and it gets phased out dollar for dollar once it exceeds 3,050,000.

Question 15

When can you not use section 179?

Answer 15

If acquired from a related party, can’t create a loss, or cannot be used if there is already a NOL.

Question 16

What are the requirements of bonus depreciation?

Answer 16

Must have a recovery period of 20 years or less, must required from a related party. 80% in 2023 and 60% in 2024.

Question 17

For intangibles they use the full month method, what is that? How long is that for?

Answer 17

You take the a full months worth of amortization for acquisition and disposition.

Normally 180 months or 15 years.

Question 18

What is the difference between 197 purchased intangibles and capitalized R&D costs?

Answer 18

Section 197 - Amortize over 180 months beginning with the month purchased.

Capitalized Research and Experimental Costs - Amortize over 5 years beginning with the midpoint of the year in which the costs were paid or incurred.

Question 19

If you purchase an intangible without acquiring the business, how is this amortized?

Answer 19

You amortize over the remaining useful life of the patent.

Question 20

How do you amortize loan costs?

Answer 20

Amortize the debt-issuance costs over the term of the loan.