Module 5: Cost Recovery

Question 1

Define real property

Answer 1

Land and all items permanently affixed to the land

Question 2

Define personal property

Answer 2

All property not classified as real property

Question 3

MACRS

What percent declining balance is used for 3, 5, 7, and 10 year property?

Answer 3

200% declining balance

Question 4

MACRS (PERSONAL PROPERTY)

What percent declining balance is used for 20 year property?

Answer 4

150% declining balance

Question 5

MACRS (PERSONAL PROPERTY)

Half-year convention

Answer 5

Treated as having been placed in service or disposed of at midpoint of year

Question 6

MACRS (PERSONAL PROPERTY)

Mid-quarter convention

Answer 6

If > 40% of depreciable proerty is placed in service in last quarter, mid-quarter convention must be used

Question 7

MACRS (REAL PROPERTY)

Mid-month convention

Answer 7

One half of the month is taken in the month property placed in service

Question 8

Section 179 Expenses: Expense deduction in lieu of depreciation
What is the limitation on immediate expensing?

Answer 8

$510,000 for new or used personal property that is acquired from an unrelated party

• Max amount reduced dollar for dollar by amount of property placed in service during taxable year that exceeds $2,030,000
• Not permitted when net loss exists or deduction would create net loss
• SUVs expenses to $25,000

Question 9

Bonus depreciation

Answer 9

Taxpayer can expense an additional percentage of qualified property that is placed into service in the current year

Question 10

Qualified property under bonus depreciation

Answer 10

Property w/recovery period of 20 year or less and original use of property commences w/taxpayer

Question 11

Bonus depreciation %’s

Answer 11

50%: ‘15-‘17
40%: ‘18
30%: ‘19

Question 12

What is the order in which depreciation deduction can be taken?

Answer 12

Asset
1st:
2nd:
3rd:

Question 13

Cost depletion: Calculate unit depletion rate

Answer 13

Remaining basis of property is divided by the remaining # of recoverable unites = unit depletion rate

Question 14

Cost depletion: Calculation deduction

Answer 14

Depletion unit rate x # of units sold

Question 15

How often should the unit depletion rate be computed?

Answer 15

Every year due to the # of unsold units changing

Question 16

Percentage depletion

Answer 16

Certain percentage x gross income from property

Question 17

What is the percentage depletion limited to

Answer 17

50% of taxable income (excluding depletion) from the well or mine

Question 18

How is % depletion deduction in excess of property’s basis treated?

Answer 18

AMT preference item

Question 19

Amortization of intangibles

Answer 19

SL amortization of 15 years starting w/month of acquisition

Question 20

Amortization of business organization and start-up costs

Answer 20

$5,000 expenses and the remainder amortized over 180 months

Question 21

What are the three ways a taxpayer may take cost recovery deductions on depreciable property?
(IBM)

Answer 21

Internal Revenue Code Section 179
Bonus Depreciation
MACRS Depreciation

Question 22

What conditions must be satisfied for a taxpayer to expense, under IRC 179, the cost of new or used tangible depreciable personal property?

Answer 22

1. The property must be purchased for use in taxpayer’s active trade/business
2. The property must be purchased from an unrelated party