Property Transactions: Depreciation and Amortization Flashcards
What kind of property is eligible for depreciation?
Tangible property used in trade, business, or production of income and has a determinable, limited useful life.
What are the different depreciation methods?
(1) Straight line depreciation
(2) 150% declining balance
(3) 200% declining balance
(4) Unit of production method
What are the two systems of MACRS and who does each apply to?
The General Depreciation System applies to most taxpayers. The law may require or the taxpayer may elect to use Alternative Depreciation System.
What are the potential useful life periods under MACRS and what are examples of assets under each?
(1) 3 years. Special Tools
(2) 5 years. Computer, cars, trucks
(3) 7 years. Machinery, office furniture and equipment
(4) 10 years. Water vessels, petroleum processing equip.
(5) 15 years. Data communication plants, sewage treatment plants, billbowards.
(6) 20 years. Utilities
5 and 7 years most common
For non-real property (personalty), what is the depreciation method, recovery period, and convention used?
The depreciation method is either 150% or 200% declining balance depending on MACRS category.
Recovery period is between 3 years and 20 years depending on MACRS classification. 5 and 7 are most common.
Convention used is mid-year unless 40% of property is put into service during the 4th quarter, in which case all personal property acquired or put in service during the year is mid-quarter.
For residential real property, what is the depreciation method, recovery period, and convention used?
Straight line depreciation
27.5 year recovery period
mid-month convention
For non-residential real property, what is the depreciation method, recovery period, and convention used?
Straight line depreciation
39 year recovery period
mid-month convention
What kind of property can be depreciated under section 179?
Depreciable personal property and qualified real property used in the active conduct of a trade or business.
Also includes certain improvements to non-residential real property.
How must Section 179 property be obtained?
Must be purchased from unrelated party.
How is the amount of allowable Section 179 property calculated?
There is an overall limitation that is phased out for each dollar of eligible 179 property purchased over a threshold amount.
2024 overall limit: $1,220,000
2024 Threshold: $3,050,000
(T/F) Section 179 deduction can be taken in excess of tax liability.
F. Section 179 deduction in excess of tax liability cannot be deducted but can be carried forward.
How are Section 179 limits applied to pass-thru entities?
Limits are applied once at entity level and once at owner level.
(T/F) Trusts and estates may use the Section 179 deduction?
F
How is Section 179 impacted if property purchased is used part business and part personal?
Only the portion used for business may be deducted.
How much bonus depreciation [168] may be taken in 2024 and beyond?
60% for 2024
40% for 2025
20% for 2026
Nothing thereafter
Certain properties have extended years
How old must property be to qualify for 168 bonus depreciation?
Can be new or used as long as it is new in the taxpayer’s hands.
Does property qualified for 168 bonus depreciation generally include MACRS property, real property, or both?
Only MACRS property with life of 20 years or less
What is the primary section relating to amortization of intangibles and what period are they amortized over?
Section 197. 180 months straight line.
How much of start up costs and organizational costs may be deducted? What is the phaseout limit?
$5,000 may be elected. $50,000 of costs begins phaseout and at $55,000, no deduction may be taken and all must be capitalized and amortized.
Examples of start-up and organizational costs?
Start-up: Costs incurred to prepare or enter a trade or business, secure suppliers and customers, and to obtain certain noncapital supplies and equipment.
Organizational: Legal and accounting fees to draft corporate charter, costs of state filings, and expenses of meetings with directors, shareholders, and partners.
What is the basic rule for what constitutes qualified intangible assets that may be amortized under 197?
Qualified intangibles are created (not acquired) in connection with a trade or business or income producing activity.
Can qualified 197 intangible asset arise from the taxpayer’s own efforts?
Generally no unless in the connection witht he acquisition of a trade or business.
Examples of qualified 197 intangible assets?
Acquired goodwill
Workforce, copyright, patent, etc.
Licenses, permits, etc.
Noncompete covenants
Franchise, trademarks, etc.
Examples of intangible assets excluded from amortization?
Interests in corporations, trusts, partnerships, and estates.
Interests in lands
Most financial instruments
Leases of intangible personal property
Professional Sports Franchises
