Property Transactions: Depreciation and Amortization

Question 1

What kind of property is eligible for depreciation?

Answer 1

Tangible property used in trade, business, or production of income and has a determinable, limited useful life.

Question 2

What are the different depreciation methods?

Answer 2

(1) Straight line depreciation
(2) 150% declining balance
(3) 200% declining balance
(4) Unit of production method

Question 3

What are the two systems of MACRS and who does each apply to?

Answer 3

The General Depreciation System applies to most taxpayers. The law may require or the taxpayer may elect to use Alternative Depreciation System.

Question 4

What are the potential useful life periods under MACRS and what are examples of assets under each?

Answer 4

(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

Question 5

For non-real property (personalty), what is the depreciation method, recovery period, and convention used?

Answer 5

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.

Question 6

For residential real property, what is the depreciation method, recovery period, and convention used?

Answer 6

Straight line depreciation
27.5 year recovery period
mid-month convention

Question 7

For non-residential real property, what is the depreciation method, recovery period, and convention used?

Answer 7

Straight line depreciation
39 year recovery period
mid-month convention

Question 8

What kind of property can be depreciated under section 179?

Answer 8

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.

Question 9

How must Section 179 property be obtained?

Answer 9

Must be purchased from unrelated party.

Question 10

How is the amount of allowable Section 179 property calculated?

Answer 10

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

Question 11

(T/F) Section 179 deduction can be taken in excess of tax liability.

Answer 11

F. Section 179 deduction in excess of tax liability cannot be deducted but can be carried forward.

Question 12

How are Section 179 limits applied to pass-thru entities?

Answer 12

Limits are applied once at entity level and once at owner level.

Question 13

(T/F) Trusts and estates may use the Section 179 deduction?

Answer 13

F

Question 14

How is Section 179 impacted if property purchased is used part business and part personal?

Answer 14

Only the portion used for business may be deducted.

Question 15

How much bonus depreciation [168] may be taken in 2024 and beyond?

Answer 15

60% for 2024
40% for 2025
20% for 2026
Nothing thereafter
Certain properties have extended years

Question 16

How old must property be to qualify for 168 bonus depreciation?

Answer 16

Can be new or used as long as it is new in the taxpayer’s hands.

Question 17

Does property qualified for 168 bonus depreciation generally include MACRS property, real property, or both?

Answer 17

Only MACRS property with life of 20 years or less

Question 18

What is the primary section relating to amortization of intangibles and what period are they amortized over?

Answer 18

Section 197. 180 months straight line.

Question 19

How much of start up costs and organizational costs may be deducted? What is the phaseout limit?

Answer 19

$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.

Question 20

Examples of start-up and organizational costs?

Answer 20

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.

Question 21

What is the basic rule for what constitutes qualified intangible assets that may be amortized under 197?

Answer 21

Qualified intangibles are created (not acquired) in connection with a trade or business or income producing activity.

Question 22

Can qualified 197 intangible asset arise from the taxpayer’s own efforts?

Answer 22

Generally no unless in the connection witht he acquisition of a trade or business.

Question 23

Examples of qualified 197 intangible assets?

Answer 23

Acquired goodwill
Workforce, copyright, patent, etc.
Licenses, permits, etc.
Noncompete covenants
Franchise, trademarks, etc.

Question 24

Examples of intangible assets excluded from amortization?

Answer 24

Interests in corporations, trusts, partnerships, and estates.
Interests in lands
Most financial instruments
Leases of intangible personal property
Professional Sports Franchises