R2 M3 - Cost Recovery (Notes)

Question 1

What is MACRS?

Answer 1

Modified accelerated cost recovery system.
- Can deduct greater expense upfront to pay less tax by reducing net income.

Question 2

What is Real Property and Personal Property?

Answer 2

Real Property:
-Building
- Paving
- land and all item permanently connected to the land

Personal property: is tangible moveable property not affixed to land.
- Machinery
- Equipment
- Automobiles

Question 3

Please list the items in a 5-year class vs 7-year MACRS: Personal Property:

Please note: the 5-year class and 7-year MACRS use the half-year convention, unless more than 40% of personal property is placed in service in the last quarter of the year than you would use the mid-quarter convention.

• First year and last year of the half-year convention is depreciated and multiplied by 50%. If you sell or dispose of the personal property before the live of the property than you would multiply the depreciation by half.
• As for mid-quarter convention if you dispose of the property in the first quarter you would use 12.5%, 2nd quarter you would use 37.5% (25+12.5), 3rd quarter 62.5% (50% + 12.5%) and the fourth quarter you would use 87.5% (75%+12.5%).

Answer 3

5-year Class: Includes automobiles, light trucks, computers and copiers

7-year Class: Includes furniture & fixtures, machinery, and other equipment.

Question 4

How would you calculate the net book value from the above example:

Question 5

Answer 5

For the computer you would use the 5-year fourth mid-quarter convention.

Computer cost of
Year 1 depreciation:
$8,500 x 5% (5-year, fourth quarter, Year 1 rate) = $425

Year 2 depreciation:
$8,500 x 38% (5-year, fourth quarter, Year 2 rate) = $3,230

Year 3 depreciation:
$8,500 x 22.8% (5-year, fourth quarter, Year 1 rate) = $1,938

Total Acc Depreciation –> $425 + $3,230 + $1,938 = $5,593

Net Book Value –> $8,500 - $5,593 = $2,907

Question 6

MACRS: Real property residential vs nonresidential property residential

Answer 6

Residential property –> 27.5 years straight line.
Ex: Apartment buildings, rental homes

Nonresidential property: 39 years straight line.
Ex: Office Buildings, warehouse.

Question 7

Answer 7

Explanation of how the mid-month works

Question 8

Answer 8

Explanation of how the mid-month works

What is the adjusted basis of the building?

Cost: $100,000
Y1 Depreciation: (1,816)
Y2 Depreciation: (2,564)
Y1 Depreciation: (534)

Adjusted Basis or Net book value would be $ 95,086

Gain/loss = Sale Price - NBV

Question 9

Section 179 Expense Deductions is personal property placed into service with come limitations.

Qualified real property
- It does not apply to real property but only qualified real property improvements.
- After- purchase improvements
- Must be nonresidential real property.

Answer 9

Examples of After purchase improvement

Question 10

1.What is the Maximum allowed annual deduction for Section 179 for 2024?

2.What is the dollar-for-dollar phase-out for 2024?

Answer 10

1. $1,220,000
2. If purchase exceeds $3,050,000

Question 11

The qualified property must be acquired from an unrelated party during the year.

Section 179 cannot be used:
- to create a loss; or
- if you already have a net operating loss (NOL).

Question 12

Bonus Depreciation: Allows for an additional deduction of qualified property placed into service.

• Qualified property must have a recovery period of 20 years or less
• Qualified property must not be acquired from a related party (family member)

Question 13

Answer 13

Start with the Section 179 Allowable Deduction:
1. Cannot exceed maximum allowable deduction of $1,220,00
2. Check if property placed in service > $3,050,000 (beginning phase-out amount):
- 3,500,000 > 3,050,000

• $3,500,000 - $3,050,000 = $450,000

Company A is $450,000 > sect 179 beg. dollar-for-dollar phase-put
$1,220,000 - $450,000 = $770,000.

Bonus depreciation based on the year. (60%)

$3,500,000 - $770,000 = $2,730,000
$2,730,000 x 60% = $ 1,638,000

Allowable expense deduction for the year: $1,638,000 ( 60% bonus depreciation rules).

For the last step please look at the attachment below.

3. Section 179 deduction cannot be used to create a loss or if NOL exist.

Question 14

Amortization: Intangible asset that are amortized for 15 years or 180 months.

-Full month convention
Example: Patents, Goodwill, Copyrights

Capitalized organizational cost and start-up costs. They are allowed to take $5,000 expense deduction and a separate $5,000 for start up

Question 15

Answer 15

Question 16

Answer 16