R3. Cost Recovery

Question 1

Depreciation

Answer 1

1BM =
179
Bounus
MACRS

Order you write and depreciate

Question 2

MACRS: personal property

Answer 2

Automobiles: 5years
Computer: 5 years
Furniture, fixtures, machinery, equipment: 7 years

Salvage value is ignored on machine & equip

……………………………………………………………..
Half-year convention
- In the year you buy it ( and year you sell it)

1st year - half year built-in
disposal year - have to manually do the half-year calculation

………………………………………
Mid-quarter convention
IF bottom-heavy with 40% in last quarter

Question 3

MACRS: Real Property

Answer 3

Subtract the cost of land; depreciate building

1) Residental Rental Property - 27.5 years SL
2) Nonresidential real property - 39 years SL

Land is not depreciable

……………………….
mid month convention
- building = used in 1st year
- One half month is taken in the month the property is placed in service

***exam trick:
carefully look to see which month the building was placed in service

Question 4

1BM

Section 179 expense

Answer 4

• each year
• 2021 allowance is $1,050,000 for qualified property acquired
• reduced dollar by dollar than exceeds $2,620,000 (2021)
• deduction limited to taxable income - Can not create a loss

Question 5

1BM

Bonus Depreciation

Answer 5

=machinery and equipment (personal property)

• if not previously used
• depreciation % 100% 2018-2022
• $8k additional first-year depreciation for vehicles
• bonus depreciation is not an adjustment or preference for AMT purpose (individuals)

Question 6

Depletion

Answer 6

1) Cost depletion (GAAP)
recoverable / total unsold units = depletion rate

depletion = depletion rate * sold units

• must be redone every year

2) % depletion ( TAX only)
- limited to 50% of taxable income
- may be taken even after the costs have been completely recovered

Question 7

Amortization

Answer 7

GAAP is NOT = GAAP

1) Tax = 15 years, SL

2) GAAP
public = imapairment test
private = option to amrotize over 10 years

………………………………..
Startup cost
GAAP = expense
Tax =$5000 ( each ) + excess over 180 months
*** the $5k is reduced dollar to dollar for dollar as total cost exceed $50,000 for each item

Biz org ( 5k ) 
Startup (5k) 

Research cost can be amortized over 60 months

Question 8

After- tax cash flows

Answer 8

After-tax cash flow = earnings after tax + amortization + depletion +depreciation