R3-M5 Cost Recovery

Question 1

what is MACRS depreciation rules?

Answer 1

• Salvage value is ignored for purposes of computing deduction for property placed in service after 1986

Question 2

what is rule of half-year convention?

Answer 2

• in year you buy it and year you sell it
• in year you buy it, 1/2 year is already built-in
• in year you sell it, you must calculate the 1/2 year manually
• personal property: machinery and equipment

Question 3

what is rule of mid-quarter convention?

Answer 3

• if over 40% in last quarter
• personal property: machinery and equipment

Question 4

what is rule of mid-month convention?

Answer 4

• real property: building used in 1st year
  -1/2 is taken in the month of property is placed in service

Question 5

what is rule of cost depletion (GAAP)?

Answer 5

• unit depletion rate (tons of ore, barrels of oil) = cost basis / recoverable barrels. this needs to be redone every year
• depletion deduction = depletion rate x numbers of units
• Tax: limited to 50% of taxable income

Question 6

what are rules of amortization?

Answer 6

• Tax: straight line 15 years
• GAAP:
  + public: impairment test
  + private: option to amortize over 10 years
• start-up and business organization cost:
  + GAAP: expense
  + tax: can deduct $5000 if total cost exceeds $50k. the remaining is amortized over 180 months
  + Research expenses: amortized over 60 months
• intangibles such as goodwill, licenses, franchises, trademarks, and covenants not to compete may be amortized straight line over 15 years