REG 3 - Cost Recovery

Question 1

What type of convention is used for personal property (machinery and equipment) for MACRS? How do you treat salvage value?

Answer 1

• Half year convention - Use half-year depreciation in the year machinery and equipment is bought AND use half-year depreciation in the year machinery and equipment is sold.
• Mid-quarter convention - Use mid-quarter depreciation if 40% of machinery and equipment is bought in the last quarter of the year
• Salvage value is ignored under MACRS

Question 2

What type of convention is used for real property (buildings) for MACRS? How do you treat salvage value? How do you treat land?

Answer 2

Mid-month convention - Use mind-month convention for only half month of credit.

E.g. Taxpayer buys warehouse on Jan 1. The taxpayer will depreciate for 11.5 months.

• Salvage value is ignored under MACRS
• Land is subtracted for cost

Question 3

What is the amount of years and method of depreciation for residential property?

Answer 3

Residential property - apartments, duplex (people sleep there)

27.5-Year Straight-Line

Question 4

What is the amount of years and method of depreciation for nonresidential property?

Answer 4

Nonresidential property - office building, warehouse, store (people don’t sleep there)

39-Year Straight-Line

Question 5

What type of property can have Section 179 expense? (Real or Personal). Does property have to be new equipment, or old equipment?

Answer 5

• Personal property (machinery and equipment) can only have Section 179 expense.
• Property can be new equipment or old equipment

Question 6

Explain the limit for Section 179 expense? How is Section 179 expense limit reduced?

Answer 6

• The limit for Section 179 expense is $510,000
• Section 179 expense is reduced dollar for dollar by the amount of property over $2,030,000.

E.g. A company buys $2,040,000 in equipment. The company can only Section 179 expense $500,000.

Question 7

When is Section 179 expense not permitted?

Answer 7

Section 179 expense is not permitted when a net loss exists OR if the deduction would create a net loss.

Question 8

What is the limit of Section 179 expense for SUVs?

Answer 8

SUVs may be expense up to $25,000

Question 9

What type of property can bonus depreciation expense? (Real or Personal). Does property have to be new equipment, or old equipment?

Answer 9

• Personal property (machinery and equipment) can only have bonus depreciation expense.
• Property must be NEW equipment

Question 10

Explain the percentages of bonus depreciation for years 2015 - 2019?

Answer 10

Taxpayers can take bonus depreciation after Section 179 for:

50% - 2015 - 2017

40% - 2018

30% - 2019

Question 11

What is the order of how depreciation is recognized?

Answer 11

1) Section 179
2) Bonus Depreciation
3) Regular Depreciation

Question 12

Explain cost depletion? What is the formula for cost depletion?

Answer 12

Items such as barrels of oil are used for depletion:

1) Total cost / number of units = Cost per unit
2) Cost per unit x # of units sold = Depletion

E.g. Oil property has 1,000,000 barrels, which cost $1,000,000. The amount of barrels sold were 50,000.

1) $1,000,000 / 1,000,000 = $1 - cost per unit
2) $1 x 50,000 = $50,000 - depletion

Question 13

How long are intangible such as goodwill, license, franchises, and trademarks amortized?

Answer 13

15 years

Question 14

How does a taxpayer amortize business organization costs, start-up costs, research expenses, and pollution control?

Answer 14

Deduct (expense) $5,000 immediately for each separate item and amortize over 180 months (15 years)