Section 1231 Assets - Cost Recovery

Question 1

What is cost recovery normally called?

Answer 1

Depreciation

Question 2

What is MACRS?

Answer 2

Modified accelerated cost recovery system.

Question 3

What is MACRS for personalty?

Answer 3

200% declining-balance method with a half-year convention.

Question 4

What is half-year convention?

Answer 4

TP gets one-half year depreciation in the year of acquisition and one-half year in the year of disposal.

Question 5

MACRS: how is the salvage value determined?

Answer 5

Always $0.

Question 6

What are examples of 5 year property? 7 yr?

Answer 6

5: light trucks, automobiles, computers, office equip.
7: office furniture/fixtures, most equip, machinery.

Question 7

MACRS table: is one-half convention included in yr 1 and the yr of sale?

Answer 7

Yr 1: Yes.

Yr of sale: no because the table doesn’t know which year you sell the item. Therefore, must do x 1/2 to get the rate.

Question 8

Is 200% declining-balance method required?

Answer 8

No, TP can elect to use straight line depreciation.

Question 9

What’s the rule regarding personalty placed in service during the last quarter of the taxable year?

Answer 9

A mid-quarter convention is used if more than 40% of all personalty is place in the period. one-half yr still applies.(x qtr/12. ex: if sold in 1st qtr, 1.5/12, 2 qtr 4.5/12, 3 qtr 7.5/12, 4 qtr 10.5/12).

Question 10

What is MACRS for realty?

Answer 10

Straight-line depreciation with mid-month convention.

Question 11

What is mid month convention?

Answer 11

TP gets one-half month depreciation in the month of acquisition and in the month of disposal.

Question 12

What are 2 categories of realty and their depreciable life?

Answer 12

Residential realty (someone lives in it) - 27.5 yrs.
Nonresidential realty (commercial) - 39 yrs.

Question 13

Depreciation for the year? Office building Cost $264,000 (include land $30,000) in Aug 3.

Answer 13

264,000-30,000=234,000 x 1/39 x 4.5/12 = $2,250.

Question 14

Declining method formula?

Answer 14

yr 1: Cost x (2/N).

yr 2: (cost - yr 1 depr.) x (2/N).

Question 15

What is Section 179 rule? Limit?

Answer 15

TP can elect to expense certain amount of tangible personalty used in a trade or business, which must be acquired from an unrelated party.
Up to $510,000 (2017).

Question 16

What is an example of item NOT eligible for Sec. 179? Are new or used property eligible?

Answer 16

Investment property, rental property, realty.

Yes to both.

Question 17

What are 2 limitations on Sec. 179 deduction?

Answer 17

1. The annual limit for this deduction is reduced dollar-for-dollar for personalty placed in service during the year that exceeds a threshold ($2,030,000 in 2017). This reduction does not create a carry forward to future tax yrs.
2. Sec. 179 expense can’t exceed the taxable income from the business. Any excess is carried forward to future taxable yrs indefinitely.

Question 18

What happens to the basis of the property when taking Sec. 179 deduction?

Answer 18

Reduced by the Sec. 179 amount, even if the deduction is limited by the taxable income rule (because the excess is carried forward and will be expensed).

Question 19

What is bonus depreciation?

Answer 19

TP can select to immediately depreciate 50% (2017,2016) of many types of PERSONALTY.
The remaining basis is depreciated under regular MACRS.

Question 20

Can Sec. 179 and bonus depreciation used together? If yes, which one first?

Answer 20

Yes. Sec. 179 first.

Question 21

Does bonus depreciation apply to both new and used?

Answer 21

Only to new property.

Question 22

What is the rule re: alternative minimum tax and bonus depreciation?

Answer 22

Alternative minimum tax (AMT) adjustments are not required for property for which bonus depreciation has been elected.

Question 23

What is luxury auto limits?

Answer 23

Depreciation amount is limited on a passenger automobile (6000 pounds or less).

Question 24

Luxury auto limits: what is the assumption? If stated otherwise, how to determine the rate?

Answer 24

Assumes 100% business/investment use.

For mixed-use auto, the limit is multiplied by % of business/investment use.

Question 25

What is listed property? 2 major examples? What is an item that used to be one but not anymore?

Answer 25

Assets that can be used for both business and personal purpose.
Vehicles and computers.

Cell phones.

Question 26

Listed property: what is a criteria in order to use accelerated cost recovery method (200% declining method)?

Answer 26

Business use of the listed assets must exceed 50% of total use. Investment use is NOT considered.

However, both business and investment use are depreciated.

Question 27

What are 3 implications when business-use test is not met?

Answer 27

1. Cost recovery is limited to straight-line depreciation (alternate depreciation system: ADS).
2. ADS depreciation must be used for the entire depreciable life even if 50% test is met in future yrs.
3. Excess depreciation over straight-line depreciation amount from prior years must be recaptured.

Question 28

Which intangible assets can be amortized? Examples?

Answer 28

Those that are acquired, but NOT created.

Goodwill, franchises, trademarks, etc.

Question 29

Intangible assets: Depreciation method and how long is the depreciable life?

Answer 29

Straight-line basis.

15 yrs.

Question 30

What is the requirement for other assets to qualify for amortization? Examples of those assets?

Answer 30

If acquired in connection with the acquisition of a trade or business.
Covenants not to compete, computer software, film, sound recordings, video tapes, patents, copyrights.

Question 31

Which form do depreciation and amortization reported on?

Answer 31

Form 4562.

Question 32

Are properties used for personal use or investment assets (stocks, so on) depreciable?

Answer 32

No. Only those used to produce income.

No.