Section 1231- Cost Recovery

Question 1

BE VERY FAMILIAR WITH THIS LESSON!

Answer 1

TRUE

Question 2

What are the general rule for personalty?

Answer 2

200% declining balance with a HALF-YEAR CONVENTION regardless of when it was purchased.

Question 3

What are the asset classes for personalty?

Answer 3

5 YR: (Trucks, automobiles, computers, peripheral equipment, office equipment)

7 YR: Furniture and Fixtures

Question 4

If an asset is sold before the end of the useful life on the MACRS table, how do you treat that? (i.e. what if you sell furniture in year 3 rather than holding it till year 7)

Answer 4

Cost of the equipment X Year 3 depreciation = #

/ 2 (you do this because it is the half-year conversion)

Question 5

Can taxpayers elect to use the SL method instead?

Answer 5

Yes, they can use that instead of MACRS

Question 6

What is the mid-quarter convention?

Answer 6

If more than 40% of all PERSONALTY is placed into service in the last quarter of the tax year.

If this is the case, then you would use the mid-quarter convention.

Remember: That you need to go to the 4th quarter table

Question 7

If you sale an asset that meets the mid-quarter convention, and you sell a 5YR asset in January of Y2, what table to you go to for the depreciation for that year?

Answer 7

You go to the 4th Quarter Table, Don’t switch tables.

• Start with the full-year deprecation on the quarter table
• Multiple it by the months it was owned during the year of sale.

Question 8

What are the general MACR rules for realty?

Answer 8

SL depreciation with mid-month confession

Residential Realty: 27.5
Non-Residential: 39 years

Question 9

Is land depreciable?

Answer 9

NO!!

Question 10

What is the formula for calculating depreciation for buildings?

Answer 10

Cost X (1/39) X (#months/12)

Question 11

If you are using the SL depreciation table for realty, how do you use the table.

Answer 11

Go to the month of purchase, always stay in that month for future years. Don’t switch to other months.

Question 12

What is qualified improvement property (Important):

Answer 12

Improvements to the interior of nonresidential real property after a building was placed into service.

Question 13

What is the recovery period for Qualified Improvement Property?

Answer 13

15 years, Straight Line, Half-year Convention

Question 14

What is section 179? What is the maximum deduction?

Answer 14

Taxpayers can elect to expense a certain amount of tangible personalty used in a trade or business.

Property used in investment activities ARE NOT eligible.

Maximum deduction: 1,020,000

Question 15

What are the two limitations on the section 179 deduction?

Answer 15

1) The annual limit is reduced dollar for dollar for personalty that exceed 2,550,000. This reduction does not carry forward to future tax years.
2) The section 179 cannot exceed the taxable income for the business. Any excess is carried forward to future tax years.

Question 16

What happens if a company uses sec 179 but doesn’t use it for the entire MACRS useful life of the asset?

Answer 16

Take the difference between the section 179 and what would have been the MACRS deprecation.

That difference will go to INCOME.

Question 17

What is bonus depreciation?

Answer 17

This does not apply to buildings, only personalty.

Applies to new and used property.

Question 18

What are the recovery rules for INTANGIBLE ASSETS?

Answer 18

Amortized over SL Basis 15 YRS

IF an intangible is CREATED, it cannot be amortized

Other assets include: computer software, film, sound recording, patents, IF ACQUIRED IN CONNECTION WITH AN ACQUISITION OF A TRADE OR BUSINESS