Section 7 - Depreciation Under Federal Income Tax Depreciation Rules Flashcards
To ensure students understand the difference between GAAP and IRS depreciation rules and how to use the IRS prescribed depreciation rate tables.
If a company with a Dec 31 year-end purchased a building on March 1 and placed it in service the same day or on the last day of the month, the company still takes 9 ½ months’ depreciation for the first year.
True or False.
True.
The mid-month convention requires that buildings be depreciated as though purchased in the middle of the month, regardless of when actually purchased.
The mid-month convention requires that buildings be depreciated as though purchased
In the middle of the month (mid-month convention)
Under GAAP rules, the length of time management estimates an asset is expected to last is called the _____ _____, however, for tax purposes, it is referred to as the _______ ______.
useful life, recovery period.
What is the name of the provision that allows a company to expense rather than depreciate over several years in the year of purchase, up to $500,000 of the equipment cost for the 2016 tax year?
Section 179
In 2016, Mack Co made purchases of $2,511,000 in equipment during the year, what is the maximum Sec. 179 that can be recognized for the year?
The $500,000 maximum Sec. 179 depreciation is reduced dollar for dollar by the $511,000 in excess of 2,000,000; therefore no Sec. 179 depreciation can be recognized.
$2,511,000 original cost basis - $2 million threshold = $511,000 excess.
$500,000 maximum Sec. 179 deduction for 2016 - $511,000 excess = $0 allowable Sec. 179 for 2016.
The mid-quarter convention applies to equipment and buildings
True or False
False.
The mid-quarter convention applies to equipment only. Buildings are governed by the mid-month convention.
Assuming the mid-quarter convention applies, if Machine 2, was purchased on Oct 11, the asset will be treated as if it was purchased on ________ and is depreciated for _________ months.
Because mid-quarter applies, all assets must be depreciated using the mid-quarter as opposed to the half-year convention. Therefore, the asset must be depreciated as if it was placed in service in the middle of the second quarter. Thus, it will be treated as if it was purchased on November 15th and is depreciated for 1 ½ months.
What happens when a company decides to sell or trade a partially depreciated asset?
If a company decides to sell or trade in a partially depreciated asset, they must determine the asset’s book value by subtracting accumulated depreciation from the depreciation schedule from the acquisition cost to see if there is a gain or loss. Please note, accumulated depreciation balance is used from the depreciation schedule and not the Accumulated depreciation general ledger account because tax depreciation is not recorded in the books.
The cost basis of a building includes
Any necessary costs incurred to get the building ready for its intended use.
Which class of assets do the following conventions apply
Mid-month
Half-year
Mid-quarter
Mid-month - Buildings
Half-year - Equipment
**Mid-quarter - Equipment
**Please note, the mid-quarter convention overrides the half-year convention when more than 40% of the aggregate basis of the equipment purchased (total acquisition cost - Sec. 179 deduction) is purchased in the last 3 months of the taxable year.
What must a company do to be exempt from recognizing first-year bonus depreciation?
A company must recognize the additional bonus unless they elect not to on Form 4562 “Depreciation and Amortization”
MACRS depreciation is based on many of the same basic concepts as GAAP
True or False
True.
The depreciation rate a company uses to determine depreciation expense under MACRS can be found in
Publication 946
Once the cost basis has been determined, it is multiplied by the depreciation rate from the appropriate MACRS table in Publication 946.
Generally, the mid-quarter convention results in more first-year depreciation than half-year.
True or False
False.
The mid-quarter convention results in less first-year depreciation than the half-year convention, which is as Congress intended to prevent abuse of the half-year convention.
Although it is required, there are certain exceptions and scenarios where a company can elect to not take bonus depreciation.
Explain one
Some examples of when a company might opt to forgo depreciation is when their revenue for the period is so low they don’t need an additional expense deduction, or if they are in the process of applying for a loan, they have a higher chance of being approved for the loan if their net income was higher.
Under tax rules, the residual value is ignored, and the acquisition cost is the maximum depreciation that can be recognized.
True or False
True.
MACRS does not recognize residual value.
If a company with a Dec 31 year-end purchased equipment on March 1, MACRS requires that the asset is depreciated as if it were purchased on
July 1.
Simply stated, under MACRS, only one-half depreciation is recognized in the first year.
The mid-quarter convention was created to prevent abuse of the half-year convention.
True or False
True.
The mid-quarter convention was created to prevent abuse of the half-year convention. The fear was that companies would intentionally purchase equipment close to the last day of the year, then write off a full one-half year of depreciation.
Under MACRS, once the cost basis has been determined, the next step is to
When the cost basis has been determined, the next step is to multiply the depreciation rate from the appropriate MACRS table
What is the maximum dollar amount of equipment, not including buildings a company can purchase before the Sec. 179 depreciation is reduced on a dollar by dollar basis?
$2,000,000
If a company purchases over $2 million of equipment, not including buildings during the year, the $500,000 maximum deduction for 2016 is reduced dollar for dollar for any original cost basis that exceeds $2 million. This is one of the two limitations of Sec. 179.
MACRS stipulates how much depreciation can be taken in the first year, regardless of purchase date.
True or False
True.
This is different from GAAP depreciation which depends on when the asset is purchased.
A computer would considered
Under MACRS, office furniture would be considered a 5-year asset
True or False
False.
7-year recovery period. This class of assets generally includes office furniture and fixtures such as desks, files, chair, safes and most equipment.
Under MACRS, a computer would be considered a 5-year asset.
True or False
True.
5-year recovery period. This class of assets generally includes computers and peripherals (machines controlled by the computer), automobiles, trucks, office machinery, typewriters, copiers and adding machines.
