Tax Lesson 4 Flashcards
Cost of business or income producing assets recovered through:
Cost recovery or depreciation for tangible
Amortization for intangible
Depletion for natural resources
Depreciation
Allowance for wear & tear, deterioration, or obsolescence
Purpose to match cost of productive asset to revenues of asset (>1 year)
Basis
Reduced by amount of cost recovery allowed or allowable
Most types of tangible property can be depreciated. Also certain intangible:
Patents, copyrights, computer software Property must meet all following: You own Used in your business or income producing activity Determinable useful life Last more than 1 year
Cannot depreciate
Property used solely for personal activities
If for both, only deduct based on business/investment use
Inventory: not held for use
Land: does not wear our, become obsolete, or get used up (can depreciate landscaping in preparing land for business use - must be closely associated with other depreciable property)
Property placed in service & disposed of in same year
Equipment used to build capital improvements
Section 197 intangibles (must be amortized)
Certain term interests
Depreciation begins:
Depreciation stops:
When property placed in service for use in trade or business or production of income
When fully recovered cost or other basis or retire property from use
ACRS & MACRS
Assets after 1980 Assets subject to wear&tear, obsolescence, etc Determinable useful life Tangible property or realty MACRS used to depreciate most property
Straight line
Deduct same amount each year over useful life unless big change in adjusted basis or useful life
If used for less than full year, prorate depreciation for number of months in use
For patents/copyrights
Useful life lesser of granted by government or remaining when acquired
If becomes valueless before end of useful life deduct remaining cost/basis in that year
Computer software
Considered intangible unless: Readily available for purchase by general public Subject to non exclusive license & Not substantially modified (36 months)
ACRS
1981
Based on recovery periods instead of useful life
Determined by IRS
Cannot use MACRS
Property before 1987 Intangible Films, video tapes, recordings Corporate/partnership property in nontaxable transfer Property you elected to exclude
MACRS consists of 2 depreciation systems:
General Depreciation System
Alternative Depreciation System
ADS must be used for:
Used 50% or less in qualified business use
Tangible used outside US
Tax exempt use property
Tax exempt bond financed property
Property used predominately in farming & placed in service in any tax year during which election not to apply uniform capitalization rules to certain farming costs is in effect
Property imported from country where executive order in effect
3, 5, 7, 27.5, 39
3: tractor, rent to own property
5: computers, autos, trucks, office equipment
7: office furniture & fixtures
27. 5: rental home
39: non residential real estate (office building)
Residential Real Property & Non Residential Real Property use
Mid month convention
Mid month convention:
Placed in service/disposed of mid month
Mid quarter convention:
If total depreciable basis of MACRS placed in service in last 3 months of tax year more than 40% depreciable based of all MACRS property placed in service during year
During quarter is midpoint of quarter
Half year convention:
One half year of service
MACRS:
3 methods GDS
1 method ADS
200% declining balance
150% declining balance
Straight line
Straight line ADS
Example Exam Question:
Purchased computer for office & paid $2000. Using MACRS, how much depreciation can be recognized first year?
A. $500
B. $1000
C. $400
D. $2000
C
Election to Expense Assets - Section 179
Immediately expense $1,080,000 business tangible property
Not for realty or production of income property
Cost recovery on remaining basis
Lesser of:
Property Placed in Service (PPS)
Taxable Income (TI) or
$1080000 phased out for PPS>$2700000
Example Exam Question:
Own & operate manufacturer of custom speed motorcycles. This year purchased new metal cutting machine costing $2,100,000. Assuming taxable income or $3,250,000 after max 179 deduction, how much taxable income before deduction?
A. $1,080,000
B. $2,700,000
C. $4,330,000
D. $3,250,000
C
Bonus depreciation
Immediate 100% first year deduction for qualified new or used equipment acquired & placed in service between 9/28/2017-12/31/2022
Intangible Amortization over 15 years
Goodwill
Trademarks
Covenants not to compete
Copyrights & patents used in trade/business
Depletion
Natural resources other than land
2 methods:
Cost: asset basis/estimated total number of recoverable units of assets x number of units sold
Percentage: statutory percentage applied to gross income from property limited to 50%
Lesson 4 Review:
Bought 2 machines in past 2 years. First on December 28 last year. Arrived January 2 current year. Installed February 15 current year. Purchase price $65k. 2nd purchased November 15 & delivered/installed December 3. Purchase price $35k. Which convention should they use?
A. Half year
B. Mid quarter
C. Mid month
D. Can choose between half year & mid quarter
A
Lesson 4 Review: Purchased computer for marketing business what property class should be used to depreciate?
A. 3 year
B. 5 year
C. 7 year
D. 10 year
B
Lesson 4 Review:
Limousine service considering purchase of new automobile for use in business. What property class?
A. 3 year
B. 5 year
C. 7 year
D. 10 year
B
Lesson 4 Review:
Consulting business booming. Recently built new office building. Purchase new office furniture for entire building. Which property class?
A. 3 year
B. 5 year
C. 7 year
D. 10 year
C
Lesson 4 Review:
Buys office equipment for business requiring 5 year straight line depreciation. Costs $20k with no salvage value. How much deduct first year disregarding half-year & mid-quarter conventions?
A. $1000
B. $4000
C. $10000
D. $20000
B
Lesson 4 Review:
Assuming MACRS, what is first year cost recovery amount for $100k worth of office furniture purchased this year?
5 year 20; 7 year 14.29
A. $7150
B. $14290
C. $20000
D. $100000
B
Lesson 4 Review:
Purchase building for $100k & paid commission of $5k. Made improvements of $20k. Took cost recovery of $12k first year. What is adjusted basis at end of first year?
A. $125k
B. $113k
C. $105k
D. $88k
B
Lesson 4 Review:
Purchased office equipment for $20k. Paid sales tax or $1,400 & shipping costs $3000. This is only section 179 property put into service this year. Taxable income of $100000. What is maximum section 179 deduction taken this year?
A. $20000
B. $21400
C. $23000
D. $24400
D
Lesson 4 Review:
Residential rental property requires which convention?
A. Mid month
B. Mid quarter
C. Half year
D. None
A
