Tax Reduction/Management Techniques: Depreciation, Cost Recovery, Amortization, Depletion, Accounting Periods, And Accounting Methods Flashcards
Taxpayers may recover the cost of certain assets she used in trader businesses through what?
Depreciation, amortization, or depletion
Property use for the production of income, such as inventory is in eligible for depreciation
Property that is eligible for depreciation, amortization, or depletion are what?
Personalty, Realty and intangibles
Must have a determinable useful life and be subject to wear and tear , decay or decline from natural causes, or obsolescence
If an individual does not take the depreciation allowed, but still, must they do?
Still must reduce the basis of the allowable depreciation
What is the simplest form of depreciation that taxpayer can take?
Straight line depreciation
What is straight line depreciation
Depreciation that is uniform throughout the useful life of the asset
What is the formula for straight line depreciation?
Cost for adjusted basis of the asset, less the assets, residual or salvage value, is deducted in equal annual installments over the assets, useful life
Straight line depreciation = (cost - residual value) / useful life
What is the modified accelerated cost recovery system? MACRS
Tangible personalty is 3, 5, 7, 10, 15, or 20 year property
Percentages are based on 200% declining balance for 10 year and less property and 150% declining balance for 15 and 20 year property
Both 200% declining balance and 150% declining balance switch over to straight line depreciation when it results in a larger deduction
What is the half year convention?
Used in both straight lined depreciation and MACRS
Half year appreciation is allowed during the year placed in service and a half year depreciation is allowed in the year of disposition. A mid quarter convention may apply.
Under modified accelerated cost recovery system (MACRS) What is the life of residential real estate in non-residential real estate?
Residential real estate has a 27.5 your lifespan
Non-residential has a 39 year life
Cost recovery percentages are calculated using straight line
Midnight convention is used
Under the modified accelerated cost recovery system (MACRS) What is the mid quarter convention and when is it required?
If more than 40% of the personal property is placed in service during the last quarter of the year, the mid convention applies to all personal property assets placed in service that year
Section 179 allows an annual write off of the cost of what kind of assets
The cost of tangible personal property used in a trade or business and placed in service during the current year
Plies to the purchase of office equipment, business, computers, and so forth
Under section 179 what is the maximum write off for 2024?
$1,220,000
What is the annual limitations of total property placed in service for a given year?
3,050,000 the allowances reduced dollar for dollar for any amount over the 3,050,000 no carryover is allowed
Amount of deduction cannot exceed the taxable income from total trade or business of the taxpayer carry forward is available
Example of section 179 with annual limitations
If a cash outlay is considered a capital expenditure cash outlay is not currently deductible. Instead, the cost must be capitalized and appreciated over the properties useful life a capital expenditure could include what
Expenditures that materially had to the value of the property
Expenditures that substantially prolong the properties useful life
Expenditures as part of a general plan of renovating improving or altering the property
Certain intangible assets are amortizable over 15 years. What assets are those?
Include Goodwill, trademarks, covenants not to compete, copyrights and patterns if they are used in trade or business or for the production of income
Natural resources except land are subject to what
Depletion
Owners entitled to a deduction for just gross income to recover his cost
What are the four types of expenditures in natural resources?
Cost of natural resources
Cost of intangible development
Tangible assets cost
Operating cost
What two options are available for intangible, drilling and development cost for expenses
Expense in the year incurred
Capitalize and deplete
After the election is made all future expenditures of a similar nature are handled in the same way generally,
What are the two depletion methods that you can use?
Cost method
Percentage method
This is an annual election and usually the method yielding. The larger deduction is chosen.
What is the difference between the cost depletion method and the percentage depletion method?
Cost depletion - asset basis is divided by the estimated total number of recoverable units of the asset then multiplied by the number of units sold to determine the amount of the deduction for the year
Percentage depletion - statutory percentage is applied to the gross income from the property (limited to 50% of the gross income) This method is unrelated to the cost or basis of the asset
What are the exceptions for cash basis taxpayers
Constructive receipt - if income is available, it is subject to income tax
Series EE Bonds - income on the savings bonds can be taxed deferred a cash basis taxpayer has the choice to either defer income recognition until maturity or redemption, or elect to include gross income, the annual increment in redemption value
Original issue discount - Treats cash basis and an accrual basis taxpayers the same by requiring that the OID be reported Nguyen earned regardless of the accounting method
