Tax Reduction/Management Techniques: Depreciation, Cost Recovery, Amortization, Depletion, Accounting Periods, And Accounting Methods

Question 1

Taxpayers may recover the cost of certain assets she used in trader businesses through what?

Answer 1

Depreciation, amortization, or depletion

Property use for the production of income, such as inventory is in eligible for depreciation

Question 2

Property that is eligible for depreciation, amortization, or depletion are what?

Answer 2

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

Question 3

If an individual does not take the depreciation allowed, but still, must they do?

Answer 3

Still must reduce the basis of the allowable depreciation

Question 4

What is the simplest form of depreciation that taxpayer can take?

Answer 4

Straight line depreciation

Question 5

What is straight line depreciation

Answer 5

Depreciation that is uniform throughout the useful life of the asset

Question 6

What is the formula for straight line depreciation?

Answer 6

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

Question 7

What is the modified accelerated cost recovery system? MACRS

Answer 7

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

Question 8

What is the half year convention?

Answer 8

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.

Question 9

Under modified accelerated cost recovery system (MACRS) What is the life of residential real estate in non-residential real estate?

Answer 9

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

Question 10

Under the modified accelerated cost recovery system (MACRS) What is the mid quarter convention and when is it required?

Answer 10

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

Question 11

Section 179 allows an annual write off of the cost of what kind of assets

Answer 11

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

Question 12

Under section 179 what is the maximum write off for 2024?

Answer 12

$1,220,000

Question 13

What is the annual limitations of total property placed in service for a given year?

Answer 13

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

Question 14

Example of section 179 with annual limitations

Answer 14

Question 15

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

Answer 15

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

Question 16

Certain intangible assets are amortizable over 15 years. What assets are those?

Answer 16

Include Goodwill, trademarks, covenants not to compete, copyrights and patterns if they are used in trade or business or for the production of income

Question 17

Natural resources except land are subject to what

Answer 17

Depletion

Owners entitled to a deduction for just gross income to recover his cost

Question 18

What are the four types of expenditures in natural resources?

Answer 18

Cost of natural resources

Cost of intangible development

Tangible assets cost

Operating cost

Question 19

What two options are available for intangible, drilling and development cost for expenses

Answer 19

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,

Question 20

What are the two depletion methods that you can use?

Answer 20

Cost method

Percentage method

This is an annual election and usually the method yielding. The larger deduction is chosen.

Question 21

What is the difference between the cost depletion method and the percentage depletion method?

Answer 21

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

Question 22

What are the exceptions for cash basis taxpayers

Answer 22

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