Taxes: Section 1231 Assets - Cost Recovery

Question 1

Taxes
Section 1231
Cost Recovery
Depreciation

Answer 1

1. Deduction allowed only to extent of MACRS
   - only business property and income-producing property used to produce income
2. 200% declining balance or 150% declining balance used for personalty; straight line used for realty
   - Realty: land and other assets affixed to it
   - Personalty: any tangible asset that can be moved
3. Time
   - Realty: mid-month convention & 1/2 month purchased
   - Personalty: Mid Year - 1/2 year in year purchased
4. Lives
   200% declining balance
   - 3 years: horses
   - 5 years: auto, trucks, computers, peripheral equipment, office equipment,
   - 7 years: office furniture and fixtures, agricultural and other machinery
   150% declining balance
   - 15 years: land and improvements
5. Residential Realty
   - Residential Realty: 27.5
   - Non-Residential Realty: 39
6. Disposition of asset follows appropriate mid-year or mid-month convention
7. Bonus Depreciation
   - 50% for new qualifying property
   - new qualifying property: recovery period less than or equal to 20 years, computer software, and leasehold improvements
8. Mid Quarter Convention
   - allowed for all new personalty if more than 40% is purchased in last quarter of the year
   - 1/2 quarter in quarter purchased and 1/2 quarter sold

Question 2

Taxes
Section 1231
Cost Recovery
Section 179

Answer 2

Section 179

• expense a limited amount of tangible personalty if used in trade activity
• taken into account before bonus depreciation
• max is lesser of business income or $500,000 for 2014; reduced to 25,000 in 2015
• cannot exceed business income; reduced by all other expenses
• phased out for qualified assets purchased > $2,000,000; reduced to 200,000 for 2015

Question 3

Taxes
Section 1231
Cost Recovery
Section 179
Example 1

Answer 3

1. TP purchased $2,040,000 (2014) of tangible assets for use in his trade. The Section 179 limit of $500,000 is reduced by $40,000 ($2,040,000 − $2,000,000) to $460,000. There is no carryforward of the amount that is phased out.

Question 4

Taxes
Section 1231
Cost Recovery
Section 179
Example 2

Answer 4

2. TP, a self-employed taxpayer, had business income of $15,000 in 2014 prior to deductions associated with cost recovery. This year TP purchased equipment for $25,000.

Question: What is TP’s deduction under the election to expense the cost of the machinery?

Answer: TP can elect to expense $25,000, but the deduction is limited to the business income of $15,000. The remaining $10,000 can be carried forward indefinitely and expensed in future years when there is sufficient business income.

Question 5

Taxes
Section 1231
Cost Recovery
Section 179
Example 3

Answer 5

3. TP, a self-employed taxpayer, purchased equipment in 2015 for $210,000.

Question: What portion of the cost may TP elect to treat as an expense rather than as a capital expenditure?

Answer: Since $210,000 exceeds the $200,000 trigger by $10,000, the overall limit of $25,000 is reduced to $15,000 ($25,000 − $10,000).

Question 6

Taxes
Section 1231
Cost Recovery
Section 179
Luxury Auto Limits

Answer 6

• anything weighing more than 6,000 lbs is exempt

Question 7

Taxes
Section 1231
Cost Recovery
Section 179

Answer 7

• Listed property must pass “Business Use” test
  
  • exceed 50%
  • does not include “investment use”
  • if it fails in subsequent years: excess depreciation

Question 8

Taxes
Section 1231
Cost Recovery
Amortization & Depletion

Answer 8

Depletion
- natural resources use straight-line
Amortization Rules
1. intangibles that are acquired: 15 years SL
2. goodwill, going concern, etc.
Organization & Startup
- expenses incurred with organization/startup
- $5,000 can be deducted, but reduced by amount exceeding $50,000
- remainder is capitalized and amortized over 18 months
- costs of selling stock also capitalized, but not amortized

Question 9

Taxes
Section 1231
Cost Recovery
Other

Answer 9

• After 1986, salvage value is ignored

- Land cannot be depreciated