Unit 8: Depreciation and Amortization Flashcards
Can the cost of land be depreciated?
No
In order to be depreciated or amortized, an asset must meet all the following requirements:
- The taxpayer generally must own the property. However, taxpayers may depreciate capital improvements for a property they lease.
- THe taxpayer must use the property in business or in an income-producing activity. If a taxpayer uses the property for both business and personal use, only the business-use percentage is deductible
- The property must have a determinable useful life of more than one year.
In order to properly depreciate an asset, the business must determine the following:
- The depreciable basis of the property
- The depreciation method for the property
- The class life (which is representative of the asset’s useful life)
- Whether the asset is listed properly
- Whether the business elects to expense any portion of the asset
- Whether the asset qualifies for bonus depreciation
What is the default depreciation method generally used for most tangible property?
MACRS
4562
Used to report:
- Claim deductions for depreciation and amortization
- Make an election under section 179 to currently expense certain depreciable property
- To claim bonus depreciation for qualified property; and
- Provide information on the business use if automobiles and other listed property
Certain property cannot be depreciated, including:
- Raw land
- Property placed in service and disposed of in the same year, or property with a useful life of one year or less
- Property that is only for personal use
- Inventory, or any other property “held for sale” to customers
- Section 197 tangibles such as copyrights, patents, franchises, non-compete agreements, and goodwill. The intangible assets must be amortized, not depreciated
3115
Allows a business to ask permission to change its depreciation method
Straight-line depreciaiton =
Cost / Useful life
Once a business switches depreciation methods, how long must they wait to change again without prior IRS approval?
10 years
Double-Declining Balance Method: Formula
2/5 each year
In 2022, businesses can expense up to how much in qualified assets, purchased under section 179?
$1,080,000
Section 179 Spending Cap
$3,780,000
Section 179 phaseout:
$2,700,000 - $3,780,000
To qualify for section 179 deduction, the property must meet all of the following requirements:
- It must be eligible property
- It must be acquired for business use (and used more than 50% for business)
- It must have been acquired by purchase
- It must not have been purchased from a related party
Qualified Improvement Property does not include the following real property improvements:
- Any enlargement of the building
- Any elevator or escalator, or
- The expansion of the internal structural framework of the building
179: Trade-in Property
If a business buys qualifying property with cash and a trade-in, its depreciable basis for purposes of the section 179 deduction includes only the cash portion of the purchase price.
179: Auto Depreciation Limits
$27,000
Can bonus depreciation generate a net operating loss?
Yes because it is not limited to a business’s taxable income
Under the TCJA, how much first-year bonus depreciation deduction is allowed for qualified property?
100%
It doesn’t matter if the property is new or used, as long as it was acquired and placed in service after September 27, 2017
Qualifying property for bonus depreciation includes the following assets:
- Tangible personal property with an applicable MARC recovery period of 20 years or less
- Water utility property
- Purchased computer software
- Costs incurred for qualified film, television and live theatrical productions
- Fruit or nut-bearing trees and vines
- Qualified Improvement Property (QIP)
Floor-plan financing indebtedness is:
Secured by motor vehicle inventory in a business that sells or leases motor vehicles to retail customers
If a business fails to properly “elect out” of bonus depreciation:
Depreciation deductions on the qualifying property must be computed as if the bonus deduction had been claimed on the return, even if the taxpayer did not claim a bonus depreciation deduction for the year the property was placed in service.
Taxpayers who elect out of bonus depreciation must do so:
Every year
The IRS includes the following as listed property:
- Any passenger vehicle used for transportation. A “passenger automobile” is any four-wheeled vehicle and rated at 6,000 pounds or less of unloaded gross vehicle weight, unless it is an excepted, or nonpersonal-use, vehicle
- Property used for entertainment, recreation, or amusement; such as photographic or video recording equipment
If a taxpayer’s business use percentage is not more than 50%, then section 179 and bonus depreciation:
Are not allowed
Cost Depletion:
This method allocates the cost of a natural resource over the total anticipated volume to yield cost depletion per unit. A depletion deduction is then allowed each year based on the units exploited. After a business determines the property’s basis, estimates the total recoverable units, and knows the number of units sold during the tax year, it can calculate the cost depletion deduction,
