Unit 8. Depreciation and Amortization Flashcards
On what cost is depreciation based for tax purposes?
On historical cost and it is not indexed for inflation
Can cost of land depreciate?
No
What are the requirements to be depreciable?
- the taxpayer must own the property. However, a taxpayer can depreciate improvements for property they lease leasehold improvements
-the taxpayer must use the property in business or in income-producing activity - useful life should be more than one year
What is t he recovery period for non-residential buildings?
39 years
What is t he recovery period for residential buildings?
27.5 years
What is the form on D&A?
Form 4562:
- claim deductions on D&A
- make election under section 179 to expense depreciated property
- claim bonus depreciation
provide information on business use of auto and other listed property
When a business start depreciation
when the property is ready and available (in service of business)
What cannot be depreciated?
- raw land BUT land improvements, e.g fences, drainage, landscaping, can be depreciated
- property with useful life< 1 year
- property for personal use, e.g. vacation home
- inventory
- intangibles, because they are amortized
How is property depreciated if used for both business and personal
Only business portion is depreciated
Is it possible to change the depreciation method?
Yes, but get permission under form 3115 Application for Change in Accounting Method BUT to switch to straight-line method is possible without prior IRS consent
Formula for Straight-line depreciation
Cost/Useful Life
Double Declining Balance Method
2/Useful life*Remaining Cost
Logic - greater deduction in the earlier years when the asset is more productive
If Initial cost is 20,000 and Useful Life = 5 years
1 year = 20000(2/5)= 8000
2 year = (20000-80000)2/5= 4800
and so on
What is Section 179
Allows to fully deduct the cost of property in the first year
Section 179 is adjusted for inflation every year
In 2004 it is 1,220,000 in qualified asset purchases. But you can use it only if it doesn’t exceed the cap of $3,050,000 worth of property is placed in service.
The 2024 Section 179 deduction limit for SUVs is $30,500.
What are the requirements for property under section 179?
- eligible property
- acquired for business (>50% for business)
- acquired by purchase
- must NOT be purchased rom a related party (spouses, ancestors, lineal descendants)
- should be used in the US
- only for property that is PLACED IN SERVICE
Eligible Section 179 property
- Section 1245 property (business property), incl:
- furnishing of lodging (dormitory, hostel) but not for regular residential rentals
- livestock (скот)
- Off-the shell software - available for general public purchase and use
- Qualified real property:
- certain property in non-residential buildings (roof, heating, ventilation, air cond., fire protection, alarm and security systems)
- single-purchse agricultural property
- storage faciliti7es in connection with petroleum
Impact of Section 179 to Net Income
Он не мoжет использоваться для генерации убытка. Если не хватает дохода, а вычет большой по этой секции, то возможно carry over for unlimited number of years
Difference between Section 179 and Bonus Depreciation in terms of election
Section 179 needs to be elected in, bonus depreciation is automatic so it needs to elected out if necessary
Section 179 in terms of vehicles
Depends on weight and personal vs business use. If it’s non-personal then it is 100% deductible, if not, then depends on weight - if it is between 6000 and 14000 pounds then $30,500 in 2024, if over 14000 pounds - no limits. If less than 6000 pounds, then (in 2023) 1 year - 11 200, 2 year - 18 000, 3 year - 10 800, 4 year - 6460.
Bonus Depreciation or Special Depreciation Allowance
Under TCJA law: for qualified property in 2023 80% bonus depreciation is allowed, in 2024 60% and so on.
Qualified property for bonus depreciation
- tangible personal property with MACRS recovery period < 20 years
- water utility property
-purchased computer software - costs incurred for film, tv or theatrical production
- fruit or nut trees and vines
- qualified improvement property (QIP)
Non qualifying property
Property used in business of :
- electrical energy, water or sewage
- gas or steam through a local distribution system
- transportation of gas or steam by gas pipeline
- motor vehicle inventory
- real property
- intangible assets
Can bonus depreciation produce a loss?
yes
Ordering rule for applying accelerated depreciation?
Section 179, then bonus depreciation, then regular deprecation
Can business delay claiming bonus depreciation to a future tax year?
No
How the election to opt out from bonus depreciation should be done?
on timely filed return
for each asset class
must do so every year (даже если не сделали в послед, у них есть 6 мес полсе подачи декларации подать amended return)
Can a tax payer revoke a prior election to opt-out of bonus depreciation?
yes, by filing an amended return
What reasons can be to opt-out of bonus depreciation
having net operating loss
expiring net operating loss carryforwards
current’s year marginal tax rate is lower than that of future years
to retain more of depreciation deductions for future years
Listed property
special rules for:
- any 4 wheels passenger vehicle used for transportation that weighs < 6000 pounds
- property used for entertainment, recreation, such as photo or video recording equipment
If it is used for both personal and business purposes, then section 179 and deductions of depreciation are limited to percentage of business use
Deduction of intangible assets or Amortization
NOT subject to section 179 except of off-the shelf computer software
What is the amortization period of intangibles
15 years or 180 months
Depletion
Depreciation in relation to mining and agriculture
Two ways of depletion
Cost depletion
Percentage depletion
Cost depletion
1) Rate per unit (Оценка месторождения на количество юнитов)
2) Умножаем этот рейт на количество проданных юнитов
percentage depletion
Flat percentage of gross income (for oil and gas)
Percentage is set by law
