tax quiz ch 10-11

depreciation

cost recovery method for tangible personal property and real property excluding land

amortization

cost recovery method for intangible property

depletion

cost recovery method for natural resources

asset’s cost basis

all expenses to purchase, prepare, and begin using an asset

placed in service

recovery period starts once an asset is

cost basis - accumulated depreciation

asset’s adjusted/tax basis =

expense immediately

when a business incurs additional costs assosciated with an asset after it has been placed in service:

• costs are for routine maintenance

record a new asset seperate from original asset

when a business incurs additional costs assosciated with an asset after it has been placed in service:

• costs significantly extend the asset’s useful life

lesser of

1. cost

2. fmv on date of conversion

what is an assets basis when the asset was:

converted from personal use

basis of the assets transferred in the transaction

what is an assets basis when the asset was:

acquired through a nontaxable exchange (like kind)

giftors basis in asset (carryover basis)

what is an assets basis when the asset was:

received as a gift

fmv on the date of death or estate valuation

what is an assets basis when the asset was:

acquired through inheritence

modified accelerated cost recovery system (MACRS)

businesses calculate their tax depreciation using _____

• requires taxpayer to know

  • og cost/starting basis

  • depreciation method

  • assets recovery period (depreciable life)

  • applicable depreciation convention

1. identify properties and their useful life

2. deduct any section 179 expense

3. deduct bonus depreciation

4. decide convention method

5. multiply remaining balance by the MACRS rate given by table

5 steps to calculate depreciation of PERSONAL property

1. real property

2. personal property

two general categories of depreciable business assets

real property

• residential property

• commercial property

personal property

not realty, tangible

immediate deduction

• short lived items (ex. supplies)

• de minimus safe harbor

  • 5000 for public company with financial stmts, 2500 for other

• routine maintenance safe harbor

  • does not apply to replacing major components or substantial structural parts of property

• small taxpayer safe harbor

  • gross receipts less than 10 mill, unadj basis of property <1 M

  • can expense the lesser of 10k or 2% unadjusted basis in building repair expenses

200 percent (double) declining method

• 3, 5, 7, 10 year property

• this method takes twice the straight line amount of depreciation each year until switching to the straight line method in the year that the straight line method over the remaining life provides a greater depreciation expense

150% declining balance method

• 15 and 20 year property

straight line

depreciation for real property

section 179 expense

purpose: incentivize/subsidize purchases of tangible personal property and qualified real property by small businesses

• allows taxpayers to immediately expense up to 2,560,000

• qualifying property:

  • tangible personal property (new and used)

  • off the shelf software

  • improvements to nonresidential real property

• not eligible:

  • intangible assets

  • tangible personal property used less than 50% for business

  • most real property

reduced dollar for dollar

taxable income

section 179 expense limitation and phase out:

• maximum deduction is _________ when the total cost for all qualifying 179 property exceeds 4, 090, 000

• fully phased out by 6,650,000

• cannot create a loss

  • limited to busines’ _____

bonus depreciation

• purpose: policymakers implement this to stimulate the economy

• allows taxpayers to immediately expense 100% of property

• qualifying property:

  • all new property

  • used property if purchased from unrelated taxpayer

• applied on basis after 179 expense

half year convention

• MACRS depreciation → personal property

• assets are treated as if they were placed in service during the middle of the year in which the business places the assets in service. accounted for in IRS tables

• if asset is held until fully depreciated → IRS table accounts for it

• if asset is disposed prior to being fully depreciated → treat as if sold in the middle of year (6/12 months)

after 179 and bonus

when is the half year convention applied

mid quarter convention

• macrs depreciation -> personal property

• required when more than 40% of personal property is placed in service during the 4th quarter

• applied after 179 but before bonus

• ALL personal property from the year becomes this

• assets are treated as if they were placed in service during the middle of the quarter in which the business' places the assets in service. accounted for in irs tables

• if asset is held until fully depreciated → irs table accounts

• if asset is disposed prior to being fully depreciated → treat as if sold in middle of quarter

mid month convention

• MACRS depreciation- real property

• applies to real property (not land)

• assets treated as if they were placed in service during the middle of the month in which the business placed the assets in service. accounted for in irs tables.

• if asset is held until fully depreciated → irs table accounts for this

• if asset is disposed prior to being fully depreciated → treat as if sold in the middle of the month

greater than 6000 pounds

exception to limited depreciation for luxury automobiles:

• vehicles with a gross weight of ____ are not subject to limitation

1. goodwill (197 purchased intagibles)

2. start up expenditures and organizational costs

3. research and experimentation costs

4. patents and copyrights

four general categories of intangible assets for tax purposes

197 purchased intangibles

goodwill, customer lists, trademarks, trade names, going concern value, covenants not compete

180 months

recovery period for purchased intangibles

full month

amortization convention that applies to 197 intangibles

organizational expenditures

expenditures to form and organize a business (does not apply to sole proprietorships)

• costs of organizational meetings, state fees, accounting service costs incident to organization, legal service expenditures)

startup costs

costs incurred to start a business

• include costs that are normally deductible as ordinary business expense except that they dont qualify because the business has not started yet

• ex. costs to train employees

5,000

50,000

can immediately expense up to _____ of organizational and start up costs

• immediate expense is phased out dollar for dollar for expenditures exceeding _____

• remaining costs are capitalizes and amortized straight line over 180 months full month convention

deduct immediately

for research and experimentation expenditures:

OBBB says

60 months

for research and experimentation expenditures:

alternative to OBBB says capitalized and amortized straight line over ____ beginning at midpoint of year

180 months

exception: expenditures for research conducted OUTSIDE of US are capitalized and amortized straight line over ____ beginning at midpoint of year

basis

amortized

if R&E leads to a patent, unamortized costs are included in the ____ of the patent and ___ over the patents life

amortized over remaining life

purchased patents/copyrights:

legal lives

self created patents/copyrights amortized over

depletion

method taxpayers use to recover their invesment in natural resources

greater of

• cost depletion

• percentage depletion

for depletion: deduct

unrecovered basis x (units of production extracted / BOY estimate of units in ground)

cost depletion =

gross income from selling resource x given %

% depletion =

yes

can % depletion exceed the cost basis in the natural resources

50

% depletion cannot exceed ___ of taxable income in a given year

ordinary assets

• inventory (goods industry)

• accounts receivable (service industry)

• supplies

capital assets

• business ownership

  • stock

  • partnership share

• investment property

• art

• anything not ordinary or 1231

1231

• depreciable personalty or amortizable intangibles used in business

• real property used in a business

• held for >1 year

  • if held for <= a year then ordinary

ordinary rates

ordinary sold for gain

ordinary loss which can offset ordinary income

ordinary sold for loss

capital income taxed at ordinary rates

capital sold for short term gain

capital income taxed at pref rates

capital sold for long term gain

• capital loss can offset capital income

• can offset 3k of ordinary income

capital sold for loss

ordinary loss

capital disposition other than sale (abandonment or theft)

capital income taxed at pref rates

1231 sold for a gain

ordinary loss which can offset/reduce ordinary income

1231 sold for a loss

recharacterizes gain from 1231 to ordinary

depreciation recapture does not create a new gain but simply

1245 recapture

depreciation recapture rule: personal property and intangibles

1250

depreciation recapture rule: depreciable real property

291

depreciation recapture rule: depreciable real property held by c corp

lesser of

1. recognized gain on sale

2. total acc dep/amort

1245 recacpure:

• amount to recapture is

straight line, max of 25%

ordinary income

1250 real property recapture

• ______ depreciation is recaptured and taxed at _____

• excess of accelerated depreciation over amount that would have been depreciated straight line is recaptured and taxed as

20% lesser of

1. recognized gain on sale

2. total acc dep/amort

recapture for real property owned by c corps (291)

amount subject to recacpture

gain, ordinary income, unrecaptured 1231 losses in prior 5 years

net 1231 ___ is characterized as ______ to the extent of ________