CH8 outline

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Iowa State University *

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301

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Accounting

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Feb 20, 2024

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DEPRECIATION, COST RECOVERY AND AMORTIZATION CH 8 Explain the concepts of depreciation and cost recovery. Depreciation is a type of cost recovery that helps taxpayer to recover some of the money they put into an investment Distinguish between realty and personalty. Also distinguish between personalty and personal use property . Realty generally includes land and buildings permanently affixed to the land Personalty is defined as any asset that is not realty. Personalty includes furniture, machinery, equipment, and many other asset that is movable or not permanently affixed to land Personalty (or personal property) should not be confused with personal use property o Personal use property is any property (realty or personalty) that is held for personal use rather than for use in a trade or business or an income-producing activity Cost recovery deductions are not allowed for personal use assets When does cost recovery begin for an asset? Begins at the date an asset is placed in service (ready and available for use), not the date of purchase. State the basis rule for personal use assets that are converted to business or income-producing assets. The basis for cost recovery and for loss is lower of - Adjusted basis or - Fair market value at the time property was converted . MACRS personalty 1. What method of depreciation is used? 200% declining balance class lives 15- years, 150% 15 0r 20 year class lives 2. Cost recovery periods are predetermined. Review Exhibit 8.1 (pg. 8-5). What are the various cost recovery periods? 3,5,7,10,15, and 20 years 3. Explain the half-year convention. Assumption that the assets was used exactly for one half of the year, and provides a half year of cost recovery 4. Explain the mid-quarter convention. When does it apply? More than 40% cost in service during las quarter of the year MACRS realty 1. What method of depreciation is used? Straight- line 2. Distinguish between residential and nonresidential real property. Residential includes property where 80% or more of the gross rental revenues are from residential rental property while nonresidential is those such as hotels, motels. 3. What is the recovery period for residential real property? For nonresidential real property? 27.5 years for residential real property and 39 years for nonresidential real property 4. Explain the mid-month convention. Half recovery allowed for month property is in service Section 179 1. Explain the §179 election. Taxpayer can deduct up to $ 1,050,000 in 2021 of specific business property (1,040,000 in 2020) 2. What type of property is eligible for §179 expensing? Computer software, qualified improvements property and certain real property ( roof, heating/AC. Fire/alarm systems 3. What is the maximum §179 ceiling amount in 2020? In 2019? $1,040,000 in 2020 and $1,020,000 in 2019

4. Is §179 expense elected before or after additional first-year depreciation? Before additional firs-year depreciation And before or after normal MACRS cost recovery ? MACRS deduction calculated on net of §179 and any additional first-year depreciation 5. Detail the annual “placed in service” maximum. Ceiling amount is reduced dollar for dollar when §179 property is placed in service 6. Detail the business income limitation. §179 deduction cannot exceed business income Additional first-year depreciation (bonus depreciation) 1. What is additional first-year depreciation? Why does Congress allow it? 100% cost recovery in year placed in service and congress allow it to stimulate economy 2. Define qualified property. Most depreciable assets other than buildings with recovery period of 20 years or less 3. Is additional first-year depreciation calculated before or after §179? After And before or after normal MACRS cost recovery? Before, MACRS deduction= remining cost recovery basis * appropriate MACRS percentage Listed property used predominantly in business 1. Define listed property. Provide examples. Certain assets that are used for both personal use and business proposes. Examples include passenger automobile or transportation, property used for entertainment/recreation. 2. What is required for property to be considered “predominantly used in business?” Business use exceeds 50% 3. Passenger automobile limits a. Define a passenger automobile. Four-wheeled vehicle than can be used on public roads, under 6,000 lbs b. What is the purpose of the passenger automobile limits? To exclude vehicles whose cost exceeds what is needed for business use c. Review the limits on pg. 8-19. Note that these are the 2019 limits. 1 st year -$10,100, 2 nd year $16,100, 3 rd year $ 9,700 d. What result if the passenger automobile qualifies for additional first-year depreciation? Limitation increases by $8000 e. What result if the passenger automobile qualifies for §179? Limits are reduced for amount taxpayer elects to expense under §179 4. What is the SUV limit and to which automobiles does it apply? $26200 for those greater than 6,000 lbs but less than 14,000 lbs Explain the tax treatment of listed property not used predominantly in business. Straight line method under alternative depreciation is required, the recovery period is five years and cost recovery deduction for any passenger automobile cannot exceed the luxury auto limit Amortization 1. Define §197 intangibles. Provide examples. Amortizing adjusted basis of intangible assets such as franchise, trademarks, copyrights, patents 2. How are §197 intangibles amortized? Straight-line recovery of 15 year once acquired 3. How are self-created intangibles treated? Not §197 intangibles 4. Start-up expenses a. Define start-up expenditures, including the two requirements that must be met. Provide examples. Startup expenditures are partially amortizable

o Treatment is available only by election • Allows the taxpayer to deduct the lesser of: o The amount of startup expenditures, or o $5,000, reduced by the amount startup expenditures exceed $50,000 the two requirements must be paid or uncured in connection with creating a business, investigating the creation or acquisition of a business, or anticipating activity becoming a business and 2 nd expenses must reflect expenses that could be deducted in an existing trade. Examples are taxes, interest b. How are start-up expenditures amortized? Straight-line recovery of 15 years

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