Chapter 8 Study Notes

Question 1

Realty

Answer 1

generally includes land and buildings permanently affixed to the land.

Question 2

Personalty

Answer 2

is defined as any asset that is not realty.2 Personalty includes furniture, machinery,
equipment, and many other types of assets.

Question 3

Placed in Service Requirement

Answer 3

The key date for the commencement of depreciation is the date an asset is placed
in service.

Question 4

modified accelerated cost recovery system (MACRS)

Answer 4

the cost of an asset is
recovered over a predetermined period that is generally shorter than the useful life
of the asset or the period the asset is used to produce income.

Question 5

Personalty depreciation life classification

Answer 5

3-year Tractor units for use over the road.
Any horse that is not a racehorse and is more than 12 years old at the time it is placed in service.
Any racehorse that is more than 2 years old at the time it is placed in service.
Breeding hogs.
Special tools used in the manufacturing of motor vehicles, such as dies, fixtures, molds, and patterns.

5-year Automobiles and taxis.
Light and heavy general-purpose trucks.
Buses.
Trailers and trailer-mounted containers.
Typewriters, calculators, and copiers.
Computers and peripheral equipment.
Breeding and dairy cattle.
Rental appliances, furniture, and carpets.

7-year Office furniture, fixtures, and equipment.
Breeding and work horses.
Agricultural machinery and equipment.
Railroad track.

10-year Vessels, barges, tugs, and similar water transportation equipment.
Assets used for petroleum refining or for the manufacture of grain and grain mill products, sugar and
sugar products, or vegetable oils and vegetable oil products.
Single-purpose agricultural or horticultural structures.

15-year Land improvements.
Assets used for industrial steam and electric generation and/or distribution systems.
Assets used in the manufacture of cement.
Assets used in pipeline transportation.
Electric utility nuclear production plant.
Municipal wastewater treatment plant.

20-year Farm buildings except single-purpose agricultural and horticultural structures.
Gas utility distribution facilities.
Water utilities.
Municipal sewer.

Question 6

half-year convention

Answer 6

MACRS views property as placed in service in the middle of the first year

Question 7

additional first-year depreciation

Answer 7

The provision allows for an additional 50 percent cost recovery in
the year the asset is placed in service.

Question 8

mid-quarter convention

Answer 8

If more than 40 percent of the value of property other than eligible real estate (see
Realty: Recovery Periods and Methods for a discussion of eligible real estate) is placed
in service during the last quarter of the year,
% are shown in table 8.2

2012
Mid-Quarter Convention Depreciation Total Depreciation
February 15 $200,000 × .35 (Table 8.2) $ 70,000
July 10 $400,000 × .15 60,000
December 5 $600,000 × .05 30,000
$160,000
2013
Mid-Quarter Convention Depreciation Total Depreciation
February 15 $200,000 × .26 (Table 8.2) $ 52,000
July 10 $400,000 × .34 136,000
December 5 $600,000 × .38 228,000
$416,000

Question 9

Residential rental real estate

Answer 9

includes property where 80 percent or more of
the gross rental revenues are from nontransient dwelling units (e.g., an apartment
building).

Question 10

mid-month convention

Answer 10

Regardless
of when during the month the property is placed in service, it is deemed to have
been placed in service at the middle of the month.

Question 11

Farm Property

Answer 11

When tangible personal property is used in a farming business, generally the cost
of the asset is recovered under MACRS using the 150 percent declining-balance
method.

Question 12

Section 179 (Election to Expense Certain Depreciable Business Assets)

Answer 12

permits the
taxpayer to elect to write off up to $139,000 in 2012 of the acquisition cost of tangible
personal property used in a trade or business.
Two additional limitations apply to the amount deductible under § 179. First, the
ceiling amount on the deduction is reduced dollar for dollar when § 179 property
placed in service during the taxable year exceeds $560,000 in 2012. Second, the
amount expensed under § 179 cannot exceed the aggregate amount of taxable
income derived from the conduct of any trade or business by the taxpayer.

Question 13

Order of Depreciation

Answer 13

1. 179 Exp
2. 50% basis
3. MACRS

Question 14

179 carryforward limitations

Answer 14

lesser of (1) the statutory dollar amount ($139,000 in 2012) reduced by the cost of
§ 179 property placed in service in excess of $560,000 (in 2012) in the carryforward
year or (2) the business income limitation in the carryforward year.

Question 15

Listed property

Answer 15

includes the following:
• Any passenger automobile.
• Any other property used as a means of transportation.
• Any property of a type generally used for purposes of entertainment, recreation,
or amusement.
• Any computer or peripheral equipment, with the exception of equipment used
exclusively at a regular business establishment, including a qualifying home office.
• Any other property specified in the Regulations.

Question 16

Automobiles and Other Listed Property Used Predominantly in Business

Answer 16

For listed property to be considered as predominantly used in business, its business
usage must exceed 50 percent.

Question 17

passenger automobile

Answer 17

any four-wheeled vehicle manufactured for use on public
streets, roads, and highways with an unloaded gross vehicle weight (GVW) rating of
6,000 pounds or less.

Question 18

cost recovery deductions for passenger automobiles:

Answer 18

Date Placed
in Service First Year Second Year Third Year Fourth and Later Years
2012*
2010–2011 $3,060 $4,900 $2,950 $1,775
2009 $2,960 $4,800 $2,850 $1,775
Also an extra 8000 can be used for new property in the first year

Question 19

Special Limitation on vehicles that aren’t passenger automobiles 6000-14000 lbs

Answer 19

The American Jobs Creation Act of 2004 (AJCA) placed a limit of $25,000 on the
§ 179 deduction for certain vehicles not subject to the statutory dollar limits on cost
recovery deductions that are imposed on passenger automobiles.

Question 20

Property that fails the 50% business use test must be depreciated over

Answer 20

straight line

Question 21

alternative depreciation system (ADS)

Answer 21

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