R2- M3- Cost Recovery Flashcards
1 Depreciation; Part 1 2 Depreciation; Part 2 3 Depreciation; Part 3 4 Depreciation; Part 4 5 Amortization (17 cards)
Depreciation
Only allowed if used in Business or Trade
An Asset Basis must be REDUCED by the DEPRECIATION allowed (allowable) for the year
EVEN IF
Depreciation is not claimed by the TP for that particular year
Real Property
Personal Property
RP- Land and all items affixed to the Land
PP- tangible movable property used in business not affixed to the land
MACR - For Personal Property Only
Modified Accelerated Cost Recovery System
SALVAGE VALUE is ignored Under MACRS
There are classes
3- year class- special tools and racehorses
5- year class- automobiles, light trucks, computer and copiers
7- year class- furniture, fixtures, machinery and equipment
10- year class- Boats and Water Transportation Equipment
15- year class- qualified improvts to the interior of existing NON residential buildings and certain improvements made directly to Land
20 year class- Farm buildings and Municipal sewers
MACR Depreciation rules
A taxpayer may elect straight line depreciation if not MACR based off:
- Regular recovery period
or the - Longer alternative depreciation system (AD) Period
for 3,5,7 and 10 year class
Placed in service after 1/1/1987
200% declining balance method
for 15 and 20 year class
150% declining balance method
Half year convention rule
A personal property is allowed 6 months of depreciation regardless of when its disposed or acquired in the year
The Half year convention is built in the 1st and last year of the MACR table so if you acquire or dispose property based on the MACR exact table no need to multiply 50%
DISPOSAL- if disposed before the last year, the full year MACRs must be MULTIPLIED by 50%
Mid Quarter Convention
If OVER 40% of
depreciable personal property is placed in service
in the LAST QUARTER of the Year,
a MID quarter rather than half year convention applies.
There is a separate Mid Quarter MACR tables used to calculate depreciation
Q1 Jan to March= 0.5 quarter out /4 = 12.5%
Q2 Apr to Jun= 1.5/4= 37.5%
Q3 July to Sept = 2.5/4= 62.50%
Q4 Oct to Dec= 3.5/4 = 87.50%
The Mid Quarter convention is built in the 1st and last year of the MACR table so if you acquire or dispose property based on the MACR exact table no need to multiply with above rates
MACRs Real Property
Salvage Value is Ignored when computing the above
- Residential Rental Property
27.5 years Straight Line
Apartment Buildings
Rental Homes
- Non residential Real Property- real property that is not residential rental property
39 Years
Office Buildings
Warehouses
Mid Month convention for MACR Real Property
Straight Line depreciation is computed based on the number of months it was in Service
1/2 taken out on the month it was
placed in service
AND
Disposed.
No built in % on first and last year depending on date of place of service or disposal. always take out HALF MONTH
SECTION 179 Expense deduction
Immediate expense of fixed amount of the cost of qualified business use property
Max allowance in 2024 is $ 1,220,000 that is purchased and placed in service during the year.
Reduced by dollar to dollar that exceeds $ 3,050,000 ( in 2024)
Deduction is LIMITED to TAXABLE INCOME BEFORE DEDUCTION
Eligible property
- tangible personal property
- Improvements- Interion-
NON RESIDENTIAL building like Roof, HVAC, Fire Protection and alarm, security systems
Ineligible Property
- Intangible assers
-Lands and inprovements
- Elevator and Escalator
- Not Qualified Real Property
- Tangible personal property used LESS THAN 50% in Business
- Acquired by Gifts inheritance exchange or conversion from personal to business use
-
Bonus Depreciation
Qualified Property
Recovery period of 20 Yrs or Less: up to 20 years
Acquiring TP never used the property personally
Not acquired from a Related Party
Can expense an additional percentage of the cost of qualified property placed in service during the year
Bonus will be:
2018-2022- 100%
2023- 80%
2024- 60%
2025- 40%
2026- 20%
There is an addtl 8k on vehicle purchased when bonus deduction is elected
You do 179 first then bonus and MACRS
Bonus deduction is claimed after 179 but before MACRS
Amortization of Intangibles
Using straight Line
Full month convention- full month depreciation taken both on the month of
-Place in service
-Disposal
Most common recovery period is
180 months or 15 years
Pass Key
Tax - straight line for 15 years
GAAP- subject to Impairment test
Intangibles with finite lives- amortize over the life of the asset
Intangibles with Infinite lives- not amortized
Section 197
Purchased Intangibles
Part of Business Acquisition , Not separately purchased
Goodwill
Patent
Copyrights
Purchased business - goodwill patent copyrights
Amortize over 180 months starting on month of purchase
REGARDLESS of Useful life
Capitalized Research and experimental cost
Capitalize over 5 years midpoint during the year it was incurred or paid
Stop amortizing once Patent is obtained.
Any unamortized portion is added to the Patent
Separately Purchased intangibles
And
Self created
For
Patent and Copyrights
Amortize over the remaining life of the patent and copy rights
Self created- over the life
Loan cost
Amortize over the life of the loan
Business Organizational Cost
Business Start up Cost
5k each.
The 5k is reduced dollar by dollar for every excess in 50k
Expensed immediately- 5k- (50k - actual))
Any excess is capitalized as intangibles and amortized
Over 180 months on starting on the month BUSINESS OPERATION
On January 1, in connection with the purchase of all of the assets of Joe Swift’s business, Fast, Inc. entered into a covenant not to compete with Joe for a period of five years, with an option by Joe to extend it to seven years. What is the amortization period of the covenant for tax purposes?
A. 17 years. B. 15 years. C. 7 years. D. 5 years.
Explanation
Choice “B” is correct. Intangibles such as goodwill, licenses, franchises, trademarks and covenants not to compete may be amortized using the straight line basis over a period of 15 years, starting with the month of acquisition.
For Tax purposes, its always 180 months regardless of the internal life of the intangibles.
