Section 7 - Depreciation Under Federal Income Tax Depreciation Rules Flashcards Preview

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Flashcards in Section 7 - Depreciation Under Federal Income Tax Depreciation Rules Deck (60):
1

If a company with a Dec 31 year-end purchased a building on March 1 and placed it in service the same day or on the last day of the month, the company still takes 9 ½ months’ depreciation for the first year.

 

True or False.

True.

 

The mid-month convention requires that buildings be depreciated as though purchased in the middle of the month, regardless of when actually purchased.

2

The mid-month convention requires that buildings be depreciated as though purchased

In the middle of the month (mid-month convention)

3

Under GAAP rules, the length of time management estimates an asset is expected to last is called the _____ _____, however, for tax purposes, it is referred to as the _______ ______.

useful life, recovery period.

4

What is the name of the provision that allows a company to expense rather than depreciate over several years in the year of purchase, up to $500,000 of the equipment cost for the 2016 tax year?

Section 179

5

In 2016, Mack Co made purchases of $2,511,000 in equipment during the year, what is the maximum Sec. 179 that can be recognized for the year?

The $500,000 maximum Sec. 179 depreciation is reduced dollar for dollar by the $511,000 in excess of 2,000,000; therefore no Sec. 179 depreciation can be recognized.

 

$2,511,000 original cost basis - $2 million threshold = $511,000 excess.

$500,000 maximum Sec. 179 deduction for 2016 - $511,000 excess = $0 allowable Sec. 179 for 2016.

6

The mid-quarter convention applies to equipment and buildings

 

True or False

False.

 

The mid-quarter convention applies to equipment only. Buildings are governed by the mid-month convention.

7

Assuming the mid-quarter convention applies, if Machine 2, was purchased on Oct 11, the asset will be treated as if it was purchased on ________ and is depreciated for _________ months.

Because mid-quarter applies, all assets must be depreciated using the mid-quarter as opposed to the half-year convention. Therefore, the asset must be depreciated as if it was placed in service in the middle of the second quarter. Thus, it will be treated as if it was purchased on November 15th and is depreciated for 1 ½ months.

8

What happens when a company decides to sell or trade a partially depreciated asset?

If a company decides to sell or trade in a partially depreciated asset, they must determine the asset’s book value by subtracting accumulated depreciation from the depreciation schedule from the acquisition cost to see if there is a gain or loss. Please note, accumulated depreciation balance is used from the depreciation schedule and not the Accumulated depreciation general ledger account because tax depreciation is not recorded in the books. 

9

The cost basis of a building includes

Any necessary costs incurred to get the building ready for its intended use.

10

Which class of assets do the following conventions apply

 

Mid-month

Half-year

Mid-quarter

Mid-month - Buildings

Half-year - Equipment

**Mid-quarter - Equipment 

 

**Please note, the mid-quarter convention overrides the half-year convention when more than 40% of the aggregate basis of the equipment purchased (total acquisition cost - Sec. 179 deduction) is purchased in the last 3 months of the taxable year.

 

11

What must a company do to be exempt from recognizing first-year bonus depreciation?

A company must recognize the additional bonus unless they elect not to on Form 4562 "Depreciation and Amortization"

12

MACRS depreciation is based on many of the same basic concepts as GAAP

 

True or False

True.

13

The depreciation rate a company uses to determine depreciation expense under MACRS can be found in

Publication 946

Once the cost basis has been determined, it is multiplied by the depreciation rate from the appropriate MACRS table in Publication 946.

14

Generally, the mid-quarter convention results in more first-year depreciation than half-year.

 

True or False

False.

 

The mid-quarter convention results in less first-year depreciation than the half-year convention, which is as Congress intended to prevent abuse of the half-year convention.

15

Although it is required, there are certain exceptions and scenarios where a company can elect to not take bonus depreciation.

 

Explain one

Some examples of when a company might opt to forgo depreciation is when their revenue for the period is so low they don’t need an additional expense deduction, or if they are in the process of applying for a loan, they have a higher chance of being approved for the loan if their net income was higher.
 

16

Under tax rules, the residual value is ignored, and the acquisition cost is the maximum depreciation that can be recognized.

 

True or False

True.

 

MACRS does not recognize residual value.

17

 If a company with a Dec 31 year-end purchased equipment on March 1, MACRS requires that the asset is depreciated as if it were purchased on

July 1.

 

 Simply stated,  under MACRS, only one-half depreciation is recognized in the first year. 

18

The mid-quarter convention was created to prevent abuse of the half-year convention.

 

True or False

True.

 

The mid-quarter convention was created to prevent abuse of the half-year convention. The fear was that companies would intentionally purchase equipment close to the last day of the year, then write off a full one-half year of depreciation.

19

Under MACRS, once the cost basis has been determined, the next step is to

When the cost basis has been determined, the next step is to multiply the depreciation rate from the appropriate MACRS table
 

20

What is the maximum dollar amount of equipment, not including buildings a company can purchase before the Sec. 179 depreciation is reduced on a dollar by dollar basis?

$2,000,000

 

If a company purchases over $2 million of equipment, not including buildings during the year, the $500,000 maximum deduction for 2016 is reduced dollar for dollar for any original cost basis that exceeds $2 million. This is one of the two limitations of Sec. 179.

21

MACRS stipulates how much depreciation can be taken in the first year, regardless of purchase date.

 

True or False

True.

 

This is different from GAAP depreciation which depends on when the asset is purchased.

22

A computer would considered 

23

Under MACRS, office furniture would be considered a 5-year asset

 

True or False

False.

 

7-year recovery period. This class of assets generally includes office furniture and fixtures such as desks, files, chair, safes and most equipment.

24

Under MACRS, a computer would be considered a 5-year asset.

 

True or False

True.

 


5-year recovery period. This class of assets generally includes computers and peripherals (machines controlled by the computer), automobiles, trucks, office machinery, typewriters, copiers and adding machines.

25

The IRS Publication 946 "How to Depreciate Property" contains the tables of rates companies must use for tax depreciation.

 

True or False

True.

26

MACRS is used for

Depreciation for tax purposes.

 

GAAP rules are used for book depreciation.

27

What are the two Sec. 179 limitations?

  • Limitation 1 - If a company purchases over $2 million of equipment, not including buildings during the year, the $500,000 maximum deduction for 2016 is reduced dollar for dollar for any original cost basis that exceeds $2 million.
  • Limitation 2 - A taxpayer cannot claim a Sec. 179 deduction greater than its taxable income from its trade or business activities. In other words, a Sec. 179 deduction cannot be used to create an overall business loss on a current tax return.

28

The mid-quarter convention overrides the half-year convention when more than 40% of the aggregate basis of the equipment purchased (total acquisition cost - Sec. 179 deduction) is purchased in the last 3 months of the taxable year. 

 

True or False

True.

 

The mid-quarter convention applies when companies purchase more than 40% of the total cost basis of assets during the fourth quarter of the year.

 

For example, for the year,  Perry Co purchased $100,000 worth of equipment, A $55,000 in assets were purchased in the first three quarters and $45,000 was purchased in the last quarter. Because the $45,000 purchased in the last quarter exceeds 40% of the aggregate basis of all equipment purchased ($45,000/$100,000 = 45%), the company must use the mid-quarter convention as opposed to the half-year convention.

29

Assuming the mid-quarter convention applies, if Machine 2, was purchased on June 11, the asset will be treated as if it was purchased on ________ and is depreciated for _________ months.

Because mid-quarter applies, all assets must be depreciated using the mid-quarter as opposed to the half-year convention. Therefore, the asset must be depreciated as if it was placed in service in the middle of the second quarter. Thus, it will be treated as if it was purchased on May 15th and is depreciated for 7 ½ months.

 

Assuming the mid-quarter convention applies, if Machine 2, was purchased on June 11, the asset will be treated as if it was purchased on ________ and is depreciated for _________ months.

30

To find depreciation for tax purposes, you simply multiply the assets cost basis by 

That year’s given rate which can be found in the IRS Publication 15 tables, "How to Depreciate Property."
 

31

For equipment and most land improvements (but not buildings), MACRS allows companies to use

For equipment and most land improvements (but not buildings), MACRS allows companies to use either the straight-line or declining balance method but prohibits sum-of-the-years’-digits.

32

Under tax rules, most assets must be depreciated using

Modified Accelerated Cost Recovery System (MACRS, pronounced "makers")

33

What is the purpose of the mid-quarter convention?

The mid-quarter convention was created to prevent abuse of the half-year convention. The fear was that companies would intentionally purchase equipment close to the last day of the year, then write off a full one-half year of depreciation.

34

In 2016, Marley Co made purchases of $2,011,000 in equipment during the year, what is the maximum Sec. 179 that can be recognized for the year?

The $500,000 maximum Sec. 179 depreciation is reduced dollar for dollar by the $11,000 in excess of 2,000,000; therefore only $489,000 of Sec. 179 depreciation can be recognized.

 

$2,011,000 original cost basis - $2 million threshold = $11,000 excess.

$500,000 maximum Sec. 179 deduction for 2016 - $11,000 excess = $489,000 allowable Sec. 179 for 2016.

35

A taxpayer cannot claim a Sec. 179 deduction greater than its taxable income from its trade or business activities. In other words, a Sec. 179 deduction cannot be used to create an overall business loss on a current tax return.

 

True or False

True.

 

This is the second limitation of Sec. 179

36

Table 1 uses the double declining balance method, referred to in tax as ‘MACRS ___ ________’ which then changes to ______ ________ to maximize tax depreciation in later years.

MACRS 200% depreciation, straight-line depreciation

37

When computing annual depreciation for equipment using MACRS tables, the first step is to

When computing annual depreciation for equipment using MACRS tables, the first step is to calculate the equipment's cost basis. Cost basis under tax depreciation is in almost all respects the same as acquisition cost under GAAP rules, invoice costs, plus all costs incurred to acquire, transport or prepare that asset for its intended use.

38

The depreciation rate under MACRS can be found using Publication ____

Publication 946 "How to depreciate property"

39

If the publication does not list an asset as a 5- or 7-year property or does not list the company's industry, it is recommended that the company

If the company is not clear on the asset recovery period or their industry is not clearly stated, it is recommended that the company seek out advice from a CPA to determine the proper recovery period.

40

Sec 179 MACRS rules allow a company to expense rather than depreciate over several years in the year of purchase, up to _______ of the equipment cost for the 2016 tax year. 

$500,000

41

The half-year convention requires that all property, including equipment and land improvements, be depreciated as though the asset was placed in service in the middle of the year, with no regard to the purchase date.

 

True or False

True.

 

This different from GAAP which determines depreciation based on when the asset was purchased and placed in service)​

42

Residual value is treated the same under MACRS and GAAP rules.

 

True or False

False.

 

Under MACRS, residual value has no relevance, therefore, a fully depreciated asset has a book value of $0. 

43

When the mid-quarter convention applies, the taxpayer cannot use the half-year convention but instead, must use the mid-quarter convention.

 

True or False

True.

44

Used property or buildings qualify for bonus depreciation. 

 

True or False

False.

 

Bonus depreciation only applies to new property such as machinery and equipment with a recovery period of 20 years or less,

45

Generally, for first-year depreciation of equipment and most land improvements, MACRS requires the ____ ____ convention.

half-year convention.

46

For buildings, Both Tables 2 and 3  use the straight-line method, and each month’s rate has the mid-month convention factored in. Thus, the real task in depreciating buildings is merely finding the right table in Publication 946.\

 

True or False

True.

 

Similar to depreciating equipment under MACRS, the real task is locating the correct table to ensure the correct depreciation rate is used to calculate depreciation expense.

47

How does a company determine whether they need to use the mid-quarter convention?

The mid-quarter convention overrides the half-year convention when more than 40% of the aggregate basis of the equipment purchased (total acquisition cost - Sec. 179 deduction) is purchased in the last 3 months of the taxable year.

 

For example, 

During 2016, Yanna Co, a calendar-year company, makes the following purchases:

 

On January 3, Machine A is purchased for $30,000

On June 22, Machine B is purchased for $20,000

On November 11, Machine C is purchased for $550,000

 

To compute whether Yanna CO has to use the mid-quarter convention, the following steps are taken:

 

    $50,000 purchased during first 9 months

+     50,000 purchased during last 3 months ($550,000 Cost - $500,000 Sec. 179)

 $100,000 total purchased during the year

X         40%

   $40,000

 

Yanna Co must use the mid-quarter convention because the $50,000 of equipment purchased in the last 3 months exceeds 40% ($40,000) of the aggregate basis of all equipment purchased during 2016. When the mid-quarter convention applies, the taxpayer cannot use the half-year convention but instead, must use the mid-quarter convention.

 

48

What is Section 179?

Section 179 is a Special First-Year Expensing for equipment which allows companies to expense rather than depreciate over several years in the year of purchase, up to $500,000 of the equipment cost for the 2016 tax year.

49

Most assets, other than real estate property have a __-year or __-year recovery period

5 or 7 year recovery period.

50

If bonus depreciation has been taken, the amount recognized should be deducted from the acquisition cost to arrive at the assets new cost basis.

 

True or False

True.

51

Under MACRS, who determines the asset's life?

Under MACRS, the IRS, not the company determines the assets life.

52

For equipment and most land improvements (but not buildings), MACRS probits which method of depreciation?

Sum-of-the-year's-digits

53

The half-year convention requires that all property, including equipment and land improvements, be depreciated as though the asset was placed in service 

In the middle of the year, (half-year convention) with no regard to the purchase date.

54

Land is never depreciated.

 

True or False

True.

 

It is assumed that the value of land is indefinite, therefore, the cost of land is never included in the cost of a building but instead, the value of the land is recorded separately on the books.

55

When new property such as machinery and equipment is purchased, and it has a recovery period of 20 years or less, taxpayers are required by the Internal Revenue Code (IRC) to

For all new property such as machinery and equipment with a recovery period of less than 20 years, taxpayers are required to take additional bonus depreciation of 50% of the asset’s cost basis in the first year.  A company must recognize the additional bonus unless they elect not to on form 4562 "Depreciation and Amortization"

56

The computation using the 3, 5, or 7-year property column from Table 1 in Publication 946 will be the same with no regard to if the asset is new or used.

 

True or False
 

True.

57

When a company depreciates the remaining cost basis after taking a Sec. 179 deduction, it must take bonus depreciation if the asset is new and has a recovery period of less than 20 years.

 

True or False

True.

 

When a company depreciates the remaining cost basis after taking a Sec. 179 deduction, it must take bonus depreciation if the asset is new and has a recovery period of less than 20 years. After the company deducts the bonus depreciation, the difference yields the new cost basis to be depreciated over the assets cost basis.
 

58

For equipment and most land improvements, but not buildings, under MACRS most companies choose the ______ ______ to recognize more expense (a bigger tax write off) as soon as possible

Declining Balance

59

A company ‘elects; to take Sec 179 on Form ____

Form 4562 - Depreciation and Amortization

60

A Sec 179 can be taken on any asset, regardless of whether it is new or used

 

True or False

True.

 

A Sec 179 can be taken on any asset, regardless of whether it is new or used as opposed to bonus depreciation which can only be taken for new assets.