Flashcards in Taxes: Section 1231 Assets - Cost Recovery Deck (9)
1. Deduction allowed only to extent of MACRS
- only business property and income-producing property used to produce income
2. 200% declining balance or 150% declining balance used for personalty; straight line used for realty
- Realty: land and other assets affixed to it
- Personalty: any tangible asset that can be moved
- Realty: mid-month convention & 1/2 month purchased
- Personalty: Mid Year - 1/2 year in year purchased
200% declining balance
- 3 years: horses
- 5 years: auto, trucks, computers, peripheral equipment, office equipment,
- 7 years: office furniture and fixtures, agricultural and other machinery
150% declining balance
- 15 years: land and improvements
5. Residential Realty
- Residential Realty: 27.5
- Non-Residential Realty: 39
6. Disposition of asset follows appropriate mid-year or mid-month convention
7. Bonus Depreciation
- 50% for new qualifying property
- new qualifying property: recovery period less than or equal to 20 years, computer software, and leasehold improvements
8. Mid Quarter Convention
- allowed for all new personalty if more than 40% is purchased in last quarter of the year
- 1/2 quarter in quarter purchased and 1/2 quarter sold
- expense a limited amount of tangible personalty if used in trade activity
- taken into account before bonus depreciation
- max is lesser of business income or $500,000 for 2014; reduced to 25,000 in 2015
- cannot exceed business income; reduced by all other expenses
-phased out for qualified assets purchased > $2,000,000; reduced to 200,000 for 2015
1. TP purchased $2,040,000 (2014) of tangible assets for use in his trade. The Section 179 limit of $500,000 is reduced by $40,000 ($2,040,000 − $2,000,000) to $460,000. There is no carryforward of the amount that is phased out.
2. TP, a self-employed taxpayer, had business income of $15,000 in 2014 prior to deductions associated with cost recovery. This year TP purchased equipment for $25,000.
Question: What is TP's deduction under the election to expense the cost of the machinery?
Answer: TP can elect to expense $25,000, but the deduction is limited to the business income of $15,000. The remaining $10,000 can be carried forward indefinitely and expensed in future years when there is sufficient business income.
3. TP, a self-employed taxpayer, purchased equipment in 2015 for $210,000.
Question: What portion of the cost may TP elect to treat as an expense rather than as a capital expenditure?
Answer: Since $210,000 exceeds the $200,000 trigger by $10,000, the overall limit of $25,000 is reduced to $15,000 ($25,000 − $10,000).
Luxury Auto Limits
- anything weighing more than 6,000 lbs is exempt
- Listed property must pass "Business Use" test
- exceed 50%
- does not include "investment use"
- if it fails in subsequent years: excess depreciation
Amortization & Depletion
- natural resources use straight-line
1. intangibles that are acquired: 15 years SL
2. goodwill, going concern, etc.
Organization & Startup
- expenses incurred with organization/startup
- $5,000 can be deducted, but reduced by amount exceeding $50,000
- remainder is capitalized and amortized over 18 months
- costs of selling stock also capitalized, but not amortized