Unit 8: Depreciation and Amortization

Question 1

Can the cost of land be depreciated?

Answer 1

No

Question 2

In order to be depreciated or amortized, an asset must meet all the following requirements:

Answer 2

• The taxpayer generally must own the property. However, taxpayers may depreciate capital improvements for a property they lease.
• THe taxpayer must use the property in business or in an income-producing activity. If a taxpayer uses the property for both business and personal use, only the business-use percentage is deductible
• The property must have a determinable useful life of more than one year.

Question 3

In order to properly depreciate an asset, the business must determine the following:

Answer 3

• The depreciable basis of the property
• The depreciation method for the property
• The class life (which is representative of the asset’s useful life)
• Whether the asset is listed properly
• Whether the business elects to expense any portion of the asset
• Whether the asset qualifies for bonus depreciation

Question 4

What is the default depreciation method generally used for most tangible property?

Answer 4

MACRS

Question 5

4562

Answer 5

Used to report:

• Claim deductions for depreciation and amortization
• Make an election under section 179 to currently expense certain depreciable property
• To claim bonus depreciation for qualified property; and
• Provide information on the business use if automobiles and other listed property

Question 6

Certain property cannot be depreciated, including:

Answer 6

• Raw land
• Property placed in service and disposed of in the same year, or property with a useful life of one year or less
• Property that is only for personal use
• Inventory, or any other property “held for sale” to customers
• Section 197 tangibles such as copyrights, patents, franchises, non-compete agreements, and goodwill. The intangible assets must be amortized, not depreciated

Question 7

3115

Answer 7

Allows a business to ask permission to change its depreciation method

Question 8

Straight-line depreciaiton =

Answer 8

Cost / Useful life

Question 9

Once a business switches depreciation methods, how long must they wait to change again without prior IRS approval?

Answer 9

10 years

Question 10

Double-Declining Balance Method: Formula

Answer 10

2/5 each year

Question 11

In 2022, businesses can expense up to how much in qualified assets, purchased under section 179?

Answer 11

$1,080,000

Question 12

Section 179 Spending Cap

Answer 12

$3,780,000

Question 13

Section 179 phaseout:

Answer 13

$2,700,000 - $3,780,000

Question 14

To qualify for section 179 deduction, the property must meet all of the following requirements:

Answer 14

• It must be eligible property
• It must be acquired for business use (and used more than 50% for business)
• It must have been acquired by purchase
• It must not have been purchased from a related party

Question 15

Qualified Improvement Property does not include the following real property improvements:

Answer 15

• Any enlargement of the building
• Any elevator or escalator, or
• The expansion of the internal structural framework of the building

Question 16

179: Trade-in Property

Answer 16

If a business buys qualifying property with cash and a trade-in, its depreciable basis for purposes of the section 179 deduction includes only the cash portion of the purchase price.

Question 17

179: Auto Depreciation Limits

Answer 17

$27,000

Question 18

Can bonus depreciation generate a net operating loss?

Answer 18

Yes because it is not limited to a business’s taxable income

Question 19

Under the TCJA, how much first-year bonus depreciation deduction is allowed for qualified property?

Answer 19

100%

It doesn’t matter if the property is new or used, as long as it was acquired and placed in service after September 27, 2017

Question 20

Qualifying property for bonus depreciation includes the following assets:

Answer 20

• Tangible personal property with an applicable MARC recovery period of 20 years or less
• Water utility property
• Purchased computer software
• Costs incurred for qualified film, television and live theatrical productions
• Fruit or nut-bearing trees and vines
• Qualified Improvement Property (QIP)

Question 21

Floor-plan financing indebtedness is:

Answer 21

Secured by motor vehicle inventory in a business that sells or leases motor vehicles to retail customers

Question 22

If a business fails to properly “elect out” of bonus depreciation:

Answer 22

Depreciation deductions on the qualifying property must be computed as if the bonus deduction had been claimed on the return, even if the taxpayer did not claim a bonus depreciation deduction for the year the property was placed in service.

Question 23

Taxpayers who elect out of bonus depreciation must do so:

Answer 23

Every year

Question 24

The IRS includes the following as listed property:

Answer 24

• Any passenger vehicle used for transportation. A “passenger automobile” is any four-wheeled vehicle and rated at 6,000 pounds or less of unloaded gross vehicle weight, unless it is an excepted, or nonpersonal-use, vehicle
• Property used for entertainment, recreation, or amusement; such as photographic or video recording equipment

Question 25

If a taxpayer’s business use percentage is not more than 50%, then section 179 and bonus depreciation:

Answer 25

Are not allowed

Question 26

Cost Depletion:

Answer 26

This method allocates the cost of a natural resource over the total anticipated volume to yield cost depletion per unit. A depletion deduction is then allowed each year based on the units exploited. After a business determines the property’s basis, estimates the total recoverable units, and knows the number of units sold during the tax year, it can calculate the cost depletion deduction,