Unit 8. Depreciation and Amortization Flashcards
On what cost is depreciation based for tax purposes?
On historical cost and it is not indexed for inflation
Can cost of land depreciate?
No
What are the requirements to be depreciable?
- the taxpayer must own the property. However, a taxpayer can depreciate improvements for property they lease leasehold improvements
-the taxpayer must use the property in business or in income-producing activity - useful life should be more than one year
What is t he recovery period for non-residential buildings?
39 years
What is t he recovery period for residential buildings?
27.5 years
What is the form on D&A?
Form 4562:
- claim deductions on D&A
- make election under section 179 to expense depreciated property
- claim bonus depreciation
provide information on business use of auto and other listed property
When a business start depreciation
when the property is ready and available (in service of business)
What cannot be depreciated?
- raw land BUT land improvements, e.g fences, drainage, landscaping, can be depreciated
- property with useful life< 1 year
- property for personal use, e.g. vacation home
- inventory
- intangibles, because they are amortized
How is property depreciated if used for both business and personal
Only business portion is depreciated
Is it possible to change the depreciation method?
Yes, but get permission under form 3115 Application for Change in Accounting Method BUT to switch to straight-line method is possible without prior IRS consent
Formula for Straight-line depreciation
Cost/Useful Life
Double Declining Balance Method
2/Useful life*Remaining Cost
Logic - greater deduction in the earlier years when the asset is more productive
If Initial cost is 20,000 and Useful Life = 5 years
1 year = 20000(2/5)= 8000
2 year = (20000-80000)2/5= 4800
and so on
What is Section 179
Allows to fully deduct the cost of property in the first year
Section 179 is adjusted for inflation every year
In 2004 it is 1,220,000 in qualified asset purchases. But you can use it only if it doesn’t exceed the cap of $3,050,000 worth of property is placed in service.
The 2024 Section 179 deduction limit for SUVs is $30,500.
What are the requirements for property under section 179?
- eligible property
- acquired for business (>50% for business)
- acquired by purchase
- must NOT be purchased rom a related party (spouses, ancestors, lineal descendants)
- should be used in the US
- only for property that is PLACED IN SERVICE
Eligible Section 179 property
- Section 1245 property (business property), incl:
- furnishing of lodging (dormitory, hostel) but not for regular residential rentals
- livestock (скот)
- Off-the shell software - available for general public purchase and use
- Qualified real property:
- certain property in non-residential buildings (roof, heating, ventilation, air cond., fire protection, alarm and security systems)
- single-purchse agricultural property
- storage faciliti7es in connection with petroleum
