Income Taxation- Ch 9 Property Acquisition And Cost Recovery

Front 1

When must you capitalize the cost of assets?

Back 1

- PPE with a useful life of more than 1 year

Front 2

Three Types of Cost Recovery Methods

Back 2

1. Depreciation- tangible personal and real property (other than land)
2. Amortization- intangible assets
3. Depletion- natural resources

Front 3

What is the basis for Cost Recovery? Define (1) Adjusted (or tax) basis and (2) Asset's Cost basis

Back 3

(1) Adjusted (or tax) basis- the amount of an asset's cost that has yet to be recovered through cost recovery deductions
(2) includes all expenses to purchase, prepare it for use, and begin using the asset (i.e. sales tax, shipping, installation)

Front 4

Basis for Cost Recovery- additional costs associated with an asset after it has been placed into service

Back 4

1. Routine Maintance Costs- are expensed
2. Cost significantly extends useful life- expenditure generates a new asset for cost recovery purposes separate from the original asset

Front 5

What is the basis for cost recovery for Personal Property Converted to Business Use?

Back 5

Basis= lesser of (1) cost basis or (2) FMV
-prevents taxpayers from converting a nondeductible personal loss into a deductible business loss

Front 6

What is the basis for cost recovery for assets acquired by nontaxable exchange?

Back 6

-exchange basis- you changed the bass you had in the property you gave up and transfer it to the basis of the property you receive (also called substituted basis)

Front 7

What is the basis for cost recovery for assets acquired by gift?

Back 7

Carryover basis: the taxpayer's basis in property received by a gift is generally the same basis the transferor had in the property

Front 8

What is the basis for cost recovery for assets acquired by inheritance?

Back 8

Basis= FMV (at the date of death)

Front 9

What needs to be known to calculate MACRS deprecation for an asset? (4)

Back 9

1. Asset's original cost
2. Applicable depreciation method
3. Asset's recovery period
4. Applicable deprecation convention (both for year of acquisition and year of disposition)

Front 10

What is considered personal property and what are the 3 depreciation methods for personal property?

Back 10

-personal property: includes all tangible property other than real property
- 200% double-declining balance (more in beg, less at end)
-150% decline balance
- straight line (less in beg, more at end)

Front 11

How do businesses elect the depreciation method?

Back 11

Business elect the depreciation method for assets placed in service during that year. If more than one machine is acquired during the year, must use the same method to depreciate all the machines!

Front 12

What is the depreciation recovery period?

Back 12

- Asset's recovery period is determined by the IRS in Rev Proc 87-56
- Categorize assets based on their description
- Used asset- the recovery period does not change but it does reset
*for book, deprecation is recorded based on estimated useful life

Front 13

200% double declining balance refers to which recovery period?

Back 13

General Recovery Period

Front 14

Half-year Convention

Back 14

-1/2 year of deprecation is allowed for the year in which property is placed into service
- if an asset id disposed of before it is fully depreciated, the MACRS depr deduction for the year is only 1/2 of the amount indicated on the IRS table (b/c the tables reflect a full year of depr)
***Basis*1st year depr

Front 15

Mid-Quarter Convention

Back 15

-REquired when >40% of total tangible personal property placed in service during the year is placed in service during the 4th quarter
- treat as though assets were placed in service during the middle of the quarter in which the business actually placed teh asset in service
**then all of the assets are treated with mid quarter convention with the respecting quarter
** in year of sale- need the quarter of disposition- then look at tables!

Front 16

§179 Expensing Election

Back 16

- important tax incentive to help small businesses buying new or used tangible personal property
- may elect to immediately expense up to $250,000 of tangible personal property placed into service
> can be less than max
> if they elect §179, must reduce the basis of assets BEFORE computing MACRS

Front 17

§179 Expensing Election- Phase Out Limitation

Back 17

-must reduce $250,000 maximum available expense dollar for dollar by the amount of tangible personal property purchased and place in service during 2010 over an $800,000 threshold
- excess is NOT carried over

Front 18

§179 Expensing Election- What are the two limitations?

Back 18

1. Phase Out (excess of $800,000)
2. Taxable Income

Front 19

§179 Expensing Election- Taxable Income Limitation

Back 19

-the deductible §179 Expense is limited to taxable income after deducting all expenses (including reg depr) except for §179 Expense
- §179 cannot create or extent a net operating loss
- excess is carried forward subject to the taxable income limit but not the phase-out limit

Front 20

§179 Expensing Election- If a business wants to maximize its current depr expense, which assets do you choose for 1/2 yr convention and mid-quarter convention?

Back 20

Half year: immediately expense the property with the longest recovery period
Mid quarter: expense the asset(s) with the lowest fir year deprecation %
**reduce the basis of assets for §179 before computing whether the mid-quarter convention applies

Front 21

What is Bonus Depreciation? And what is considered qualified property?

Back 21

- can elect to immediately expense 50% of qualified property (recovery period of 20 years or less, no real property, property must be new)
*calculated after §179 expense but before MACRS

Front 22

What is Listed Property?

Back 22

- business assets that tend to be used for both business and personal property
- deprecation on listed property is limited to the portion of the asset used for those business purposes
- Above 50%- use % * full annual depr
- Below 50% - use % * SL method

Front 23

Luxury Automobiles

Back 23

- annual deprecation expense is limited
- can deduct 179, bonus, etc. but all DEPR is limited to whatever congress decides

Front 24

What classifies as real property?

Back 24

- Land (NONDEPRECIABLE)
- Residential rental property (houses, condos, apartment complexes)
-nonresidential property

Front 25

Real Property Depreciation uses which depr method and which convention?

Back 25

- Straight Line Method
- Mid-Month Convention- expense 1/2 of moth's deprecation for month in which asset was placed into service and 1/2 for the moth of the year it is sold
- *STAY IN MONTH COLUMNS

Front 26

AMT Depreciation

Back 26

-recovery periods and conventions are the same as regular tax depr
- cannot use 200% DBB for TPP
- any differences b/w tax and AMT depr will change TI before computing AMT
- §179 deductible for both regular and AMT purposes

Front 27

Amortization

Back 27

- recover the cost of intangible assets
- use straight line method for both tax and book

Front 28

Amortization- 4 categories of intangible assets

Back 28

1. §197 purchased intangibles
2. Start-up expenditures and organizational costs
3. research and experimental costs
4. patents and copyrights

Front 29

§197 purchased intangibles
>recovery period?
> convention? purchase/sale?
> examples

Back 29

- always have a recovery period of 180 months (15 yrs)
- full month convention applies
> can deduct an entire month's worth of amortization for the month of purchase and all subsequent months of the year
> also applies to month of disposition
-goodwill, patents ,trademarks, trade names, customer lists, going-concern value, covenants not to compete

Front 30

Organizational Expenditures

Back 30

-expenditures to form and organize a corporation or a partnership
- incurred prior to starting the business
- state filing and registration fees, costs of organizational meetings, legal and accounting costs, creating terms of original stock certificates *NOT selling/marking stock issuance

Front 31

Start up costs

Back 31

- costs incurred to start up a business
- applies to all business forms
- routine expenses incurred before the new business is operational
- typically includes business expenses normally deductible but do not qualify b/c the business hasn't started yet

Front 32

Amortization of Organizational Expenditures and Start Up Costs

Back 32

- May immediately expense up to $5000
- $5000 max is reduced by the amount total costs exceed $50,000
- nondeductible costs are capitalized and amortized suing SL over 15 years
- limits are computed separately for org ex and start up costs!
- * total amortization includes amount expensed

Front 33

Amortization of Research and Experimentation Expenditures

Back 33

- businesses may immediately expense these costs of they may elect to capitalize and amortize these costs using the SL over a period of not less than 60 months, beginning from the month benefits are first derived from research
- full month convention
- if receive a patent related to these expenditures, add the basis of the patent to the remaining basis of the cost of research assets and amortize over PATENT's life

Front 34

Amortization of Patents and Copyrights (directly purchased)

Back 34

-amortize the cost over the remaining life of the patents or copyrights
- full month convention applies

Front 35

Amortization of Patents and Copyrights (self-created)

Back 35

- amortize the cost or basis of the self-created intangible assets over their legal lives (patents max 17 yrs, copyrights max 28 yrs)
- full month convention applies

Front 36

What is depletion and what are two methods? *choose higher of the two

Back 36

Depletion- a method used to recover capital investment in natural resources
*Cost depletion
*Percentage depletion

Front 37

Cost Depletion

Back 37

unrecovered basis in mine or well * (units of production sold divided by estimated total units at beg)

..when produced

Front 38

Percentage Depletion

Back 38

gross income from depletable property * statutory deplation rate (fixed)....when you sell

*allowable even after basis has been reduced to zero