Property includes both?
1. realty (real property)
2 . personalty (personal property
Personal use property is?
1. (realty or personalty)
2. Property that is held for personal use rather than for use in a trade or business or an income-producing activity
Cost recovery deductions are not allowed for?
personal use assets
Assets used in a trade or business or for the production of income are eligible for cost recovery if?
if they are subject to:
1.wear and tear
2. decay or decline from natural causes
3. or obsolescence
(e.g., an automobile that the taxpayer rents to third parties).
Assets that do not _____1________ or that do not have a _____2 _____ are not eligible for cost recovery.
1. decline in value on a predictable basis
2. determinable useful life
Assets must have what 2 things to be eligible for cost recovery?
1. decline in value on a predictable basis
2. determinable useful life
Placed in Service Requirement
Date asset is placed in service not the purchase date is the key date for the commencement of depreciation
The allowed cost recovery is ?
the cost recovery actually deducted
The allowable cost recovery is?
the amount that could have been taken under the applicable cost recovery method
Allowed VS Allowable cost recovery
Allowed - actual
Allowable - Could have been taken
If the taxpayer does not claim any cost recovery on property during a particular year, the basis of the property still is reduced by?
the allowable cost recovery
If personal use assets are converted to business or income-producing use, the basis for cost recovery and for loss is?
the lower of the adjusted basis or the fair market value at the time the property was converted.
Return to the facts of The Big Picture. Five years ago, Dr. Payne purchased a personal residence for $250,000. In the current year, with the housing market down, Dr. Payne found a larger home that he acquired for his personal residence. Because of the dow
$180,000 because the fair market value is less than the adjusted basis. The $70,000 decline in value is deemed to be personal (because it occurred while the property was held for personal use by Dr. Payne) and therefore nondeductible.
Under the modified accelerated cost recovery system (MACRS), the cost of an asset is
recovered over a predetermined period that generally is shorter than the useful life of the asset or the period that the asset is used to produce income.
The MACRS rules were designed to
encourage investment, improve productivity, and simplify the pertinent law and its administration.
MACRS provides separate cost recovery tables for
realty and personalty.
Cost recovery allowances for real property, other than land, are based on
recovery lives specified in the law
� IRC � 263
Capital expenditures
IRC � 263 ? Capital expenditures
- (a) General rule No deduction shall be allowed for�
� (1) Any amount paid out for new buildings or for permanent
improvements or betterments made to increase the value of any
property or estate.
Cost Recovery - Recovery of the cost of business or income?producing assets is through: 3 things
1. Depreciation: tangible assets -
2.Amortization: intangible assets
3.: natural resources
Depreciation
tangible assets
Amortization
intangible assets
Depletion
natural resources
Depreciation General rule
General rule There shall be allowed as a
depreciation deduction a reasonable allowance
for the exhaustion, wear and tear (including a
reasonable allowance for obsolescence)
Depreciation - 2 conditions
1) of property used in the trade or business, or
� (2) of property held for the production of income
Realty generally includes
land and buildings
permanently affixed to the land
Personalty is defined as?
& includes?
defined as any asset that is not
realty
Includes furniture, machinery, equipment, vehicles,
and other assets.
Modified Accelerated Cost Recovery
System (MACRS) applies to:
...
Modified Accelerated Cost Recovery
System (MACRS) applies to:
1. Assets used in a trade or business or for the production of income
2.Assets subject to wear and tear, obsolescence, etc.
3.Assets that have a determinable useful life or decline in value on a predictable basis
4. Assets that are tangible personalty or
� IRC � 168 - Accelerated cost recovery system
- (a) General rule Except as otherwise provided in
this section, the depreciation deduction provided
by section 167(a) for any tangible property shall
be determined by using�
(1) the applicable depreciation method,
� (2) the applicable recovery period, and
� (3) the applicable convention.
Personalty - Half?Year Convention:
1. General rule for personalty
2.Assets treated as if placed in service (or disposed of) in the middle of taxable year regardless of when actually placed in service (or disposed of)
Euclid acquires a 7-year class asset on May 9, 2015, for $200,000. Euclid does not elect immediate expensing under � 179. He does not claim any available additional first-year depreciation.
Euclid's cost recovery deduction is $ ___________ for 2015 and __
Use Table 8.1 (from book): Mid-Year Convention
In year one use 1 on the left side and 7-year on the top row.
For year 2 use year 2 on left and 7 year on top row.
Multiply by $200,000 , the price the asset was acquired for.
Andre acquired a computer on March 3, 2015, for $47,800. He elects the straight-line method for cost recovery. Andre does not elect immediate expensing under � 179. He does not claim any available additional first-year depreciation.
Use this table: "MACRS straight-line depreciation for personal property assuming half year convention"
Since its a computer it falls in the 5 year class.
Mid-Year quarter convention
Applies if more than 40 percent of the value of property other than eligible real estate (discussed in a later section) is placed in service during the last quarter of the year
Additional first-yeardepreciation (also referred to as bonus depreciation
Under this provision, taxpayers can take an additional 50 percent cost recovery in the year qualified property is placed in service.
Diana acquires, for $274,400, and places in service a 5-year class asset on December 19, 2015. Diana does not elect immediate expensing under � 179. She elects additional first-year deprecation.
Note: Assume that the 2014 additional first-year depreciatio
Dec 19,2015 is the 4th quarter therefore we would use this table Table 8.2 (from book): Mid-Quarter Convention.
She also elects directional first year deprecation so she gets to take 50% of the depreciation in 2015 plus the normal amount of depreciation f
Limits exist on MACRS deductions for automobiles and other listed property that are used for both personal and business purposes. If the listed property is predominantly used for business, the taxpayer can use the MACRS tables to recover the cost. In case
straight line method
Listed property includes:
1.Any passenger automobile.
2.Any other property used as a means of transportation.
3.Any property of a type generally used for purposes of entertainment, recreation, or amusement.
4.Any computer or peripheral equipment, with the exception of equipment us
When given a list of assets acquired during the year to decide what MACRS convention applies to the assets remember that if __1 ____ of the total value of the all of the assets was placed in service during the last quarter of the year use the _____2______
1. 40%
2. Mid-quarter convention
The question i asked the teacher :
Assets placed in service in the 2nd quarter (April,May,June) , use the "half year convention" table
The question i asked the teacher :
Assets placed in service in the 2nd quarter (April,May,June) , use the "half year convention" table
Startup expenditures are?
partially amortizable by using a � 195 election.
A taxpayer must make the election for start up expenditures no later than?
The due date of the return for the taxable year in which the trade or business begins.
If no election is made for start up expenditures, the costs are?
Capitalized
Example of cost that does not qualify as a start up cost?
Interest on a short-term note
3 examples that do qualify as start up costs?
Salaries , Travel , Professional Fees
Any startup expenditures not deducted are amortized ratably over a ___1___ period, beginning in the month in which _____2____.
1. 180-month period
2. the trade or business begins
Start up expenditures include:
advertising
salaries and wages
travel
other expenses incurred in lining up prospective distributors, suppliers, or customers
salaries and fees for executives, consultants, and professional services
Start up expenditures do not include:
interest
taxes
research cost
experiential cost