Liberty Tax Service Online Basic Income Tax Course. Lesson 12 Chapter 11 Homework 1 HOMEWORK 1:
William D. Williams ( , born 10/14/1960) of 4545 West Ave., Braden, TN is single. He received the following forms and he is a radio engineer. Prepare Williams return. Chapter 11 Homework 1 Chapter 11 Homework 1 Chapter 11 Homework 1 Chapter 11 Homework 1 Chapter 11 Homework 1 Chapter 11 Homework 1 Chapter 11 Homework 1 Chapter 11 Homework 2 HOMEWORK 2:
Matthew J. Morgan (SSN , born 9/18/1958) lives at 4684 McKinley Parkway, New Orleans, LA He has Form 1099-B from Broker One, who reported gross proceeds as follows: Stock Date Sold Sales Price 100 shares MNO 02/12/2008 $5,050 500 shares ZYX 08/06/2008 $5,250 Broker One reported sales commissions to Matthew separately.They were:MNO, $50 and ZYX, $200. Chapter 11 Homework 2 Stock Date Sold Sales Price 200 shares BCA
Matthew also has a Form 1099-B from Broker Two, who reported the net proceeds as follows: Matthew gave you the following information about the stocks he sold: He paid $6,940, plus a $60 commission, to buy the MNO stock on February 12, 2006. He bought the ZYX on March 11, 2005, for $5,200, plus a $100 commission. He paid $3,900, plus a $50 commission, to buy the BCA stock on January 29, 2008. He bought the JKL on June 25, 2006, for $6,300, plus a $30 commission. Stock Date Sold Sales Price 200 shares BCA 08/06/2008 $4,000 300 shares JKL $5,910 Chapter 11 Homework 2 Matthews filing status is head of household.His son Joe (SSN , born 03/25/1999) lived with him the whole year.His only other income was $65,182 in wages. Line 41 of his Form 1040 shows $54,182. Matthews Form 1040 and Capital Loss Carryover Worksheet from 2007 shows that he has a $450 short-term loss and a $325 long-term loss that he can carryover to his 2008 return. Complete Matthews Schedule D and his Form 1040 through line 13. Also complete the Capital Loss Carryover Worksheet to figure how much capital loss he can carry over to 2009. Chapter 11 Homework 2 Chapter 11 Homework 2 Chapter 11 Homework 2 Chapter 11 Homework 2 Chapter 11 Homework 2 Chapter 12: Depreciation
Chapter Content The Depreciation Deduction Modified Accelerated Cost Recovery System (MACRS) Listed Property Section 179 Deduction Disposition of Property Amortization Form 4562, Depreciation and Amortization Key Ideas Objectives Understand Property Depreciation and the Depreciation Deduction Know How to Use MACRS to Depreciate Property Understand the Limits on Depreciating Listed Property Determine What Property Qualifies for the Section 179 Deduction Know When to Use Form 4562 and How to Complete the Form Depreciation Depreciation is the decrease in the value of property over the time it is used. B. You can recover the cost of certain business or income-producing property by taking yearly deductions for depreciation over the life of the property. C. The property must have a useful life lasting substantially beyond the tax year. D. Tax law sets the time periods that different types of property are expected to last. DEPRECIATION is the decrease in the value of property over the time the property is being used. As a tax term, it refers to a way of spreading the cost of a business or investment property purchase over the period of years which is the expected useful life of the purchased property. You recover (get back) the cost of certain business or income-producing property on your tax return by taking yearly deductions for depreciation over the life of the property. Depreciable property must be property you own that you use in your business or income-producing activity. It must have a determinable useful life and it must be expected to last more than one year. Depreciation starts when you first use the property in your business or for the production of income (placed-in-service date). It ends when you have deducted all your depreciable cost or you take the property out of service (no longer use the property for your business or the production of income). Depreciation E. To depreciate property you need to know:
1. The basis of the property 2. The useful life of the property, and 3. The depreciation method. 4. Date placed in service 5. Convention F. There are additional rules and requirements for depreciation of property that is listed property. To depreciate property, you need to know the cost or other basis of the property (see Chapter 11 for a discussion of basis) and the life of the property. In general, the basis of property purchased for business use is its cost. Tax law sets the time periods that different types of property are expected to last. For most property placed in service after 1986, depreciation is figured using the Modified Accelerated Cost Recovery System (MACRS). IRS designates certain types of property as LISTED PROPERTY and explains the special rules and depreciation deduction limits that apply. Listed property includes cars and other property used for transportation, property used for entertainment and other property such as certain computers and cellular phones. Additional rules and record-keeping requirements apply when depreciating listed property. Depreciation G. Section 179 allows you to deduct all or part of the cost of certain property, up to a limit, in the first year you place the property in service (this is called expensing). H. The form or schedule used to report depreciation depends on the use of the property being depreciated. I. For many depreciation deductions, you must also complete Form 4562. The depreciation deduction for an individual property is usually taken yearly over the life of the property. However, section 179 of the Internal Revenue Code allows you to deduct a larger portion of, or even all of, the cost of certain property in the first year you place the property in service. Deducting the cost in this way is called EXPENSING (treating the property as an expense). The form or schedule on which you claim the depreciation deduction depends on the use of the property being depreciated.For most depreciation deductions you claim, you must complete Form 4562, Depreciation and Amortization. Depreciation Depreciation THE DEPRECIATION DEDUCTION
The depreciation deduction is a percentage of the basis of depreciable property taken over the useful life of the property. You purchase a copier in 2008 at a cost of $4,000. If the useful life of the copier is 5 years, you deduct a percentage of the $4,000 each year. B. IRS rules determine the useful life and the percentage to use. C. If the property is depreciable, you must take the deduction. The depreciation deduction is a percentage of the basis of depreciable property which is taken yearly over the useful life of the property. IRS rules determine the useful life of a particular item and the percentage to use. If your property is depreciable, you must either take the depreciation or the section 179 deduction. When you dispose of the property, the depreciation you deducted or should have deducted must be subtracted from the basis of the property when you determine your taxable gain or loss. To determine the depreciation deduction, you need to understand who can claim depreciation, the different types of property, what can and cannot be depreciated, and when depreciation begins and ends. THE DEPRECIATION DEDUCTION
D. To claim the deduction, you must own the property and use it in your business or for producing income. Sue took out a loan to buy a van. She is a carpenter and she uses the van 75% in her business and 25% for personal purposes. She owns the van and can depreciate 75% of the cost of the van. E. Depreciable property is either tangible or intangible. 1. Tangible property is property you can see or touch and includes both real and personal property (land, buildings, cars, furniture) John rents apartments in an apartment building he owns. The building, the furnace, the garage, and the trees and shrubs are all real property owned by John. His computer, the furniture in his office, and the truck he uses for his business are all examples of tangible personal property. To claim depreciation, you must be the owner of the property and you must use the property in your trade or business or for producing income. You own the property and can depreciate it even if you borrowed the money to purchase it through a mortgage or other loan. Property is either tangible or intangible. Different depreciation rules apply depending on the type of property you own. Tangible property is property that you can see or touch and includes both real and personal property. Tangible real property is land, buildings, and generally anything built or constructed on land, growing on land, or attached to the land. Tangible personal property includes cars, trucks, machinery, furniture, equipment, and anything you can see or touch, except real property. THE DEPRECIATION DEDUCTION
2. Intangible property is generally any property that has value but cannot be seen or touched (computer software, copyrights, patents). F. Real or personal property used for personal (nonbusiness) purposes is not depreciable. Chris owns a framing business. In 2007, she purchased a van that she uses to deliver frames to her customers. She also uses the van to shop and take her kids to school. Chris can depreciate the cost of the van based on its business use. If 60% of the miles she drives are for business, she can use 60% of the cost of the van as her cost basis for depreciation. Intangible property is generally any property that has value but cannot be seen or touched. This includes items such as computer software, copyrights, goodwill, franchises, patents, trademarks, and trade names. Do not confuse personal property with personal-use property. Personal or real property used for personal (nonbusiness) purposes is not depreciable. If you use the property both for business and for personal use, you can depreciate only the part used for business and must keep records substantiating business use.Property converted from personal to business use is depreciable from the date placed in service. THE DEPRECIATION DEDUCTION
What Can And Cannot Be Depreciated G. You can depreciate property only if it: 1. Is used for business or held to produce income 2. Is expected to last more than one year, and, 3. Has a limited useful life (for this reason, land is never depreciable). You can depreciate property only if it meets all the following requirements: It must be property you own It must be used in business or held to produce income. It must have a determinable useful life. It must be expected to last more than one year. It must be something that wears out, decays, gets used up, becomes obsolete or loses its value from natural causes. In other words, it must have a limited useful life. For this reason, land is never depreciable. THE DEPRECIATION DEDUCTION
H. In addition to land, business-use property you cannot depreciate includes: 1. Inventory and stock in trade 2. Items placed in service and disposed of in the same year 3. Most leased property John completely replaces the roof on the apartment building he owns. The new roof increases the value of the property so he must depreciate the cost of the roof. If John merely repaired a leak around the chimney, he would deduct the cost of the repair in the year the repair is made. In addition to land and personal-use property, nondepreciable property includes: Inventory Items placed in service and disposed of in the same year Most leased property You cannot depreciate repairs and replacements that do not add to the value of the property or extend its useful life. The cost of these repairs will generally be deductible as an expense of doing business. THE DEPRECIATION DEDUCTION
When Depreciation Begins And Ends I.Begin depreciating property when you place it in service for use in your trade or business. 1. Property is placed in service when it is ready and available for its specific use. J. Stop depreciating when you have fully recovered the cost or when you retire the property from service, whichever comes first. 1. The cost is recovered when your section 179 and depreciation deductions are equal to your cost or investment in the property 2. Property is retired from service when you permanently withdraw it from use in your trade or business or from use in the production of income. You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income. For depreciation purposes, you place property in service when it is ready and available for use. Even if you are not using the property, it is in service when it is ready and available for its specific use. You stop depreciating property either when you have fully recovered your cost or when you retire the property from service, whichever comes first. You fully recover your cost when your section 179 deduction and depreciation deduction are equal to your cost or investment in the property. Property is retired from service when you permanently withdraw it from use in your trade or business or from use in the production of income. Property is retired from service by sale or exchange, abandonment, or destruction. THE DEPRECIATION DEDUCTION Problem 1
John bought his apartment building in January 2008 and started advertising for tenants immediately. Because he did not rent the first apartment until April, depreciation will not begin until April. True or False? THE DEPRECIATION DEDUCTION Problem 1
John bought his apartment building in January 2008 and started advertising for tenants immediately. Because he did not rent the first apartment until April, depreciation will not begin until April. False The building was ready and available for rent in January so January 2008 is when it was placed in service and depreciation begins even though he did not rent the apartment until April. THE DEPRECIATION DEDUCTION
Depreciation Systems There are three different systems used to figure the depreciation deduction, each with its own set of rules. B. The rules of each system determine the useful life of the property and which depreciation method to use. 1. Straight line method of depreciation provides equal depreciation deductions each year of the useful life. 2. Accelerated methods allow larger deductions during the early years, resulting in a faster recovery of the cost of the property. There are three different systems used to figure depreciation deductions, each with its own set of rules. Generally, the system you use depends on the type of property and when the property was placed in service. The rules of each system determine the useful life of the property and which depreciation method you use. The straight line methods of depreciation provide equal depreciation deductions each year. The accelerated methods such as the declining balance methods result in larger deductions during the early years of the recovery period. THE DEPRECIATION DEDUCTION
C. Generally, the system you use depends on the type of property and when the property was placed in service. The three systems are: 1. Modified Accelerated Cost Recovery System (MACRS) for most tangible depreciable property placed in service after 1986. 2. Accelerated Cost Recovery System (ACRS) for most depreciable property placed in service after 1980 but before 1987. 3. Useful lives and either straight line or accelerated methods for property placed in service before 1981 or for which MACRS or ACRS is not used. D. IRS provides MACRS and ACRS tables that give the depreciation rate (the percentage of the cost you can deduct) for each year the property is in service. E. There are no tables for property placed in service before 1981. The three systems are: 1. The Modified Accelerated Cost Recovery System (MACRS) for most tangible depreciable property placed in service after 1986. 2. The Accelerated Cost Recovery System (ACRS) for most depreciable property placed in service after 1980 but before 1987. 3. Methods for property placed in service before 1981 which did not qualify for MACRS or ACRS included "any reasonable method," including useful life, straight line and accelerated methods. One of these can be used on property you choose to exclude from MACRS or ACRS. MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS)
MACRS may be used for most tangible depreciable property placed in service after 1986 and must be used to depreciate real property acquired before 1987 that you changed from personal to business or income producing use after 1986. B. MACRS cannot be used to depreciate the following property: 1. Intangible property 2. Any films, video tape and recordings 3. Certain real and personal property placed in service before 1987. MACRS applies to most tangible depreciable property placed in service after You must use MACRS to depreciate all real property you acquired before 1987 that you converted from personal use to a business or income-producing use after 1986. MACRS cannot be used to depreciate the following property: intangible property any films, video tapes and recordings certain real and personal property placed in service before 1987 MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS)
C. MACRS is actually two systems. 1. General Depreciation System (GDS) is used for most tangible property (accelerated methods and straight line method) 2. Alternative Depreciation System (ADS) is used when specifically required by law or if you elect it (straight line method) 3. Refer to Table 12-1 for a summary of MACRS depreciation methods used in each system. D. The MACRS percentage tables are based on the different depreciation methods. 1. Refer to Table 12-2 for the percentage tables to use to depreciate personal property and to Table for the tables for residential rental and nonresidential real property. MACRS is actually two systems. The discussion here will refer to the main system which is called the General Depreciation System (GDS). The second system is called the Alternative Depreciation System (ADS). The main difference between the two systems is that ADS generally provides for a longer recovery period. Using ADS, it takes longer to recover the cost of your property. Unless you are specifically required by law to use ADS or you elect it, you generally use GDS to figure your depreciation deduction. To figure your depreciation deduction using MACRS, you multiply the basis of your property by a percentage taken from the applicable percentage rate table. The tables you use are determined by the depreciation methods. You can use a separate depreciation method for each piece of real property you own. You must use the same depreciation method for all personal property of the same class (defined below) that is placed in service in the same year. You must choose the depreciation method in the first year the property is placed in service. Table 12-1 summarizes the depreciation methods and the benefits of each method. Table 12-2 shows which percentage table to use for each method for personal property. Table 12-3 shows the tables to use for residential rental and nonresidential real property. MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS) MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS) MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS)
Table MACRS Percentage Table Guide for Residential Rental and Nonresidential Real Property MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS)
E. To use the MACRS tables, you need to know the depreciation method and the following about your property: 1. The basis 2. The property class and recovery period 3. The date placed in service 4. The convention to use. In addition to the depreciation method, you need to know the following information about your property to use the MACRS percentage tables: Basis Property class and recovery period Date placed in service Convention to use MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS)
Basis Basis is usually the cost of purchased property. The cost includes sales tax (unless it was claimed on Schedule A), shipping, installation and testing fees. 1. If you change personal use property to business use, the basis is the lesser of the fair market value on the date you change it from personal use or your original cost basis adjusted for the cost of improvements and certain tax deductions 2. If you use property for both personal and business purposes, use only the percentage of the basis used for business to figure the depreciation deduction. To figure your depreciation deduction, you must determine the cost or other basis of your property. If you bought the property, the basis is usually its cost. The cost of property is the amount you paid for the property plus any sales tax, freight charges, installation costs, and any improvements. Cost basis for real property includes certain settlement costs such as transfer taxes, title insurance, and legal fees. If you change personal-use property to business use, the depreciable basis is the lesser of the fair market value on the date of the change or your original cost basis adjusted for the cost of improvements and certain tax deductions. If you use an item of property for both personal and business purposes, you must determine the percentage of business use to figure your depreciation deduction. MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS) Problem 1
Rebecca bought a computer system for use in her business. The price of the system was $28,000. She paid sales tax of $1,400 and shipping charges of $130. What is her cost basis? a. $28,000 b. $29,400 c. $28,130 d. $29,530 MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS) Problem 1
Rebecca bought a computer system for use in her business. The price of the system was $28,000. She paid sales tax of $1,400 and shipping charges of $130. What is her cost basis? d. $29,530 The cost basis is $29,530 ($28,000 +$1,400 + $130). MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS)
Property Classes And Recovery Periods Property classes establish the recovery period (number of years) over which you can take the deduction. 1. The class property it is assigned to is generally determined by its class life. 2. Under GDS, property is assigned to one of 9 classes. 3. The shorter the recovery period, the sooner you get back the cost of the property. MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS)
The nine property classes: 3-year property 5-year property 7-year property 10-year property 15-year property 20-year property 25-year property Residential rental property Nonresidential real property MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS)
4. Residential rental property and nonresidential real property have different recovery periods. 5. The recovery period for nonresidential real property depends on the year it was placed in service. 6. Additions and improvements are treated as separate property for depreciation purposes. In 2003, William and Mary bought a house to be used as rental property for $70,000 not including the land value. They began depreciating the $70,000 in 2003 over the recovery period of 27.5 years. In 2008, they completely replaced the roof at a cost of $7,000. In 2008, they will begin depreciating the $7,000 cost of the roof over 27.5 years. Real property is divided into residential rental property (apartment buildings, rental homes) and nonresidential real property (office buildings, factories, office in the home and business use of home). Treat additions or improvements you make to any property, including leased property, as separate property items for depreciation purposes. The start date of the recovery period for an addition or improvement begins on the later of the date you place it in service or the date you place the underlying property in service. The class recovery period of the addition or improvement is the one you would use for the underlying property. MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS)
Conventions Conventions determine the number of months you can depreciate property in the year it is placed in service and the year it is disposed of. The half-year convention is generally used for personal property. 1. Under the half-year convention, all property is treated as having been placed in service or disposed of at the midpoint of the year no matter when in the year you begin or end the use of the property. MACRS also provides three conventions. These conventions determine how many months you can depreciate your property in the year it is placed in service and in the year you dispose of the property. To figure your deduction you must determine if you have to use the half-year convention, the mid-quarter convention or the midmonth convention. Choose the appropriate MACRS table for the convention you are using. The half-year convention is the convention usually used for personal property. The half-year convention applies to all property except residential rental and nonresidential real property and property subject to the mid-quarter convention (covered later). Under the half-year convention, property is treated as having been placed in service or disposed of at the midpoint of the year no matter when in the year you begin or end the use of the property The following table is for the half-year convention. Convention Property Classes Years Property Has Been in Service
Depreciation Percentage Rate MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS)
Louise is furnishing her new office. In February 2008, she purchased filing cabinets for $600, office furniture for $2,000, and computer equipment for $5,000. All her purchases are used 100% for her business. This is all tangible personal property so she can use MACRS. First, she determines the class for each item. The filing cabinets and the office furniture are 7-year property. The computer equipment is 5-year property. Next she determines the convention. The property is all tangible personal property and none of it was bought in the last quarter of the year. She can use the half-year convention. She figures the depreciation deduction for each item using percentage Table A-1. MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS)
The basis for the filing cabinets is $600. She looks in year 1 under 7-year property and finds the percentage rate is 14.29%. Her depreciation deduction for the cabinets is $86 [$600 basis (cost) x 14.29%]. The furniture is also 7-year property so the deduction is $286 ($2,000 basis x 14.29%). The computer equipment is 5-year property so Louise uses the percentage under the 5-year column which is 20%. The deduction for the computer equipment is $1,000 ($5,000 basis x 20%). Louise will enter these amounts on a depreciation worksheet . She will then add the 7-year property together and enter the 5-year property and the 7-year property on Form 4562. MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS)
The mid-quarter convention must be used if the depreciable basis of personal property placed in service in the last 3 months of the year exceeds 40% of the total depreciable basis of all personal property placed in service that year. 1. Under this convention, all property is treated as having been placed in service or disposed of at the midpoint of the quarter of the year in which you begin or end the use of the property. 2. There is a separate MACRS percentage table for each quarter. 3. If you are required to use the mid-quarter convention, you must use it for all personal property placed in service during the entire year. The mid-quarter convention must be used if the depreciable basis of the personal property placed in service during the last three months (the last quarter) of the year exceeds 40% of the total depreciable basis of all personal property you placed in service during the entire year. In figuring the total basis of property placed in service during the year, do not take into account residential rental property, nonresidential real property, property you placed in service and disposed of in the same year, or for which you took a section 179 deduction. If you are required to use the mid-quarter convention for personal property, you must use it for all such property placed in service during the entire year. Under this convention, you treat all property as having been placed in service or disposed of at the midpoint of the quarter of the year in which the property was actually placed in service or disposed of. There is a separate MACRS percentage table for each quarter (1st quarter-January, February, March; 2nd quarter-April, May, June; 3rd quarter- July, August, September; 4th quarter-October, November, December). MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS) Problem 2
In 2008, Richard purchased and placed in service office furniture and computer equipment for his business. The total cost was $14,000.$7,000 worth of equipment was purchased in November 2008 ($7,000 is 50% of $14,000).He does not claim the section 179 deduction.What convention will Richard use to depreciate his office furniture and equipment? a. Mid-month b. Mid-quarter c.Half year MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS) Problem 2
In 2008, Richard purchased and placed in service office furniture and computer equipment for his business. The total cost was $14,000.$7,000 worth of equipment was purchased in November 2008 ($7,000 is 50% of $14,000).He does not claim the section 179 deduction.What convention will Richard use to depreciate his office furniture and equipment? b. Mid-quarter Because the cost of Richard's purchases in the last three months of the tax year is more than 40% of the total cost of the property, he must use the mid-quarter convention for all the property placed in service in 2008. He may have to use a different percentage rate table for each quarter in which he placed the other property in service. MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS)
4. Property that is depreciated under the mid-quarter convention in the first year it is placed in service must be depreciated under the mid-quarter convention for each later year. Property that must be depreciated under the mid-quarter convention in the first year placed in service must continue to be depreciated under the mid-quarter convention for each later year. MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS)
The mid-month convention is used for nonresidential real property and residential rental property. 1. Under this convention, all property is treated as having been placed in service or disposed of at the midpoint of the month in which you begin or end the use of the property. The mid-month convention is used for nonresidential real property and residential rental property. Under this convention, all property is treated as placed in service or disposed of at the midpoint of the month during which you begin or end the use of the property. The IRS percentage table for 39-year property is shown below. MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS)
On June 1, 2008, Chuck Greene purchased an office building for $500,000. The value of the land included in the price was $75,000. Land is never depreciable so his depreciation basis is $425,000 ($500,000 - $75,000). Because this is nonresidential real property purchased after 5/12/1993, the recovery period is 39 years. Since the property is real property, the mid-month convention is used. MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS)
Chuck figures his depreciation deduction by using Table A-7a. Chuck placed the property in service in June so he looks under column 6 (June is the sixth month). The depreciation percentage rate for June is 1.391%. His depreciation deduction for 2008 is $5, ($425,000 basis x 1.391%). To figure his deduction for tax year 2009, he will multiply the basis by the second year percentage under column 6 ($425,000 x 2.564% = $10,897). MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS)
For any convention, when determining the year of the recovery period to use count the year the property was placed in service as year 1. Mighty Maids bought filing cabinets in May In 2008, the filing cabinets are in year 4 of the recovery period, not year 3. The correct percentage in Table A-1 under 7-year property is 12.49% not 17.49%. MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS)
Special Depreciation Allowance For property placed in service beginning January 1, 2008, only certain types of property are eligible for an additional 50% (or 30% if applicable) special depreciation allowance, primarily limited to: Qualified Liberty Zone property Qualified Gulf Opportunity Zone (GO Zone) property Qualified Recovery Assistance property ( property in the Kansas disaster area) Qualified disaster assistance property (property in federally declared disaster areas) Certain qualified property placed in service after December 31, 2007, and before January 1, 2010. MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS)
Special Depreciation Allowance This allowance is an additional deduction taken after any section 179 deduction and before figuring regular depreciation under MACRS for the year the property is placed in service. The allowance applies only for the first year the property is placed in service. You can elect, for any class of property, not to deduct any special allowances for all property in such class placed in service in the tax year. To make an election, attach a statement to your return indicating what election you are making and the class of property for which you are making the election. MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS)
On November 24, 2008, Elisabeth Martin bought and placed in service qualified 7-year property for $100,000 for her business in the Gulf Opportunity Zone. Elisabeth can deduct $50,000 ($100,000 x 50%) as a special depreciation allowance for She will use the remaining $50,000 ($100,000 - $50,000) of the cost to figure her regular year one depreciation deduction and for each later year of the recovery period. Her regular year one depreciation deduction is $7,145 ($50,000 depreciation basis x 14.29%). Her total 2008 depreciation deduction is $57,145 ($7,145 regular year one depreciation deduction plus $50,000 special depreciation allowance). MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS)
The special depreciation allowance for property placed in service after September 10, 2001 and before January 1, 2005 and after December 31, 2007 and before January 1, 2010 applied to all areas of the country and is not limited to the Qualified zones. For qualified property placed in service after September 10, 2001 and before May 6, 2003, the 30% additional depreciation automatically applied unless you elected not to use it. After May 5, 2003 and before January 1, 2005, the 50% additional depreciation automatically applied unless you elected out. If you did elect out, the 30% bonus depreciation applied. Or you could have elected out of both the 30% and 50% additional depreciation. DEPRECIATION WORKSHEET
Use a depreciation worksheet to assist you in maintaining depreciation records. On the worksheet you record the date placed-in-service, basis, recovery period and other information needed to figure the deduction for each item of property you are depreciating. Use the worksheet to figure your deductions each tax year and keep the worksheet with your records for that year. LISTED PROPERTY A. Property the IRS considers likely to be used for personal as well as business purposes is listed property and it includes: 1. Any passenger automobile 2. Any other property used for transportation (trucks, buses, boats) 3. Any property used for entertainment, recreation or amusement (cameras, VCRs) 4. Computers and related equipment (unless used at a regular business establishment owned or leased by the person operating the establishment) 5. Any cellular telephone or similar telecommunication equipment. Listed property is property that the IRS considers suitable to be used for personal as well as business purposes, such as property used for transportation or entertainment and certain computers and cellular phones. There are additional rules and recordkeeping requirements you must follow when depreciating listed property. It is important to keep good records as deductions for listed property are often audited. Listed property: Any passenger automobile (defined later under Special Rules for Passenger Automobiles) Any other property used for transportation, unless it is an excepted vehicle Any property of a type generally used for entertainment, recreation, or amusement (including photographic, phonographic, communication, and video-recording equipment) Any computer and related peripheral equipment unless it is used only at a regular business establishment and owned or leased by the person operating the establishment. A regular business establishment includes a portion of a dwelling unit if that portion is used both regularly and exclusively for business Any cellular telephone (or similar telecommunication equipment) LISTED PROPERTY Depreciating Listed Property
B. There are additional rules and record keeping requirements for depreciating listed property. C. Only the business-use part of the cost can be depreciated. D. To depreciate listed property using GDS, the qualified business use of the property must be more than 50% of its total use (Predominant Use Test). 1. A qualified business use is any use in your trade or business 2. Qualified business use does not include use of investment or rental property; use of a vehicle for commuting; or employee use of listed property unless the use is required as a condition of employment. Depending on the percentage of qualified business use, you use either GDS or ADS to depreciate listed property. To depreciate listed property using GDS, the property must be used predominantly for a qualified business use. This means that the business use of the property must be more than 50% of its total use. This is called the Predominant Use Test. A qualified business use is any use in your trade or business. For listed property, qualified business use does not include: Use of property held only for the production of income such as investment property or rental property (if renting property is not your trade or business Use of a vehicle for commuting (traveling from your home to your place of business). It does not matter if you perform work during the trip. This does not change the character of the trip from personal commuting to business. If you are an employee, your use of your own listed property unless the use is for your employers convenience and the use is required as a condition of employment. LISTED PROPERTY Problem 1
April is self-employed and sells cosmetics. She uses a computer in a part of her home that does not qualify as a home office, so the computer is listed property. Her records show that in 2008 she used the computer a total of 1,300 hours. She used it 900 hours for business and 400 hours for personal purposes. How much of the cost of the computer can April depreciate? a. 100% b. 32% c. 69% LISTED PROPERTY Problem 1
April is self-employed and sells cosmetics. She uses a computer in a part of her home that does not qualify as a home office, so the computer is listed property. Her records show that in 2008 she used the computer a total of 1,300 hours. She used it 900 hours for business and 400 hours for personal purposes. How much of the cost of the computer can April depreciate? c. 69% Because her business use of the computer is more than 50% of the total use (900 of 1,300 hours is 69%), she can depreciate 69% of the cost of the computer using the regular (GDS) MACRS rules. LISTED PROPERTY E. If the qualified business use of the property is 50% or less of its total use: 1. Must depreciate using ADS 2. Cannot claim a section 179 deduction. F. To take a depreciation deduction for listed property, you must be able to prove business use with supporting records or evidence. If the qualified business use of listed property is 50% or less of its total use, you must depreciate the property using the Alternate Depreciation System (ADS) which uses the straight-line method. Also, you cannot claim the section 179 deduction for listed property if the qualified business use is 50% or less of its total use. To take a depreciation or section 179 deduction for listed property, you must be able to prove your business/investment use with adequate written records or sufficient evidence to support your own statements. Adequate records would be an account book, diary, log or other documentary evidence that is sufficient to establish each element of an expenditure or use. LISTED PROPERTY Sally Jones uses the computer in her home 50% of the time to manage her investments. She also uses the computer 40% of the time in her research business. The computer is listed property because it is not used at a regular business establishment or in a part of her home used regularly and exclusively for business. Because she does not use the computer more than 50% for business, it does not meet the predominant use test. Because it does not meet the predominant use test, she cannot claim a section 179 deduction and she must use ADS to depreciate the computer. Her depreciation basis under ADS is 90% of the cost of the computer (50% investment use on Form 4952 and 40% business use on her business return). LISTED PROPERTY Special Rules For Passenger Automobiles
G. There are special additional depreciation rules for passenger automobiles. 1. Total depreciation allowed (including the section 179 deduction) is limited to the lower of amounts set by tax law or yearly percentage of the cost basis 2. Each year of useful life, you must determine maximum depreciation allowed under these limits by the date the automobile is placed in service 3. Also figure the deduction using MACRS and use the lower amount as your deduction a. Must reduce the deduction further if business use is less than 100%. 4. Refer to Table 12-4 for the maximum deduction, based on the year the automobile was placed in service. For purposes of these rules, a passenger automobile is any four wheeled vehicle made primarily for use on public streets and rated at 6,000 pounds or less of unloaded gross vehicle weight (6,000 pounds or less of gross vehicle weight for trucks and vans). Trucks and vans meeting this definition are considered passenger automobiles. Vehicles unlikely to be used for personal purposes, such as an ambulance or a hearse, or a vehicle used for hire, such as a taxi, are not passenger automobiles. The total depreciation deduction (including the section 179 deduction and the special depreciation allowance) you can claim for passenger automobiles is limited to amounts set by the tax law. Determine the maximum depreciation you can claim for a passenger automobile under these limits by the date you place the automobile in service. If the deduction you figure using MACRS is more than the limit, you must use the lesser amount as your deduction. The maximum deductions for 2007, based on the year the automobile was placed in service are shown in Table 12-4. If your business use of the automobile is less than 100%, you must reduce the maximum deduction by multiplying the maximum deduction limit by the percentage of business use. Remember, you must be able to prove business use with adequate records such as a mileage log. To figure the correct depreciation, use the "Depreciation Worksheet for Passenger Automobiles" found in Pub 946. LISTED PROPERTY On September 26, 2008, Charles Smyth bought and placed in service a new car for $18,000. He used the car 60% for business during He files his tax return based on the calendar year. Under GDS, his car is a 5-year property.He uses Table A-1 to determine the depreciation rate.Using Part 1 of the Depreciation Worksheet for Passenger Automobiles and Table 12-4, Donald determines his maximum possible depreciation deduction for a passenger automobile is $6,576 ($10,960 x 60%). Donald's depreciation deduction is limited to $2,160 (the lesser of $6,576 MACRS depreciation or the passenger auto limit of $2,160) as shown in the worksheet on the following page. If Donald continues to use his car for business, he will be subject to the deduction limits in Table 12-4 each year. LISTED PROPERTY LISTED PROPERTY LISTED PROPERTY Trucks and Vans
5. The maximum depreciation deduction limit for certain trucks and vans first placed in service in 2008 are higher than those for other passenger automobiles. Refer to Table 12-5 The maximum depreciation for trucks and vans first placed in service in 2007 are higher than those for other passenger automobiles. This includes vehicles such as minivans and sport utility vehicles built on a truck chassis. The maximum deduction amounts are shown in Table 12-5 LISTED PROPERTY SECTION 179 DEDUCTION A. Under section 179 of the Internal Revenue Code (IRC) you can elect to deduct (expense) all or part of the cost of certain qualifying property in the year you place it in service instead of taking depreciation deductions over a recovery period. 1. Elect the section 179 deduction on Form 4562 2. You can expense part of the cost (the elected cost) and depreciate the rest of the cost over the applicable recovery period 3. You can revoke an election to take a section deduction without IRS approval. Make revocation on an amended return. Applies to tax years beginning in 2003. 4. You must keep records identifying each piece of section 179 property. Instead of recovering the cost of your business-use property by taking depreciation deductions over a recovery period, you can elect (choose) to expense all or part of the cost of certain qualifying property in the year you place it in service. This is called a section 179 deduction because it is allowed under section 179 of the Code.Section 179 also places limits on the amount you can deduct in a tax year. You make the election by taking the section 179 deduction on Form You can choose to expense part of the cost of the property and depreciate the rest of the cost over the applicable recovery period. The part of the cost you elect to expense is called the elected cost. You can revoke an election to take a section 179 deduction for any property without IRS approval. The revocation can be made on an amended return and applies to elections made on tax returns for tax years beginning in 2003. You must keep records that show the specific identification of each piece of qualifying section 179 property. The records must show how you acquired the property, from whom you acquired it and when you placed it in service. SECTION 179 DEDUCTION Deductible Costs
B. Generally, qualifying property must be tangible personal property: 1. Acquired by purchase 2. Used in your trade or business 3. Used for business more than 50% of the total use in the year you place it in service. a. Use only the business use cost of the property to figure the section 179 deduction. Only the cost of property acquired by purchase for use in your trade or business qualifies for the section 179 deduction. Property acquired by trade is not qualified property. Generally, the property must be tangible personal property such as machinery and office equipment. If you use the property for both business and nonbusiness purposes, you can elect the 179 deduction only if your business use is more than 50% of the total in the year you place the property in service. Use only the part of the cost of the property that reflects its business use to figure your section 179 deduction. SECTION 179 DEDUCTION Problem 1
In 2008, Sam Smith bought and placed in service an item of tangible property. He paid $11,000 for it and used it 80% for business and 20% for personal purposes.What is the business part of the cost of the property that Sam can claim as a section 179 deduction? a. $8,800 b. $11,000 c. $2,200 SECTION 179 DEDUCTION Problem 1
In 2008, Sam Smith bought and placed in service an item of tangible property. He paid $11,000 for it and used it 80% for business and 20% for personal purposes.What is the business part of the cost of the property that Sam can claim as a section 179 deduction? a. $8,800 The business part of the cost of the property is $8,800 (80% x $11,000). John cannot claim more than $8,800 as his section 179 deduction. SECTION 179 DEDUCTION Nondeductible Costs
C. Property for which a section 179 deduction generally cannot be claimed includes: property held only for the production of income and rental property; property used predominately to furnish lodging, and property acquired from relatives. Generally, the section 179 deduction cannot be claimed for any of the following: Property you hold only for the production of income such as investment property and rental property (if renting property is not your trade or business) Real property, including buildings and their structural components Property acquired from related persons Air conditioning or heating units Certain property used predominantly outside the U.S. Property used predominantly to furnish lodging Certain property you lease to others (if you are not a corporation) SECTION 179 DEDUCTION Figuring The Deduction
D. Your section 179 deduction cannot be more than the business cost of the qualifying property. There are three additional limits on the amount of the deduction. 1. For tax year 2008, the total amount you can elect to deduct under section 179 property cannot exceed $250,000 2. The $250,000 maximum must be reduced one dollar for each dollar the cost of the property is over $800,000 3. The total cost of the property you can deduct is limited to the amount of your taxable income from the active conduct of any trade or business, including wages, salaries, and other employee compensation 4. Any cost that is not deductible because of the taxable income limit can be carried over to the next tax year SECTION 179 DEDUCTION Problem 2
In 2008, Carter James placed in service machinery costing $807,000.Because this cost is $7,000 more than the investment limit of $800,000, he must reduce his maximum dollar limit of $250,000 by $7,000. If his taxable income is at least $243,000, he can claim a $243,000 section 179 deduction for He will depreciate the balance of the basis over the applicable recovery period. Assume that Carters net income from his business in 2008 was $240,000. His wifes wages were $19,000 and they are filing jointly. For what amount can they take a section 179 deduction? a. $250,000 b. $243,000 c. $240,000 SECTION 179 DEDUCTION Problem 2
In 2008, Carter James placed in service machinery costing $807,000.Because this cost is $7,000 more than the investment limit of $800,000, he must reduce his maximum dollar limit of $250,000 by $7,000. If his taxable income is at least $243,000, he can claim a $243,000 section 179 deduction for He will depreciate the balance of the basis over the applicable recovery period. Assume that Carters net income from his business in 2008 was $240,000. His wifes wages were $19,000 and they are filing jointly. For what amount can they take a section 179 deduction? b. $243,000 Taxable income for section 179 purposes is $259,000. They can take a section 179 deduction for the entire $243,000. SECTION 179 DEDUCTION In 2008, Ray bought and put into service office furniture for his new business at a cost of $13,500. He elected to expense the cost on his tax return. $13,500 is less than the maximum dollar limit of $250,000 and less than the investment limit of $800,000. However, Rays net income in 2008 from his business was only $11,000. His section 179 deduction is limited to $11,000. He can carry the $2,500 he could not deduct to 2009 and take the $2,500 deduction then, if it is within all three limits. He must deduct the $2,500 before he takes any section 179 deduction for property acquired in 2009. SECTION 179 LIMIT FOR SUVs Sport utility vehicles (SUVs) and other vehicles weighing over 6,000 pounds are normally not subject to the luxury auto limitations. However, the maximum section 179 expense for sport utility vehicles and certain other vehicles placed in service after October 22, 2004, is $25,000. DISPOSITION OF PROPERTY
A. The permanent withdrawal of property from use. B. A withdrawal can be made by sale, exchange, abandonment, or destruction. C. Disposal before the end of the recovery period is called early disposition. D. For MACRS property, you are allowed a depreciation deduction for the year of the disposition. E. The deduction is a percentage of the MACRS deduction for that year of service 1. The percentage is different depending on which convention you are using. A disposition is the permanent withdrawal of property from use in your trade or business or in the production of income. A withdrawal can be made by sale, exchange, retirement, abandonment, or destruction. You generally recognize gain or loss on the disposition of property by a sale. If you dispose of your property before the end of its recovery period, it is called an early disposition. For property depreciated under MACRS, you are allowed a depreciation deduction for the year of the disposition. You determine the depreciation deduction for the year of disposition by using the table you used when the property was placed in service. Your actual deduction is a percentage of the deduction for the year. The percentage is different depending on which convention you are using. For example, if you used the half-year convention for the property, the deduction for the year of disposition is half the depreciation determined for that full year. DISPOSITION OF PROPERTY Problem 1
In May 2006, Tots Toys bought desks for $3,000 for 100% business use. Desks are 7-year property. The desks were sold in Using the half-year convention, the 2008 regular depreciation deduction for year 3 is $525 ($3,000 x 17.49%) for a full year of business use.What is the actual deduction for the property when it was disposed of in 2008? a. $525 b. $263 c. $350 DISPOSITION OF PROPERTY- Problem 1
In May 2006, Tots Toys bought desks for $3,000 for 100% business use. Desks are 7-year property. The desks were sold in Using the half-year convention, the 2008 regular depreciation deduction for year 3 is $525 ($3,000 x 17.49%) for a full year of business use.What is the actual deduction for the property when it was disposed of in 2008? b. $263 Because the property was disposed of, the actual deduction is $263 ( of $525). AMORTIZATION Used for intangible property; business start up costs; and certain other expenses. B. Deduct an equal amount of the cost of property each year over a period of time set by tax law (first and last years will generally be less than a full year). Amortization is similar to straight-line depreciation in that you deduct an equal amount of the cost of your property over a period of time. However, the amortization rules are not as complex as depreciation rules. Basically, you figure amortization by dividing the cost of the property by the number of months in the time period and multiplying the result by the number of applicable months in the tax year. Generally after the first year, you multiply by 12. The Code specifies time periods and first year number of months for the amortization of different types of property. For example: Intangible property you purchased after 08/10/93 for use in your trade or business or for the production of income is amortized over 15 years. Such property includes: Goodwill Franchise, trademark or trade name Copyrights and patents Any information base such as customer and direct mail lists Licenses, permits and other government granted rights Covenants not to compete Business start-up costs are amortized over a 60-month period if the expenses were incurred on or before October 22, Start-up costs must be incurred before you begin operation of your business. Such costs include expenses for travel, surveys, and advertising. For expenses incurred after October 22, 2004, taxpayers can elect to deduct up to $5,000 of start-up costs and up to $5,000 of organizational costs in the tax year the trade or business begins. Start-up and organizational costs that are not deductible in the year the trade or business begins must be capitalized and amortized over 15 years (instead of 60 months) on a straight-line basis. FORM 4562 A. You are not required to file Form 4562 to report depreciation or amortization of non-listed property for the years after the property was placed in service. B. You must complete Form 4562 and attach it to your tax return if you claim: 1. A section 179 deduction or carryover 2. A depreciation deduction on property placed in service in the current year 3. A depreciation deduction on any vehicle or other listed property regardless of the year placed in service 4. A deduction for any vehicle using the standard mileage rate unless the deduction is reported on Schedule C or C-EZ 5. A deduction for amortization of costs that begin in the current year. Use Form 4562 to: Claim your deduction for depreciation and amortization Make the election to expense certain tangible property Provide information on the business/investment use of automobiles and other listed property You are not required to file Form 4562 to report depreciation or amortization for non-listed property for the years after the property was placed in service. However, you must complete Form 4562 and attach it to your tax return if you are claiming any of the following: Section 179 deduction for the current year or a section 179 carryover deduction from a prior year Depreciation deduction for property placed in service during the current year Depreciation deduction on any vehicle or other listed property, regardless of the year it was placed in service Deduction for any vehicle using the standard mileage rate if the deduction is reported on a form other than Schedule C or Schedule C-EZ Deduction for amortization of costs if the amortization began in the current year FORM 4562 C. Table 12-7 explains the purpose of each part of Form 4562. D. Complete and file a separate Form 4562 for each business or activity for which you are claiming a depreciation deduction. E. The amount on line 22 of Form 4562 is entered on the form or schedule on which you are claiming the deduction. F. If you are an employee claiming actual expenses or the standard mileage rate for the business use of your vehicle, you must use Form 2106 instead of Form 4562. If you are an employee claiming actual expenses (including depreciation) or the standard mileage rate for the business use of your vehicle, you must use Form 2106, Employee Business Expenses instead of Form 4562 (See Chapter 13). Complete and file a separate Form 4562 for each business or activity for which you are claiming depreciation. Table 12-7 on the following page explains the purpose of each part of Form 4562. The amount on line 22 of Form 4562 is the total depreciation calculated for the year and is entered on the form or schedule on which you are claiming the deduction. For example, if you are self-employed you enter the amount from line 22 on the appropriate line of Schedule C, Profit or Loss From Business. Depreciation, figured on Form 4562, is also claimed on Schedule E, Supplemental Income and Loss, and Schedule F, Profit or Loss From Farming. The amount on line 44 is amortization and is not included in the line 22 total mentioned above. It should be entered on the "Other Deductions" or "Other Expenses" line of the form for the business to which it applies. Table Purpose of Form 4562 Part Purpose I Electing the section 179 deduction Figuring the maximum section 179 deduction for the current year Figuring any section 179 deduction carryover to the next year II Reporting depreciation deduction on property being depreciated under any method other than Modified Accelerated Cost Recovery System (MACRS) Reporting special depreciation allowance deductions III Reporting MACRS depreciation deductions for property placed in service before this year Reporting MACRS depreciation deductions for property (other than listed property) placed in service during the current year IV Summarizing total depreciation listed in other parts V Reporting depreciation on automobiles and other listed property Reporting information on the use of automobiles and other transportation vehicles VI Reporting amortization deductions Depreciation KEY IDEAS
The depreciation deduction is a yearly deduction that allows you to recover your cost of certain business or investment property over the life of the property. The yearly deduction is a percentage of the business/investment basis of the property. You can only depreciate property you own that is used in business or to produce income, is expected to last more than one year, and has a limited useful life in that it wears out, gets used up or becomes obsolete. Land can never be depreciated. The Modified Accelerated Cost Recovery System (MACRS) is the depreciation system used to depreciate most tangible property placed in service after To depreciate property under MACRS, you need to know its basis, property class and recovery period, the placed-in-service date, and which convention to use. Depreciation KEY IDEAS
Under MACRS, you use rates taken from IRS percentage tables to figure your depreciation deduction. The tables incorporate the class lives of different types of property, the depreciation method, and the appropriate convention. Listed property is property that is likely to be used for personal purposes. This includes property used for transportation and entertainment as well as certain computers and cellular phones. You can use the GDS declining balance MACRS tables or expense such property only if the qualified business use of the property is more than 50% of its total use. If the qualified business use of the property is 50% or less, you must use the MACRS Alternative Depreciation System (ADS) which uses the straight-line method of depreciation. Depreciation KEY IDEAS
Instead of depreciating tangible personal property, you can choose to deduct part or all of the business cost of certain qualifying property in the year you place it in service for business. This is called a section 179 deduction. Property used 50% or less for business or property you hold only for the production of income such as investment property and rental property (if renting property is not your trade or business) does not qualify for this deduction. The depreciation (including the section 179 deduction) that can be taken for passenger automobiles (and small trucks and vans) is subject to a dollar limit. If you are depreciating property placed in service in the current year, taking a section 179 deduction, depreciating a vehicle, claiming a deduction using the standard mileage rate, or beginning amortization of costs, you must complete Form 4562. The total depreciation reported on Form 4562 is transferred to the schedule on which you are claiming depreciation such as Schedule C, E or F. Amortization will be entered separately as other deductions or other expenses. Depreciation CLASSWORK 1: True or False.
Sharon bought business equipment costing $12,000 in She took delivery of and placed in service $5,000 worth of that equipment in November. She had to use the mid-quarter convention to depreciate all the equipment she purchased in 2007 and must use the mid-quarter convention when she depreciates the equipment in 2008. (2) Under the half-year convention, real property is treated as having been placed in service or disposed of at the midpoint of the year, no matter when in the year you begin or end the use of the property. (3) Depreciable property is property that is used in business or held to produce income, is expected to last more than one year, and has a limited useful life. Depreciation CLASSWORK 1: True or False.
(4) In 2008, Virginia Dare bought a computer and related equipment for $4,000 which she used 100% to manage her investment property. If her taxable income from trade or business is $4,000 or more, she can take a section 179 deduction for the computer. (5) In 2008, Ricky used his cellular phone 48% for business. The rest of the time the phone was used for personal purposes. Woody cannot depreciate his phone. (6) Amortization is the deduction of equal amounts of the cost of certain property over time periods set by tax law. (7) To take a section 179 deduction for, or to depreciate, listed property you must be able to prove each element of your expenditure or use with account books, logs or similar records. Depreciation CLASSWORK 1: True or False.
(8) In addition to the $5,000 she made as a part time receptionist in 2008, Rebecca earned income from selling crafts that she made. She used a room in her home exclusively for her business. She bought furniture and equipment costing $6,000 for her home office. Her income from her craft business was $4,500. The maximum section 179 deduction she can claim is $4,500. (9) The MACRS conventions determine how many months you can depreciate your property in the year it is placed in service and in the year you dispose of the property. (10) Under MACRS, the class to which property is assigned determines the number of years over which it can be depreciated. (11) Charles owns a building that he rents to a real estate company. In 2008, Charles paid for a new furnace which added to the value of the property. Charles must depreciate the cost of the furnace. Depreciation CLASSWORK 1: True or False.
(12) A trademark is an example of intangible property. (13) If you are only claiming a section 179 deduction, you do not need to complete a Form 4562. (14) In 2007, Mike bought a computer which he used for personal purposes. In January 2008, he started his own business and began to use the computer for business only. His business use of the computer in 2008 was 100%. Mike can take a section 179 deduction for 2008. (15) A computer used at a regular business establishment and owned by the person operating the establishment is not listed property. Depreciation CLASSWORK 1: True or False.
Sharon bought business equipment costing $12,000 in She took delivery of and placed in service $5,000 worth of that equipment in November. She had to use the mid-quarter convention to depreciate all the equipment she purchased in 2007 and must use the mid-quarter convention when she depreciates the equipment in T (2) Under the half-year convention, real property is treated as having been placed in service or disposed of at the midpoint of the year, no matter when in the year you begin or end the use of the property.F (3) Depreciable property is property that is used in business or held to produce income, is expected to last more than one year, and has a limited useful life.T Depreciation CLASSWORK 1: True or False.
(4) In 2008, Virginia Dare bought a computer and related equipment for $4,000 which she used 100% to manage her investment property. If her taxable income from trade or business is $4,000 or more, she can take a section 179 deduction for the computer.F (5) In 2008, Ricky used his cellular phone 48% for business. The rest of the time the phone was used for personal purposes. Woody cannot depreciate his phone.F (6) Amortization is the deduction of equal amounts of the cost of certain property over time periods set by tax law.T (7) To take a section 179 deduction for, or to depreciate, listed property you must be able to prove each element of your expenditure or use with account books, logs or similar records. T Depreciation CLASSWORK 1: True or False.
(8) In addition to the $5,000 she made as a part time receptionist in 2008, Rebecca earned income from selling crafts that she made. She used a room in her home exclusively for her business. She bought furniture and equipment costing $6,000 for her home office. Her income from her craft business was $4,500. The maximum section 179 deduction she can claim is $4,500.F (9) The MACRS conventions determine how many months you can depreciate your property in the year it is placed in service and in the year you dispose of the property.T (10) Under MACRS, the class to which property is assigned determines the number of years over which it can be depreciated.T (11) Charles owns a building that he rents to a real estate company. In 2008, Charles paid for a new furnace which added to the value of the property. Charles must depreciate the cost of the furnace.T Depreciation CLASSWORK 1: True or False.
(12) A trademark is an example of intangible property.T (13) If you are only claiming a section 179 deduction, you do not need to complete a Form F (14) In 2007, Mike bought a computer which he used for personal purposes. In January 2008, he started his own business and began to use the computer for business only. His business use of the computer in 2008 was 100%. Mike can take a section 179 deduction for F (15) A computer used at a regular business establishment and owned by the person operating the establishment is not listed property.T Depreciation CLASSWORK 2: Multiple Choice.
In 2006, Randy bought furniture for his office for $10,000. Of the $10,000 total, $3,000 was for purchases made after October His depreciation deduction in 2007 is: $1,749 $1,429 different for the purchases made before and after October $1,920 For which of the following property can you claim a section 179 deduction: office equipment you bought from your brother a car used 50% for business furniture used in a rental property none of the above Depreciation CLASSWORK 2: Multiple Choice
Which property can you depreciate an undeveloped piece of land used as a parking lot an apartment building used as rental property a small tool expected to last 6 months that you use in your business your personal residence Under MACRS, the mid-month convention is used for: only nonresidential real property placed in service after 5/12/1993 tangible personal property acquired during the last 3 months of the year only residential rental property nonresidential real property and residential rental property Depreciation CLASSWORK 2: Multiple Choice.
Cassie uses the car she purchased for $18,000 in March 2007 to deliver goods to her customers. She depreciated the car using the half-year convention and in 2007, she used the car 80% for business. In 2008, she used the car 70% for business and 30% for personal use. Her 2008 depreciation deduction for the car is: $3,920 $4,800 $4,900 $3,430 Under MACRS, you compute a deduction for depreciation by multiplying the business basis of your property by a percentage taken from the applicable table. To find the right percentage you must know: the year the property was placed in service the class the property is assigned to whether to use the half-year, mid-quarter, or mid-month convention all of the above Depreciation CLASSWORK 2: Multiple Choice.
William and Mary have owned an apartment building since They paid $120,000 for the building. In 2008, they put on a new roof which cost $8,000. They must: add the $8,000 to the $120,000 cost and depreciate the total subtract the $8,000 from their rental income as an expense start depreciating the roof in 2007 as a separate property item depreciate the roof as a separate item placed in service in 2001 On May 20, 2008, Judy paid $18,750 for a new car which she placed in service and uses 80% in her business. She does not elect a section 179 deduction. What is her allowable depreciation for 2008? a.$2,368 b.$2,960 c. $3,000 d.$3,750 Depreciation CLASSWORK 2: Multiple Choice.
In 2006, Randy bought furniture for his office for $10,000. Of the $10,000 total, $3,000 was for purchases made after October His depreciation deduction in 2008 is:a. $1,749 For which of the following property can you claim a section 179 deduction:d. none of the above Which property can you depreciate:b. an apartment building used as rental property Depreciation 4. Under MACRS, the mid-month convention is used for:
CLASSWORK 2: Multiple Choice. 4. Under MACRS, the mid-month convention is used for: d. nonresidential real property and residential rental property 5. Cassie uses the car she purchased for $18,000 in March 2007 to deliver goods to her customers. She depreciated the car using the half-year convention and in 2007, she used the car 80% for business. In 2008, she used the car 70% for business and 30% for personal use. Her 2008 depreciation deduction for the car is: d. $3,430 6. Under MACRS, you compute a deduction for depreciation by multiplying the business basis of your property by a percentage taken from the applicable table.To find the right percentage you must know:d. all of the above Depreciation CLASSWORK 2: Multiple Choice.
7. William and Mary have owned an apartment building since They paid $120,000 for the building. In 2008, they put on a new roof which cost $8,000. They must: c. start depreciating the roof in 2008 as a separate property item 8. On May 20, 2008, Judy paid $18,750 for a new car which she placed in service and uses 80% in her business. She does not elect a section 179 deduction. What is her allowable depreciation for 2008? c. $3,000 Depreciation CLASSWORK 3: The following are items of business property followed by the date each was placed in service. Each is used 100% for business and none are subject to the mid-quarter convention. Determinethe property class and MACRS percentage rate for 2008 for each item: 1. taxi 2007 2. computer 2003 3. file cabinet 2005 4. copier 2006 5. race horse age 3 2008 6. factory building - August 2008 7. calculator 2008 8. over-the-road tractor unit 2007 9. office building - April 1993 10. office desk and chair 2002 11. residential rental - February 1998 12. apartment building - December 2008 Depreciation CLASSWORK 3: The following are items of business property followed by the date each was placed in service. Each is used 100% for business and none are subject to the mid-quarter convention. Determinethe property class and MACRS percentage rate for 2008 for each item: 1. taxi years, 32% 2. computer years, 5.76% 3. file cabinet years, 12.49% 4. copier years, 19.20% 5. race horse age 3 years, 33.33% 6. factory building - August years, 0.963% 7. calculator years, 20% 8. over-the-road tractor unit years, 44.45% 9. office building - April years, 3.174% 10. office desk and chair years, 8.93% 11. residential rental - February years, 3.636% 12. apartment building - December years, 0.152% Questions & Answers