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Chapter 11 Homework 1 HOMEWORK 1: William D. Williams (345-77-3443, born 10/14/1960) of 4545 West Ave., Braden, TN 38010 is single. He received the following forms and he is a radio engineer. Prepare William’s return.
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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