Questions and Answers
What is another term for depreciation?
cost recovery
What properties are allowed a depreciation deduction under the IRC?
Are personal use assets depreciable?
False
The same concept currently applies to cost recovery under MACRS.
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Which of the following properties is depreciation not allowed for?
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Why is land not depreciable?
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What is the timing of depreciation?
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How is depreciation measured?
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What are the three categories of depreciation rules based on when property is placed in service?
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Why are we only focusing on the MACRS depreciation method?
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What are three key facts about MACRS?
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How does MACRS eliminate the need to determine an asset's useful life?
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How does MACRS eliminate the need to select a depreciation method?
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How does MACRS eliminate the need to determine salvage value?
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In a General Depreciation System (GDS), how does the taxpayer determine the depreciation deduction?
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MACRS uses specific asset classes based on the type of property.
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List the 5 classifications of property under MACRS.
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What property types are included in 5-year property?
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Most depreciable property is classified as _______ or ________ under MACRS.
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What does 7-year property include?
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Study Notes
Depreciation Fundamentals
- Cost recovery refers to depreciation and is used interchangeably in tax contexts.
- Depreciation deductions are permitted for property used in trades/businesses and property held for income production.
- Personal use assets are not eligible for depreciation under tax laws.
MACRS and Depreciation Methods
- The current concept of cost recovery applies to depreciation under the Modified Accelerated Cost Recovery System (MACRS).
- Certain properties, including inventory, land, intangibles, natural resources, and works of art, are not depreciable.
- Land is not depreciable because it has an indefinite life.
Timing and Measurement
- Depreciation begins in the year when qualified property is placed in service, not when purchased.
- Pro rata depreciation is taken in the first year and in the year of disposition, using established conventions.
- Depreciation is generally limited to the asset's cost or basis; in some cases, lesser of cost or fair market value applies.
Historical Depreciation Context
- Depreciation rules are categorized based on the property's in-service date:
- Pre-ACRS: before 1981
- ACRS: between 1980 and 1986
- MACRS: after 1986, which is the focus of this study.
Key Aspects of MACRS
- MACRS simplifies depreciation by eliminating the need to determine useful life, choose a depreciation method, or assess salvage value.
- Recovery periods are established by the Internal Revenue Code (IRC), reducing disputes between taxpayers and the IRS.
- The IRC specifies recovery methods for each year and provides tables for practical implementation.
Classification of Depreciable Property
- Depreciable assets under MACRS are categorized into classes with specified depreciation timelines.
- Common classifications include 5-year, 7-year, and various real property categories.
- 5-year property includes automobiles, light/heavy trucks, and specialized equipment; uses the 200% declining balance method with a switch to straight-line in optimal years.
- 7-year property encompasses office furniture, manufacturing equipment, and is the default class for non-specifically classified personal properties.
Specialized Asset Classes
- The five classifications of property are:
- 5-year property
- 7-year property
- Residential rental property
- Nonresidential real property
- 3, 10, 15, and 20-year property and other specialized properties.
Depreciation Strategies
- Most depreciable property is classified as either 5-year or 7-year under MACRS guidelines.
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Description
Test your understanding of depreciation concepts and methods, including MACRS and cost recovery. This quiz covers exceptions, timing, and measurement of depreciation, vital for real estate and investment professionals. Brush up on your knowledge of eligible and non-depreciable assets to ensure accurate financial reporting.
