Depreciation Fundamentals and Methods Quiz

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Questions and Answers

What is another term for depreciation?

cost recovery

What properties are allowed a depreciation deduction under the IRC?

Property used in a trade or business (correct)

Property held for the production of income (correct)

Personal use assets

None of the above

Are personal use assets depreciable?

False

The same concept currently applies to cost recovery under MACRS.

True Signup and view all the answers

Which of the following properties is depreciation not allowed for?

All of the above Signup and view all the answers

Why is land not depreciable?

land has an indefinite life Signup and view all the answers

What is the timing of depreciation?

Depreciation is first allowed in the year the taxpayer places qualified property in service. Signup and view all the answers

How is depreciation measured?

Depreciation is generally limited to cost or other basis. Signup and view all the answers

What are the three categories of depreciation rules based on when property is placed in service?

Pre-ACRS, ACRS, MACRS Signup and view all the answers

Why are we only focusing on the MACRS depreciation method?

Most assets placed in service before 1987 are now fully depreciated. Signup and view all the answers

What are three key facts about MACRS?

MACRS eliminates the need to determine an asset's useful life, select a depreciation method, and determine salvage value. Signup and view all the answers

How does MACRS eliminate the need to determine an asset's useful life?

The IRC sets the recovery period. Signup and view all the answers

How does MACRS eliminate the need to select a depreciation method?

The IRC sets the recovery method for a given year. Signup and view all the answers

How does MACRS eliminate the need to determine salvage value?

Salvage value is assumed to be zero. Signup and view all the answers

In a General Depreciation System (GDS), how does the taxpayer determine the depreciation deduction?

By using the applicable depreciation method, recovery period, and convention. Signup and view all the answers

MACRS uses specific asset classes based on the type of property.

True Signup and view all the answers

List the 5 classifications of property under MACRS.

5-year property, 7-year property, residential rental property, nonresidential real property, and other specialized properties. Signup and view all the answers

What property types are included in 5-year property?

Automobiles and light trucks, heavy trucks, research, and certain technological equipment. Signup and view all the answers

Most depreciable property is classified as _ or __ under MACRS.

5 or 7 year Signup and view all the answers

What does 7-year property include?

Office furniture and equipment, many types of manufacturing equipment. Signup and view all the answers

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.