Depreciation Methods and Trusts
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Depreciation Methods and Trusts

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Questions and Answers

How is the depreciation deduction divided when property is held in trust?

  • Only to the beneficiaries according to their contributions.
  • Based on the trust agreement or income distribution. (correct)
  • Equally among beneficiaries and trustees.
  • Solely to the trustees at their discretion.

    • What depreciation method does NOT belong to the list of common methods allowed?

  • Straight-line method
  • Sum-of-the-years-digit method
  • Discounted cash flow method (correct)
  • Declining-balance method

    • In the context of trust-managed properties, what happens if the trust agreement does not specify how to divide depreciation deductions?

  • It is divided equally among beneficiaries.
  • It is allocated based on income distribution from the trust. (correct)
  • No depreciation deduction can be claimed.
  • The trustee makes the decision unilaterally.

    • Maria can claim depreciation on the building she owns for life due to her:

    <p>Life interest in the property.</p> Signup and view all the answers

    How can a business owner like Anna deduct for the loss in value of assets over time?

    <p>Through an annual depreciation deduction.</p> Signup and view all the answers

    What is meant by 'reasonable allowance' for depreciation?

    <p>An allowance that conforms to prescribed rules and methods.</p> Signup and view all the answers

    If Lucy and a charity are beneficiaries of a trust, how would the depreciation deduction be divided?

    <p>According to terms specified in the trust document.</p> Signup and view all the answers

    Which method allows for the depreciation deduction to be calculated at varying rates over time?

    <p>Declining-balance method</p> Signup and view all the answers

    What is the annual deduction for an asset costing ₱100,000 with a useful life of 5 years using the straight-line method?

    <p>₱20,000</p> Signup and view all the answers

    Under which method does an asset incur higher deductions in the early years and smaller deductions in later years?

    <p>Declining-balance method</p> Signup and view all the answers

    If the straight-line depreciation rate is 20%, what is the maximum depreciation rate allowed under the declining-balance method?

    <p>40%</p> Signup and view all the answers

    What happens when the total depletion allowance equals the initial capital investment in the well or mine?

    <p>No further deductions can be claimed.</p> Signup and view all the answers

    For non-producing wells or mines, when can costs incurred be deducted?

    <p>In the year they occur.</p> Signup and view all the answers

    For the sum-of-the-years-digits method, what is the first year's deduction for a printer costing ₱600,000 with a useful life of 5 years?

    <p>₱200,000</p> Signup and view all the answers

    What is the deduction amount Lisa would claim in the second year using the declining-balance method with a 40% rate?

    <p>₱144,000</p> Signup and view all the answers

    Which option describes how ABC Oil Company manages their development costs for a producing well?

    <p>They capitalize the costs and choose to amortize.</p> Signup and view all the answers

    What deduction would Lisa take in the second year if using the sum-of-the-years-digits method?

    <p>₱160,000</p> Signup and view all the answers

    What is the total depletion that ABC Oil Company claims by the end of the fifth year?

    <p>₱10,000,000</p> Signup and view all the answers

    How much did ABC Oil Company incur for exploratory drilling in a non-producing area?

    <p>₱1,000,000</p> Signup and view all the answers

    Which of the following methods allows for the possibility of using alternative depreciation methods when needed?

    <p>Other methods approved by the Secretary of Finance</p> Signup and view all the answers

    In terms of asset depreciation, what factor is crucial in determining the annual deduction rate?

    <p>Useful life of the asset</p> Signup and view all the answers

    What is the annual amortization amount for the capitalized development costs related to the producing well?

    <p>₱100,000</p> Signup and view all the answers

    What strategy does ABC Oil Company utilize to manage their costs effectively?

    <p>Maximizing tax deductions related to both non-producing and producing wells.</p> Signup and view all the answers

    What indicates the completion of ABC Oil Company's ability to claim further depletion allowances?

    <p>When total depletion matches initial capital investment.</p> Signup and view all the answers

    What is classified as exploration expenditures?

    <p>Expenses incurred for geological surveys and drilling.</p> Signup and view all the answers

    At what point do expenditures transition from exploration to development expenditures?

    <p>Upon detection of significant mineral deposits.</p> Signup and view all the answers

    What is the consequence of an irrevocable election regarding expenditure deductions?

    <p>The corporation must keep using the elected method in future taxable years.</p> Signup and view all the answers

    How much does XYZ Mining Corporation deduct from their current taxable income?

    <p>₱750,000</p> Signup and view all the answers

    Which phase incurs costs for building access roads and setting up processing facilities?

    <p>Development Phase</p> Signup and view all the answers

    What is the definition of development expenditures?

    <p>Costs incurred during the development stage prior to extraction.</p> Signup and view all the answers

    What happens to the remaining amount of expenditures after deduction?

    <p>It can be carried forward to future taxable years.</p> Signup and view all the answers

    Which activity is not considered an exploration expenditure?

    <p>Building facilities for processing ore.</p> Signup and view all the answers

    What are intangible costs in petroleum operations primarily characterized by?

    <p>Being necessary for drilling wells and preparing them for production</p> Signup and view all the answers

    Which of the following costs is excluded from the definition of intangible costs?

    <p>Depreciation allowances on physical property</p> Signup and view all the answers

    In computing taxable income, how should intangible exploration and development costs be treated?

    <p>They should not be included in the adjusted cost basis for cost depletion.</p> Signup and view all the answers

    What is the maximum percentage of net income from mining operations that can be deducted for exploration and development expenditures?

    <p>25%</p> Signup and view all the answers

    Which statement about salvage value and intangible costs is accurate?

    <p>Intangible costs are characterized by having no salvage value.</p> Signup and view all the answers

    What distinguishes intangible costs from depreciation allowances related to physical property?

    <p>Depreciation allowances can be deducted but are related to property improvements.</p> Signup and view all the answers

    How are intangible costs treated regarding the adjusted cost basis for cost depletion?

    <p>They must be entirely removed from the adjusted cost basis.</p> Signup and view all the answers

    What does the 'election to deduct exploration and development expenditures' allow taxpayers to do?

    <p>Deduct exploration and development costs as adjusted basis or incurred costs.</p> Signup and view all the answers

    Study Notes

    Depreciation Deduction for Property in Trust

    • The beneficiaries and trustees of a trust split the depreciation deduction based on the terms of the trust agreement.

    Depreciation Deduction for Life Estate

    • A person holding a life estate in property can claim depreciation deductions as if they were the complete owner.

    Depreciation Methods

    • The "reasonable allowance" for depreciation is calculated using different methods.
    • Straight-line method: Depreciates the asset at an equal amount each year over its useful life.
    • Declining-balance method: Allows for larger deductions in the early years of the asset's life and smaller deductions in later years. The rate can be up to twice the rate used in the straight-line method.
    • Sum-of-the-years-digits method: Similar to the declining-balance method, resulting in higher deductions in earlier years.
    • Other methods: The Secretary of Finance, based on the recommendation of the Commissioner of Internal Revenue, may approve other methods.

    Depletion Allowance

    • The depletion allowance is a deduction for the depletion of natural resources.
    • The allowance is calculated using the cost-depletion method.
    • Limit on Allowance: No further deductions can be claimed once the depletion allowance equals the initial capital investment.

    Intangible Costs in Petroleum Operations

    • Intangible costs refer to expenses with no salvage value that are necessary for drilling wells and preparing them for petroleum production.
    • Excluded Costs: Acquisition or improvement of physical property that can be depreciated.
    • Deduction Rules: Intangible costs deducted from taxable income for the year are not included in the adjusted cost basis for cost depletion calculations.

    Exploration and Development Expenditures

    • Exploration expenditures: Expenses incurred before the development stage to ascertain the existence, location, extent, or quality of mineral deposits.
    • Development expenditures: Expenses incurred during the development stage, after the discovery of commercial deposits and before the start of actual extraction.
    • Election to Deduct: Taxpayers can elect to deduct exploration and development expenditures.
    • Deductible Limit: Deductions are limited to 25% of the net income from mining operations, excluding tax incentives.
    • Irrevocable Election: Once elected, the taxpayer must continue using this deduction method for subsequent taxable years.

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    Depreciation and Depletion Deductions PDF

    Description

    Explore the intricacies of depreciation deductions for property held in trusts and life estates. This quiz covers various depreciation methods including straight-line, declining-balance, and sum-of-the-years-digits. Test your knowledge on how these concepts apply to property ownership and taxation.

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