Question & Answer

Are taxpayers allowed to claim depreciation on assets they use for both business and personal purposes? What are the tax consequences if the business use drops from above 50 percent in one year to below 50 percent in the next? 

Describe assets that are listed property. Why do you think Congress requires them to be “listed”? 

Why might a business claim a reduced §179 expense amount in the current year rather than claiming the maximum amount available?

What strategies will help a business maximize its current depreciation deductions (including §179)? Why might a taxpayer choose not to maximize its current depreciation deductions? 

Compare and contrast the types of businesses that would and would not benefit from the §179 expense.

Explain the two limitations placed on the §179 deduction. How are they similar? How are they different?

Discuss how the property limitation restricts large businesses from taking the §179 expense. 

Compare and contrast computing the depreciation deduction for tangible personal property versus computing the depreciation deduction for real property under both the regular tax and alternative tax systems.

If a taxpayer has owned a building for 10 years and decides that it should make significant improvements to the building, what is the recovery period for the improvements?

] Discuss why Congress has instructed taxpayers to depreciate real property using the mid-month convention as opposed to the half-year convention used for tangible personal property. 

] There are two recovery period classifications for real property. What reasons might Congress have to allow residential real estate a shorter recovery period than nonresidential real property? 

AAA Inc. acquired a machine in year 1. In May of year 3, it sold the asset. Can AAA find its year 3 depreciation percentage for the machine on the MACRS table? If not, what adjustment must AAA make to its full-year depreciation percentage to determine its year 3 depreciation?

A business buys two identical tangible personal property assets for the same price. It buys one at the beginning of the year and one at the end of year. Under what conditions would the taxpayer’s depreciation on each asset be exactly the same? Under what conditions would it be different? 

What are the two depreciation conventions that apply to tangible personal property under MACRS? Explain why Congress provides two methods.

Compare and contrast the recovery periods used by MACRS and those used under generally accepted accounting principles (GAAP). 

Describe how you would determine the MACRS recovery period for an asset if you did not already know it.

If a business places several different assets in service during the year, must it use the same depreciation method for all assets? If not, what restrictions apply to the business’s choices of depreciation methods?

What depreciation methods are available for tangible personal property? Explain the characteristics of a business likely to adopt each method.

Can a taxpayer with very little current-year income choose to not claim any depreciation deduction for the current year and thus save depreciation deductions for the future when the taxpayer expects to be more profitable? 

MACRS depreciation requires the use of a recovery period, method, and convention to depreciate tangible personal property assets. Briefly explain why each is important to the calculation.

Graber Corporation runs a long-haul trucking business. Graber incurs the following expenses: replacement tires, oil changes, and a transmission overhaul. Which of these expenditures may be deducted currently and which must be capitalized? Explain.

Explain why the expenses incurred to get an asset in place and operable should be included in the asset’s basis. 

Compare and contrast the basis of property acquired via purchase, conversion from personal use to business or rental use, tax-deferred exchange, gift, and inheritance.

Is an asset’s initial or cost basis simply its purchase price? Explain.

Explain the similarities and dissimilarities between depreciation, amortization, and depletion. Describe the cost recovery method used for each of the four asset types (personal property, real property, intangible property, and natural resources).