Enrolled Agent > EA - Part 2: Businesses > Unit 8: Depreciation and Amortization > Flashcards

Unit 8: Depreciation and Amortization Flashcards

Apply MACRS, Section 179, and amortization rules to business property. (58 cards)

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1
Q

What is depreciation?

A

An annual allowance for the gradual loss in value or usefulness of tangible property like buildings, machinery, vehicles, furniture, and equipment.

Depreciation is a method for spreading out the cost of an asset over its expected useful life and the amount of revenue it generates.

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2
Q

What is amortization?

A

A tax deduction for the gradual loss in value or usefulness of intangible assets such as patents, copyrights, and goodwill.

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3
Q

When does a property cease to be depreciable or amortizable?

A

When the business has fully recovered its cost or when it sells or retires the property from service, whichever happens first.

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4
Q

What must be determined to properly depreciate an asset?

A
  • The depreciable basis of the property
  • The depreciation method for the property
  • The class life (the asset’s useful life)
  • Whether the asset is listed property
  • Whether the business elects to expense any portion of the asset
  • Whether the asset qualifies for bonus depreciation
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5
Q

What is the Modified Accelerated Cost Recovery System (MACRS)?

A

The current tax depreciation system in the United States that divides depreciable assets into separate classes dictating the number of years over which their cost can be recovered.

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6
Q

What is the useful life of nonresidential real property under MACRS?

A

39 years

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7
Q

What is the useful life of residential rental property under MACRS?

A

27.5 years

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8
Q

What is the purpose of Form 4562, Depreciation and Amortization?

A
  • Claim deductions for depreciation and amortization
  • Make an election under section 179
  • Claim bonus depreciation for qualified property
  • Provide information on the business use of automobiles and other listed property
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9
Q

What is a nondepreciable asset?

A

Assets with an undetermined lifespan or that serve as a means of preserving value rather than generating income through usage, such as land.

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10
Q

What is the Section 179 deduction?

A

A special allowance allowing a business to elect to potentially take a full deduction for the cost of new or used property in the first year it is placed in service.

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11
Q

What is the default depreciation method for residential and nonresidential real property?

A

Straight-line depreciation.

The method lets a business deduct the same amount of depreciation each year over the useful life of the property.

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12
Q

What is the double-declining balance method?

A

An accelerated depreciation method that applies twice the straight-line rate to the asset’s declining adjusted basis, producing larger deductions in the early years and smaller deductions in later years.

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13
Q

What happens when a business wishes to switch depreciation methods?

A

The business must ask for permission by filing Form 3115, Application for Change in Accounting Method, unless switching to the straight-line method.

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14
Q

What is the spending cap for Section 179 in 2025?

A

$6,500,000

No Section 179 election is permitted once the total Section 179-eligible property placed in service for the year (2025) exceeds this amount.

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15
Q

What are the requirements for property to qualify for the Section 179 deduction?

A
  • It must be eligible property
  • It must be acquired for business use and used more than 50% for business
  • It must have been acquired by purchase
  • It cannot have been acquired from a related party
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16
Q

Which parties are considered ‘related’ under Section 179 rules?

A
  • A spouse
  • Ancestors
  • Lineal descendants

The family attribution rules do not apply to siblings for purposes of Section 179.

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17
Q

What types of property are not eligible for Section 179 deduction?

A
  • Land
  • Intangible assets (except off-the-shelf computer software)
  • Inventory
  • Property primarily used outside the United States
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18
Q

What types of property are eligible for Section 179?

A
  • Section 1245 property (e.g., machinery, office furniture, vehicles, and equipment)
  • Off-the-shelf computer software
  • Qualified section 179 real property
  • Qualified improvement property
  • Property used in nonresidential buildings
  • Single-purpose agricultural or horticultural structures
  • Storage facilities used in connection with distributing petroleum
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19
Q

What is the maximum Section 179 deduction for heavy SUVs in 2025?

A

$31,300

This rule applies to most vehicles weighing between 6,001 and 14,000 pounds.

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20
Q

What is the allowable bonus depreciation percentage in 2025?

A

100% for qualified property acquired and placed in service on or after January 19, 2025.

40% generally applies to property acquired before January 20, 2025.

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21
Q

What types of property qualify for bonus depreciation?

A
  • Tangible personal property with an applicable MACRS recovery period of 20 years or less
  • Water utility property
  • Off-the-shelf computer software
  • Costs for qualified film, television, and live theatrical productions
  • Fruit or nut-bearing trees and vines
  • Qualified Improvement Property (QIP)
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22
Q

What types of property do not qualify for bonus depreciation?

A
  • Property used primarily in the trade or business of furnishing or selling electrical energy, water, or sewage disposal services
  • Gas or steam through a local distribution system
  • Transportation of gas or steam by pipeline
  • Most real property (raw land, buildings)
  • Intangible assets (patents, franchise or copyrights)
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23
Q

What is the required order of deductions when a taxpayer claims both Section 179 and bonus depreciation in the same year?

A

Section 179 deduction is considered first, followed by bonus depreciation, and then regular MACRS depreciation.

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24
Q

True or False:

Bonus depreciation can be used to generate a net operating loss.

25
What is **bonus depreciation**?
It allows businesses to deduct a large percentage of the purchase price of eligible assets in the first year they are placed in service. ## Footnote Businesses can elect out of bonus depreciation on a timely-filed return, and it is not limited to taxable income.
26
# True or False: Bonus depreciation can be carried forward as a net operating loss.
True ## Footnote Bonus depreciation can create a net operating loss, which can be carried forward to deduct against future income, subject to NOL utilization rules.
27
How can a business **elect out** of bonus depreciation?
A business must make the election on a timely filed tax return (including extensions). The election applies to all property in the same asset class placed in service during the year, not to individual assets.
28
What are **listed properties**?
They are certain types of property that are used for both business and personal purposes, such as passenger vehicles and entertainment equipment. ## Footnote Depreciation and section 179 deductions for listed properties are limited to the percentage of business use, and stricter recordkeeping rules apply.
29
# Fill in the blank: Intangible assets must be amortized over a \_\_\_\_\_\_ period.
15-year | (180 months) ## Footnote Most intangible assets are section 197 intangibles and must be amortized straight-line over 15 years.
30
What is the **difference** between cost depletion and percentage depletion?
* Cost depletion allocates the cost of a natural resource over the total anticipated volume to yield cost depletion per unit. * Percentage depletion takes a flat percentage of gross income from the property as the depletion deduction. ## Footnote Depletion is the method of cost recovery for mining and agricultural activities.
31
What **types of assets** are not eligible for section 179 deductions?
Most intangible assets, with the exception of off-the-shelf computer software, are not eligible for section 179 deductions.
32
What is the purpose of **amortization**?
Amortization is used to deduct the cost or basis of an intangible asset over its estimated life.
33
What is the **annual limit** for Section 179 in 2025?
$2,500,000 | (adjusted for inflation) ## Footnote Section 179 allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year.
34
Can Section 179 property be acquired from a **related party**?
No ## Footnote Property cannot be acquired from a related party under Section 179 rules.
35
What types of property qualify for **bonus depreciation**?
* Tangible personal property with a MACRS recovery period of 20 years or less, including machinery and equipment * Qualified film, television, and live theatrical productions * Off-the-shelf software * Trees bearing fruits and nuts * Land improvements * Qualified Improvement Property (QIP)
36
Is bonus depreciation **mandatory**?
Yes, unless the taxpayer opts-out on a timely-filed return. ## Footnote The election to opt-out of bonus depreciation must be made on a class-by-class basis and filed on time.
37
What are the **Section 179 limits** for 2025?
The maximum deduction is $2,500,000, reduced dollar-for-dollar when qualifying property placed in service exceeds $4,000,000. No deduction is allowed once total qualifying property placed in service exceeds $6,500,000.
38
What is the definition of **useful life**?
The period of time for which the asset will be **economically useful** in a business. ## Footnote The IRS assigns a useful life (recovery period) to each asset class.
39
What are the basic requirements for an asset to be **depreciated or amortized**?
* Ownership by the taxpayer. * Used in a trade or business. * Has a useful life extending beyond one year.
40
What is the default **depreciation method** under MACRS for tangible personal property?
The 200% declining-balance method.
41
What is the **straight-line depreciation method**?
A method that deducts the **cost of property evenly** over its recovery period.
42
When is an asset considered **placed in service**?
When it is **ready and available** for use in a trade or business or for the production of income.
43
What is the **half-year convention**?
Personal property is treated as if it were placed in service in the **middle of the year**.
44
What are **non-depreciable assets**?
* Raw land. * Property placed in service and disposed of in the same year. * Property with a useful life of one year or less. * Property for personal use only. * Inventory or property held for sale. * Section 197 intangibles.
45
What is the purpose of **Form 3115**?
To file for a **change in accounting method**, including correcting an improper depreciation method.
46
What are the **luxury automobile depreciation limits** for passenger cars in 2025?
* First year: $20,200 * Second year: $19,600 * Third year: $11,800 * Each succeeding year: $7,060
47
What are the **bonus depreciation percentages** under the transitional election for 2025?
* 40% for standard qualified property * 60% for qualified property with longer production periods and certain aircraft * 40% for specified plants that are planted or grafted
48
Does **bonus depreciation** apply to used property?
Yes, as long as the property meets the **acquisition rules**.
49
# True or False: Bonus depreciation has a **dollar limitation** or spending cap.
False ## Footnote Unlike section 179, bonus depreciation does not have a dollar limitation or spending cap.
50
What happens if a taxpayer does not properly **elect out** of bonus depreciation?
Depreciation on the property must be computed as if **bonus depreciation** had been claimed.
51
How is **goodwill** amortized for tax purposes?
Goodwill is amortized over **15 years**.
52
What is the amortization period for a **covenant not-to-compete** under Section 197?
15 years ## Footnote Even if the covenant agreement is for a shorter period, it must be amortized over 15 years.
53
What is **depletion** in the context of tax deductions?
Depletion is the method of **cost recovery** for natural resources. ## Footnote It refers to the exhaustion of a natural resource as a result of production, similar to depreciation for tangible fixed assets.
54
Percentage depletion is a tax benefit primarily available for which type of **investors**?
Oil and gas investors ## Footnote It serves as an incentive to develop domestic mineral and energy production.
55
Can **percentage depletion** be used for timber?
No, percentage depletion may not be used for timber.
56
# True or False: Bonus depreciation has an **annual dollar limit**.
False
57
What must a taxpayer do to use **Section 179 expensing** on specific assets?
The taxpayer must **elect in**.
58
Does **Section 179** have a statutory end date?
No, Section 179 is permanent.
EA - Part 2: Businesses
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