CPA Regulation (REG) : Cost Recovery (Depreciation, Depletion, & Amortization)
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Example Questions
Example Question #1 : Cost Recovery (Depreciation, Depletion, & Amortization)
A taxpayer purchased a forklift for use in the taxpayer's business for $20,000 on January 1 of the current year. The taxpayer sold the forklift for $22,000 on June 1 of the current year. What is the taxpayer's Section 1231 gain as a result of the sale?
$22,000
$0
$2,000
$6,000
$0
To qualify for Section 1231 gains, the asset must be held for more than 12 months. Since the asset was purchased and sold in the same year, it is not eligible.
Example Question #2 : Cost Recovery (Depreciation, Depletion, & Amortization)
A taxpayer wants to deduct the cost of a seven-year asset placed in service this year. The cost qualifies for the Section 179 election to expense assets. Which of the following statements is most accurate regarding the immediate expensing of this asset versus the depreciation of this asset over seven years?
The cost of the asset may be deducted under both Section 179 and as depreciation.
Depreciation provides a greater deduction over the life of the asset.
There is no difference in the total amount that is deductible over the life of the asset.
Section 179 provides a greater deduction over the life of the asset because, subject to limitations, the cost of the asset is deductible in full.
There is no difference in the total amount that is deductible over the life of the asset.
The Section 179 election allows a taxpayer to deduct the entire cost of an asset (up to certain dollar thresholds) in place of depreciating the asset over its useful life. Since it is an alternative to depreciation in terms of when the depreciation costs are recognized (not the amount recognized), there is no difference in the amount that would be deductible depreciation expense over the life of the asset.
Example Question #2 : Cost Recovery (Depreciation, Depletion, & Amortization)
Gold Corp. purchased all the assets of a sole proprietorship, including the following intangible assets:
- Goodwill: $50,000
- Covenant not to compete: 13,000
For tax purposes, what amount of these purchased intangible assets should Gold amortize over the specific statutory cost recovery periods?
$13,000
$0
$50,000
$63,000
$63,000
All intangible assets (e.g., goodwill, licenses, franchises, trademarks) may be amortized on the straight-line basis over 15 years. This treatment differs from US GAAP, where indefinite-lived assets are not amortized, and definite-lived assets are amortized over their useful lives (which may vary between intangible assets).
Example Question #3 : Cost Recovery (Depreciation, Depletion, & Amortization)
Under the MACRS method of depreciation for property placed in service after 1986:
Used tangible depreciable property is excluded from the computation
Salvage value is ignored for purposes of computing the MACRS deduction
The recovery period for depreciable realty must be 27.5 years
No type of straight-line depreciation is allowable
Salvage value is ignored for purposes of computing the MACRS deduction
Under the MACRS method for property places in service after 1986, salvage value is ignored for purposes of computing the deduction.
Example Question #1 : Cost Recovery (Depreciation, Depletion, & Amortization)
Of the following conditions, which must be satisfied for a taxpayer to expense in the year of purchase under IRC 179, the cost of new or used tangible depreciable personal property? A) The property must be purchased for use in the taxpayer’s active trade or business B) The property must be purchased from an unrelated party.
Neither
A
B
Both
Both
To qualify for IRC 179, the property must be tangible personal property acquired by purchase from an unrelated party for use in the active conduct of a trade or business
Example Question #1 : Cost Recovery (Depreciation, Depletion, & Amortization)
Per IRS tax or MACRS depreciation, _____ is never used for calculation purposes.
Positive adjustments to basis
Salvage value
Adjusted basis
Straight line
Salvage value
Under MACRS depreciation, salvage value is never used. Straight-line may be used, and any sort of basis would be relevant.
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