Ind.__2007_Chap._10

Ind.__2007_Chap._10 - Chapter I10 Depreciation Cost...

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Chapter I10 Depreciation, Cost Recovery, Depletion and Amortization Discussion Questions I10-1 a. An automobile that is held for personal use is not eligible for depreciation or amortization. b. Goodwill is a Sec. 197 intangible asset that is amortizable ratably over a 15-year period beginning with the month of acquisition. c. Since the cost of the customer list represents a Sec. 197 intangible, its cost is amortizable on a ratable basis over a 15-year period beginning with the month of acquisition. d. A patent is amortizable over its legal life of seventeen years since the cost of the patent has a definite and limited life. The patent does not qualify for 15-year amortization under Sec. 197 because it was not acquired in connection with a transaction that involves the acquisition of a trade or business or a substantial portion of a trade or business. e. Land is not eligible for depreciation or amortization. f. A covenant not to compete is a Sec. 197 intangible which is amortizable ratably over a 15-year period despite the fact that the period under the agreement may be for a different period (e.g., five years). In such case no loss is recognized and the basis of retained Sec. 197 intangibles is increased by the unrecognized loss. pp. I10-2, I10-3 and I10-15. I10-2 Depreciation deductions are not discretionary. The basis of property must be reduced by the amount of depreciation that should have been taken (allowable depreciation) even if no depreciation had been claimed. The basis of the property must be reduced on a consistent basis by the amount of the depreciation computed using one of several accounting methods provided under the tax law. If no method had previously been used, allowable is defined as the slowest possible method allowed by law (e.g., straight-line using the longest permissible recovery period). So, Rick could wind up recognizing a gain to the extent the asset is sold for more than its adjusted basis. p. I10-3. I10-3 The basis of property converted from personal-use to business or investment use is the lesser of the adjusted basis or the FMV of the property (at the date of conversion). The decline in value of $20,000 ($120,000 - $100,000) represents a personal nondeductible loss and is not depreciable. Therefore, the depreciable basis is $100,000 of which a portion must be allocated to land. This lower of cost or market rule is intended to prevent taxpayers from depreciating unrealized nondeductible personal losses. p. I10-4. I10-1
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Subject to Sec. I10-4 a. Subject to MACRS 197 Amortization b. Recovery Period Furniture Yes No 7 years Plumbing fixtures Yes No 7 years Land No No N/A Trademark No Yes 15 years Goodwill No Yes 15 years Automobile Yes No 5 years Heavy Truck Yes No 5 years Machinery Yes No 7 years Building used in manufacturing Yes No 39 years pp. I10-5 and I10-6, I10-14 and I10-15.
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