413sol10-04 - Chapter 10: Cost Recovery on Property 10-1 _...

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Chapter 10: Cost Recovery on Property 10-1 _________________________________________________________________ CHAPTER 10 COST RECOVERY ON PROPERTY ________________________________________________________________ DISCUSSION QUESTIONS 1. How does the allowable capital recovery period affect the potential return on the investment in an asset? The period in which capital can be recovered affects the return on an investment in an asset through the tax savings the deduction provides. The time value of money factor makes earlier capital recovery (i.e., earlier tax savings) more valuable. Therefore, the more rapid an asset's cost can be written off, the greater the return on that asset from the tax savings generated by the deduction. 2. Which two tests must be met to claim a periodic recovery deduction on a capital expenditure? To claim a periodic recovery deduction on a capital expenditure, the expenditure must be made for a business purpose (either in a trade or business or in an investment activity) and the expenditure must have a definite useful life. Assets that are used for purely personal purposes (e.g., the family automobile) or which do not have a definitive life (e.g., land) do not qualify for any periodic capital recovery deduction. 3. What types of capital expenditures are not deductible over time (i.e., their cost is recovered upon disposition of the asset)? Assets that do not have a business purpose (i.e., personal use assets) and those with indefinite lives (e.g., land and securities) are not deductible until they are disposed of. Even then, the recovery on personal use assets is limited to the amount realized from the disposition (personal use losses are not deductible). 4. What is the depreciable basis of an asset? What role does depreciable basis play in determining the annual cost recovery on a depreciable asset? The depreciable basis of an asset is the amount of the initial basis that is subject to recovery through depreciation. Under the MACRS depreciation system, the depreciable basis does not change throughout the tax life of the asset. Each period's depreciation is determined by multiplying the depreciable basis by the pre-determined MACRS depreciation percentage. This assures that the entire capital investment is recovered over the tax life of the asset. 5. What was the purpose of changing from the facts and circumstances depreciation method to the ACRS method? The change to ACRS was done to simplify the depreciation calculation and to provide economic stimulation by accelerating the amount of the depreciation deduction. Simplification is obtained through the use of standard class lives and methods, making the depreciation calculation the same for all taxpayers. This allows the building of tables, which are used to calculate the deduction. The economic stimulation was accomplished by reducing the tax life of most properties and using accelerated methods to calculate depreciation. This has the
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Chapter 10: Cost Recovery on Property
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This note was uploaded on 02/08/2012 for the course MGMT BA 413 taught by Professor Lindamittermaier during the Spring '04 term at Capital University.

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413sol10-04 - Chapter 10: Cost Recovery on Property 10-1 _...

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