Topic 8 - Property Acquisition and Cost Recovery
Property Acquisition and Cost Recovery
Explain the reasoning why the tax laws require the cost of certain assets to be
capitalized and recovered over time rather than immediately expensed.
Assets with an expected life of more than one year must be capitalized and
recovered through depreciation, amortization, or depletion deductions—
depending on the type of underlying asset.
The policy attempts to match the
revenues and expenses for these assets because the assets have a useful life
of more than one year.
Explain the differences and similarities between personal property, real property,
intangible property, and natural resources.
Also, provide an example of each type of
Personal property, real property, and natural resources are all tangible
property than can be seen and touched.
Natural resources are assets that
occur naturally (e.g. timber or coal). Real property is land and all property
that is attached to land (e.g. buildings). Personal property is all tangible
property that is not a natural resource or real property.
Intangibles are all
intellectual property rights (e.g. patents and copyrights) and any other value
not assigned as a tangible assets during a purchase (e.g. goodwill). Each of
these has an expected useful life of more than one year.
Automobiles, equipment, furniture, and machinery
Land and items attached to land such as buildings
(warehouse, office building, and residential
Start-up and organizational costs, copyrights,
patents, covenants not to compete and goodwill
Commodities such as oil, coal, copper, timber, and
Explain the similarities and dissimilarities between depreciation, amortization, and
Describe the cost recovery method used for each of the four asset types
(personal property, real property, intangible property, and natural resources).
There are three types of cost recovery: depreciation, amortization, and
Each is similar in that they recover the cost basis of long-lived