Property transactions
The Cost Recovery Engine
Layer the deductions in order: section 179 first, then bonus, then MACRS on what remains, each with its own convention.
How the exam words it
- -The stem buys business property and asks for the first-year depreciation deduction.
- -Section 179 expensing or 100 percent bonus depreciation is available and it asks how much can be deducted.
- -The half-year versus mid-quarter convention matters because of when the assets were placed in service.
- -Goodwill or another acquired intangible is amortized under section 197.
The playbook
- 1Stack the deductions: elect section 179 first (subject to its dollar cap and the taxable-income limit), then apply bonus depreciation, then MACRS on the remaining basis.
- 2Match the recovery period: 5-year for autos and computers, 7-year for most equipment, 27.5-year residential and 39-year nonresidential real property.
- 3Apply the convention: half-year for personalty in general, mid-quarter when more than 40 percent of personalty is placed in service in the last quarter, and mid-month for real property.
- 4Amortize section 197 intangibles (purchased goodwill, covenants not to compete, customer lists) straight-line over 15 years regardless of their actual life.
The trap
Using section 179 to create or deepen a loss. Section 179 is limited to business taxable income, so the disallowed amount carries forward rather than generating a loss; 100 percent bonus depreciation, by contrast, can create a loss.
How the exam varies it
The same pattern, re-skinned along these axes:
Section 179 versus bonus depreciation versus MACRSWhich convention: half-year, mid-quarter, or mid-monthTangible personalty versus real property versus section 197 intangibles
Drill this pattern
8 questions of The Cost Recovery Engine from across the AUD topics. Clear it by getting 5 right with a streak of 3.