Property transaction planning
The Cost Recovery Plan
Stack the write-offs in order: section 179 first (income-capped), then 100 percent bonus (can create a loss), then MACRS on any basis left.
How the exam words it
- -The stem buys equipment and asks the maximum first-year deduction, testing the section 179 then bonus then MACRS ordering.
- -It gives additions over 4,000,000 and asks how the 2,500,000 section 179 cap phases out.
- -It places personal or real property in service and asks which MACRS convention or rate applies.
- -It allocates cost to acquired goodwill and asks the section 197 amortization.
The playbook
- 1Apply section 179 first, capped at 2,500,000 (2025), reduced dollar-for-dollar for additions over 4,000,000, and never beyond business taxable income.
- 2Apply 100 percent bonus to the basis remaining after section 179 for property with a life of 20 years or less; bonus is not income-limited and can create a loss.
- 3Run MACRS on any remaining basis, using half-year (or mid-quarter when over 40 percent of personalty is placed in service in Q4) and mid-month straight-line for real property.
- 4Amortize section 197 intangibles, including acquired goodwill, straight-line over 15 years regardless of actual life.
The trap
Letting section 179 create a loss, or applying the income cap to bonus depreciation. Only section 179 is limited to taxable income; bonus is not income-limited and is the deduction that can create a loss.
How the exam varies it
The same pattern, re-skinned along these axes:
Section 179 dollar cap, phaseout, and income limitBonus depreciation creating a loss versus the section 179 capMACRS conventions versus 15-year section 197 amortization
Drill this pattern
8 questions of The Cost Recovery Plan from across the AUD topics. Clear it by getting 5 right with a streak of 3.