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REG Practice Questions: Calculating Tax Depreciation for Tangible Business Property Using MACRS
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May 3, 2024
In this video, we walk through 5 REG CPA exam practice questions on calculating tax depreciation for tangible business property using MACRS. Important Links Link to the free study training webinar mentioned in the video: https://www.superfastcpa.com/strategic-study See the full post for this video: https://www.superfastcpa.com/reg-practice-questions-explained-calculate-tax-depreciation-for-tangible-business-property-using-macrs/ If you want to learn more about the Section 179 deduction, watch this video: https://youtu.be/4DPWEC45fxA See the other REG walkthrough videos here: https://www.superfastcpa.com/free-reg-cpa-practice-question-walkthroughs/ 00:00 Intro 00:48 Question 1: Learning midquarter, half year, and mid month conventions 06:38 Question 2: MACRS depreciation for real property 09:40 Question 3: MACRS 5-year and 7-year assets 13:08 Question 4: Using the Section 179 deduction
View Video Transcript
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Hi, I'm Logan, and in today's video, we're going to be going over how to calculate tax depreciation for tangible business property using makers or macers, including identification of the applicable recovery period and convention
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But we'll be doing it the Super Fast CPA way, which is going straight into questions to learn the material
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Now, if you've never really heard our strategies or don't know much about us, you should go to SuperfastCPA.com and watch our one hour webinar training
0:25
We go over the six key ingredients to passing the CPA exam. Again, it's one hour, it's free, and it will save you months and months of struggling with your study process
0:34
One more thing about this video, I'm only going to be doing five questions in this video to learn this topic
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but SuperFest CPA members will have access to the full video in which I go over 10 questions
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All right, with all that said, let's get straight into doing the questions to learn how to do this
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Here's the first question. Jackson Enterprises, a calendar year taxpayer, acquired the following business assets in the current year
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February, they required manufacturing equipment for $80,000. In April, they acquired an office building for $300,000
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In September, they acquired high-end printers for $40,000. In October, they acquired corporate fleet vehicles for $100,000
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And in December, they acquired some desks and chairs for $20,000. Now, assuming these are the only assets they purchased during the year
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and no election is made to use a different convention, which convention should Jackson enterprises use to calculate makers depreciation
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So basically, just a quick overview. Makers is the tax depreciation system, essentially
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that we use for most things, most assets. It's different than normal depreciation. It is not
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straight line most of the time. There are some situations where obviously you still use straight line
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inmakers, but it is different. And so you'll be seen that throughout this video. There's different
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assets that have different lives. They have different depreciation each year and different conventions
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for how much depreciation you can take in a given year. So that's what we're going to be learning a
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lot about in this video. Now, if you need to take a second to kind of understand what this question
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is even asking, go ahead and pause the video. And when you're ready, we're going to go ahead and look
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at the answer and start learning about how to apply makers depreciation. All right, here's the answer
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So, in this case, you want to use mid-quarter for the manufacturing equipment, and for the high-end
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printers for the corporate fleet, and for the desks and chairs. So we want to use mid-quarter convention
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whatever that is. We want to learn what that is, right? And then mid-month for the office building
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Okay, so looks like this explanation has a lot of information to teach us
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So let's go ahead and read through it and kind of start learning what the different conventions
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the different ways to depreciate are under makers. Okay, under the half-year convention
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the half-year convention assumes that all property placed in service or disposed of during a tax year
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is placed in service or disposed of at the midpoint of the year, so halfway through the year
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This means that in the first year, you can only deduct half the year's depreciation regardless of when the asset was actually placed in service
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and in the year of disposal, again, you can only deduct half regardless of when it was disposed
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in that year. And then this convention is generally used unless the mid-quarter convention applies
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Okay, so we already saw here, mid-quarter is going to apply. So why is that? Let's learn about
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mid-quarter convention. The mid-quarter convention is used instead of the half-year convention
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when more than 40% of the value, not including real estate of property other than real estate
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kind of redundant there, is placed in service in the last quarter of the taxpayers' fiscal year
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So essentially, if you place a disproportionate amount of property into service in the final
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quarter of the year, so October, November, and December for a calendar year taxpayer, the IRS
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requires the use of the mid-quarter convention to ensure a more accurate reflection of when
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assets were actually available to use. Under the mid-quarter convention, each asset is treated
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as placed in service or disposed of at the midpoint of the quarter in which it actually occurred
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So, for example, if it was placed in the last quarter, so October, November, December
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it's treated as if it was placed in service right in the middle of November, because that's in the
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middle of that whole quarter. So, with all that, Jackson Enterprises placed $160,000 worth of property, so the high-end printers
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the corporate fleet vehicles, and the desks and chairs, into service in the last quarter
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which represents $53.33,000 out of $300,000 of the total personal property cost placed in
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service for the year. Therefore, the mid-quarter convention applies to all personal property acquired
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So what we learned there is, again, just reiterating that, if 40% of the total personal assets acquired
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so not real estate, are placed in the service in the last quarter, then all personal assets
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during that year have to use the mid-quarter convention. Now, let's move on to real property
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which is, again, real estate. Real property, like buildings, does not use the mid-quarter convention
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it uses either the mid-month or the straight line, depending on the type of real property
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For the office building, which is real property, the mid-month convention is used regardless
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of when during the tax year the property is placed in service
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This means that for each month, an asset is placed in service. Depreciation is calculated as if it were placed in service at the mid-point of that month
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So what that means is any building that you place in service, it's going to start depreciation
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in the month that you placed it in, but it'll only count for half of the first month
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I mean by that is let's say you put it into use in February, you'd only be able to take half
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the depreciation for February, and then you'd be able to take normal depreciation for the remaining
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10 months in the year. Or if you place something in service in June, you'd be able to take half
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of the depreciation for June and then you have the remaining six months to take normal full depreciation So again real property uses the mid convention not the mid or the half In summary you use the half convention by default for personal property
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unless the mid-quarter convention is triggered by a large amount of property being placed in service
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at the end of the year, and that is the case in this scenario. Real property usually uses the
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mid-month convention, irrespective of when during the year it is placed in service. So a lot to unpack
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there, a lot to learn there. Basically, now we know there's the half-year convention, the mid-quarter
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convention and then there's the mid-month convention but that is only for real property
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Real property does not use the mid-quarter or the half-year convention. And half-year is what you typically use unless 40% or more of your personal property
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again, not real estate, is placed into service in the last quarter of the year
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And then you have to use mid-quarter for all of your personal property. So that's why that makes sense why everything is mid-quarter except for the office building
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All right. So a lot that we were able to learn there from just one question. That's why we like to use the questions first, because sometimes the explanations can be really
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helpful and they show you exactly what you need to know for the CPA exam
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Let's go ahead and go to the next question. All right, here's the next question. A CPA is evaluating the appropriate depreciation schedule for a client's real estate investment
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The client acquired a residential rental property and a commercial office building during the current tax year
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So they acquired two real properties. The residential rental property was placed in service on May 15th, and the commercial
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office building was placed in service on April 1st. Using the makers depreciation methods and
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conventions, which of the following scenarios correctly computes the depreciation deduction for the
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first year of service for each property. Okay, so we know that first off with that question that
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we just went over, we know that real property doesn't use half year or mid-quarter. So we know
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that it's going to have to use mid-month and probably, I would guess, straight line with it
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based off of these responses that are here. So if we see any, anything that doesn't, that has something other, like right here, half year, we're not going to
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apply that from what we understood from the first question. But we haven't learned yet what counts
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as 27.5 year recovery, what counts as 39 year. So that's what we're trying to learn from this
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question, building off of the last question. All right, so take a second, think about this
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kind of read through it, make sure you understand what the question is asking. Pause the video if you need to, and then we're going to go into the answer. All right, here's the answer. Okay
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The residential rental property is depreciated over a 27.5 year recovery period using the straight line method with a mid-month convention starting in May
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And the commercial office building is depreciated over a 39-year recovery period using the same method and convention starting in April
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So it looks like both a residential rental and like a commercial like a business rental
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They both use straight line as the method and mid-month convention. but looks like residential has a 27 and a half year recovery period and commercial has a 39 year recovery period
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So let's learn a little bit more about that. 27 and a half year property typically includes residential rental property
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They require that this property is depreciated using the straight line method, which spreads the cost evenly over the recovery period with the mid-month convention, so we know that
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And then it looks like similarly 39-year property generally includes non-residential property like office buildings and commercial property
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This is also depreciated using the straight-line method with the mid-month convention. So what, so let's learn a little bit more about the mid-month convention
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So it applies in both situations here. It assumes the property is placed in service or disposed of in the middle of the month
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which affects the depreciation calculation for the first and last year service. So everything in between, it's not going to matter
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But in that first and last year of service, you're going to have that half month at some point
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So straight-land depreciation, we all know a lot about that. That's more normal than this maker's stuff
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The only method allowed for residential rental property under makers, and typically is used for commercial property, it results in equal annual appreciation deductions
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We learned a lot there from that question as well. YSC incorrect. They don't use the 200% double declining balance method
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They also don't use half year convention, which we learned from the first question
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So yeah, learned a lot just from even just the second question already. So let's go ahead and go to the next question
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Here's the next question. Lunar Industries purchased various assets for its new office on January 10, 2023
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Below is a list of assets and their costs. So high-end workstation computers, 14,000, assembly
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line machinery, 50,000, office tables and chairs, 7,000, company cars for executive use, 60,000
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According to makers, which of the following correctly lists the assets under their proper
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recovery periods. So now, this is another thing that we're learning about makers
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different assets have different recovery periods, and they're all just kind of piled into
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different, like, even if an asset is in better shape than an asset that is the
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same but just like maybe older they're both five-year property the both machinery which is like you
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know or which could be seven-year property we're not 100% sure here we haven't looked at the answers
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as far as like what falls into what category but the categories are just way more broad than
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typical depreciation where you actually look at the useful life and stuff like that very subjective
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all of these things that were created for makers so let's go ahead and learn what's five-year property
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Well, it's seven-year property. That's what we want to learn here. So when you're ready, if you need to, pause the video
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But go ahead and come back when you're ready. We're going to look at the answer. Okay. So computers, five-year property
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machinery, seven-year property, office furniture, seven-year property, and company cars, five-year property
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So it looks like we going to learn a lot about that here So workstation computers and company cars that generally classified as five Let learn more just about these two categories in general Five property Assets in this category typically include property that has a shorter life and is subject to more rapid depreciation
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So some examples will be computers and peripheral equipment like desktops, laptops
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service printers, routers, office equipment, certain, like office machinery like copiers and calculators
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Looks like most vehicles are going to be a five-year property, except for like maybe some
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some really big trucks, maybe like a dump truck or something like that, but most of the time
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vehicles are going to be a five-year property. Construction machinery like trenches, compactors, and other things like that, research equipment
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And this is a very specific thing. You probably won't really see this on the exam, but cattle and horses, if they are over two years
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old, when they're placed in service. But yeah, those are some of the things that fall under the five-year property category
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and then the seven-year property category, definitely, you know, usually a little bit longer class life
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So that would be stuff like office furniture, like desks and cabinets and safes
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It would be things like agricultural equipment, like fences, barns, that kind of equipment
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manufacturing tools like lathes and drill presses, transportation, this would exclude everything that's in the five years
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So again, this is more limited. So again, it would be more like heavy, big trucks
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are more likely to fall into seven-year category. Railroad track is considered seven-year property for
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railroad companies. And then a lot of times, things that don't have a category are just kind of
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thrown into the seven-year category. So again, there's a lot, I mean, there's a lot that goes into
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makers. We've already learned about the different conventions, learned about residential property
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well, just real property. And then now we know that there are also five-year properties and seven-year
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properties and different things fall into those. And that will affect how they're depreciated
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over, you know, compared to other assets. All right, let's go ahead and go to the next question
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Okay. Here's the next question. High Tech Solutions LLC purchased new equipment for its data center
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operations at a total cost of $920,000. The company elected to take the maximum section 179
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deduction available, which this year was $910,000. The equipment is classified as five-year property
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under Makers. In the following tax year, high-tech solutions calculates its depreciation
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using the 200% declining balance method. If the maker's depreciation percentage for the second year is
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32%, what is high-tech solutions depreciation deduction for the equipment in the second tax year
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after considering this section in 179 deduction? Okay, it seems like there's a lot going on there
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but let's break it down a little bit before we go any further. First off, one blanket thing I want
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to say about the CPA exam, when it comes to reg and TCP, you will not
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be required to memorize all of these tax numbers. There may be the very occasional instance where
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there's a certain number that you might need to know. But overall, you're not going to be tested on
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what is the 179 max deduction in 2024. Like what is that exact number? Most of the time you will
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not be tested on that. A lot of times, they just want to see if you know how to use it correctly
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So regardless of what the number is, they just want to know that you can use it. in this situation, obviously, if you know anything about current taxes, this is not the current
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Section 179 deduction. This 910,000 is not the current 179 deduction, because again, that's not what
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we're trying to teach you, not what we're trying to test you on, or what the ASCPA is trying to test
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you on. They want to know that you know how it works and then what happens after that. In this
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situation, pretty straightforward, right? The max deduction is 910,000. So they are able to
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reduce this 920,000 by the 910,000. If you think through it, you can probably know what the
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right answer is because in the second year it says they take 32% of the depreciation. So what's 32% of
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10,000? 3,200. Let's go ahead and go into the answer and kind of read more about it
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3,200, yep. This is calculated by applying the 32% depreciation rate for the half year
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Oh, here, let me pull in a table here to show you. Okay, here's a table right here that we're going to
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look at in just a second. But okay, this is calculated by the 32 depreciation rate for the second year for
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a five-year property. We're assuming this equipment is the type of property that would be a five-year
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property. Because again, that's not. Right now we're trying to learn about the once and a nine deduction
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And since it doesn't specify that this was bought in the final quarter, we're assuming it's
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half-year, because again, you use half-year unless 40% was bought in the final quarter of the year
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So we're going to use half year. And basically, you will probably have access to a table like this in the CPA exam
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This table basically shows you how much depreciation you're going to take for each year
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for the different kinds of properties, again, under the half year convention
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So pretty easy to follow here if you have it. And again, you probably won't be asked to memorize this kind of a thing
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although you kind of will, you probably will know some of it just because you'll see it a whole bunch by studying
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So basically what we know is that in year one, we would have taken 20% of the 10,000
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so that would have been 2000 in year one, but it's asking for the second year
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So we would take 32 which is the 3200 and then you know we would take these percentages all the way until it was done being depreciated So again the AICPA is not trying to test you on specific numbers most of the time
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They just want to see if you can apply the concept with whatever number you're given
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And again, you'll probably have access to something like this on the reg or the TCP exam
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if it's needed for the question. They'll probably give you this kind of information most likely
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So take a second if you need to kind of look at this table
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Again, you'll probably be able to see this on the exam or something similar, but it is still good to kind of have an idea
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And then let's go to the next question. Right Wave Technologies Inc. acquired several new pieces of office equipment for its corporate headquarters during the year
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The company purchased the following items. They purchased high-end computers for $50,000 in January, 30,000 commercial printers in July, conference room in 20,000 in August
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each item is classified as a five-year property. Assuming Bright Wave Technologies uses the 200% declining balance method for depreciation
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What is the total maker's depreciation deduction for the first year for these assets? So we're already five questions in
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Now you know that these things are not real property, they're personal property
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So we already know that mid-month won't apply here. Mid-quarter probably won't apply because it doesn't look like any of it was purchased
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in the final quarter of the year. Therefore, half-year convention is going to be used
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And if you did take a second to look at that table up above, you'll remember how much is supposed
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to be taken for the first year for five-year property. If you don't remember, though, that's okay
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We're going to go ahead and look at the answer and see how you would calculate the depreciation
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for these five-year properties using makers. Let's go ahead and look at the answer
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So it'd be 20,000. So let's go ahead and read it. So under the half-year convention, a half-year worth of depreciation is claimed in the first
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year for all assets, regardless of when during the year the asset was placed in service. so it could have been placed in service in December
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And as long as it's not causing the mid-quarter convention to occur
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then yeah, it would still just use half of the year. This means that in the first year
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each asset is treated as though it was in service for only half the year. For five-year property under the 200% declining balance method
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the first year depreciation rate is 20%. This 20% already takes into account that only half the year is counted for depreciation
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So again, don't get caught up or confused thinking, okay, so it's 20%, but then I have to
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cut that in half because it's half year. No, the half year, like the tables that this table up above
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right here, this 20% is already taking into account that it's half year. So you just apply the 20
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to each of the items and you'll see that here. So the high end computers, 20% of 50,000, 10,000
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20% of 30,000, 6,000, 20,000, 4,000. So the total is 20,000. So we learned a lot from these questions
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so far. Before we go any further, let's do another part of the process, pillar topics
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Now, if you don't know much about Superfast CP8, again, this is part of our strategy where you're
19:35
going through these questions and learning from the questions as your main learning material
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instead of watching videos and reading through the textbook. And a great thing to do is find the
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topics, find the basic things that you're supposed to have learned the concepts, and we call
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them pillar topics. So let's go ahead and make some pillar topics. So again, these are the things
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that we noticed that we were supposed to know from doing these questions so far. So there is
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half-year convention, mid-quarter, mid-month, half-year always apply. Oh, well, let's see here
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And mid-quarter apply to personal property, mid-month to real property, half-year, most of the time, unless mid-quarter applies
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And let's go ahead and write down what causes the mid-quarter to happen, which would be 40% of personal property being placed into service in final quarter
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And then let's see, there is five-year property, five-year, seven-year, and these are the most common, by the way
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Most likely you're not going to be tested on the other types of things. If you noticed in that table, there's like 10-year, 15-year
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Again, not super common. The five-year and the seven-year is the most common thing that you'll be tested on
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For personal property, 27.5, for residential. rental 39 for commercial
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okay let's see is there anything else I mean these are like
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again this is pretty general you could make your pillar topics even more
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specific you could do more detail if you need to but basically pillar topics
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you're not trying to write down every single thing like you don't want to write
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a question word for word you're just trying to put these are the things that I learned from doing those questions that I obviously need
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to remember because that's what was trying to be taught to me. So again, those are the pillar topics
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All right. That's the five questions for this video. Again, Superfast CPA members will be able to
21:51
access the full video where I go over 10 questions. If you liked this video and found it helpful
21:56
make sure to like it, leave a comment, and especially make sure you go to superfastcpa.com
22:01
to learn more about our strategies and watch our free one-hour webinar so that you can learn
22:06
the six key ingredients to passing the CPA exam and stop struggling with your studying
22:10
Thanks for watching, and I'll see you in the next one
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