Question

Complete the following regarding statements regarding the Mid-Quarter Convention and how the multiplying factor is applied. Enter numerical values as a decimal to one decimal place, if required (i.e. 8.5). If 40% of the value of property, other than is placed in service during quarter of the year, the mid-quarter convention applies. Based on when the asset is placed in service, the first quarter is allowed months of cost recovery; the second quarter is allowed months of cost recovery; the third quarter is allowed months of cost recovery; and, the fourth quarter is allowed months of cost recovery.

Answer 1

Depreciation, cost recovery, amortization, or depletion deduction based on an asset's cost. The Cost should be capitalised if benefit more than one accounting period otherwise shown expenditure and charge to profit and loss accounts. Government completely overhauled the depreciation rules by creating the accelerated cost recovery system (ACRS), which shortened depreciable lives and allowed accelerated depreciation methods. Substantial modifications to ACRS, which resulted in the modified accelerated cost recovery system (MACRS). Tax professionals use the terms depreciation and cost recovery interchangeably in these days.

Taxpayers may be deduct the cost of certain assets that are used in a trade or business or held for the production of income. A deduction may take the form of depreciation, depletion, or amortization. Tangible assets, other than natural resources, are depreciated. Natural resources, such as oil, gas, coal, and timber, are depleted. Intangible assets, such as copyrights and patents, are amortized. Generally, no write-off is allowed for an asset that does not have a determinable useful life.

Assets used in a trade or business or for the production of income are eligible for cost recovery if they are subject to wear and tear. Assets that do not decline in value on a predictable basis or that do not have a determinable useful life are not eligible for cost recovery.

On March 31,2014, Ram purchased an assets, to use in his business, for $10,000.An assets is 5-year property, and Ram elected to use the straight-line method of cost recovery.

Because the business was doing poorly, Ram did not even claim any cost recovery deductions in 2016 and 2017. In 2018 and 2019, Ram deducted the proper amount of cost recovery. Therefore, the allowed cost recovery and the allowable cost recovery are computed as follows.

Cost Recovery Allowed -- Cost Recovery Allowable

Year 2014: $1,000 -- $1,000

Year 2015: 2,000 -- 2,000

Year 2016: 0 -- 2,000

Year 2017: 0 -- 2,000

Year 2018: 2,000 -- 2,000

Year 2019: 1,000 -- 1,000

If Ram sold an Assets for $800 in 2020, he would recognize an $800 gain ($800 amount realized − $0 adjusted basis); the adjusted basis of an assets is zero ($10,000 cost − $10,000 total allowable cost recovery in 2014 through 2019).