Question

The Gonzaleses filed their prior year federal, state, and local returns on April 12 of the current tax year. They paid the following additional taxes with their prior year returns: federal income taxes of $630, state income taxes of $250, and city income taxes of $75.

Using relevant tax laws and regulations, identify and explain the maximum depreciation deduction for Graham’s business.Complete tax forms for filing the Gonzales couple's tax return for the current tax year 2016. You will use 2016 tax return forms.

Prepare a tax memo addressing all tax positions taken for each item, citing relevant code and regulations to support each position. Please take the positions using tax law before the enacted Tax Cut and Job Act of 2017

Answer 1

Tax Depreciation – Section 179 Deduction and modified accelerated cost recovery system (MACRS )

Under MACRS, these three conventions determine when property is placed in service:

1. Half-year convention — In most cases, the half-year convention is used for personal property. Personal property includes machinery, furniture, and equipment. Under the half-year convention, a half-year of depreciation is allowed in the first year of depreciation. This applies regardless of when you actually placed the asset in service.

2. Mid-quarter convention — You’ll use the mid-quarter convention instead of the half-year convention if both of these apply:

• More than 40% of the assets were placed in service during the tax year.
• Those 40% of assets were placed in service in the last three months of the year.

Under the mid-quarter convention:

• Property is considered placed in service at the midpoint of a quarter. This is true regardless of when it was actually placed in service during the quarter.
• You’ll be allowed to claim more or less than a half year’s depreciation. This depends on which quarter of the year the property was placed in service.

3. Mid-month convention — Real property (Ex: buildings) is depreciated under the mid-month convention. The property is considered placed in service at the midpoint of the month. This applies regardless of the actual date it was placed in service.

Section 179 deduction

Under Section 179, you can claim a deduction in the current year. You’d do this by deducting all or a portion of the cost of certain property as opposed to depreciating it.

You can claim the Section 179 deduction when you placed these types of property into service during the tax year:

• Qualified tangible personal property
• Qualified real property expenditures, which include:
  • Qualified leasehold improvement property
  • Qualified restaurant property
  • Qualified retail improvement property