REG cost-recovery coverage for MACRS, Section 179, bonus depreciation, amortization, and compliance issues.
This chapter explains how the tax law allocates capitalized costs over time through depreciation, amortization, and expensing provisions. The main task is to identify the right recovery method, timing convention, and deduction limit for the asset in question.
Cost-recovery questions are timing questions built on basis. The candidate must identify the asset type, placed-in-service date, business use, election availability, and limitation order before computing the current deduction.
| Recovery issue | What to decide first | Common REG trap |
|---|---|---|
| MACRS | Asset class, recovery period, convention, and placed-in-service date. | Using the correct basis but the wrong recovery period or convention. |
| Section 179 | Whether the asset qualifies and whether income or dollar limits apply. | Taking immediate expensing without checking limitations. |
| Bonus depreciation | Whether the property and tax year qualify for bonus treatment. | Assuming bonus depreciation is always available or always required. |
| Amortization | Whether the cost is an amortizable intangible and over what period. | Depreciating an intangible cost that should be amortized. |
| Step | What to identify | Why it matters |
|---|---|---|
| Establish depreciable or amortizable basis | Cost, adjustments, business-use percentage, and placed-in-service date. | Recovery starts with the correct basis. |
| Classify the property | Tangible personal property, real property, listed property, or intangible. | Classification controls recovery system and period. |
| Apply expensing elections | Section 179, bonus depreciation, and limitation ordering. | Accelerated deductions may be limited or unavailable. |
| Choose convention and recovery period | MACRS class life, half-year, mid-quarter, or mid-month convention. | Timing rules drive first-year deduction. |
| Track future consequences | Recapture, basis reduction, carryovers, and compliance records. | Cost recovery affects later dispositions and planning. |
| Checkpoint | What to verify | Common REG effect |
|---|---|---|
| Business use | Whether the asset is used in a trade or business, investment activity, personal use, or mixed use. | Personal-use or insufficient business-use facts can limit or deny recovery. |
| Listed property | Whether heightened substantiation or business-use thresholds apply. | Failure to meet requirements can change deductions and trigger recapture. |
| Section 179 election | Qualified property, taxable income limitation, dollar limit, and phaseout. | The election can accelerate recovery but may produce carryovers. |
| Bonus depreciation | Eligible property, applicable percentage, and whether the deduction is mandatory or electable under the facts. | Bonus treatment changes basis before regular MACRS depreciation. |
| Disposition planning | Prior deductions, adjusted basis, and recapture exposure. | Current cost recovery affects later gain character and amount. |