Quick Notes

One-liners — the first dozen are from the end of the chapter as I wrote them; the rest are the rules pulled out of the practice questions I worked, one sentence each, brought current to 2026.

From the end of the chapter

• Gain on the sale/disposition of 1245 property is treated as ordinary income to the extent of depreciation taken; the remainder of the gain is taxed as long-term capital gain (Sec. 1231).
• Unsuccessful business start-up expenses become personal expenses and are not deductible (unless the taxpayer is already in a similar business).
• To be amortizable, a start-up cost must be a cost that would be deductible if it were paid or incurred to operate an existing trade or business, and it must be paid before you actually begin business operations.
• A deduction as wages is allowed for certain loans and advances to an employee even if it is doubtful the loan will be repaid. The loan is deductible only if it is for personal services actually performed.
• When a residence is rented for less than 15 days, the rental income does not need to be reported as income. However, any corresponding rental expenses cannot be deducted either.
• Interest during construction on self-constructed property that is not inventory is generally capitalized and recovered as depreciation deductions over the recovery period of the asset.
• The costs of all section 197 intangibles are amortized over a 15-year period beginning in the month of acquisition. This 15-year period applies regardless of actual useful life.
• Section 197 intangible assets include the portion of an acquired business attributable to the existence of a customer base.
• Section 1231 property is depreciable or real property used in a trade or business and held for more than one year, or an involuntarily converted non-personal capital asset. A boat is a personal use capital asset and does not qualify for treatment under section 1231.
• Examples of listed property include passenger automobiles, other transportation vehicles, and entertainment or recreational property. check My original note also listed goodwill here. Goodwill is Sec. 1245 property and a Sec. 197 intangible, but it is not listed property — I think that was a copying error.
• The computation of recapture amounts is not necessary when the business use percentage of section 179 or listed property stays above 50%.
• The alternative depreciation system must be used for tax-exempt bond-financed property, tax-exempt use property, and tangible property used predominantly outside the United States.

What is depreciable

• Land, a personal residence, and inventory are never depreciated. A rental residence and a business auto are. Acquired goodwill is amortized; self-created goodwill is not.
• Inventory is not depreciated because it is not used in the business — it is sold.
• An oil refinery is depreciated, not depleted; a gas well, timber lot, stone quarry, or geothermal deposit is depleted.
• Elevators and escalators are part of the building — Sec. 1250, not 1245. Office furniture, packaging machines, and computers in the same building are 1245.
• Paving a parking lot and outdoor fencing are land improvements (15-year property). They are not Sec. 179 property as tangible personal property, though they are eligible for bonus depreciation. updated 2026
• A lessee's improvements to leased real property are depreciated under MACRS as if the lessee owned the building, without regard to the lease term or renewal options.

MACRS mechanics

• Under MACRS, useful lives are called recovery periods and are set by statute: 3, 5, 7, 10, 15, 20, 27.5, or 39 years. Salvage value is ignored.
• To use the percentage tables you need the basis, the recovery period, the convention, and the placed-in-service date. The declining-balance rate is built into the table — you don't pick it.
• The table percentages are applied to the unadjusted basis (cost) every year, not to the declining adjusted basis.
• GDS uses 200% declining balance for 3-, 5-, 7-, and 10-year property and 150% for 15- and 20-year property. ADS is always straight-line.
• Under ADS, personal property with no class life gets 12 years; the old "15 years if no class life" answer is wrong.
• A light-duty truck is 5-year property. First-year MACRS with the half-year convention is 20% of cost: a $25,000 truck gets $5,000.
• An 8,000-pound delivery truck is over the 6,000-pound GVWR line, so the passenger-auto caps do not apply to it. The Sec. 179 SUV cap ($32,000 for 2026) may. updated 2026
• An apartment building is 27.5-year straight-line; the only alternative is ADS straight-line over 30 years. There is no 125% declining balance and no 35- or 45-year option.
• The ADS election is made on the return for the year the property is placed in service, is irrevocable, and applies to the whole class for that year — except residential rental and nonresidential real property, which can be elected property by property.
• Residential rental property placed in service after 1986 is always straight-line, so there is no accelerated-over-straight-line Sec. 1250 recapture on it.

Listed property

• Listed property is passenger autos, other transportation vehicles (trucks 6,000 lb GVWR and under), and entertainment or recreational property such as a video camera. Computers came off the list for property placed in service after 2017. updated 2026
• A 17,000-pound cargo truck is not listed property. A pickup under 6,000 pounds and a video camera are.
• Recreational property used 40% for personal purposes is still listed property — the question is what it is, not how it is used.
• An employee's home computer used for the employer's work is not qualified business use unless the employer requires it for the employer's convenience as a condition of employment. Unreimbursed employee business expenses are not deductible anyway (through 2025 under TCJA; made permanent by the 2025 act). updated 2026
• If business use of listed property or Sec. 179 property drops to 50% or less after the first year, the excess of the depreciation and 179 taken over what ADS would have allowed is recaptured as income in that year.

Section 179

• Only the business-use portion of the cost qualifies: a $13,000 computer used 90% for business gets $11,700 of 179.
• The 179 deduction is limited to taxable income from the active conduct of all trades or businesses (for an individual that includes wages). The disallowed amount carries forward.
• A taxpayer with $6,000 of business income and a $2.8 million machine gets $6,000 of 179 this year and carries the rest forward. Bonus depreciation has no income limit — this is the main reason to use bonus instead. updated 2026
• Phase-out: the 2026 limit of $2,560,000 drops dollar-for-dollar once Sec. 179 property placed in service exceeds $4,090,000, and hits zero at $6,650,000. updated 2026
• Basis carried over from a trade-in used to be excluded from 179 (Sec. 179(d)(3)). Since 2018 a trade-in of personal property is a taxable sale, so the new asset's basis is its full cost and all of it is eligible. updated 2026
• A car is subject to both tests: the lesser of 179 on the business portion of cost, or the first-year auto cap times the business percentage. A $20,000 car used 75% for business in 2026 gets at most $12,300 × 75% = $9,225 in the first year, 179 and depreciation combined. updated 2026
• A $64,000 car used 100% for business, with bonus elected out, gets $12,300 in 2026 — the cap, not 20% of cost. With bonus, $20,300. updated 2026
• 179 is treated as depreciation: it reduces basis before regular depreciation is figured and it is recaptured under Sec. 1245 on sale.
• If 179 property goes to personal use (business use 50% or less) before the end of its recovery period, recapture the 179 taken over the MACRS that would have been allowed: $5,000 of 179 less $3,889 of allowable MACRS means $1,111 of income.

Amortization

• Goodwill, going-concern value, workforce in place, customer lists and information bases, know-how, licenses and permits (a liquor license, a government permit), franchises, trademarks, trade names, and covenants not to compete entered into with a business acquisition are all Sec. 197 intangibles.
• Not Sec. 197: an interest in land, an interest in a corporation or partnership, an interest under an existing lease of tangible property, and most financial contracts.
• Sec. 197 amortization runs 15 years from the month of acquisition, by months. Buy $180,000 of intangibles on July 1 and the first-year deduction is $180,000 × 6/180 = $6,000. Buy $15,000 of goodwill in July and it's $500.
• A 5-year non-compete covenant bought with a business is amortized over 15 years, not 5. $75,000 ÷ 15 = $5,000 a year.
• When you buy a business, only the intangibles are amortized. The land is not recovered, the building is 39-year (or 27.5), and the equipment is MACRS.
• Start-up costs: market surveys, accounting fees to set up, advertising for the opening, travel to line up suppliers and customers, and hiring and training employees. Not start-up costs: interest, business taxes and licenses, fixtures and equipment, a trademark purchase, and a logo design.
• The first-year start-up deduction is up to $5,000, reduced dollar-for-dollar when total start-up costs exceed $50,000; $62,500 of costs means no first-year deduction, and everything goes over 180 months.
• The 180 months start with the month business begins, not the month the cost was paid. Open on October 1 and you get 3 months of amortization that year.
• Start-up and organizational costs each get their own $5,000, but both must be amortized over the same 180-month period.
• A taxpayer is deemed to have made the Sec. 195 election; no statement is required.
• Construction-period interest on self-constructed business property is capitalized under Sec. 263A and recovered through depreciation — not expensed, not amortized over 10 years, not deducted on sale.

Depletion

• Cost depletion: adjusted basis ÷ estimated units at the start of the year × units sold. A $20,000 basis over 40,000 tons is $0.50 a ton; sell 10,000 tons and deduct $5,000.
• Units mined but not sold do not count. Units sold is the multiplier.
• Percentage depletion for oil and gas is 15% of gross income from the property, available only to independent producers and royalty owners, limited to 100% of taxable income from the property (50% for other minerals). A $30,000 royalty gets $4,500.
• Take the larger of cost or percentage depletion each year. Percentage depletion continues after basis is gone; cost depletion stops.

Recapture

• Sec. 1245: ordinary income to the extent of the lesser of all depreciation taken (MACRS, 179, bonus, amortization) or the gain. The method of depreciation does not matter for 1245 — straight-line or accelerated, it all comes back as ordinary.
• Depreciation taken includes any basis adjustment for an investment credit, such as the energy credit.
• If gain is less than depreciation taken, the whole gain is ordinary: a $90,000 backhoe with $60,000 of depreciation sold for $65,000 is $35,000 of ordinary income, no capital gain.
• If gain exceeds depreciation taken, the excess is Sec. 1231: a $50,000 machine with $20,000 of 179 and $18,974 of depreciation sold for $52,000 has a $40,974 gain, of which $38,974 is ordinary and $2,000 is 1231.
• Ball machines bought for $3,500 with $1,260 of depreciation sold for $3,700: $1,460 gain, $1,260 ordinary, $200 Sec. 1231.
• Sale of a trademark: amortization taken is 1245 ordinary income, the rest of the gain is 1231.
• On a rental condo sold with the price allocated among building, personal property, and land, only the personal property is 1245. Its recapture is the lesser of its gain or its depreciation; the building's depreciation is unrecaptured 1250 gain.
• Residential rental property held less than one year: all depreciation is recaptured as ordinary income on sale, even though it was straight-line.
• Residential rental property held over a year and depreciated straight-line: $0 of Sec. 1250 ordinary recapture, even where an accelerated method would have given more. The straight-line depreciation is unrecaptured 1250 gain taxed at up to 25% for individuals.
• A C corporation selling a building adds 20% of the straight-line depreciation back as ordinary income under Sec. 291; the rest is 1231.
• Figure the gain with the current year's depreciation included: Willis's apartment building had $243,000 of depreciation through last year plus $27,000 this year, so basis is $742,500 − $270,000 = $472,500 and the Sec. 1231 gain on a $500,000 sale is $27,500.
• Low-income housing is Sec. 1250 property like any other building.
• A boat used personally is a capital asset, not 1231. Condemnation of a business building and sale of a point-of-sale system are 1231 events.
• Involuntary conversion (Sec. 1033): a forklift with $2,000 basis destroyed, $9,000 of insurance, $7,500 spent on a replacement — recognize only the $1,500 not reinvested, and that $1,500 is 1245 ordinary income because it is less than the $6,000 of depreciation taken.

Parked for other chapters

These came up in the same question set but belong elsewhere. I'll move them when those chapters are built.

• Sec. 351: no gain or loss on transferring property to a corporation solely for stock if the transferors own at least 80% afterward. Stock received for services is ordinary income for its value, and the service provider's shares do not count toward the 80%.
• Sec. 357(c): if liabilities assumed by the corporation exceed the total basis of property transferred, the excess is recognized gain — $120,000 mortgage on a $100,000-basis building is $20,000 of gain, even in a valid 351.
• Shareholder's basis in 351 stock is the basis of property given, plus cash, plus gain recognized, less boot received. The corporation takes the shareholder's basis plus gain recognized.
• A sole shareholder who contributes property with no new stock issued still gets 351 treatment; the property's basis is added to the stock basis.
• Fail the 80% control test and the transfer is a taxable sale at fair market value.
• Prepaid interest is capitalized even by a cash-basis taxpayer and deducted in the year it accrues. A cash-basis borrower who "pays" interest by renewing the loan with the same lender has paid nothing and deducts nothing; an accrual-basis borrower deducts it.
• Rental income includes advance rent and any security deposit intended as last month's rent, in the year received. A true refundable deposit is not income until forfeited.
• The $25,000 passive rental loss allowance for active participants phases out by 50% of AGI over $100,000 (AGI figured before IRA deductions, Social Security, and passive losses). Gone at $150,000.
• Ending inventory includes goods shipped FOB destination that haven't arrived and raw materials invoiced but not received when title has passed. A reserve for inventory decline is not allowed.
• COGS for a manufacturer under Sec. 263A: beginning inventory + raw materials + freight-in + direct labor + production overhead − ending inventory. Freight-out and general and administrative costs are not inventory costs.
• An employer-provided vehicle used personally is wages; de minimis fringes, meals for the employer's convenience, and small non-cash achievement awards are excludable.
• An LLC member's basis includes the member's share of entity debt; an S corporation shareholder's does not, even with a personal guarantee. LLCs also have no limit on the number or type of owners.
• Employee pay is deductible when it is reasonable, for services actually rendered, and paid or incurred in the year — legal control over the worker is not a requirement.

Private reference, not client advice. Original notes written 2022–2023 while studying for the SEE Part 2; figures updated October 2026 (Rev. Proc. 2025-32, Rev. Proc. 2026-15, P.L. 119-21). Verify current-year amounts before relying on them.