Depreciation, Cost Recovery, Amortization & Depletion
Tangible Property ? Depreciated Macrs & Acrs How physical Substance
e.g. building, equipment, automobiles
Intangible ? Amortized (sec. 197 intangible 15 years)
No physical substance
e.g. goodwill, trademarks, patents, copyrights, franchises
Natural resources ? depleted cost depletion, % depreciation
e.g. oil, gas, coal, timber not land
Assets must have a determinable useful life. I.e. land is not depreciable,
amortizable or delectable.
Assets must be used in trade or business – assets used for personal purposes
not written off.
Accelerated cost recovering system
ACRS ? after 12/31/80 to 12/31/86
MACRS ? post 12/31/86
Personal property ? any asset not realty Real property ? land and buildings permanently affixed
Cost of assets recovered over predetermined period
useful life for ease of ?
Cost recovery allowed or allowable
- Basis must be reduced even if depreciation deduction forgotten in a
? Affects gain calculation upon scale
Assets converted to business use from personal
? Take lover of adj. basis or FMV at time of conversion
Cost Recovery Periods (see p. 8-6 Ex. 8-1 for property classification)
* ACRS: 3,5,10 year (fully depreciated)
15 year ( public utilty prop.)??real property
??18 year ( after 6/22/85) SL using mid month ??
3 year ?
?5 year?2002 DB switch to SL ?7 year?10 year?
15 year? 150% DB switch to SL?20 year?
27.5 year - res.. rental real estate??
?? 31.5year - nonres. realestat (1/1/87 - 5/13/93) SL mid month ??
??39 year - nonres. realestate (5/13/93 - )??
? Cost basis applicable % (see tables)
Conventions see concept summary p. 9-9
1 Real Property – Mid month convention
Property considered placed in service at mid point of a month and sold a
mid point no matter actual date.
e.g. building purchased 2/3/99 for $100,000 year 1 depreciation
100,00010.5 x (or use table p. 8-36) 3912
100,000 x 2.247%
2 Personal Property – Half-year convention or mid-quarter convention
a.) Half year – property placed in service in the middle of the first year and sold in the middle of the year and retired in the middle of the year
e. g. car purchased 8/1/99 for $20,000 year 1 depreciation
20,000/5 x 200% x ? = 4,000
or 20,000 x .20 – 4,000 year 2 depreciation
20,000-4,000/5 x 200% - 6400
year 3 sale 20,000 x 19.3% x ? - 1920 or 20,000 – 4000- 6400 = 9600
b.) mid quarter convention
- use if >40% of value of property other than realty is placed in
service during the last quarter of the year.
- property acquisitions grouped by quarter
1Q = 10.5 months cost recovery allowed
2Q = 7.5 months
3Q = 4.5 months
4Q = 1.5 months
- Properly treated as acquired midpoint of quarter & disposed/ retired at
e.g. F&F purchased 12/1/99 = $10,000
1.5year 1 depreciation = $357 12 10,000/7 x 200% x or 10,00 x 3.57% = $357
year 2 depreciation
10,000 – 357/7 x 2002 – 2755
10, 000 x 27.55% - 2755
Straight line Election
- use same class life
ACRS ? election on property-by-property basis
MCSS ? election available on class-by-class basis and year-by-year
Additional First year depreciation
Qualified new property ( does not include real property) if placed in service
between May 4, 2003 and January 1, 2005 = 50% depreciation allowance
179 Expense Elections ? Allows taxpayer to elect to writhe off up to $24,000 of the acquisition cost of a
tangible personal property.
2002 – 24,000
2003 – 100,000
1 ceiling amount – dollar for dollar
Reduction for property placed in service exceeding $410,000 for
2004 (or 400,000 for 2003)
2. 179 expense cannot > taxable income (exclusive of 179 expense)
? Any excess 179> taxable income carried forward
Section 179 expense is deducted before the 50% or 30% bonus depreciation.
Any basis remaining after bonus depreciation and Sec. 179 expense is
- Property used fro both business and personal use
1. Used predominantly for business – 1.2. for business use >5-%
use stationary % method for cost recovery
2. Not used predominantly for business i.e. < 50% business used
used SL recovery under ADS
1 passenger auto 15,250 cost yearly costly recovery limited to
year 1 3060
year 3 5000
year 3 1775
? Note: If MARS cal N above use MARCS
3. Leased autos – taxpayer who leases must report an inclusion amount
from IRS tables & can take a deduction – business use % x lease
Alternative Depreciation System (ADS)
- used for AMT – 150% DDB
- computed using straight line recovery system (property outside US)
- taxpayers may elect straight live over 200% DB election available on
class-by-class and year-by-year basis.
Amortation of Intangible Property
197 – any intangible acquired after 8/10/93 & held in connection with the
conduce of a trade business amortized over 15 years beginning with moth of
? has to be purchased (not self created) e.g. goodwill, going concern,
franchise, and trademarks, patent, copyright, trade names, covenants not to be
complete, and workforce
? disregard actual life and use 15 years
Depletable Natural Resources
- oil, gas, timber, coal, gravel
- for oil and gas well – 4 types of costs:
1. Natural resources cost – recovered through depletion
2. Intangible Drilling & Development Cost (IDC_
- Costs incurred in making the property ready for drilling
? Either a charge off as expense year incurred or
? Capitalized and written off through depletion
3. Cost for tangible assets
- Capitalized and depreciated
4. Operation costs – cost incurred after well is producing – (expense as
1 Cost depletion
- adj. bases of assets – depletion amount
est. recoverable units of assets
Depletion amount x number of units sold – cost depletion
2. % Depletion – specified % in code, which varies depending upon
material type, see EX 8-2, p 8.23
? Gross income x rate = % depletion but % depletion cannot > 50%
taxable income before depletion.
- Form 4562 for depreciation amount
- Note cost recovery schedules are not required to be submitted with tax