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Chapter 8 Depreciation, Cost Recovery, Amortization & Depletco

By Jim Lopez,2014-06-27 23:04
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Chapter 8 Depreciation, Cost Recovery, Amortization & Depletco ...

    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.

Tangible Assets

    Accelerated cost recovering system

    ACRS ? after 12/31/80 to 12/31/86

    MACRS ? post 12/31/86

    Different rules

    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 ?

    administration

    Cost recovery allowed or allowable

    - Basis must be reduced even if depreciation deduction forgotten in a

    year

    ? 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 ??

    ??19year (after5/8/85?1/11/87)??

    3 year ?

    ?5 year?2002 DB switch to SL ?7 year?10 year?

     * MARCS:

    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

    mid point

    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

    basis

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

     2004 --102,000

    Limitations:

     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

    depreciated.

Listed Property

    - 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

    Limitations:

    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

    payments.

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

    purchase.

     ? 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

    incurred.

Depletion Methods:

     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.

Reporting Procedures

    - Form 4562 for depreciation amount

    - Note cost recovery schedules are not required to be submitted with tax

    report.

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