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COST RECOVERY

COST RECOVERY. ACTG508 Class Presentation Spring 2000 Yueyang Li Lin Dou. What we’ll cover today:. Depreciation (for tangible personal properties and real properties) -- Three depreciation methods -- Sec. 179 Depletion (for natural resources) Tax consideration -- IDCs.

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COST RECOVERY

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  1. COST RECOVERY ACTG508 Class Presentation Spring 2000 Yueyang Li Lin Dou

  2. What we’ll cover today: • Depreciation(for tangible personal properties and real properties) • -- Three depreciation methods • -- Sec. 179 • Depletion(for natural resources) • Tax consideration -- IDCs

  3. Types of property Note: 1. All must be used for business or investment 2. Personal Property is NOT equal to Personal Use Property 3. NO depreciation for land or intangible property.

  4. Three Depreciation Systems • Pre-ACRS (before 1981) • ACRS (1981-1986) • MACRS (1987- present)

  5. Features Shared by ACRS and MACRS • Salvage Value = 0 • The depreciation methods are built into the ACRS and MACRS tables • Asset Class Life vs. Recovery Period • Assumptions are used as to when the property is put into service or disposed.

  6. Depreciation Tables • MACRS • Table 1: personal property (half-year) • Table 2, 3, 4, 5: personal property (mid-quarter) • Table 6: real property (residential) • Table 7, 8: real property (nonresidential) • Table 9, 10, 11: ADS • Table 17: Luxury Automobile Limitations • ACRS • Table 12: Tangible personal property • Table 13, 14, 15, 16: real property

  7. MARCS for Personal Property • Certain types of property are excluded • The properties are classified into 6 categories by recovery period: 3yr., 5yr., 7yr., 10yr., and 20yr. • Half-year convention used for both the acquisition and disposition years.(Table 1) • Use of Mid-quarter convention (Table 2-5) • Accelerated methods & Straight-line selection and ADS (Alternative Depreciation System) (Table 9,10, 11)

  8. MARCS for Real Property • Defined recovery periods: • Residential rental property: 27.5 years • Nonresidential real property: 39 years or 31.5 years (1/1/87 - 5/13/93) • Straight-line depreciation • Mid-month convention for both acquisition and disposal years • Capital improvement is treated as if it’s a separate property and thus depreciated over the full life of the improvement

  9. Sec 179 Expense Election • Deduction • Limitation • Used in active trade or business • Not from related parties, by gift or inheritance • Asset purchases Deductible expense = 19000 – (total cost of qualified property – 200,000) • Taxable income limitation • Basis reduction • Recapture

  10. MACRS Restrictions • Personal use portion-not deductible • Business use restriction • Listed property • Business usage > 50% of total usage,--MACRS • Business usage <= 50% of total usage,--ADS • Recapture If business usage <= 50% of total usage in subsequent year, … …

  11. MACRS Restrictions – continue • Limitations on luxury automobiles • Definition of luxury automobile in Sec.280F. • Sec.179 expense limits: 1999 1st year $3,060 2nd year 5,000 3rd year 2,950 4th and later years 1,775 • Leased luxury automobile limitations

  12. Depletion Typesof expendituresof oil and gas property: • Payments for the mineral interest • Intangible drilling and development costs(IDCs) • Tangible asset costs • Operating costs after the well is producing

  13. Treatment of IDCs • Capitalized • Added to the property’s basis • Written off through cost depletion • Expense

  14. Depletion methods percentage depletion The amount of depletion = greater of cost depletion

  15. Cost depletion • Adjusted basis ==> Per-unit depletion cost • Cost depletion = per-unit depletion cost * units sold • Property’s adjusted basis change

  16. Percentage depletion The amount of depletion = lesser of: 100% of Taxable Income (oil and gas properties) 15% of Gross Income or 50% of Taxable Income (property other than oil and gas)

  17. Tax consideration – IDCs:Capitalization versus expensing election cost depletion The amount of depletion = greater of percentage depletion Lesser of 15% of Gross Income 100% of Taxable Income (oil and gas properties)

  18. Thank you

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