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Depreciation

Depreciation. No requirement to use the same: Depreciation method or Useful life For income tax and financial statement purposes Generally, method used for income tax purposes (MACRS) provides more depreciation in initial years of asset Present value of income tax benefits. MACRS.

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Depreciation

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  1. Depreciation • No requirement to use the same: • Depreciation method or • Useful life • For income tax and financial statement purposes • Generally, method used for income tax purposes (MACRS) provides more depreciation in initial years of asset • Present value of income tax benefits

  2. MACRS • 3-year property: semis • 5-year property: vehicles, computers, office equipment • 7-year property: most equipment, office furniture • 10-year property: specialty barns, orchard trees and vines • 15-year property: land improvements (sidewalks, roads)

  3. MACRS • 20-year property: barns • 27 1/2-year property: residential real estate (was 19 years under ACRS) • 39-year property: non-residential real estate (was 19 years under ACRS) • Land: can not be depreciated

  4. MACRS • Take basis of asset times appropriate percentage for that year • One-half year depreciation in first year and last year • So, 5-year property is depreciated over six years • If buy more than 40% of your assets for the year at the end of the year, a use mid-quarter convention • If dispose of asset, take one-half year depreciation in year of disposal

  5. Section 179 election • Expense any amount of cost of asset up to $133,000 in year of purchase • As long as purchases < $530,000 • Must be personal property used in active trade or business • Real estate does not qualify • Furniture in rental house does not qualify • Limited to amount of income from business • Can carry over excess not used to following year • Reason for provision • Post year-end tax planning • Gives taxpayer ability to determine taxable income and income taxes

  6. Allocation of cost of an asset • Apartment building • Furnishings and equipment • Land improvements • Building • Land • Based on: • Appraisal • Property tax assessments

  7. Depreciation recapture • Section 1245: personal property • All gain on sale of property up to the amount of accumulated depreciation is ordinary income • Basis is reduced by accumulated depreciation • Even if failed to claim depreciation • So, only portion of sales price more than original basis is capital gain

  8. Depreciation recapture • Section 1250: real estate • No recapture of depreciation if depreciated under MACRS (not treated as ordinary income) • However, all gain on sale of real estate is taxed at a capital gains tax rate of 25% to the extent of accumulated depreciation

  9. Depreciation limitations • Listed property • Cars and computers used less than 50% for business • Use straight-line depreciation

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