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Depreciation

Depreciation

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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