Chapter 8
Depreciation and Amortization

Depreciation - Form 4562
o    Cost or Basis
o    Date placed into service
o    Life
o    Method
History
o    Pre 1981
o    1981-1986 - Accelerated Cost Recovery System
o    1987-Now - Modified Cost Recovery System
Modified Accelerated Cost Recovery System
(MACRS) for Personal Property

        MACRS cost basis of the property
x    Percentage taken from an IRS-provided table
=     Depreciation expense using MACRS
Half-Year vs. Mid-Quarter Averaging Conventions
o    Use if over 40% of personal property place in service in last 3 months of year


MACRS for Personal Property
MACRS Table for 3-, 5-, 7-, and 10-Year Classes Using the Half-Year Convention
MACRS Table for 3-, 5-, and 7-Year Classes Using the Mid-Quarter Convention
MACRS Table for 3-, 5-, and 7-Year Classes Using the Mid-Quarter Convention (continued)
Section 179
o    Write off cost of property in year of purchase
o    Deduction (phased out if you buy $420,000 in qualifying property)
$24,000 for 2001, 2002
$100,000 for 2003
$102,000 for  2004
$105,000 for 2005; adjusted for inflation in the future
$108,000 for 2006
$125,000 for 2007
o    Not allowed for
Residential rentals
Investment property
If property acquired from a related party, gift or inheritance
o    Limited to cash paid if a trade-in is involved
o    Can't create a loss
Can carryover to next year

MACRS for Real Property
Depreciation of a Business in the Home
    Taxpayers who use part of their home for business purposes can depreciate the business portion of the home using the cost recovery rules for nonresidential realty.
Alternative Depreciation System (ADS)
Listed Property

o    If more than 50 % business use, then can use MACRS and IRC §179; otherwise, you must use straight-line
o    If employee, it must be for the convenience of the employer and required by the employer
o    Adequate Records - log/diary to prove business use
Property Suitable for Personal Use
Property used for transportation
Property used for entertainment, recreation, or amusement
Vehicles
o    Under 6,000 pounds - $15,300 or more
Maximum depreciation allowed  - see page 8-16
o    9 people or less; no open cargo area
o    Section 179 is limited to $25,000 for property put into service after 10/22/04
o    Deduction limited - lease inclusion amount

Items Included as Section 197 Intangible Personal Property
California - Form 3885A (pg 39)   
o    Accelerated Cost Recovery System (ACRS)
o    Bonus Depreciation
o    MACRS on corporations
End of Chapter 8