Chapter 8
Depreciation and Amortization
Depreciation - Form 4562
- Business Property with a life longer than 1 year must write off that asset over it's life - called depreciation
- Material non-cash expense
- Can be real or personal property, but land is never depreciable
- What information do you need to determine depreciation?
o Cost or Basis
o Date placed into service
o Life
o Method
History
- Financial Accounting
- Tax
o Pre 1981
o 1981-1986 - Accelerated Cost Recovery System
o 1987-Now - Modified Cost Recovery System
- Bonus Depreciation 9/11/01 to 12/31/04
o 30% 9/11/01 to 12/31/03
o 50% for 2004
- Bonus Depreciation 2008 to 2010
o 50%
o New Personal Property
o 100% property placed into service from Sept. 9, 2010 through Dec. 31, 2011.
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
- Depreciation basis - cost plus: inherited; gift
- Depreciation methods - MACRS
o 200% - switching to Staight-Line
o 150% - switching to Staight-Line
o Staight-Line
o Alternative Depreciation System
Half-Year vs. Mid-Quarter Averaging Conventions
- Half-year convention assumes that taxpayers place personal property in service halfway through the tax year.
- Mid-quarter convention assumes that taxpayers place personal property in service midway through the quarter.
o Use if over 40% of personal property place in service in last 3 months of year
- Disposals of property are also considered half-year or mid-quarter
MACRS for Personal Property
Section 179
- Write off cost of property in year of purchase
- Deduction (phased out if you buy $2 million in qualifying property)
o $24,000 for 2001, 2002
o $100,000 for 2003
o $102,000 for 2004
o $105,000 for 2005; adjusted for inflation in the future
o $108,000 for 2006
o $125,000 for 2007
o $250,000 for 2008 & 2009
o $500,000 for 2010
- Not allowed for
o Residential rentals
o Investment Property
o If property acquired from a related party, gift or inheritance
- Limited to cash paid if a trade-in is involved
- Can't create a loss
o Can carryover to next year
MACRS for Real Property
- Residential real estate: 27.5 years
- Nonresidential real estate placed in service before 5/13/93: 31.5 years
- Nonresidential real estate placed in service after 5/12/93: 39 years
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
- Property that can be used personally and/or business
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
o Airplanes and motorcycles
o Passenger automobiles
o Trucks, buses, boats
- Property used for entertainment, recreation, or amusement
o Cameras and VCRs
o Communication equipment
o Stereo equipment
o Computers and related equipment
Vehicles
- Luxury Automobile Limitations
o Under 6,000 pounds - $15,300 or more
Maximum depreciation allowed - see page 8-16
- Trucks/SUVs/Vans
o Over 6,000 pounds - $15,300 or more
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
- Additionally limited to business use
- Leased Vehicles
o Deduction limited - lease inclusion amount
Items Included as Section 197 Intangible Personal Property
- Business books and records, operating systems, or any other information base
- Covenant not to compete entered into in connection with the acquisition of a business
- Customer-based intangibles, including customer lists
- Franchise (other than a sports franchise), trademark, or trade name
- Goodwill
- Patent, copyright, formula, process design, or similar item
- Supplier-based intangibles
California - Form 3885A (pg 39)
- Never allowed
o Accelerated Cost Recovery System (ACRS)
o Bonus Depreciation
o MACRS on corporations
- Allows MACRS on individual & partnership tax returns
- Section 179 Depreciation is limited to $25,000
End of Chapter 8
