Depreciation  No requirement to use the same: Depreciation method or Useful life  For income tax and financial statement purposes  Generally, method.

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Presentation transcript:

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  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)

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

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

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

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

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

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

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

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