May 21mgmt127a

May 21mgmt127a - MGMT 127A Quick Review of Depreciation(for...

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May 21, 2008 MGMT 127A Quick Review of Depreciation (for property) Take your cost, and knock off $105,000 if you wish too. You are left with your adjusted cost. Once you get to your adjusted cost, identify the life of your property: 3, 5 or 7 years. Then you follow the table. The table uses double declining balance. Partial year for first and last year are built in. Always multiply the table factor by the original adjusted cost What if you sell the asset prematurely? (has a 5 year life and you sell it before 5 years have passed) If you sell it in Year 2, Year 3, or Year 4, you must use the table factor designed for a full year and mechanically multiply by ½. On a 5 year table, how many rows would you need? You would need 6 rows. The first and last years are half years, while the ones in between are full years. Example Knowing that the first year is a half year, you are thinking of buying some equipment worth a total of $200,000. You can arrange for it to arrive late Year 1 or early Year 2. Is there a reason, from a tax standpoint why you would want to buy it late in Year 1 rather than early in Year 2? Yes, because if you buy it in year 1, you will be able to claim an additional half-year of depreciation and then a full year of depreciation in Year 2, giving you 1.5 years of depreciation. If you buy the equipment in Year 2, you will only get half a year of depreciation.
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By purchasing at the end of Year 1, you get an additional year of depreciation. This is immaterial in the real world, but important in the eyes of the tax law because of the half-year convention. Placed in service date is the important date. However, arrival date is good enough. People started abusing this rule by buying everything they needed in Year 2 at the end of Year 1. Manufacturers had to work twice as hard in the last quarter, and had nothing to do following that because nobody was ordering anything. Congress created an overriding rule:
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May 21mgmt127a - MGMT 127A Quick Review of Depreciation(for...

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