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Ind. IO Chap. 10 - 2008 - Chapter I:10 Depreciation Cost...

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Chapter I:10 Depreciation, Cost Recovery, Amortization, and Depletion Learning Objectives After studying this chapter, the student should be able to 1. Understand the general concepts of tax depreciation. 2. Classify property and calculate cost recovery under the MACRS rules. 3. Calculate amortization for intangible assets and understand the difference between amortizable and non-amortizable assets. 4. Apply cost and percentage depletion methods and understand the treatment for intangible drilling costs. Areas of Greater Significance Depreciation and cost recovery rules have changed several times over the past years. Knowledge of these rules is important to determining the results of operations and in making investment decisions. Areas of Lesser Significance In the interest of time, the instructor may determine that the following is best covered by student reading, rather than class discussion. 1. IDC election Problem Areas for Students The following areas may prove especially difficult for students: 1. Learning and separating the various ACRS and MACRS real property rules by time period. 2. Reporting cost recovery, depreciation, depletion, and amortization. I:IO10-1
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Highlights of Recent Tax Law Changes The following items changed from the 2007 edition of this chapter: 1. The maximum Section 179 expensing deduction has increased to $112,000. 2. The total cost of qualified property acquisitions cannot exceed $450,000 to fully utilize the Sec. 179 expensing deduction. 3. The maximum annual depreciation for luxury autos has changed for 2007 acquisitions. Teaching Tips 1. In order to help the students perceive the importance of pre-1987 depreciation methods, emphasize that clients may continue to hold and dispose of assets (primarily real property) that are subject to pre-1987 depreciation methods. 2. Compare and contrast depreciation/cost recovery in the year of disposition for the various methods. Students may have a problem differentiating between the different disposal rules. Lecture Outline I. Depreciation and Cost Recovery (Instructor Aid I:10-1) A. General Considerations (Examples I:10-1, I:10-2) 1. Depreciation/cost recovery methods must be used on a consistent basis from year to year, and the adjusted basis of the asset must be reduced by depreciation/cost recovery allowed or allowable. EXAMPLE: The taxpayer acquires business equipment for $50,000. During the first three years of operation, $20,000 of depreciation is allowed (and allowable). At this time the equipment has a $30,000 adjusted basis ($50,000 - $20,000) for purposes of calculating gain or loss on disposition. 2. The depreciable basis of property converted from personal use is the lower of the taxpayer's adjusted basis or the FMV at the date of conversion.
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