Week 7 (Ch10).pdf - Todayu2019s Agenda Recap u2022...

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Today’s AgendaRecapBusiness income and deductionsGeneral rulesExceptions or limitationsAccounting periodsAccounting methods and the timing of recognitionTodayChapter 10Next ClassChapter 11
Chapter 10: Property Acquisition and CostRecoveryINSTRUCTED BY: COLLEEN GREEN
OutlineFormsInitial concepts3 cost recovery methodsDepreciationPersonal tangible propertyReal propertySpecial rules for cost recovery with depreciationAmortization (intangibles and pre-business start date costs)Depletion (natural resources)3
FormsForm4562(Depreciation and Amortization)Won’t show the forms for depletion as it depends on the naturalresource (e.g. Form T is used for timber)4
Initial conceptsBusinesses make large investments in PP&E that providebenefits expected to last greater than one year.How do we represent these costs to tax authorities?Capitalize the asset and use a Cost Recovery method todetermine amount of deduction.Distribute the cost of a long-term asset (i.e. one that will benefit thetaxpayer for > 12 months) over tax years it is used.If an asset is purchased and sold within the same tax year, no depreciation isallowed on the asset.5Initial Cost of AssetRecovery Period$10,000 cost10yrs== $1,000/yr
Initial conceptsDepreciationDeduct the cost oftangible & real property(not land) over a specificperiod of timeAmortizationDeduct the cost of certainintangible assets over aspecific time periodDepletionDeduct the cost ofnatural resourcesover time6Initial Cost of Asset“Adjusted Basis”Each year, cost recovery deductionsreduce the asset’s adjusted basisInitial Cost = Adj Basis$10,000YR1 Depreciation- 1,000Adj Basis (12/31/YR1)$9,000YR2 Depreciation- 1,000Adj Basis (12/31/YR2)$8,000Example:
Initial conceptsAdjusted basis (AB) or tax basis:Description:Amount of an asset’s cost that has yet to be recovered through costrecovery deductions.How to calculate Initial Cost:See additional notes/details for concepts in your note sheets.7OriginalCost(Purchaseprice)Allexpenses topurchase,prepare,and startusing itInitialCostSales tax, shipping,installation…
DepreciationHistoryBefore 1981, the method for depreciation waslargely the same for taxaccounting as it was for financial accounting.In 1981,ACRSWe now useMACRS, which is a modified form of accelerateddepreciation that also uses fixed asset classes and recovery periods.Why do you think the government offers accelerated depreciation?8
DepreciationHow do you use MACRS? Four pieces of information and pre-designated tables from tax authorities.1.The “initial cost”2.Method3.Recovery Period (class)4.Convention9
DepreciationPart of what determines the appropriate method, recoveryperiod, and convention is whether the property is personaltangible property or real property.

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