In the previous lesson, we discussed deductions and losses for certain business expenses and
losses. In this lesson we will discuss cost recovery, depreciation, amortization and depletion. Next
any assets that are acquired for use in a trade or business or are held for the production of
income do not produce tax benefits in the year of acquisition equal to their costs because their
lives are for more than one year. This lesson discusses the procedures by which a tax benefit is
received over an asset’s useful life or over a specified period of time. The write-off of an asset’s
cost is referred to as depreciation, cost recovery, amortization, or depletion. Depreciation and cost
recovery are terms associated with tangible property, amortization pertains to intangible property,
and depletion relates to certain natural resources.
These provisions have been changed numerous
times over the years and, as a result, have produced something of a nightmare for taxpayers who
own long-lived assets. Further, distinctions, such as whether an asset has a business or personal
use, whether it is realty or personalty, or whether it is tangible or intangible, are important when
determining the tax treatment of an asset. So as you can tell, cost recovery can be somewhat of a
complicated subject. Next Slide:
After completing this lesson, you should be able to: Understand the rationale for the cost
consumption concept and identify the relevant time periods for depreciation, accelerated cost
recovery system, or ACRS, and the modified accelerated cost recovery system, or MACRS.
Determine the amount of cost recovery under ACRS and MACRS. Recognize when and how to
make section one seventy-nine expensing elections, calculate the amount of the deduction, and
apply the effect of the election in making the MACRS calculation. Identify listed property and
apply the deduction limitations on listed property and on luxury automobiles.
and how to use the alternative depreciation system, or ADS. Identify intangible assets that are
eligible for amortization and calculate the amount of the deduction, and
Determine the amount of
depletion expense including being able to apply the alternative tax treatments for intangible
drilling and development costs.
When an asset benefits more than one accounting period, recovery of the cost of the business or
income-producing assets is through: cost recovery or depreciation for tangible assets,
amortization for intangible assets, and
depletion for natural resources. Next Slide:
Tangible property is any property with physical substance and is depreciated according to IRS
guidelines. IRS Form forty-five sixty two is used to report the depreciation deduction to the IRS.