CHAPTER 8 - CHAPTER 8 CHAPTER 8 Cost Recovery...

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Unformatted text preview: CHAPTER 8 CHAPTER 8 Cost Recovery (Depreciation) (Skip pages 20­28) Requirements for DD&A Requirements for DD&A Asset Must Be: or for; Used In Trade/Business The Production of Income (i.e. rentals) Asset can be Realty or Personalty* (*tangible or intangible business assets) Basis For Depreciation Is “Adjusted Basis” Exception: Personal assets converted to business Legislative History Legislative History 1981 – 1986 Accelerated Cost Recovery (ACRS) Designed to Encourage Asset Investment Created Property Classes – 3, 5, 10, 15 Year Life TRA of 1986 Created Modified Accelerated Cost Recovery System (MACRS) which retained the ACRS Classes and: Added 7 Year, 27.5 Year, and 39 Year Property and also: Established Half­Year, Mid­Month, & Mid­Quarter Conventions (Refer to Exhibit 8­1 on page 8­6) Straight Line Depreciation Is Available For Personalty, But Mandatory For Realty MACRS Depreciation MACRS Depreciation Half­Year Convention Applies to Tangible Business Property Assets are deemed to be placed in service on July 1 ½ year depreciation allowed in year of acquisition ½ year depreciation allowed in year of disposition Taxpayer may elect Straight­Line depreciation MACRS Depreciation (cont) MACRS Depreciation Mid­Quarter Convention Applies to Tangible Business Property Must use when >40% of value of assets are placed in service in 4th quarter of year Requires assets acquired during year to be grouped by quarter. Assets are deemed to be placed in service at midpoint of quarter ½ quarter depreciation in year of acquisition and year of disposition MACRS Depreciation (cont) MACRS Depreciation Realty Straight­Line Depreciation is Required 27.5 Years for Residential Realty 39 Years for Commercial Realty Assets deemed to be placed in service at mid­month ½ month depreciation allowed in month of acquisition ½ month depreciation allowed in month of disposition Effective or 2008 and 2009 (May be Additional 1 Year Depreciation Additional 1 st extended by congress for 2010) Allows for an additional 50% depreciation in year that “qualified property” is placed in service Qualified Property is NEW Personalty (not realty) May be claimed in addition to MACRS depreciation Section 179 Election Section 179 Election to Expense Assets Allows For Current Year (2010) Expense Up To $250,000 of Tangible Personal Property Limited To $800,000 of Assets Purchased in 2010 §179 election cannot create a net loss for the business (i.e. can only bring Net Income to ­0­) Adjusted Basis of Assets are Reduced To Zero Gain On Sale of the asset(s) is Ordinary Income Listed Property Listed Property Applies To Assets That Can Be Used For Both Business And Personal Purposes such as: Passenger Autos Cell Phones Computers and Software Entertainment Assets (Boats, etc.) Depreciation is Based On Business Use Test If asset is used predominantly for business (>50%), then; Taxpayer may use MACRS tables reduced by personal use If asset is used predominantly for personal use (>50%), then taxpayer must use Straight­Line reduced by personal use Listed Property (cont) Listed Property Severe Limits For Depreciation Of Passenger Automobiles used for Business See table on page 8­15 Vehicles with GVW rating > 6,000 pounds are eligible for up to $25,000 of §179 expensing for business use Leased Automobiles – Lease Payment Deduction is Reduced by “Inclusion” Amount Amortization Applies To Intangibles Amortization Applies To Intangibles §197 Allows For 15 Year Write Off Of: Goodwill Franchises Trademarks Trade Names Copyrights Patents Beginning In Month of Acquisition ...
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