CH8 - Chapter 8 Depreciation, Cost Recovery, Amortization,...

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Chapter 8 Depreciation, Cost Recovery, Amortization, and Depletion Cost Recovery Recovery of the cost of business or income-producing assets is through: Cost recovery or depreciation: tangible assets Amortization: intangible assets -- Depletion: natural resources Nature of Property Property includes both realty (real property) and personalty (personal property) Realty generally includes land and buildings permanently affixed to the land Personalty is defined as any asset that is not realty Personalty includes furniture, machinery, equipment, and many other types of assets Personalty (or personal property) should not be confused with personal use property Personal use property is any property (realty or personalty) that is held for personal use rather than for use in a trade or business or an income-producing activity Write-offs are not allowed for personal use assets General Considerations MACRS applies to: Assets used in a trade or business or for the production of income Assets subject to wear and tear, obsolescence, etc. Assets that have a determinable useful life or decline in value on a predictable basis Assets that are tangible personalty or realty MACRS characteristics: MACRS Personalty . Statutory lives: 3, 5, 7, 10 yrs 15, 20 yrs Method: 200% DB 150% DB Convention: Half Yr or Mid-Quarter DB = declining balance with switch to straight-line Straight-line depreciation may be elected Half-Year Convention General rule for personalty Assets treated as if placed in service (or disposed of) in the middle of taxable year regardless of when actually placed in service (or disposed of) Example: Half-Year Convention Purchased and placed an asset in service on March 15 (Tax year end is December 31) Treated as placed in service June 30 Six months cost recovery in year 1 (and year disposed of, if within recovery period) Additional First-Year Depreciation The Economic Stimulus Act of 2008 provided for additional first-year depreciation on qualified property Applied to property acquired after 12/31/07 and before 01/01/09 and placed in service before 01/01/09 ARRTA of 2009 extended additional first-year depreciation for qualified property placed in service before January 1, 2010 Allows an additional 50% cost recovery in year asset is placed in service Qualified property includes most types of new property other than buildings Property that is used but new to the taxpayer does not qualify At the time of this writing, additional first-year depreciation has not been extended beyond December 31, 2009 Example: Additional First-Year Depreciation
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Maple Company acquires a 5-year class asset on March 20, 2009, for $20,000. Maple’s cost recovery deduction for 2009 is computed as follows: Mid-Quarter Convention Applies when more than 40% of personalty is placed in service during last quarter of year Assets treated as if placed into service (or disposed of) in the middle of the quarter in
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This note was uploaded on 02/01/2011 for the course ACCT 401 taught by Professor Savage,g during the Fall '08 term at Winthrop.

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CH8 - Chapter 8 Depreciation, Cost Recovery, Amortization,...

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