AppendixG - Appendix G DEPRECIATION INTRODUCTION Cost...

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Appendix G DEPRECIATION I NTRODUCTION Cost recovery, amortization, and depletion are presented in Chapter 8. For most fixed assets (e.g., machinery, equipment, furniture, fixtures, buildings) placed in service after December 31, 1980, the Economic Recovery Tax Act of 1981 (ERTA) has replaced the depreciation system with the cost recovery system. 1 The general relationship between the depreciation system and the cost recovery system is sum- marized in Exhibit G.1. Despite ERTA, a discussion of § 167 depreciation is still relevant for two reasons. First, assets that were placed in service prior to 1981 are still in use. Second, certain assets placed in service after 1980 are not eligible to use the cost recovery system (ACRS and MACRS) and therefore must be depreciated. They include property placed in service after 1980 whose life is not based on years (e.g., units-of-production method). D EPRECIATION Section 167 permits a depreciation deduction in the form of a reasonable allowance for the exhaustion, wear and tear, and obsolescence of business property and prop- erty held for the production of income (e.g., rental property held by an investor). 2 Obsolescence refers to normal technological change due to reasonably foreseeable EXHIBIT G.1 Depreciation and Cost Recovery: Relevant Time Periods System Date Property Is Placed in Service § 167 depreciation Before January 1, 1981, and certain property placed in service after December 31, 1980. Original accelerated cost recovery system (ACRS) After December 31, 1980, and before January 1, 1987. Modified accelerated cost recovery system (MACRS) After December 31, 1986. G-1 1 Depreciation is covered in § 167, and cost recovery (ACRS and MACRS) is covered in § 168. 2 § 167(a) and Reg. § 1.167(a)–1.
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economic conditions. If rapid or abnormal obsolescence occurs, a taxpayer may change to a shorter estimated useful life if there is a ‘‘clear and convincing basis for the redetermination.’’ Depreciation deductions are not permitted for personal use property. The taxpayer must adopt a reasonable and consistent plan for depreciating the cost or other basis of assets over the estimated useful life of the property (e.g., the taxpayer cannot arbitrarily defer or accelerate the amount of depreciation from one year to another). The basis of the depreciable property must be reduced by the depreciation allowed and by not less than the allowable amount. 3 The allowed depre- ciation is the depreciation actually taken, whereas the allowable depreciation is the amount that could have been taken under the applicable depreciation method. If the taxpayer does not claim any depreciation on property during a particular year, the basis of the property still must be reduced by the amount of depreciation that should have been deducted (the allowable depreciation).
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AppendixG - Appendix G DEPRECIATION INTRODUCTION Cost...

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