Chapter 10 Fall 11

Chapter 10 Fall 11 - ACCT 403 CHAPTER 10 - COST RECOVERY...

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ACCT 403 CHAPTER 10 - COST RECOVERY DEDUCTIONS Fall 2011 I. Capital Expenditure Versus Current Expense A. General Concepts 1. If tax rates do not change, the present value of tax savings resulting from a deduction is greater the sooner it is deductible. a. Examples 1-2, pages 10.2-3 2. Under the “Ordinary and Necessary” tests a deduction for purchase or improvement of a long-term asset. a. “Ordinary” is used as a contrast to capital. 3. As discussed below, capital recovery allowance deductions are allowed (depreciation, depletion, amortization) for certain capital expenditures. a. A capital expenditure is one that provides value beyond the current year and generally is recorded as an asset. b. For capital expenditures which are not deductible, the after-tax cost equals the before tax cost. C. Basis 1. Initial basis generally equals the cost of the asset. a. Includes sales taxes, excise taxes, and certain other incidental costs. b. Exceptions to the general rule are covered in future chapters (tax free exchanges, gifts, inheritances, etc.). II. Type of Recovery Allowance. A. Overview. 1. Cost recovery allowances and depreciation are synonymous. The purpose is to allocate the cost of long-lived assets, which are subject to wear and tear and obsolescence, over a specified period. 2. From a present value standpoint, one generally would desire more depreciation deductions earlier during the life of the asset than later. 3. The primary methods used in computing tax depreciation are: a. Straight-Line [Original Basis/Specified Period]. 1. Depreciation amount is the same each year (except first and last year) b. Declining Balance [(Straight-Line Rate X Declining Balance Percentage) X Remaining Basis]. 1. DB rate could be as high as twice [200%] the straight-line rate. c. Specified period depends on ADR class life/recovery period (discussed later).
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2 B. MACRS – Modified Accelerated Cost Recovery System. 1. Applies to realty and tangible personal property used in a business or held for the production of income after 1986. 2. Real property – land and buildings and components. a. Since land is not depreciable, must allocate the purchase price to the land and building components. 3. Personal property – property other than land and buildings. 4. Tangible – has physical substance. C. Amortization. 1. Applies generally to intangible assets, special incentive expenditures and to certain other capital expenditures. 2. Intangible – lacks physical substance. Is an asset right (patents, copyrights, etc.). D. Timing. 1. Generally begins when the asset is placed into service. III. Post ERTA Depreciation (1/1/81). A. MACRS [after 1986] Overview (NOT RESPONSIBLE FOR PRE-87, ACRS history on pages 10.4-5) 1. Applies to property placed into service after 1986. a.
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This note was uploaded on 11/05/2011 for the course ACCT 403 taught by Professor White during the Fall '11 term at South Carolina.

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Chapter 10 Fall 11 - ACCT 403 CHAPTER 10 - COST RECOVERY...

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