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Chap 8 - Chapter 8 Depreciation Part I What is...

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Chapter 8 Depreciation Part I
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What is Depreciation? Concept of depreciation – asset has benefits spanning more than 1 accounting period Based on the recovery of capital doctrine MACRS – widens the gap between book and tax income For business entities, deductions against gross income. For individuals, deduction FOR AGI, schedule c for individuals (sole proprietorship)
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What is Cost Recovery? Tangible assets Depreciated - machinery, equipment, furniture, fixtures, etc. Intangible assets Amortized - copyrights, patents, etc. Natural Resources Depleted - oil, gas, coal, timber, etc. NO write-off is permitted for an asset that does not have a determinable life! (forever). If it doesn’t have a determinable life then it’s not DEPRECIABL
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Concepts – What is Eligible for Cost Recovery? Realty property – land, buildings (anything built on land) Personalty property – furniture, machinery, etc. Personal Use Property – no write off allowed. Anything u use i.e personal pc, car Assets that are used in a T/B and are subject to wear & tear, decay, decline, obsolescence ELIGIBLE FOR COST RECOVERY If asset has no predictable basis / determinable useful life (e.g. antiques, land, etc.) NO COST RECOVERY
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Concepts – Placed in Service The critical date to consider when depreciation starts is the “PLACED IN SERVICE” date. NOT the purchase date.
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Concepts – HOW much depreciation? Two terms: ALLOWABLE and ALLOWED Allowable: Amount the Code says you claim as the depreciation. Allowed: Amount that was actually expensed on the tax return . Even if the taxpayer did not claim any depreciation for a particular year, the basis (what you have put into an asset, your cost) is still reduced by the ALLOWABLE cost recovery.
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Example of Allowed Vs Allowable Allowed (Tax Return) Allowable (Code) Year 1 $1,000 1,000 Year 2 $2,000 2,000 Year 3 $0 2,000 Year 4 0 2,000 Year 5 2,000 2,000 Year 6 1,000 1,000 If the asset was bought for $10,000 and sold in Year 7 for $800, what is the gain realized on the sale?
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