Depreciation outline 2011

Depreciation outline 2011 - Lecture NotesDepreciation Sec...

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Lecture Notes—Depreciation Sec. 167, 168 1. Sec. 167—provides for a deduction for assets acquired by TP and used in a T/B. 2. Depreciation deductions do not accrue until the day purchased assets are placed into service. 3. The property must be subject to “wear and tear.” This issue is the subject of the fascinating Simon case 2 nd Circuit, 1995 where the TP was a musician who had two violin bows that were 200 years old. These were like the Stradarvious of bows, costing $45,000 and $35,000. a. The musician uses them when he plays and tries to depreciate them. IRS says, no way—no determinable life—this is like a Picasso—good forever so you can’t depreciate. Not so fast says the Court. b. The real test imposed by the law is who is the property being used—is it subject to wear and tear under Sec 167(a) test for “exhaustion, wear and tear and obsolesce. Since the bow do get stressed by playing—the hair wears out, the Court feels that the test is met. c. Had the bow been purchased for display or held for appreciation, this would be a different story as the wear and tear in a T/B test would not be satisfied. d. If you ask me, this is a retarded decision. If this guy thought he was using up the economic value of the bow he never would have paid $45,000 for it. And you will notice that there was a vigorous dissent in the case. 4. Sec. 168, since 1980, depreciation has mostly been computed by reference to sec. 168. But note that you are still taking your deduction under Sec. 167 as Sec. 168(a) states a) General rule. Except as otherwise provided in this section, the depreciation deduction provided by section 167(a) for any tangible property shall be determined by using— (1) the applicable depreciation method, (2) the applicable recovery period, and (3) the applicable convention. I only point this out because all throughout the code, when they refer to depreciation deductions they refer to the deduction allowed by Sec. 167. I
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would not want you to think that this sentence does not apply since you are using ACRS under Sec. 168. For example, in Sec 168(k)(1)(A) dealing with bonus depreciation, they tell you to increase your Sec. 167(a) deduction by the bonus depreciation amount. At first blush you might not think that applied to you. 5. At one time, it was required than an asset have an ascertainable life in order to be depreciated. a. For example land and art could not be depreciated. 6. But determining life is no longer the key test a. See the Simon case (1995) 2 nd Cir. 7. Key issues that you need to consider one by one: a. Is the property tangible—i.e., can you bang your toe on it? b. Was the property acquired from a related party? (Anti-churning rules) c. When can we start to depreciate? Key is to identify the asset. c.i.
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Depreciation outline 2011 - Lecture NotesDepreciation Sec...

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