Like financial accounting, most business property must be capitalized for tax purposes.
Tax cost recovery methods include depreciation, amortization, and depletion.
If a business mistakenly claims too little depreciation, the business must only reduce the asset's basis by
the depreciation actually taken rather than the amount of the allowable depreciation.
An asset's capitalized cost basis includes only the actual purchase price; whereas the other expenses
associated with the asset are immediately expensed.
The basis for a personal use asset converted to business use is the lesser of the asset's cost basis or fair
market value on the date of the transfer or conversion.
Depreciation is currently computed under the Modified Accelerated Cost Recovery System
The 200 percent or double declining balance method is allowable for five and seven year property.
Taxpayers may use historical data to determine the recovery period for tax depreciation.
Taxpayers use the half-year convention for all assets.
10. If a taxpayer places only one asset (a building) in service during the fourth quarter of the year, the mid-
quarter convention must be used.
11. The MACRS depreciation tables automatically switch to the straight-line method when it exceeds the
declining balance method.
12. If tangible personal property is depreciated using the half-year convention and is disposed of during
the first quarter of a subsequent year, the taxpayer must use the mid-quarter convention for the year of
13. If a machine (seven-year property) being depreciated using the half-year convention is disposed of during
the seventh year, a taxpayer must multiply the appropriate depreciation percentage from the MACRS
table percentage by 50 percent to calculate the depreciation expense properly.
14. Real property is always depreciated using the straight-line method.
15. The mid-month convention applies to real property in the year of acquisition and disposition.
16. All taxpayers may use the section 179 immediate expensing election on certain property.
17. The section 179 immediate expensing election phases out based upon a taxpayer's taxable income.
18. The section 179 immediate expensing election phases out based upon the amount of tangible personal
property a taxpayer places in service during the year.
19. Property expensed under the section 179 immediate expensing election is not included in the 40 percent
test to determine whether the mid-quarter convention must be used.
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