T11F-Chp-10-1-Depreciation-and-Amort--2011

T11F-Chp-10-1-Depreciation-and-Amort--2011 - Chapter 10...

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Chapter 10 Depreciation Howard Godfrey, Ph.D., CPA UNC Charlotte Copyright © 2010, Dr. Howard Godfrey Edited October 30, 2011.
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Introduction Alternate Dep. Methods Capital Cost Recovery MACRS Tables Section 179 Election Straight-Line Election Qualified Taxpayers Alt. Dep. System (ADS) Qualified Property Listed Property Limits Limits on Deduction Depletion MACRS Depletion Methods MACRS Property Cost Depletion Basis-Cost Recovery Percentage Depletion Recovery Period Intangible Assets MACRS Conventions Summary 10. Depreciation, Depletion, Amortization
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Capital Cost Recovery Section 179 Election Qualified Taxpayers Qualified Property Limits on Deduction
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Concept Review The capital recovery concept allows a taxpayer to recover all invested capital before income is taxed An asset’s basis is the maximum investment that qualifies as capital for recovery Legislative grace allows the capital to be recovered systematically over the life of the asset
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Categories of Assets Realty includes land and buildings Personalty is any asset that is not realty and includes machinery and equipment Personal-use property is any property used for personal purposes
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Capital Expenditures The cost of a business asset with a useful life extending beyond the current year may be Deducted currently Capitalized until disposal or Capitalized with the cost allocated to the years the asset’s use benefits (cost recovery period)
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Basis of Property Basis is the taxpayer’s unrecovered investment in an asset that can be recovered without tax cost As the asset’s basis is recovered (through depreciation, depletion or amortization deductions), basis is reduced and is called
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Basis of Property The original basis of an asset includes Cash plus fair market value of property given up by the purchaser Money borrowed and used to pay for the property Liabilities of the seller assumed by the purchaser Expenses of the purchase such as attorney fees or brokerage commissions
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After-Tax Cost Tax savings from depreciation deductions reduce the effective after-tax cost of an asset The annual tax saving equals the depreciation deduction multiplied by the marginal tax rate Recovering an asset’s basis over a shorter time period reduces the after-tax cost of the asset
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Methods of Recovery Depreciation: used for tangible assets that Are used for a business or production of income purpose Have a determinable life Depletion: used for wasting assets Amortization: used for intangible
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History of Depreciation Based on facts and circumstances related to asset life and taxpayer’s situation ACRS Based on method and life prescribed by law MACRS Based on method and life prescribed by law; less accelerated than ACRS 1981 1987 Section 179 Election to Expense Assets
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depreciation Asset lives used for depreciation are specified in the tax law. Do not subtract estimated
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T11F-Chp-10-1-Depreciation-and-Amort--2011 - Chapter 10...

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