Chapter 8 - Depreciation

Methods in 1981 under the reagan tax cuts

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Methods In 1981, under the Reagan tax cuts, depreciation was used as a major economic stimulus. The lives of assets were arbitrarily assigned and were so short as to allow very quick basis recovery. The more depreciation expense allowed, the less tax paid, the more cash a taxpayer has to spend elsewhere to stimulate the economy with its purchases.
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Methods The 1981 methods became known as ACRS (Accelerated Cost Recovery System) Was a system of lives and methods having nothing to do with economic reality of the underlying assets. Only applies to assets placed in service from 1981 through the end of 1985.
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Methods MACRS (Modified Accelerated Cost Recovery System) was introduced in 1986. This system still applies today.
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Methods Using the recovery periods from Rev Proc 87-56, taxpayers use one of three methods to depreciate property: 200% declining balance (DDB) 150% declining balance Straight line Under the declining balance methods, the taxpayer switches to SL at the point where the SL method provides a larger deduction.
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Methods If, for some reason, you happen to fall out of §168 (the MACRS section), you will fall into §167. §167 is the “old” depreciation section and is still active in the Code, but only as a default. Generally, uses straight line, with an economic life. If you cannot determine a useful life, you cannot claim depreciation.
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Methods If the depreciation method is changed before you are done depreciating an asset, do you have to change to the new method? No, general rule is that the asset will continue to be depreciated under the rules in effect when the asset was placed in service. Thus, you can have one taxpayer using multiple depreciation methods and lives for similar assets depending upon when they were placed in service.
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Methods Allowed or allowable §1016(a)(2) provides that cost basis is reduced by the annual depreciation up to the amount allowed Even if you do not claim that much. Potential whipsaw effect. This is now a “fixable” problem but only if you recognize it in time.
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Conventions Convention means “when do we start depreciating” Under current law, there are really only two conventions: Half year Mid-quarter
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Conventions Half year: Regardless of when the asset is actually placed in service, depreciation is calculated under the life and method as if the asset was placed in service at the mid-point of the taxpayer’s year. But see the Mid-quarter exception.
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Conventions Mid-quarter: If more than 40% of your assets placed in service during the year, are placed in service in the last quarter of the taxpayer’s year, the mid-quarter convention applies instead of the half year convention. Essentially, provides a portion of the deduction under the half year method.
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Methods In 1981 under the Reagan tax cuts depreciation was...

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