Business deductions related to capital expenditures

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Business Deductions Related to Capital Expenditures Allocating the cost of a capital expenditure to various tax periods is accomplished through depreciation, amortization, or depletion depending on the type of capital expenditure involved in the allocation process. ¶6801 Depreciation of Tangible Property Depreciation of tangible property depends on whether the property is real property or personal property. Real property is land, land improvements, buildings, and building improvements. Land does not have a limited life; therefore, it does not qualify for depreciation. Personal property is usually business machinery and equipment and of fi ce furniture and fi xtures. Accelerated Cost Recovery System (ACRS) ACRS applies to most tangible property, new or used, placed in service for business or investment purposes after 1980 and before 1987. Modi fi ed Accelerated Cost Recovery System (MACRS) MACRS applies to most tangible property, new or used, placed in service for business or investment purposes after 1986. The general MACRS rules classify property based on class life for purposes of determining the applicable depreciation method, the applicable recovery period, and applicable convention. Averaging Conventions for Depreciation Under MACRS, a half-year averaging convention applies to personal property. Under this convention, property placed in service or disposed of during a taxable year is considered placed in service or disposed of at the midpoint of that year. A midquarter convention applies when more than 40 percent of the cost of all personal property is placed in service during the last quarter of the taxable year. Under the midquarter convention, personal property is treated as placed in service (or disposed of) in the middle of the quarter in which it was actually placed in service. For real property, both residential and nonresidential, depreciation is based on the number of months the property is in service during the taxable year with a midmonth convention applying in the fi rst month of service and in the last month of service. ¶6805 Business Use of Passenger Cars MACRS applies for determining depreciation for business use passenger cars placed in service after 1986. Taxpayers who use the actual cost method for claiming deductions in lieu of the standard mileage rate are subject to speci fi c limits on the depreciation amount (adjusted annually for in fl ation) that they can claim for cars in any particular year. These limits were slightly reduced for 2009 relative to prior years. ¶6815 Alternative MACRS System MACRS deductions are reduced for certain property by requiring that an alternative MACRS method, based on the Asset Depreciation Range System (ADR) class lives, be used for (1) tangible property used predominantly outside the United States, (2) tax-exempt use property, (3) tax-exempt bond- fi nanced property, and certain other depreciable property.
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