o $22,000 (adjusted basis) - $15,000 (insurance proceeds) - $5,000 (deductible loss) leaves you with an adjusted basis of a mere $2,000…Now, you add the $17,000 (fixing the car) to that basis and you get $19,000 IX. D EPRECIATION A. Introduction: IRC §§ 167(a), (c), 168(a), (b), (c), (e)(1) and (2), (f)(1) and (5), (g)(1), (2) and (7), (i)(1); 1016(a)(2). Section 62(a)(1) and (4); 168(d); 263(a); 263A; REGS §§ 1.162-4; 1.167-(a)-(1)(a), -10; 1.167(b)-0(a), -1(a), -2(a) For tax purposes, §§ 167 and 168 treat depreciation as if it were an operating expense by allowing an annual deduction for exhaustion and wear and tear 1. Pre-requisites for Deduction § 167(a) and 168(a) restrict the depreciation deduction to either (1) Property used in a trade or business; OR (2) Property held for the production of income Therefore, inventory and property held for sale to customers are placed outside the scope of the section Note: Property that is held for personal use is also placed outside the scope, even though it declines in value over a period of time b/c unimproved realty is said to be non-depreciable. Hypo : Professor is sick of being a tax law teacher and decides she is going to quit and get rid of the items in her office Analysis : If she doesn’t get to deduct the costs of those items then she may never be able to deduct these costs b/c they will go into basis or she might sell them at some point. o This would distort her income b/c she wouldn’t get to reflect them tax wise unless she sells them somewhere down the road Depreciation was created to correct this concern o Boils down to taking a deduction each year based on how much value was lost in that year E.g. If you know what your desk was worth on day 1 of the year and the last day of the year than the appropriate amount for you to deduct would be the difference b/w these two amounts The problem is that this requires you to value everything each year which is a real pain in the ass and can be inaccurate. The statute solves these administrative problems by describing what the rules are for this process. 2. Accelerated Cost Recovery System (ACRS) A way for a taxpayer to recover the entire cost of an asset over a number of year’s b/c it allows you to deduct the entire cost of the asset over a period of time. 51
Professor : In most instances, either b/c the property either goes up in value or b/c you have taken all of these deductions, the basis is actually lower than the actual value of the property when you sell it so you end up with a gain. Special Note : It is not technically correct to say ACRS deductions but it is commonly used, so she doesn’t care if we say that or depreciation deductions Under the current system, every year that you take deductions you will deduct your basis downwards leaving you with a zero basis at the end. Note : A real depreciation system would almost never allow you to get your basis down to zero.
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- Fall '19