1、C8-1,Chapter 8,Depreciation, Cost Recovery, Amortization, and Depletion,Copyright 2010 Cengage Learning,Comprehensive Volume,C8-2,Cost Recovery,Recovery of the cost of business or income-producing assets is through:Cost recovery or depreciation: tangible assetsAmortization: intangible assetsDepletio
2、n: natural resources,C8-3,Nature of Property,Property includes both realty 不动产 (real property) and personalty 动产 (personal property)Realty generally includes land and buildings permanently affixed to the landPersonalty is defined as any asset that is not realtyPersonalty includes furniture, machiner
3、y, equipment, and many other types of assetsPersonalty (or personal property) should not be confused with personal use propertyPersonal use property is any property (realty or personalty) that is held for personal use rather than for use in a trade or business or an income-producing activityWrite-of
4、fs are not allowed for personal use assets,C8-4,General Considerations(slide 1 of 3),Basis in an asset is reduced by the amount of cost recovery that is allowed and by not less than the allowable amountAllowed cost recovery is cost recovery actually takenAllowable cost recovery is amount that could
5、have been taken under the applicable cost recovery methodIf no cost recovery is claimed on property The basis of the property must still be reduced by the amount that should have been deducted i.e., The allowable cost recovery,C8-5,General Considerations(slide 2 of 3),If personal use assets are conv
6、erted to business or income-producing useBasis for cost recovery and for loss is lower ofAdjusted basis or Fair market value at time property was convertedLosses that occurred prior to conversion can not be recognized for tax purposes through cost recovery,C8-6,General Considerations(slide 3 of 3),M
7、ACRS applies to:Assets used in a trade or business or for the production of incomeAssets subject to wear and tear, obsolescence, etc.Assets that have a determinable useful life or decline in value on a predictable basisAssets that are tangible personalty or realty,C8-7,MACRS-Personalty,MACRS charact
8、eristics: MACRS Personalty . Statutory lives: 3, 5, 7, 10 yrs 15, 20 yrs Method: 200% DB 150% DB Convention: Half Yr or Mid-Quarter DB = declining balance with switch to straight-lineStraight-line depreciation may be elected,C8-8,Half-Year Convention,General rule for personaltyAssets treated as if p
9、laced in service (or disposed of) in the middle of taxable year regardless of when actually placed in service (or disposed of),C8-9,Example: Half-Year Convention,Purchased and placed an asset in service on March 15 (Tax year end is December 31)Treated as placed in service June 30Six months cost reco
10、very in year 1 (and year disposed of, if within recovery period),C8-10,Additional First-Year Depreciation,The Economic Stimulus Act of 2008 provided for additional first-year depreciation on qualified propertyApplied to property acquired after 12/31/07 and before 01/01/09 and placed in service befor
11、e 01/01/09ARRTA of 2009 extends additional first-year depreciation for an additional year (qualified property acquired and placed in service before January 1, 2010)Allows an additional 50% cost recovery in year asset is placed in serviceQualified property includes most types of new property other th
12、an buildingsProperty that is used but new to the taxpayer does not qualify,C8-11,Example: Additional First-Year Depreciation,Maple Company acquires a 5-year class asset on March 20, 2009, for $20,000. Maples cost recovery deduction for 2009 is computed as follows:50% additional first-year depreciati
13、on ($20,000 X .50) $10,000MACRS cost recovery ($20,000 - $10,000) X .20 (Table 81) 2,000Total cost recovery $12,000,C8-12,Mid-Quarter Convention,Applies when more than 40% of personalty is placed in service during last quarter of yearAssets treated as if placed into service (or disposed of) in the m
14、iddle of the quarter in which they were actually placed in service (or disposed of),C8-13,Example: Mid-Quarter Convention,Business with 12/31 year end purchased and placed in service the following used 5-year class assets:Asset 1: on 3/28 for $50,000, andAsset 2: on 12/28 for $100,000More than 40% p
15、laced in service in last quarter; therefore, mid-quarter convention used:Asset 1: $50,000 .20 200% 10.5/12 = $17,500Asset 2: $100,000 .20 200% 1.5/12 = $5,000Table 8-2 provides the relevant percentages to be used when applying the mid-quarter convention,C8-14,MACRS-Realty (slide 1 of 2),MACRS charac
16、teristics: MACRS Realty Residential Rental Nonresid. RealtyStatutory lives: 27.5 yrs 31.5 yrs or 39 yrsMethod: Straight-lineConvention: Mid-monthResidential rental real estate Includes property where 80% or more of gross rental revenues are from nontransient dwelling units e.g., Apartment building,C
17、8-15,MACRS-Realty (slide 2 of 2),Mid-month ConventionProperty placed in service at any time during a month is treated as if it was placed in service in the middle of the monthExample: Business building placed in service April 25 is treated as placed in service April 15,C8-16,Optional Straight-line E
18、lection,May elect straight-line rather than accelerated depreciation on personalty placed in service during yearUse the class life of the asset for the recovery periodUse half-year or mid-quarter convention as applicableElection is made annually by class of property,C8-17,Farm Property (slide 1 of 2
19、),Generally, for farm assets use:MACRS 150% declining-balance method for personaltyMACRS straight-line method is required for any tree or vine bearing fruits or nutsStraightline method over the normal periods (27.5 years and 39 years) for real property If the election is made to not have the uniform
20、 capitalization rules apply, alternative depreciation system (ADS) straight-line method must be used,C8-18,Farm Property (slide 2 of 2),Under the Emergency Economic Stabilization Act of 2008New machinery or equipment placed in service in a farming business in 2009 has a recovery period of 5 years un
21、der MACRSDoes not include a grain bin, cotton ginning asset, fence, or land improvement,C8-19,Leasehold Improvement Property (slide 1 of 3),If lessor is owner of leasehold improvement property, depreciation is calculated as follows:Real Property Use straight-line method over 27.5 or 39 year statutor
22、y recovery periodsTangible personal property Use the shorter MACRS lives and accelerated methodsWhen these improvements are disposed of or abandoned by the lessor due to lease terminationProperty is treated as disposed of by the lessorA loss can be taken for the unrecovered basis,C8-20,Leasehold Imp
23、rovement Property (slide 2 of 3),If lessee is owner of leasehold improvement propertyCosts of leasehold improvements are recovered in accordance with the general cost recovery rulesCost recovery period is determined without regard to the lease termAny unrecovered basis in the leasehold improvement p
24、roperty not retained by the lessee is deducted in the year the lease is terminated,C8-21,Leasehold Improvement Property (slide 3 of 3),Under the Emergency Economic Stabilization Act of 2008, qualified leasehold improvement property placed in service before 01/01/10 is allowed 15-year recovery period
25、Includes any improvement to an interior portion of nonresidential real property if:The improvement is 1250 propertyThe lease is not between related personsInterior portion of building is to be occupied exclusively by the lessee or any sublessee of that interior portionImprovement is placed in servic
26、e 3 years after date building was first placed in service by any person,C8-22,Election to Expense Assets -Section 179 (slide 1 of 5),General rulesCan elect to immediately expense up to $250,000 (for 2009) of business tangible personalty placed in service during the yearCannot use 179 for realty or p
27、roduction of income property,C8-23,Election to Expense Assets -Section 179 (slide 2 of 5),Section 179 general rulesAmount expensed reduces depreciable basisAny elected 179 expense is taken before the 50% additional first-year depreciation is computedThe base for calculating the standard MACRS deduct
28、ion is net of the 179 expense and the 50% additional first-year depreciation,C8-24,Election to Expense Assets -Section 179 (slide 3 of 5),Annual limitations:Expense limitation ($250,000 for 2009) is reduced by amount of 179 property placed in service during year that exceeds $800,000Example: In 2009
29、, taxpayer placed in service $815,000 of 179 property. The 179 expense limit is reduced to $235,000 $250,000 ($815,000 $800,000),C8-25,Election to Expense Assets -Section 179 (slide 4 of 5),Annual limitations:Election to expense cannot exceed taxable income (before 179) of taxpayers trades or busine
30、ssesAny amount expensed under 179 over taxable income limitation may be carried over to subsequent year(s)Amount carried over still reduces basis currently,C8-26,Election to Expense Assets -Section 179 (slide 5 of 5),Example: Taxpayer buys 5-year property for $275,000 on August 15, 2009 and elects i
31、mmediate expensing of the maximum amount. The total deduction for the year is calculated as follows: 179 expense $250,00050% additional first-year depreciation ($275,000 - $250,000) X .50 12,500Standard MACRS calculation ($275,000 - $250,000 - $12,500) X .20 2,500Total cost recovery allowed in 2009$
32、265,000,C8-27,Listed Property (slide 1 of 4),There can be substantial limits on cost recovery of assets considered listed propertyListed property includes the following:Passenger automobileOther property used as a means of transportationProperty used for entertainment, recreation, or amusementComput
33、er or peripheral equipmentCellular telephone,C8-28,Listed Property (slide 2 of 4),To be considered as predominantly used for business, business use must exceed 50%Use of asset for production of income is not considered in this 50% testHowever, both business and production of income use percentages a
34、re used to compute cost recovery,C8-29,Listed Property (slide 3 of 4),To be considered as predominantly used for business (contd)If 50% test is met, then allowed to use statutory percentage method of cost recovery with some limitations,C8-30,Listed Property (slide 4 of 4),If asset is not used predom
35、inantly for business i.e., business use does not exceed 50%Must use straight-line methodIf business use falls to 50% or lower after year property is placed in service, must recapture excess cost recovery,C8-31,Passenger Auto Cost Recovery Limits (slide 1 of 7),For autos placed in service in 2008, co
36、st recovery limits are:Year Recovery Limitation 1 $2,960 2 4,800 3 2,850Succeeding years until the cost is recovered 1,775If passenger automobile qualifies for 50% additional first-year depreciation (i.e., new property), the 2009 recovery limitation is increased by $8,000The initial-year cost recove
37、ry limitation increases from $2,960 to $10,960 ($2,960 + $8,000),C8-32,Passenger Auto Cost Recovery Limits (slide 2 of 7),Limits are for 100% business useMust reduce limits by percentage of personal useLimit in the first year includes any amount the taxpayer elects to expense under 179,C8-33,Passeng
38、er Auto Cost Recovery Limits (slide 3 of 7),Example: Taxpayer acquired an auto in 2009 for $30,000 and used it 80% for business2009 cost recovery allowance: ($30,000 X 50%) + ($15,000 X 20%) X 80%$14,400But deduction is limited to $10,960 Business use % .80Cost recovery allowance$8,768,C8-34,Passeng
39、er Auto Cost Recovery Limits (slide 4 of 7),Limit on 179 deduction For certain vehicles not subject to the statutory dollar limits imposed on passenger automobiles the 179 deduction is limited to $25,000The limit applies to sport utility vehicles with an unloaded GVW rating of more than 6,000 pounds
40、 and not more than 14,000 pounds,C8-35,Passenger Auto Cost Recovery Limits (slide 5 of 7),Listed property that fails the 50% business usage test in year property is placed in service must be recovered using the straight-line methodSuch property does not qualify for the 50% additional first-year depr
41、eciationIf the 50% business usage test is failed in a year after the property is placed in service, straight-line method must be used for remainder of propertys lifeCost recovery of passenger auto under straight-line listed property rule still subject to annual limits,C8-36,Passenger Auto Cost Recov
42、ery Limits (slide 6 of 7),Change from predominantly business useIf the business use percentage falls to 50% or lower after the year the property is placed in service, the property is subject to cost recovery recaptureThe amount recaptured as ordinary income is the excess cost recoveryExcess cost rec
43、overy is the excess of the cost recovery deductions taken in prior years using the statutory percentage method over the amount that would have been allowed if the straight-line method had been used,C8-37,Passenger Auto Cost Recovery Limits (slide 7 of 7),Leased autos subject to “inclusion amount” ru
44、leUsing IRS tables, taxpayer has gross income equal to each lease years inclusion amountPurpose is to prevent avoidance of cost recovery dollar limits applicable to purchased autos by leasing autos,C8-38,Alternative Depreciation System (ADS) (slide 1 of 2),ADS is an alternative depreciation system t
45、hat is used in calculating depreciation for:Alternative minimum tax (AMT)Assets used predominantly outside the U.S.Property owned by the taxpayer and leased to tax exempt entitiesEarnings and profits,C8-39,Alternative Depreciation System (ADS) (slide 2 of 2),Generally, use straight-line recovery wit
46、hout regard to salvage valueFor AMT, 150% declining balance is allowed for personaltyHalf-year, mid-quarter, and mid-month conventions still apply,C8-40,Amortization (slide 1 of 2),Can claim amortization deduction on 197 intangiblesUse straight-line recovery over 15 years (180 months) beginning in m
47、onth intangible is acquiredSection 197 intangibles include acquired goodwill, going-concern value, trademarks, trade names, etc.,C8-41,Amortization (slide 2 of 2),Startup expenditures are also partially amortizable under 195Treatment is available only by electionAllows the taxpayer to deduct the lesser of:The amount of startup expenditures, or $5,000, reduced by the amount startup expenditures exceed $50,000Any amounts not deducted may be amortized ratably over 180-months beginning in month trade or business begins,
