Ch8 - 2015

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2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible ebsite, in hole or in part.

Comprehensive Volume

1

Chapter !

"epreciation, Cost

Recovery, A#orti$ation,

and "epletion

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2

%he &ig 'icture (slide 1 o) 2*

+ "r. Cli)) 'ayne purchases and places in service in his dentalpractice the )olloing )ied assets during the current year-

))ice )urniture and )itures / 0,000

Co#puters and peripheral euip#ent ,0!5"ental euip#ent 35,000

+ 4sing his )inancial reporting syste#, he concludes that thedepreciation epense on chedule C o) 6or# 1030 is /71,27!.

))ice )urniture and )itures (/0,000 8 13.279* /10,00:

Co#puters and peripheral euip#ent (/,0!5 8 209* 1:,31

"ental euip#ent (/35,000 8 13.279* ,!!

/71,27!

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3

%he &ig 'icture (slide 2 o) 2*

+ ;n addition, during the current year, "r. 'aynepurchased another personal residence )or /:00,000

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4

Cost Recovery

+ Recovery o) the cost o) business or inco#e@

producing assets is through-

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5

ature o) 'roperty

+ 'roperty includes both realty (real property* andpersonalty (personal property*

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6

Beneral Considerations(slide 1 o) :*

+ &asis in an asset is reduced by the a#ount o) cost

recovery that is allowedand by not less than the

allowablea#ount

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Beneral Considerations(slide 2 o) :*

+ ;) personal use assets are converted to business

or inco#e@producing use

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Beneral Considerations(slide : o) :*

+ MACR applies to-

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%he &ig 'icture @ Ea#ple 2

Cost Recovery &asis )or 'ersonal 4se Assets

Converted to &usiness 4se

+ Return to the )acts o) %he &ig 'icture p. !@1.

+ 6ive years ago "r. 'ayne purchased his personal residence )or/250,000.

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MACR@'ersonalty

+ MACR characteristics-

MACR 'ersonalty .

tatutory lives- :, 5, , 10 yrs 15, 20 yrs

Method- 2009 "& 1509 "&

Convention- =al) Fr or Mid@Guarter

"& H declining balance ith sitch to straight@line

traight@line depreciation #ay be elected

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=al)@Fear Convention

+ Beneral rule )or personalty

+ Assets treated as i) placed in service (or

disposed o)* in the #iddle o) taable year

regardless o) hen actually placed in service

(or disposed o)*

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Ea#ple- =al)@Fear Convention

+ 'urchased and placed an asset in service on

March 15 (%a year end is "ece#ber :1*

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Mid@Guarter Convention

+ Applies hen #ore than 309 o) personalty is

placed in service during last uarter o) year

+ Assets treated as i) placed into service (or

disposed o)* in the #iddle o) the uarter in

hich they ere actually placed in service (or

disposed o)*

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Ea#ple- Mid@Guarter Convention

+ &usiness ith 12J:1 year end purchased and placed in

service the )olloing used 5@year class assets-+ Asset 1- on :J2! )or /50,000, and

+ Asset 2- on 12J2! )or /100,000

+ More than 309 placed in service in last uarterK

there)ore, #id@uarter convention used-+ Asset 1- /50,000 :59 (%able !.2* H /1,500

+ Asset 2- /100,000 .05 (%able !.2* H /5,000

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%he &ig 'icture @ Ea#ple

Mid@Guarter Convention

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MACR@Realty(slide 1 o) 2*

+ MACR characteristics-

MACR Realty Residential Rental onresid. Realty

tatutory lives- 2.5 yrs :1.5 yrs or :7 yrs

Method- traight@line

Convention- Mid@#onth

+ Residential rental real estate

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MACR@Realty(slide 2 o) 2*

+ Mid@#onth Convention

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ptional traight@line Election

+ May elect straight@line rather than accelerated

depreciation on personalty placed in service

during year

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traight@Line Election

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traight@Line Election

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Additional 6irst@Fear "epreciation(slide 1 o) 2*

+ Additional )irst@year depreciation has beenalloed )or several years

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Additional 6irst@Fear "epreciation(slide 2 o) 2*

+ Additional )irst@year depreciation allos an

additional 509 o) cost recovery in year asset is

placed in service

+ Guali)ied property includes #ost types o) ne

property other than buildings

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Ea#ple- Additional

6irst@Fear "epreciation

Maple Co#pany acuires a 5@year class asset on

April 25, 201:, )or /20,000. Maples cost recovery

deduction )or 201: is co#puted as )ollos-

509 additional )irst@year

depreciation (/20,000 8 .50* /10,000

MACR cost recoveryN(/20,000 @ /10,000* 8 .20 (%able !.1*O 2,000

%otal cost recovery /12,000

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MACR ?ith Additional 6irst@Fear

"epreciation

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Election to Epense Assets

@ection 17 (slide 1 o) 5*

+ Beneral rules

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+ ection 17 general rules

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@ection 17 (slide : o) 5*

+ Annual li#itations-

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+ Annual li#itations-

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Example 18:

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Listed 'roperty (slide 1 o) 3*

+ %here can be substantial li#its on costrecovery o) assets considered listed property

+ Listed property includes the )olloing-

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+ %o be considered as predo#inantly used )or

business, business use #ust eceed 509+ 4se o) asset )or production o) inco#e is not considered

in this 509 test+ =oever, both business and production o) inco#e use

percentages are used to co#pute cost recovery

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Listed 'roperty (slide : o) 3*

+ %o be considered as predo#inantly used )or

business (contd*+ ;) 509 test is #et, then alloed to use statutory

percentage #ethod o) cost recovery ith so#eli#itations

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+ ;) asset is not used predo#inantly )or business

i.e., business use does not eceed 509

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'assenger Auto Cost

Recovery Li#its (slide 1 o) *

6or autos placed in service in 201:, cost recovery li#its are-

Fear Recovery Li#itation

1 /:,10

2 5,100

: :,050

ucceeding years until

the cost is recovered 1,!5

+ ;) a passenger auto used predo#inantly )orbusiness uali)ies )or additional )irst@yeardepreciation

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'assenger Auto Cost


+ Li#its are )or 1009 business use

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'assenger Auto Cost

Recovery Li#its (slide : o) *

Example: %apayer acuired an auto in 201:)or /:0,000, used it !09 )or business, andelects not to tae additional )irst@year

depreciation.201: cost recovery alloance-

(/:0,000 209* !09 /3,!00

&ut deduction is li#ited to /:,10

&usiness use 9 !09

Cost recovery alloance /2,52!

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'assenger Auto Cost


+ Li#it on P 17 deduction

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'assenger Auto Cost


+ Listed property that )ails the S509 business usage

test in year property is placed in service #ust be

recovered using the straight@line #ethod

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'assenger Auto Cost

Recovery Li#its (slide o) *

+ Change )ro# predo#inantly business use

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'assenger Auto Cost

Recovery Li#its (slide o) *

+ Leased autos subDect to inclusion amountrule

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6ar# 'roperty(slide 1 o) 2*

+ Benerally, )or )ar# assets use-

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6ar# 'roperty(slide 2 o) 2*

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Leasehold ;#prove#ent 'roperty(slide 1 o) 2*

+ ;) lessor is oner o) leasehold i#prove#ent property,

depreciation is calculated as )ollos-

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Leasehold ;#prove#ent 'roperty(slide 2 o) 2*

+ ;) lessee is oner o) leasehold i#prove#ent

property

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Alternative "epreciation

yste# (A"* (slide 1 o) 2*

+ A" is an alternative depreciation syste# that

is used in calculating depreciation )or-

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Alternative "epreciation

yste# (A"* (slide 2 o) 2*

+ Benerally, use straight@line recovery ithout

regard to salvage value

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A#orti$ation (slide 1 o) 2*

+ Can clai# a#orti$ation deduction on P 17

intangibles

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A#orti$ation (slide 2 o) 2*

+ tartup ependitures are also partially a#orti$able

under P 175

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"epletion(slide 1 o) 3*

+ %o #ethods o) natural resource depletion

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+ Cost depletion

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"epletion(slide : o) 3*

+ 'ercentage depletion

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+ 'ercentage depletion

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;ntangible "rilling Costs

(;"C*

+ ;ntangible drilling costs include

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%a 'lanning+ Return to the )acts o) %he &ig 'icture p. !@1.+ ;n Ianuary 201:, "r. 'ayne purchased residential rental property )or

/10,000 (/20,000 allocated to the land, /150,000 to the building*.

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%a 'lanning

+ %he deductible loss )ro# the rental property is co#puted as )ollos-Rent inco#e (/1,200 8 12 #onths* / 13,300

Less epenses (see above* (17,353*

et loss (/ 5,053*

+ &ut hat is "r. 'aynes overall position )or the year hen the ta bene)it

o) the loss is taen into account>+ Considering Dust the cash intae and outlay, it is su##ari$ed belo-;ntaeT

Rent inco#e /13,300

%a savings N2!9 (inco#e ta bracet* 8 /5,053

(loss )ro# the property*O 1,315

et ;ntae / 15,!15utlayT

Mortgage pay#ents (/1,000 8 12 #onths* 12,000

Repairs and #aintenance 2,200

et utlay (13,200*

et cash bene)it / 1,15

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Re)ocus n %he &ig 'icture

+ Evidently, "r. 'aynes accounting syste# uses MACRbecause /71,27! o) depreciation is the correct a#ount.

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Ch8 - 2015