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Depreciation

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Page 1: Depreciation

• Depreciation

https://store.theartofservice.com/the-depreciation-toolkit.html

Page 2: Depreciation

Accelerated depreciation

1 For tax purposes, accelerated depreciation provides a way of

deferring corporate income taxes by reducing taxable income in current years, in exchange for increased taxable income in future years

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Page 3: Depreciation

Accelerated depreciation

1 For financial reporting purposes, the two most popular methods of accelerated depreciation are the 'double declining balance' method and the 'sum-of-the-

years’ digits' method. For tax purposes, the allowable methods of accelerated

depreciation depend on the tax law that the taxpayer is subject to. In the United

States, the two currently allowable depreciation methods for tax purposes

are both accelerated depreciation methods (ACRS and MACRS).

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Accelerated depreciation - Background

1 Companies in many countries pay taxes on profit (accounting)|profits:

revenues minus expenses. There are various types of expenses, including

salaries paid to workers, cost of inputs, and amortization and

depreciation. Profits for tax purposes will, in most countries, differ from

accounting profits or earnings.

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Accelerated depreciation - Background

1 Conventions determine how much of the depreciation deduction the taxpayer may

take the first year

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Accelerated depreciation - Additional factors

1 There is no evidence, however, that accelerated depreciation leads to higher overall tax revenue for the

government

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Accelerated depreciation - Additional factors

1 Governments generally provide opportunities to defer taxes where there

are specific policy reasons to encourage an industry. For example, accelerated

depreciation is used in some countries to encourage investment in renewable energy.

Further, governments have increased accelerated depreciation methods in time of

economic stress (in particular, the US government passed laws after 9-11 to

further accelerate depreciation on capital assets).

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Accelerated depreciation - Example

1 As a simple example, a company buys a Electrical generator|generator that costs

$1,000 that is expected to last for 10 years. Under the most simple form of

depreciation, the company might allocate $100 of the cost of the generator to its expenses every year, until the $1000

capital expense has been used up. Under accelerated depreciation, the company may be allowed to allocate $200 of the

cost of the generator for five years.

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Accelerated depreciation - Example

1 a) Normal depreciation: the company claims $100 in depreciation every

year and has a tax profit of $100; it must pay tax of $20 on the $100

gain. Over ten years, $200 in taxes are paid.

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Accelerated depreciation - Example

1 To compare these two (simplified) cases, the company pays $200 in

taxes in both instances. In the second case, it has deferred taxes to a much later period. The deferral of taxes to a later period is favorable

according to the time value of money principle.

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Accelerated depreciation - Example

1 (This example has been simplified for a basic demonstration of how

accelerated depreciation works. It does not factor in an accurate class life, recovery period or account for

convention.)

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Tax deduction - Capitalized items and cost recovery (depreciation)

1 Many systems require that the cost of items likely to produce future benefits

be capitalized.See, e.g., [http://www.law.cornell.edu/uscode/htm

l/uscode26/usc_sec_26_00000263----000-.html 26 USC 263]; International

Financial Reporting Standards ([IFRS]), particularly IAS 16, applicable in most

EU jurisdictions for determining business profits as the starting point for

taxable income

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Tax deduction - Capitalized items and cost recovery (depreciation)

1 The annual depreciation deduction may be computed on a straight line, declining balance, or other basis, as

permitted in each country's rules.The U.S

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Tax deduction - Capitalized items and cost recovery (depreciation)

1 Some systems allow specific charges for cost recovery for some assets

upon certain identifiable events.For example, Germany allows a

deduction for “depreciation” for assets that have come to be worth

significantly less than their unrecovered cost due to identifiable

events

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Tax deduction - Capitalized items and cost recovery (depreciation)

1 Capitalization may be required for some items without the potential for

cost recovery until disposition or abandonment of the asset to which

the capitalized costs relate

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Matching principle - Depreciation

1 Depreciation is used to distribute the cost of the asset over its expected life

span according to the matching principle. If a machine is bought for $100,000, has a life span of 10 years, and can produce

the same amount of goods each year, then $10,000 of the cost of the machine

is matched to each year, rather than charging $100,000 in the first year and nothing in the next 9 years. So, the cost of the machine is offset against the sales in that year. This matches costs to sales.

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Depreciation

1 In accountancy, 'depreciation' refers to two aspects of the same concept:

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Depreciation

1 # the decrease in value of assets (fair value depreciation),

and

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Depreciation

1 # the allocation of the cost of assets to periods in which the assets are

used (depreciation with the matching principle).

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Depreciation

1 For example, a depreciation expense of 100 per year for 5 years may be

recognized for an asset costing 500.

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Depreciation - Accounting concept

1 Depreciation is technically a method of allocation, not

valuation,[http://asc.fasb.org/sectiontrid=2155842%26analyticsAssetNam

e=subtopic_page_subsection%26nav_type=subtopic_page#d3e11

73-110223 ASC 360-10-35-4]

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Depreciation - Accounting concept

1 The business then records depreciation expense in its financial

reporting as the current period's allocation of such costs

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Depreciation - Accounting concept

1 *expected salvage value, also known as residual value of the

assets,

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Depreciation - Accounting concept

1 *estimated useful life of the asset, and

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Depreciation - Accounting concept

1 *a method of apportioning the cost over such life.Kiesco, et al, p. 521.

See also Walther, Larry, [http://www.principlesofaccounting.com/chapter%2010.htm Principles of

Accounting Chapter 10].

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Depreciation - Depreciable basis

1 Cost generally is the amount paid for the asset, including all costs related to acquisition.An allocation of costs

may be required where multiple assets are acquired in a single

transaction

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Depreciation - Net basis

1 When a depreciable asset is sold, the business recognises gain or loss

based on net basis of the asset. This net basis is cost less depreciation.

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Page 28: Depreciation

Depreciation - Impairment

1 Accounting rules also require that an impairment charge or expense be recognized if the value of assets

declines unexpectedly.A charge for such impairment is referred to in Germany as depreciation. Such

charges are usually nonrecurring, and may relate to any type of asset.

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Depreciation - Impairment

1 Many companies consider write-offs of some of their long-lived assets

because some property, plant, and equipment have suffered partial

obsolescence

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Depreciation - Impairment

1 • Large amount of decrease in fair value of an asset.

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Depreciation - Impairment

1 • A change of manner in which the asset is used.

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Depreciation - Impairment

1 • Accumulation of costs that are not originally expected to acquire or construct an

asset.

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Depreciation - Impairment

1 • A projection of incurring losses

associated with the particular asset.

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Depreciation - Impairment

1 Events or changes in circumstances indicate that the company may not

be able recover the carrying amount of the asset. In which case,

companies use the recoverability test to determine whether impairment

has occurred. The steps to determine are:

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Depreciation - Impairment

1 1. Estimate the future cash flow of asset. (from the use of the asset to disposition)

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Depreciation - Impairment

1 2. If the sum of the expected cash flow is less than the carrying amount of the asset, the asset is considered

impaired.

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Depreciation - Depletion and amortization

1 Depletion_(accounting) | Depletion and amortization are similar

concepts for minerals (including oil) and intangible assets, respectively.

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Depreciation - Effect on cash

1 opera ting at a profit) depreciation is a source of

cash in a statement of cash flows, which generally offsets the cash cost of acquiring new assets required to continue operations when existing assets reach the end of their useful

lives.

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Page 39: Depreciation

Depreciation - Accumulated depreciation

1 While depreciation expense is recorded on the income statement of a business,

its impact is generally recorded in a separate account and disclosed on the

balance sheet as accumulated depreciation, under fixed assets,

according to most accounting principles. Accumulated depreciation is known as a

contra account, because it separately shows a negative amount that is directly

associated with another account.

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Depreciation - Accumulated depreciation

1 Showing accumulated depreciation separately on the balance sheet has the effect of preserving the historical cost of assets on the balance sheet

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Depreciation - Methods of depreciation

1 There are several methods for calculating depreciation, generally

based on either the passage of time or the level of activity (or use) of the

asset.

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Depreciation - Straight-line depreciation

1 Salvage value is also known as scrap value or residual value.) The

company will then charge the same amount to depreciation each year over that period, until the value shown for the asset has reduced

from the original cost to the salvage value.

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Earnings before interest, taxes, depreciation and amortization

1 A company's 'Profit (accounting)|earnings before interest, taxes, depreciation, and

amortization (tax law)|amortization' (commonly abbreviated 'EBITDA',

pronounced ,Professional English in Use Finance, Cambridge University Press , or ) is

computed by considering a company's earnings before interest payments, tax,

depreciation, and amortization are subtracted for any final accounting of its

income and expenseshttps://store.theartofservice.com/the-depreciation-toolkit.html

Page 44: Depreciation

Earnings before interest, taxes, depreciation and amortization

1 It is intended to allow a comparison of profitability between different

companies, by canceling the effects of interest payments from different forms

of financing (by ignoring interest payments), political jurisdictions (by

ignoring tax), collections of assets (by ignoring depreciation of assets), and

different takeover histories (by ignoring amortization often stemming from

goodwill (accounting)|goodwill).

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Earnings before interest, taxes, depreciation and amortization

1 A negative EBITDA indicates that a business has fundamental problems with

profitability. A positive EBITDA, on the other hand, does not necessarily mean

that the business generates cash. This is because EBITDA ignores changes in

Working Capital (usually needed when growing a business), capital expenditures

(needed to replace assets that have broken down), taxes, and interest.

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Earnings before interest, taxes, depreciation and amortization

1 Warren Buffett famously asked: Does management think the tooth fairy pays for capital expenditures? Depreciation is often a very good approximation of the capital expenditures required to

maintain the asset base, so it has been argued that EBITA (Earnings before Interest, Taxes and Amortization)

would be a better indicator.

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Earnings before interest, taxes, depreciation and amortization

1 'EBITDA margin' refers to EBITDA divided by total revenue (or total

output, output differing revenue by the changes in inventory).

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Earnings before interest, taxes, depreciation and amortization - Use

1 Apart from the use mentioned above, EBITDA is widely used in loan

covenants, mostly in the following two metrics:

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Earnings before interest, taxes, depreciation and amortization - Use

1 #Leverage: 'Debt/EBITDA'. This metric measures the amount of debt in

relation to the EBITDA (i.e., how does the debt relate to the operational profit

generating ability of the company). Whilst there is no absolute target and whilst leverage ratios differ widely, it

can probably be argued that a leverage 1 is not sustainable for long.

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Earnings before interest, taxes, depreciation and amortization - Misuse

1 EBITDA has increasingly become the key metric to show the intrinsic operational performance of the

business, i.e., the performance when all costs that do not occur in the normal course of business (e.g.,

restructuring costs, ramp-up costs, consulting fees for special projects,

special legal fees) are ignored

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Earnings before interest, taxes, depreciation and amortization - Misuse

1 Because EBITDA (and its variations) are not measures generally accepted under U.S. GAAP, the U.S. Securities and Exchange Commission requires

that companies registering securities with it (and when filing its periodic reports) reconcile EBITDA to net

income in order to avoid misleading investors.

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Earnings before interest, taxes, depreciation and amortization - Misuse

1 In another attempt to boost EBITDA, some companies have reverted to

activate development efforts in the profit and loss statement. This effectively

increases total output and hence increases EBITDA. Such development

costs are then recorded as capital expenditures. Instead of EBITDA, a view

on EBITA (as discussed above) would eliminate such an artifact.

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Real estate economics - Adjustment with depreciation

1 The diagram to the right shows the

effects of depreciation

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Profit model - Depreciation

1 All depreciation rules can be stated as equations representing their curve

over time. The reducing balance method provides one of the more

interesting examples.

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Profit model - Depreciation

1 Using c = cost, t = time, L = life, s = scrap value, Fd = time based depreciation:

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Profit model - Depreciation

1 : Depr/yr = Fd = c (s/c)(t-L)/L *

[L(s/c)1/L] …………… (equation 7)

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Profit model - Depreciation

1 This equation is better known as the rule: Depreciation per year = Last

year's written down value multiplied by a constant %

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Profit model - Depreciation

1 Inserting into equation 8

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Profit model - Depreciation

1 This equation is best solved by trial and error, Newton Raphson or

graphing. Like depreciation within the model, the adjustment for

learning does provide a form of non-linear sub-modelling.

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Amortization (tax law) - Depreciation

1 A corresponding concept for tangible assets is depreciation. Methodologies for allocating amortization to each tax period

are generally the same as for depreciation. However, many intangible assets such as

goodwill or certain brands may be deemed to have an indefinite useful life, or “self-created” and are therefore not subject to amortization.House Report No. 103-111,

103rd Congress, 25 May 1993.

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Earnings Before Interest, Taxes, Depreciation, Amortization, and Restructuring or Rent Costs

1 'Earnings before interest, taxes, depreciation, amortization, and rent (or restructuring) costs' (EBITDAR) is a non-Generally Accepted Accounting

Principles|GAAP metric that can be used to evaluate a company's

financial performance.

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Earnings Before Interest, Taxes, Depreciation, Amortization, and Restructuring or Rent Costs

1 ::EBITDAR = revenue – expenses (excluding tax, interest, depreciation,

amortization and rent costs)

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Earnings Before Interest, Taxes, Depreciation, Amortization, and Restructuring or Rent Costs

1 For example, consider two nursing home companies: one company rents

its nursing homes and the other owns its homes and thus does not pay rent but instead has to make capital expenditures that are not necessarily of the same order of magnitude as the depreciation

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Earnings Before Interest, Taxes, Depreciation, Amortization, and Restructuring or Rent Costs

1 Some companies use an EBITDAR where R indicates restructuring

costs. While this analysis of profits before restructuring costs is also

helpful, such a metric should better be termed 'adjusted EBITDA'.

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Earnings before interest, taxes, depreciation, and amortization

1 A company's 'Profit (accounting)|earnings before interest, taxes, depreciation, and amortization (tax law)|amortization' (commonly abbreviated 'EBITDA',

pronounced ,Professional English in Use Finance, Cambridge University Press , or ) is an accounting

measure calculated using a company's net earnings, before interest expenses, taxes, depreciation and

amortization are subtracted, as a proxy for a company's current operating profitability, i.e., how much profit it makes with its present assets and its operations on the products it produces and sells, as

well as providing a proxy for cash flow.

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Earnings before interest, taxes, depreciation, and amortization

1 It is intended to allow a comparison of profitability between different companies,

by discounting the effects of interest payments from different forms of financing (by ignoring interest payments), political jurisdictions (by ignoring tax), collections

of assets (by ignoring depreciation of assets), and different takeover histories

(by ignoring amortization often stemming from goodwill (accounting)|goodwill)

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Earnings before interest, taxes, depreciation, and amortization

1 A negative EBITDA indicates that a business has fundamental problems with profitability

and cash flow. A positive EBITDA, on the other hand, does not necessarily mean that

the business generates cash. This is because EBITDA ignores changes in

Working Capital (usually needed when growing a business), capital expenditures

(needed to replace assets that have broken down), taxes, and interest.

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Earnings before interest, taxes, depreciation, and amortization - Misuse

1 Along the time, EBITDA has mostly been used as a calculation to

describe the performance in its intrinsic nature, which means

ignoring every all cost that does not occur in the normal course of

business

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Economy of Armenia - Appreciation and depreciation of the dram

1 ScaleMajor = unit:year

increment:100 start:0

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Economy of Armenia - Appreciation and depreciation of the dram

1 In 2010, the value of the Armenian Dram (AMD) was artificially kept high

during the height of the global economic crisis

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Economy of Armenia - Appreciation and depreciation of the dram

1 The AMD/USD exchange rate depreciated by 6.1 percent in the

first three quarters of 2010 compared to the same period in 2009, before it began to show the expected end-of-the-year appreciation. In comparison

between the January to October periods of 2010 and 2009,

depreciation stands at 4.7 percent.

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Accumulated Depreciation - Effect on cash

1 Depreciation expense does not require current outlay of cash. However since

depreciation is an expense to the Income statement|PL account, provided the

enterprise is operating in a manner that covers its expenses (e.g. operating at a

profit) depreciation is a source of cash in a statement of cash flows, which generally

offsets the cash cost of acquiring new assets required to continue operations

when existing assets reach the end of their useful lives.

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Alternative minimum tax - Depreciation and other adjustments

1 When a taxpayer is required to recognize gain or loss on disposal of a depreciable asset (or pollution control

facility), the gain or loss must be adjusted to reflect the AMT depreciation

amount rather than regular depreciation

amounts.[http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000

056----000-.html 26 USC 56(a)(6)]https://store.theartofservice.com/the-depreciation-toolkit.html

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Alternative minimum tax - Depreciation and other adjustments

1 In addition, corporate taxpayers may be required to make adjustments to

depreciation deductions in computing the adjusted current

earnings (ACE) adjustment. Such adjustments only apply to assets

acquired before 1989.

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Alternative minimum tax - Depreciation and other adjustments

1 Adjustments are also required for the

following:

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Alternative minimum tax - Depreciation and other adjustments

1 *Long term contracts: taxpayers must use the percentage of

completion method for AMT.[http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000056----000-.html 26 USC 56(a)(3)].

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Alternative minimum tax - Depreciation and other adjustments

1 *Mine exploration and development costs must be capitalized and

amortized over 10 years, rather than expensed.[http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000056----000-.html 26 USC 56(a)

(2)].

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Alternative minimum tax - Depreciation and other adjustments

1 *Certain accelerated deductions related to pollution controls facilities

are not allowed.[http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000056----000-.html 26 USC 56(a)

(5)].

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Alternative minimum tax - Depreciation and other adjustments

1 *The credit allowed for alcohol and biodiesel fuels is included in income.[http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000056-

---000-.html 26 USC 56(a)(7)].

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Impairment cost - Effect on depreciation

1 To calculate depreciation on the asset, the new non-current asset

value is considered. Continuing with the previous example, if using the

Depreciation#Methods of depreciation|Straight line

Depreciation method at say, 20%, then depreciation would be:

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Impairment cost - Effect on depreciation

1 Therefore there is a smaller depreciation charge than if the

original non-current asset value had been used.

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Depreciation recapture

1 In the UK, HMRC uses negative depreciation.

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Depreciation recapture

1 Depreciation recapture in the USA is governed by sections 1245 and 1250 of the

IRC.

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Depreciation recapture - Basis

1 The starting point for determining when a depreciation recapture will

occur is to determine the Cost basis|basis of the asset. There are three

different types of basis: original, adjusted, and recomputed basis.

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Depreciation recapture - Basis

1 The original basis of an asset is usually the value of a taxpayer’s investment in the asset. (See IRC § 1012). When a

taxpayer purchases an asset, the original basis is the purchase price, or cost, of

the asset. Different factors, including tax deductions for depreciation, can lead to an adjusted or recomputed basis for the

asset. (See IRC § 1016 and IRC § 1245(a)(2)(A)).

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Depreciation recapture - Basis

1 An adjusted basis under IRC 1016 is the original basis of a piece of property plus any increases for improvements to the

property or any decreases for depreciation deductions allowed with

respect to such property. So, if a taxpayer buys something for $100,000, and takes allowable deductions under IRC 167 for the next 3 years at $5000

per year, his adjusted basis is $85,000.

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Depreciation recapture - Basis

1 Recomputed basis under IRC 1245(a)(2) basically means, with respect to any

property, its adjusted basis recomputed by adding all adjustments reflected on

account of deductions allowed or allowable to the taxpayer for

depreciation. In the previous example, the taxpayer’s recomputed basis would

be $100,000 because you add to the adjusted basis the amounts the taxpayer

depreciated.

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Depreciation recapture - Basis

1 If a taxpayer sells an asset for less than its basis, then the taxpayer has taken a loss. If the taxpayer sells the asset for more than its basis, the taxpayer has experienced a gain. For example, if a

taxpayer purchased a widget for $1,000, the original basis of the widget would be $1,000. If the taxpayer sold the widget

for $1,500, the taxpayer would experience a capital gain of $500.

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Depreciation recapture - Depreciation

1 The IRS publishes specific depreciation schedules for different classes of assets

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Depreciation recapture - Depreciation

1 For example, if a taxpayer purchased a widget with a $1,000 basis, then deducted $100 from his ordinary income each year for the widget’s depreciation, after five years the widget’s adjusted basis would be

$500.

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Depreciation recapture - Computing depreciation recapture

1 When a taxpayer sells an asset for a gain after taking deductions for

depreciation, depreciation recapture is used to tax the gain. Because the

taxpayer received a deduction from ordinary income for the depreciation of

the asset, any gain the taxpayer receives, up to the depreciation

amount, must be included as ordinary income to offset the earlier deduction.

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Depreciation recapture - Computing depreciation recapture

1 This is a depreciation

recapture

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Depreciation recapture - Computing depreciation recapture

1 The portion of Accumulated Depreciation which corresponds to straight line depreciation is called Unrecaptured Section 1250 Gain

(though sometimes informally called Unrecaptured Depreciation, and it is

taxed at a maximum rate of 25% (also to the extent of any gain

realized)

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Depreciation recapture - Computing depreciation recapture

1 If Section 1245 or Section 1250 property is held one year or less, any

gain is considered a short-term capital gain, and all Accumulated Depreciation that may have been taken is recaptured and taxed at

ordinary income tax rates.

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Depreciation recapture - Computing depreciation recapture

1 Though this article is about Recaptured Depreciation, it would

probably be a good place to explain Unrecaptured 1250 Gain as well as Long-Term and Short-Term Capital

Gain. There should not be any differences between the treatment of

Section 1245 property and Section 1250 property.

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Depreciation recapture - Loss

1 When a taxpayer takes a loss on the sale of an asset, there is no

depreciation recapture. However, the taxpayer may qualify for ordinary

loss treatment under IRC § 1231.

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Depreciation recapture - Property affected

1 This higher tax rate serves as a rough surrogate for depreciation recapture.

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MACRS - Depreciation methods

1 Taxpayers using the declining balance change to the straight line

method at the point at which depreciation deductions are

optimized

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MACRS - Depreciation methods

1 The method and life used in depreciating an asset is an

accounting method, change of which requires IRS approval.See IRS

[http://www.irs.gov/app/picklist/list/formsInstructions.html?

value=3115criteria=formNumbersubmitSearch=Find Form 3115] and

instructions.

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MACRS - Depreciation methods

1 Taxpayers may track the basis and accumulated depreciation of assets individually or in vintage accounts, as in the old ADR system. Where

assets are tracked in vintage accounts, a first-in-first-out

convention is usually applied to determine basis of assets retired.

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MACRS - Special allowances and bonus depreciation

1 In addition to extending the availability of bonus depreciation in general, the Tax Relief Act provided for a new 100 percent depreciation deduction for qualified property that is acquired and placed into service

by the taxpayer between September 8, 2010, and January 1, 2014

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MACRS - Alternative depreciation system

1 ADS lives are the same as regular depreciation lives for a few classes, but are generally somewhat longer than regular lives for most classes.

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Depreciation (economics)

1 The net (economics)|net increment to the capital stock is the difference

between gross investment and depreciation, and is called net

investment.

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Depreciation (economics) - Models

1 In economics, the value of a capital asset may be modeled as the

present value of the flow of services the asset will generate in future,

appropriately adjusted for uncertainty. Economic depreciation over a given period is the reduction

in the remaining value of future services.

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Depreciation (economics) - Models

1 Under certain circumstances, such as an unanticipated increase in the

price of the services generated by an asset or a reduction in the Annual

effective discount rate|discount rate, its value may increase rather than

decline. Depreciation is then negative.

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Depreciation (economics) - Models

1 Depreciation can alternatively be measured as the change in the

market value of capital (finance)|capital over a given period: the

market price of the capital at the beginning of the period minus its

market price at the end of the period.

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Depreciation (economics) - Models

1 Such a method in calculating depreciation differs from other methods, such as straight-line

depreciation in that it is included in the calculation of implicit cost, and

thus economic profit.

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Depreciation (economics) - Models

1 Modeling depreciation of a durable as delivering the same services from purchase until failure, with zero scrap value (rather

than slowing degrading and retaining residual value), is referred to as the 'light

bulb model' of depreciation, or more colorfully as the one-hoss shay model, after

a poem by Oliver Wendell Holmes, Sr., about a carriage which worked perfectly for

exactly one hundred years, then fell completely apart in an instant.

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Depreciation (economics) - National accounts

1 Unlike depreciation in business accounting, CFC in national accounts

is, in principle, not a method of allocating the costs of past

expenditures on fixed assets over subsequent accounting periods

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Car costs - Depreciation

1 Normally this value is correlated with the price a certain car has on the market, but

on average a car has a depreciation around 15% to 20% per

year.http://www.bbc.co.uk/news/business-23797016http://auto.howstuffworks.com/under-the-hood/cost-of-car-ownership/car-

depreciation1.htmhttp://www.carsdirect.com/auto-loans/what-is-the-average-car-depreciation-ratehttp://www.edmunds.com/car-buying/how-fast-

does-my-new-car-lose-value-infographic.html

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Currency appreciation and depreciation

1 'Currency depreciation' is the loss of value of a country's currency with respect to one

or more foreign reference currencies, typically in a floating exchange rate system.

It is most often used for the unofficial increase of the exchange rate due to Market

(economics)|market forces, though sometimes it appears interchangeably with

devaluation. Its opposite, an increase of value of a currency, is 'currency

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Currency appreciation and depreciation

1 The 'depreciation' of a country's currency refers to a decrease in the value of that country's currency. For

instance, if the Canadian dollar depreciates relative to the euro, the exchange rate (the Canadian dollar price of euros) rises: it takes more

Canadian dollars to purchase 1 euro (1 EUR=1.5 CAD → 1 EUR=1.7 CAD).

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Currency appreciation and depreciation

1 When the Canadian dollar depreciates relative to the euro, the Canadian dollar becomes

more competitive because the price of Canadian goods when exchanged to euro will

be cheaper leading to a larger Canadian export. On the other hand, European countries

that denominates its goods and services in euros will have lost competitiveness to the

Canadian dollar. The price of European products denominated in euros will thus

become more expensive in Canada.

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Currency appreciation and depreciation

1 The 'appreciation' of a country's currency refers to an increase in the

value of that country's currency

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Currency appreciation and depreciation - How currency appreciates

1 A currency appreciates as a result of increased demand for that currency on world markets: its value in the

world market increases.

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Currency appreciation and depreciation - How currency appreciates

1 This increase in demand can occur for several reasons:

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Currency appreciation and depreciation - How currency appreciates

1 * When a country's exports are high, the buyers of these exports need its currency to pay for those exports.

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Currency appreciation and depreciation - How currency appreciates

1 * When the country's central bank increases interest rates, people will want that currency to deposit in the banks to earn that higher interest

rate.

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Currency appreciation and depreciation - How currency appreciates

1 * When employment and per capital income in a country increase, the demand for its goods and services increases, along with demand for

that country's currency in the local market.

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Currency appreciation and depreciation - How currency appreciates

1 * When the demand of the currency is

high in foreign exchange market

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Currency appreciation and depreciation - How currency appreciates

1 * Due to Government borrowing or loosening of fiscal policy. See Twin deficits hypothesis

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History of the rupee - 2013 Depreciation

1 He was of the view that, the present depreciation is partly led by global factors as well as domestic factors

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Trademark dilution - How to prove depreciation of goodwill?

1 The plaintiff has to prove the elements of section 22, particularly that the use would likely depreciate

the value of the goodwill of the claimant’s mark. A precision has been made by Vaver, that the fact “that the use could well cause depreciation is not enough”. The use must actually

have caused depreciation”.

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