Depreciation Review Outline

I. Property subject to depreciation

 Taxpayer must own the property
 Must be business use
 Must have a determinable useful life of more than a year

II. Property that is not depreciable

 Personal-use assets
 Assets with an unlimited or in-determinable useful life (Ex: land)
 Inventory (Ex: stock in trade)
 Assets disposed of in the year of purchase

III. Personal type assets

Half-year
 Regular MACRS - GDS column of CLADR table, Depreciation Table A.1
 General Straight Line Depreciation System - GDS Column of CLADR table, Depreciation Table A.8.
Think “spread evenly”
 Alternative Straight Line Depreciation System - ADS Column of CLADR table, Depreciation Table A.8.
Think “spread evenly longer”
Mid-quarter: Applied to all personal property assets purchased in current year, if more than 40% value of
business assets are placed in service 4th quarter. (Regular: Tables A.2-A.5; Straight Line: Tables A.8)

Think of Straight Line like this.  If you straighten the line, you spread it out evenly.  When you want to spread it out for
longer you add (ADS – Alternative) to it (adding time).

IV. Real type assets – Always mid-month convention – Always Straight Line method
 Residential Rental - Table A.6 – 27.5 years
 Non-residential - Table A.7a – 39 years (only use table A.7 if placed in service before May 13, 1993)

V. §179 Deduction
 An election to deduct up to 100% of the cost of an asset in the first year
 Can be used on new or used property
 Maximum dollar limit is $500,000.
 Limited to business income (generously defined as taxpayer wages, business income and spouse’s wages
and business income if MFJ)
 Subject to recapture if business use ends before the life of the asset or drops to 50% or less%
 Always apply this election before the bonus depreciation is calculated
 Investment Limit – If purchases are more than $2Million worth of personal property assets during one year,
the §179 dollar limit of $500,000 is reduced dollar for dollar that exceeds the $2Million.

VI. Property not eligible for §179 deduction

 Rental furnishings
 Real Property
 Listed property used 50% or less for business

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VII. Special Bonus Depreciation

 Election to be used on new personal property placed in service during the current year
 Computed after any Section 179 election is applied
 Opting out for one asset excludes all assets in the same class life as well
 All or nothing choice, must take the current percentage (50%) or none

VIII. §179 vs. Bonus Depreciation comparison

IX. Listed Property

 Includes autos < 6000 lbs., entertainment, recreation, computers not used exclusively at a place of business
 If business use is 50% or less, no §179 is allowed and client must use ADS system which means a longer life
(ADS column of CLADR table, Table A.8) Straight Line method
 If business use was > 50% and then dropped later, recapture will apply and client will then continue
depreciation under the ADS system

X. MACRS in year of disposition

If business asset is:
Half-year – you take half of the normal full year depreciation
Mid-Quarter – you take a percentage of normal full year
Mid-Month – you take a fraction of normal full year

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X. Other Items to Consider

 When as asset is disposed of, the basis must be reduced by the depreciation amount “allowed or allowable”,
before subtracting it from the selling price.
 The basis of an asset must be adjusted according to the business use % and the value of the land must be
subtracted.
 Asset Class 57.0 on CLADR tables is for any asset used to create income that is not named elsewhere in the
tables. (Example: shelves, rental furnishings)
 You can take a §179 deduction on the 4 th quarter asset(s) to help reduce the total to less than 40%; but
taking the bonus depreciation does not affect the mid-quarter rules.
 When you have rental furnishings, remember:
1. Bonus depreciations is allowed
2. §179 Deduction is not allowed
3. Class life is 5 years unlike office furniture which is 7 years.

XI. When approaching an exam question, think about:

 What is the Recovery Period of the asset? Use CLADR table to determine recovery period (3, 5, 7, 10, 15, 20,
29.5, 39)
 What is the Recovery Year?
 Which convention applies?
 Which depreciation method applies, MACRS, GDS, ADS? Be sure to choose the appropriate column in the
CLADR table and the appropriate depreciation table.
 Is this listed property and what is the business use %?
 Are there more than one business assets? If so, does mid-quarter apply?
XII. Use all of the resources available to you as you go through each question:
 Participants guide
 Notes you took
 This handout
 IRS Publication 946
 The Tax Institute
 The Tax Book

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