CHAPTER 10: DEPRECIATION

·adjusted basis -> initial basis -

accumulated depreciation
·initial basis - includes any costs like shipping, customizations, modifications
·regulations provide a de minimis safe harbor to allow is to
immediately deduct low-cost personal property
-up to
$3K/invoice or item (Shisklitemor invoice if IP doesn't have an applicable financial statements

in some cases

·Routines repairs/maintenance ->

expensed; may immediately deduct the costs
·Replacements - improvements ->
capitalized we truck and added to truck's life

Special Rules for Determining Tax Basis

A) Asset is used for personal purposes and is later converted to business (or rental) use

-> Basis is the lesser

of:
(1) the cost basis
of the asset

BU
(2) FMV ofthe asset on the date
of conversion to

cannot deduct losses

any
*

B) Like-kind exchanges
- take the same basis the to had in the
property they transferred

2) Gifts
->
carryover basis
Ex: Grandma bought a car
for $30K, 10yrs ago
FMU= $ISK

Gift: Alive ->$50K (grandma's basis)

holding period =

10yrs

D) Inheritance
-> basis: FMr& date
of death
·When a business
acquires multiple
assets for one purchase price, must determine a cost basis
for each separate asset
Ex: lande building

$100K
tasksas/soasllook-sloenters
lands
Bargain Purchase

$100,000
Improvements
A
FTER placed in service

·routine repairs e maintenance are ALWAYS expensed

·

anything that improves, restoration, replaces a

major component, of
fixing a substantial portion offramework
->
gets capitalized

Apt Building (RP-97.3) :

Bought $500K 10yrs ago
$5OK
Roof
New

B,SD0
Initial Basis AD 1-10

Bldg $500,000 -

$170,440 = still
A.Byrs, depreciation
to so

127.3) New
Roof $50,000 -

19 =$813 still 24
years depreciation
to
go

depreciation) $378,375

Sell Bldg $800,000 378,375:$421, 423

-
 ↑Note: personal property is
different from personal-use property
Personalproperty

·furniture, machines equipment

cars
-
n

trucks -
computers -> 3
years
·

was
on
Depreciation
·makes 179 and MACRS redundant
·
can write-off most tangible property in
1styr of service

IS
ACR
-> don't start depreciating an asset until
you place
in service Not
always when
you acquire
it

->
if you place an asset in service and take
it back out
of service all in the same
year- NO DEPRECIATION!

-> APs do NOT determine useful years and NO

salvage values ->
everything is depreciated til

-> used property -

gets same useful life as brand new
property liter

3 Methods
for Tangible Personal Property
① 200%. DBB (default)
generates the largest depreciation deduction in the
early years of the asset's
life and less
after
②
3
188%
must make an election to use these
③ straight line
methods
early years of
·slowest in the
-
generates less depreciation the asset's
life

Cy: 2001. cars 130%. PCs

LY: STL cars 130% PCs

businesses elect the depreciation method for the assets placed that
-> in service
during year
-> can use
diff methods
for diff assets

-> can change methods fromyear toyear(for machines acquired in different tax years
->
however, assets
of the same class must be the same method for that
year
-> use the same method for the rest
of the asset's life

offrEEE
conventions

2 Personal Property
for Tangible
&Half-year
② Mid-quarter ->
if TP places more than 40%
of tangible personal property in the th quarter
·conventions
affect amount of depreciation taken first and last years -> in between is the same
the

·half-year convention allows

one-half of full-year's depreciation in the year the asset is placedin service, regardless of when
a

it was
actually placed in service

·mid-quarter convention treat assets as though they were placed in service

during the middle of the quarter in which the business

the assets in service

actually placed
·even though 3-year property -> had 6 to depreciate ble of convention
years
& furniture
Ex. Desk $3500 0.7.6 4/13 (HY)
&yr, asset

-J. *

y1 $3500 * 14.29%. = $300 $35001712=$250

+2 $3300 x 24,191. =
$837 $3300/7=$500

the chart
·conventions are built into the first final year inside
·for 52 must remember to apply first blast year
·if you take out
of service in the middle
of useful life (AKA early) - in that case have to
go out and apply half-year convention

sell on 017173 (continuation

of problem above

1306.00.935 El2=Paso
soox(z nas.
(3612,15/2
=
-

came in as
half-year- coming out as

- -
34 -
47 -
910-12

Mid-Quarter Convention

OT lump real
property w/ tangible personal property

caronatoolonlyoneinofindenavention
#

a2
Pc
bll
mach" 3/1

In
Boo
PA3.0siado : Inte $3/6/4*2,5=$375
our 40.3=$700
3 951.

1,000
o

much
$1281s/4* 3.3=$1600

000 65.700quarter
=
&

&Mid-quarter convention for year ofdisposition

is
-> asset treated as
though it is sold in the middle of the quarter of which it is
actually
sold

98-303anca, s

Furniture ↓
st sold
HY OB00 * 0.93%. = $4911.5012=$24sS
machine F
3/23/19 Ma 3/15/22 72,000+10.93%. =
$7869.601440.3=$983.70
Deliverysuck
- 3 9) 17/9093 My
·like 20,000 + 19,201. =
$304012: $1920
Machine f 10
1/2104 MP &
(11/22 270,000427.65%. $74,383/4*2.5:$90.63
=

01
PCs S
10(11/22 HY 12/15/2 80,00040.=NODEPRECIATION $31, 830.08
P3
machine
(Fyrs.) Ps of$12K (ma) sell 9/s/y
#
15.311.
+
$1837/4*
=
2.3=$1140.125

ste,000/7/4 *2.5=$1071.320
propertyordepreciable
a T
commercial

·residential rental property (27.3yrs) non-residential

property
or
L
·** Straight-line only 39yr.
·memouth convention

/YI Rental Home

$300Kajust
a routine repair so it is expensed

S 29

8/1/Y PIS
$300K
41$300,000 + 1.367 =
$40,920
 5)$300,000
(27,3/12 * 4.3=$4091

sell rental home on

3/7/43
$4090,s0
$300,000 & 3.636%. =

$10,908(1244.3:

*
7s11244.3=$4090.91

·For astroe
a
My

Mo
2001

200s. 0
20%.
14.291.
=

=
$5000
$2143,5

ad.Ilbad
F-M
t-18
enter,
oo; 100,000

IS 300,000
mM T
3 so

Allowed(Allowable Rule
- must reduce assets basis by the
greater of:
(1) depreciation allowed on
↳ Whether
you
took depreciation or
not, whatever booked that's what is allowed
you
(2) allowable depreciation
↳ What
you
should have depreciated by proper conventions/rules/periods

Campasset $200,000 -

PIS HY, STL sell 12/31/43

oreorveviarotooned Howdoe
reduce asset's basis by the
- allowed vs. allowable
greater of
f
#

180,000
140,000
20,000 60,000

what business thinks: sell 13=$1201-($285k = 655x) =

$0
KS. $ROK-1$200K-$140K): $40K
-

Immediate Expensing (179)

the asset is placed
Y applies in the in service
·

year
it is a
yearly election ->
if you want to claim
it, must attach to tax return
·
meant to help small businesses

·businesses
may
elect to immediately expense up to $1.00 million of qualified property
-> OES apply to
off-the-shelf software AND custom
types of qualified real property (Not buildings, but

types of property
attached to those ofshorter lives)
179 used 50% in
-> can only use
if assets are
than your business

used
-> DoSS apply to
property
-
if asset has not been purchased ARA
gift/inheritance, then it will NOT
quality for 179

& Limitations:
i limit on election - can
immediately expense up to $1,000,000 ofqualified property Butplace into
service more than $2.7 million worth
of qualifiedproperty, then you can not obtain the entire $1.08 million
- dednct $for the increase from $1, of

② (after deduct MACKS

can deduct up to taxable income - bonus wont 179)
X: PIS $2.81mQP
$2,000,000 2,700,000 $180,000 in excess of qualified property
=
-

$1,000,000 100,000 $900,000 max ELECTION

- =

mossible
↑max DEDUCTION
71: $1,200,000 (after MACks/Bonus)
1,200,000
8) -

900,000 =
$300,00071

what
if I max deduction?
11 =
$300,000 (after MACKS/Bonus
03
OF1 - only drive
$ TI to zero

$MOOK CF
(indefinitely
179- Bonus -MACRS

#SF corp of 71 $USOK "for purposes of calc179exp) (subt MACKS/Bonus

as00
MACKS
mach pos,000 agi. 1000 671 939

3
-

pa

Certain
2/10

645000
B 203,000 32,000 MARS
Furniture M12
7
880,000

3.
413,000
2 exceeds 2.7 mil

2,700,000 =
713,000
asBoEsaeeeedn
1,000,000
-

713,000 =
367,000 max 179
election

#38

corp w/ T1 =
$240,000

11a7 sasisoO179, an
S
in than Deduction

*0000000
Furniture 7 30, and
computer
squip
3
a/2001 90,000 33% 90,000 201 18,000

AtiOratrees
copier S 7/1303 30,000 131. &0.

22Q250000
mach 7 6 17.6T and in

10000
- 26%
= o

longer me
switch to MY
↳ max depreciation
deduction for the
years
#62 SOWI 24OUTI before depreciation
Furniture Pasoan in

(d) elect $50,000 of

Furniture 0ESIA00 isa misson00 MACKS

x14.21.= $143, 33

77$240,000
333)
inter
#

on is available for a

soooo
T
I

(b)maxedelection000 0,000)
macks
masis

120,000*14.2. =
MACKS

117, on a
11 $240,000

ElYOSMareas available
for 17

he S7,
&

0 71
$ 148 CF

Bonus Depreciation
tangible personal property
NOT real
*

Y applies to
property
·100%bonus depreciation of the asset

applied automatically ONLY during the

first yr. PIS
opt out, you opt-out for
entire asset class
is if you
·may have business use
of over 300
if asset used as both a
personale business asset

How to calculate Depreciation

&179 (if you elect 179)

② Bonus (if you don't opt out)

B MACRS

63 C
#
w/$1.76mm If before 179
Bonns
by can electe deduct 1,
00mg Basis

mach F 4/12 1,440,000 + 1.291.

(987,000) 453,000 1433,000
PC 3 2/10 70,000+281. 70,000 170,000)
PTruck 3
eal 93,000 20%. 193,000)
↓
No
Furn

Bonus,
F

so use
112
000
minia in
3

10,000,000
in
179 election instead
and
for
very on bonus
else
total max depressation =
$1,913,010
everything
 Listed
Property
·mainly automobiles ->
cars, airplanes, trucks
usedfor both business,
also eligible for 1790 bonus
·business assets personal purposes I
·if business-use>60% -> Calculate normal MACRS depreciation *).
of business use

if business-use(30). -> Use STL method over MACKS ADS (alternative depreciation method
↳S
year assets are
typically 3; Fyrs-> 10yrs
#66 camera mensIESBasalt
syr

A) Y1 -> Bu80/

$3000 * 201.*80%. =
$480 41

B) Y1 - By 751.

$300039.4751.=$72041

c) 42->Bu 45%. Share to adjust y to sit

Y1 $30001/2* 001.= 1940 Y

Taco reduction
12$30001s*Us)

(catch-up

D)Y2> Bn 30%

11 $30001s12+80%. =
240

$3000

30.Iagointensis
u2 +

↳ s0 depreciation deduce

67

Luxury Automobiles
·
taxpayers are allowed to expense $0,000 of bonus depreciation above the otherwise allowable max depreciation
Imax depreciation of $10,200 in 1st year)
DOESN'T apply AND those that
to
delivery trucks charge fortransportation (taxis, cabs, limos
·

·
DOESWIT
apply to vehicles
weighing more than 6,000lbs
·
the table limits depreciation on automobiles > $31,000

·TPs deduct of: the LO

O regular mAeRS

② max depreciation based on IRS-provided tables

BU<s0%multiply Buy by
& If LO

* line
if BU<s01ST USE
straight

Automobiles and 179

limitations calculate its
·large surs are Not subject to the
luxury car ->
regular MACS depreciation
·for these vehicles -tP
may take a 179 expense amount of $27,000 IN ADDITION to their MACRS depreciation

Automobiles and Bonus

· IPs are allowed to increase the limitation in the first year by $8,000
limit $17,200
-> first-year =
67
#

a) PIS 2022 HY

$35,000 on; 100%BU

aoaab30ooxa 000orsoldinto
6)$10,000 0B;100). B

zodd:$100000000.=0boood food
in
2) $80,000 op;801. BU
2 022: 10,200d801. =
$0160
2023: 16,400 4801.= 13,120

d)$80,000 OB: 801. BU; sold 3(1172

2022: 10,200 480. =
$8160
2023:
14,400/2*80%.: $4500
e) $80,000 0B; 281. BU

doza:soooooo too or10,200000to

use
f) $80,000 0B; 1001. By
- Sur weighs 4,500

use 179 1st MACKS

year, 79 basis
2022:
$80,000 27,000 $33,000 + 201. $10,000
= =
-

2023:$33,000 + 321. =
$141960

Amortization
·ALWAYS gound use straight-line -> starts on first of the month
of the purchase
-> full-month convention

section 197 Intangibles

·
intangibles from basket purchases
· must be amortized over 15
years
does NOT to self-created intangibles
apply
·

organizationally start-up costs

·
organizational expenditures - expenditures to
forme organize a business in the
form of a
corp or an
entity taxed as a
partnership
2: costs of organizational meetings, state fees, accounting service costs incident to
organization and
legal service

A costs incurred by
starting a business

x costs of selling/marketing stocks NOT quality - Not amortized

start-up expenses
costs associated of investigating the possibilities of and
actually creating
or
acquiring trade or business
·
a

business expenses
i also include costs that normally deductible
ordinary
as

onces
any immediately expense up to $15,000 of organizational expenditures
·$ for $ phase-out begins of $50K for org expenditures start-up nests -

when expend estart-up costs exceed bash, there is no immediate expensing

insemizational
*
start Bus ally start-up costs

A -
$48,000
immediately expense 5SK

Amortize (P40k=$S1) $43h =

$434/180mins 44 = $950 centized in the

first you

B- $52,000
$35,000 -

32,000 =
$3000

immediately expense $3K

Amortize $sak-$3k =
149K
$491/100months & 4 =
$1089 amotized in the
first yr.

c-$00,000
$O
immediately expense

xpenses
·permitted to amortize syrs
start in the middle of the year
·if research occurs outside U.S. - amortize over 15 yrs.

amortize
amortizing the life
business receives costs -> over the
·
when a a patent -> it must stop patent's

patents and copyrights

·if you purchase a patent through a basket purchase -> amortize under 1971100 months)

·if you purchase patent in isolation -> amortize the cost over
remaining life
·if you self-create patent/copyright -> amortized over legal life

R+E to patent example

July 11 $20,000 R+9

Ang 43 $10,000 patent legal life 10yrs

11 =
$20,0001/2tSthalta yearon
Rea
ye= $20,0001= $4,000
73=$10,000/s/124
ab33Rd amortized
months
-

$20,000
-
33
1 1,667 unamortized R, E

OOOOpatentcostotized
$21,667/18legalite
intus $902,08+styr of patent =