10-1 ©2007 Prentice Hall, Inc.. 10-2 ©2007 Prentice Hall, Inc. DEPR., COST RECOVERY, AMORTIZATION,...
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Transcript of 10-1 ©2007 Prentice Hall, Inc.. 10-2 ©2007 Prentice Hall, Inc. DEPR., COST RECOVERY, AMORTIZATION,...
10-1©2007 Prentice Hall, Inc.
©2007 Prentice Hall, Inc. 10-2
DEPR., COST RECOVERY, DEPR., COST RECOVERY, AMORTIZATION, & AMORTIZATION, &
DEPLETIONDEPLETION
Depreciation and cost recoveryAmortizationDepletion, intangible drilling an
development costsTax planning considerationsCompliance and procedural
considerations
©2007 Prentice Hall, Inc. 10-3
Depreciation and Cost Depreciation and Cost RecoveryRecovery
General considerationsDepreciation methodsCalculation of depreciationMACRS restrictions
©2007 Prentice Hall, Inc. 10-4
General Considerations(1 of 3)
Taxpayers must use specific depreciation methods depending on when an asset is placed into servicePrior to 1981After 12/30/80 and before 1/1/87
(ACRS)After 12/31/96 (MACRS)
©2007 Prentice Hall, Inc. 10-5
General Considerations(2 of 3)
Common rules to all systemsNo depreciation may claimed on land
or other assets with an indefinite lifeDepreciation permitted in year asset
placed into serviceApply method consistentlyBasis of property being depreciated
reduced by amount of allowable depreciation each taxable year
©2007 Prentice Hall, Inc. 10-6
General Considerations(3 of 3)
Types of PropertyTangible Property (physical)Intangible Property (non-physical)Real Property Personal Property vs. Personal-Use
Property
©2007 Prentice Hall, Inc. 10-7
Depreciation Methods(1 of 2)
MACRSPersonal property
Use 3, 5, 7, 10, 15, 20 year useful lifeDDB with conversion to straight-lineHalf-year convention
½ year depr in 1st year and year of dispositionMid-Quarter convention when aggregate basis
of all personal property placed into service during last three months of year exceed 40%
No salvage value
©2007 Prentice Hall, Inc. 10-8
Depreciation Methods(2 of 2)
MACRSReal property
Residential rental property 27.5 yearsNonresidential rental property 39 yearsStraight-line depreciation methodMid-month convention in year of
acquisition and year of disposition Straight-line or Alternate Depreciation
System (ADS)
©2007 Prentice Hall, Inc. 10-9
Calculation of Depreciation§179 Expense
May elect to expense up to $108K in 2006 for certain tangible personal property placed into service during the year
$ for $ phaseout if qualified property placed into service during year >$430K
Limited to taxable ToB income
©2007 Prentice Hall, Inc. 10-10
Calculation of DepreciationYear of Disposition
MACRS allows depreciation to be taken in year of disposition based on conventionE.g., ½ year, mid-quarter, mid-
month
©2007 Prentice Hall, Inc. 10-11
MACRS Restrictions(1 of 2)
Portion of asset used for personal use is not depreciable
Listed property rulesMust use straight-line of business
use < 50%Recapture of excess cost-recovery if
MACRS claimed and business use falls below 50%
©2007 Prentice Hall, Inc. 10-12
MACRS Restrictions(2 of 2)
Luxury automobile limitationDepreciation cannot exceed ceiling
limitations (see page P10-14)Trucks, vans and SUVs (>6,000 lb)
More generous rulesLeased vehicles
Income inclusion based on IRS tables to eliminate avoiding luxury auto rules
©2007 Prentice Hall, Inc. 10-13
AmortizationAmortization
§197 intangiblesResearch and experimental
expendituresComputer software
©2007 Prentice Hall, Inc. 10-14
§197 Intangibles
Goodwill and going concern value, covenants not to compete, franchise fees, trademarks, trade names, etc.
Classification and disposition of intangibles§197 asset treated as depreciable prop
so that § 1231 treatment accorded disposition if held > 1 year
©2007 Prentice Hall, Inc. 10-15
Research and Experimental Expenditures
Include experimental and laboratory costs incidental to the development of a product (see table I10-4)
Tax treatment optionsExpense in year paidDefer and amortize costs over 60 mo.Capitalize and write-off when project
abandoned or is worthless
©2007 Prentice Hall, Inc. 10-16
Computer Software
Developed computer softwareCost of developing software is
qualified R&E under §174Expense immediately orAmortize over 60 months
Separately purchased softwareStraight-line depreciation over 36
months
©2007 Prentice Hall, Inc. 10-17
Depletion, Intangible Depletion, Intangible Drilling and Development Drilling and Development
CostsCosts (1 of 2) (1 of 2)
Depletion methodsCost depletion
Similar to units of activity depreciationPercentage depletion
Depletion rates based on statutory percentages
Can claim depletion deductions in excess of cost over the life of the asset
©2007 Prentice Hall, Inc. 10-18
Depletion, Intangible Depletion, Intangible Drilling and Development Drilling and Development
CostsCosts (2 of 2) (2 of 2)
Treatment of intangible drilling and development costsCapitalized or deducted currentlyDecision to expense or capitalize
depends on taxpayer’s current positionExpected marginal tax rates
©2007 Prentice Hall, Inc. 10-19
Tax Planning Tax Planning ConsiderationsConsiderations
Alternative depreciation under MACRS
Units of production depreciationMay use instead of MACRS
Structuring a business combinationMust consider amortization of goodwill
©2007 Prentice Hall, Inc. 10-20
Compliance and Compliance and Procedural Procedural
ConsiderationsConsiderations
Form 4562 is used to report depreciation, §179 expense, depletion, and amortization deductions
Comments or questions about PowerPoint Slides?Contact Dr. Richard Newmark atUniversity of Northern Colorado’s
Kenneth W. Monfort College of [email protected]
10-21©2007 Prentice Hall, Inc.