How to Depreciate Property

J.S. DominoThe Training Professional

How to Depreciate PropertyWelcome to:

Welcome to How to Depreciate Property. A training course for taxpayers and tax professionals.1

J.S. DominoThe Training Professional

This course provides the user several options. In addition to this slide presentation your media includes the following files:

Read Me IRS Publication 946 Depreciation_Exercise 1.pdf Depreciation_Exercise 2.pdf Depreciation_Exercise 3.pdf

To get the most value from this course please review the Read Me file for instructions on how to use the supporting documents and exercises included in this package.The indicates an audio discussion of the topic is present. Introduction

This course provides the user several options. In addition to this slide presentation your media includes the following files:

Read Me.pdf IRS_2009_p946.pdf Depreciation_Exercise 1.pdf Depreciation_Exercise 2.pdf Depreciation_Exercise 3.pdf Play_Course.bat

To get the most value from this course please review the Read Me file for instructions on how to use the supporting documents and exercises included in this package.The indicates an audio discussion of the topic is present2

J.S. DominoThe Training Professional

At the completion of this course you will:

Recognize Property Class Life & Recovery Periods Understand MACRS Conventions Identify and Select the proper MACRS Method Calculate Section 179 Deductions Understand Special Depreciation Allowance Know how to Report Depreciation Calculate RecaptureHow to Depreciate Property

At the completion of this course you will:

Recognize Property Class Life & Recovery Periods Understand MACRS Conventions Identify and Select the proper MACRS Method Calculate Section 179 Deductions Understand Special Depreciation Allowance Know how to Report Depreciation Calculate Recapture

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J.S. DominoThe Training Professional

Depreciation is an annual tax deduction that allows the tax payer to recover the costs of certain property over time by reducing their taxable income. It is an allowance for wear and tear, deterioration or obsolescence of the property. How to Depreciate PropertyWhile other cost recovery systems may be available, this course will focus primarily on the current cost recovery system known as MACRS.

Depreciation is an annual tax deduction that allows the tax payer to recover the costs of certain property over time by reducing their taxable income. It is an allowance for wear and tear, deterioration or obsolescence of the property.

While other cost recovery systems may be available, this course will focus primarily on the current cost recovery system known as MACRS. Most depreciable property placed in service today falls under the MACRS guidelines.

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J.S. DominoThe Training Professional

MODIFIED ACCELERATEDCOST RECOVERY SYSTEM (MACRS)A cost recovery system used for most tangible property placed in service after 1986. MACRS must be used for any property acquired after 1986. The rules for depreciating property under MACRSare available in IRS Publication 946, aptly namedHow to Depreciate Property.A copy of this document has been included in your package.MACRS

MACRS is an acronym for the Modified Accelerated Cost Recovery System. This system was put in place in 1986 and allows for the depreciation of most tangible property. Tangible property includes such things as buildings (but not the land they are on), machinery, vehicles, furniture, and equipment.

MACRS provides a means of recovering the cost of certain business and investment use property. The systems, methods and conventions defined in MACRS will determine how quickly you can recover your costs.

MACRS allows the taxpayer some choices with regard to how they wish depreciate property, but generally once you begin depreciation it is cumbersome (sometimes difficult) to change systems. Having a good understanding of MACRS before you begin will help reduce the users tax liability.5

J.S. DominoThe Training Professional

Half Year ConventionMACRS ConventionsThere are three Conventions that the IRS has defined for use when depreciating property.

The three available Conventions are: Mid-Quarter Convention Mid- Month Convention

There are three Conventions that the IRS has defined for use when depreciating property.

The three available Conventions are: Half Year Convention Mid-Quarter Convention Mid-Month Convention

We will discuss the rules that determine when we are required to use each of these conventions in the next few slides..6

J.S. DominoThe Training Professional

Expense Deductions

In addition to the annual depreciation calculations, the taxpayer may have the option to expense some or all of the cost of the property by electingone or more deductions in the year the property is placed in service. This option effectively reduces the original basis to a new lower depreciable basis.Two expense deductions are: Section 179 Deduction can reduce the depreciable basis by up to 100%. It is available for certain property types and may be limited.

Special Depreciation Allowance can reduce the depreciable basis by 30% or 50% depending on when and where the property is placed in service.

In addition to the annual depreciation calculations the taxpayer may have the option to expense some or all of the cost of the property by electing one or more deductions in the year the property is placed in service. This option effectively reduces the original basis to a new lower depreciable basis.

The Section 179 deduction can reduce the depreciable basis by up to 100%. It is available for certain property types and may be limited.

The Special Depreciation Allowance can reduce the depreciable basis by 30% or 50% depending on when and where the property is placed in service.

The taxpayer may choose one or both options.7

J.S. DominoThe Training Professional

Calculating Depreciation

Time to PracticePause your slide show here and Assemble the documents forExercise #1. Follow the instructions.

When finished advance to the next slide to view the answer explanation.

We will now practice by performing a Depreciation Exercise. Using the instructions and worksheets in Exercise 1, you will learn to calculate depreciation for several properties.

The first step in calculating the depreciation is to list the various properties using the Depreciation Worksheet. It provides an easy way to track properties year to year and gives a good visual representation of your depreciable property.

This exercise will ask you to calculate your allowable depreciation using the MACRS percentage tables available in Pub 946 Appendix A. Remember, if you use the MACRS tables when you begin depreciating a property you must generally continue to use the same percentage tables and calculations for the entire recovery period.

When you have completed Exercise 1, advance to the next slide to see the completed worksheet.8

J.S. DominoThe Training Professional

Maintaining RecordsTo meet the requirements for adequate records the taxpayer must maintain account books, logs, statements, trip sheets or other documentary evidence of the expenditure or usage.

The records must show:

Timeliness of the expenditure Business Purpose Supported Business Use Supported

Records should be kept as long as any recapture can occur.

To meet the requirements for adequate records the taxpayer must maintain account books, logs, statements, trip sheets or other documentary evidence of the expenditure or usage.

The records must show:

Timeliness of the expenditure Business Purpose Supported Business Use Supported

Records should be kept as long as any recapture can occur. 9

J.S. DominoThe Training Professional

Summary Depreciation is a Cost Recovery tool . Depreciation can be reported on IRS 1040 Schedules A, C, E and other forms. The current system for calculating depreciation is MACRS. MACRS allows for accelerated deductions on some property types. Correctly calculating depreciation may reduce a taxpayers tax liability. MACRS requires accurate, written records and reporting. Any gain from the disposition of property must be recaptured and reported.

To summarize what we have learned in this course:

Depreciation is a Cost Recovery tool . Depreciation can be reported on IRS 1040 Schedules A, C, E and other forms. The current system for calculating depreciation is MACRS. MACRS allows for accelerated deductions on some property types. Correctly calculating depreciation may reduce a taxpayers tax liability. MACRS requires accurate, written records and reporting. Any gain from the disposition of property must be recaptured and reported.

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