Chapter 8 The concept of depreciation is based on the premise that the asset acquired (or improvement made) benefits

s more than one accounting period. a. b. c. d. Pre-1981 Depreciation (Past 1981) ACRS (1981 1986) MACRS (1986 Present) No Write-off is allowed for an asset that does not have a determinable useful life

1) Type of Property a. Realty i. Land ii. Buildings permanently affixed to th eland b. Personalty Everything that is not realty 2) Cost Recovery Allowed or Allowable a. Allowable Maximum amount which would have been allowed. If Allowable not claimed, the basis is still reduced by the allowable amount b. Allowed - Amount deducted 3) Personal use coverted to Business Use Lower-of-basis rule a. The basis used for depreciation is the lower of i. Adjusted basis or ii. Fair market value 4) MACRS Personalty a. Straight line depreciation may be elected instead of MACRS b. MACRs uses the half year convention i. 3 Year 200% Declining balance switchover to straight line when it yields larger deduction ii. 5 Year 200% Declining balance switchover to straight line when it yields larger deduction iii. 7 Year 200% Declining balance switchover to straight line when it yields larger deduction iv. 10 Year 200% Declining balance switchover to straight line when it yields larger deduction v. 15 Year 150% Declining balance switchover to straight line when it yields larger deduction vi. 20 Year 150% Declining balance switchover to straight line when it yields larger deduction 5) Additional First Year Depreciation a. Must be New Property b. Property which is used but new to the taxpayer does not qualify c. Allows for additional 50% cost recovery in the year the asset is placed in service

d. Additional First Year Depreciation is 100% if property is placed into service between September 9, 2010 and before December 31, 2012. e. Additional first year depreciation is 50% if property is placed into service between January 1, 2012 and before January 1, 2013 Is probably extended, check Professors slides 6) Mid Quarter Convention a. If greater than 40% of the value of property other than eligible real estate is placed in service during the last quarter of the year i. First test for greater than 40% of value of property placed into service during last quarter of the year ii. Identify the asset and the quarter in which it belongs in. Then use appropriate depreciation tables. iii. When disposed of 1. Identify the quarter in which the asset was disposed ie, 1st, 2nd, 3rd, or 4th quarter 2. Then place it in the mid quarter following the these ratios a. 1.5/4 b. 2.5/4 c. 3.5/4 7) Realty a. Residential Rental Real Estate includes property where 80 percent or greater of gross rental revenues are from nontransient dwelling units i. Recovery Period 27.5 Years ii. Straight line depreciation iii. Mid Month Convention iv. Examples include Apartment buildings, Low-income housing v. Does not include hotels, motels and similar establishments are not residential rental property b. Non Residential Real Estate i. Straight line depreciation ii. Recovery Period 39 Years (Service date after May 13th, 1993) iii. Recovery Period 31.5 Yeas (Service date before May 13th, 1993) iv. Mid Month Convention c. If property is sold then i. Determine which month ii. Use Applicable rates 1. .5/12 2. 1.5/12 3. 2.5/12 4. 3.5/12 5. 4.5/12 6. 5.5/12

7. 6.5/12 8. 7.5/12 9. 8.5/12 10. 9.5/12 11. 10.5/12 12. 11.5/12 8) Straight Line Election a. Realty is all straight line b. Personalty default is MACRS however straight line is allowed if elected c. Straight line still follows the Half Year or Mid Quarter convention 9) Leasehold Improvement Property a. Lessor is the owner of the leasehold improvement property i. Residential Rental Real Estate 27.5 Years ii. Non Residential Real Estate 39 Years iii. When leasehold improvements are disposed of, or the lease terminates, the lessor will be treated as disposing the property and a loss can be taken for unrecovered basis. 1. Additional First Year Depreciation is allowed for qualified leasehold improvement to interior portion of a building 2. Applies only to non-residential property 10) Section 179 Expenses Permits taxpayer to write off up to $500k for 2012 & 2013 a. May still use additional first year depreciation with basis less Section 179 deduction b. May also use MACRs on top of the Section 179 and additional first year depreciation c. Section 179 Ceilings i. If property placed in service in a taxable year exceeds $2mm, then Section 179 deductions are reduced dollar for dollar on the increase ii. Section 179 deduction can not exceed taxpayers taxable income. If it exceeds the taxable income, the excess is carried forward iii. If section 179 is limited by taxable income, MACRs depreciation is still calculated based of net of Section 179 allowable and not the deducted