Review Guide w/ Tables for Depreciation & Taxes

Basic Non-Macrs Depreciation

All Depreciation Methods

BVj = BV0  D1  D2    Dj

BVj = BVj -1  Dj

BVj  SV


Straight Line

Dj = (IC  SV ) / n , j = 1, 2, …, n


Declining Balance

DBR = 100%, 125%, …, or 200% (double)

p = DBR / n

Dj = pBVj -1 , j = 1, 2, …, n, while BVj  SV

 DB to SL Switch
Any switch

Treat current BV as IC and remaining years of

recovery as depreciation life
SL Depr = (current BV – SV ) / (Remaining Yrs)

Optimal switch for SV = 0 and constant tax rate

ST = Switch Time = First Integer  n  n /DBR

DST+1 =  = Dn = (BVST – SV ) / (n – ST)


If SV  0 or tax rate not constant, then use trial-


and-error to determine time to switch
 MACRS
1. Use table to determine property class and
recovery period
2. Use tables to obtain recovery rates rj
3. Dj = rj BV0 until end of recovery or disposal,
and then Dj = 0
4. Early disposal
a) Personal property: Before last yr in table
Dj = 0.5 rj BV0
b) Real property: Before mid-month of
purchase plus recovery period
Dj = (Mid-disposal-month / 12) rj BV0
 MACRS Personal Property Classes
n Examples of Assets
3 Special handling devices for food and beverage manufacture
Special tools for manufacturing fabricated metal, motor vehicles, rubber, glass
Truck tractors and racehorses
5 Computers and peripherals, office machinery
Research and experimentation equipment
Oil and gas drilling, construction, apparel manufacturing equipment
Cars (subject to limits), trucks, and buses
7 Any item not placed in a specific property class
Office furniture and equipment such as desks, files, or safes
Machinery for wood products and furniture
Oil and gas exploration and production equipment
Waste reduction and resource recovery plants
10 Docks and ship building equipment
Equipment for grain, sugar, and vegetable oil products
Durable goods manufacturing and oil refining equipment
15 Pipelines
Municipal wastewater treatment plants
Land improvements such as shrubbery, fences, or roads, but not land itself
20 Electric, gas, water and steam utilities
27.5 Residential rental property (excludes hotels and motels)
39 Nonresidential real property
 Personal Property Recovery Rates (%)
j n=3 n=5 n=7 n=10 n=15 n=20
1 33.33 20.00 14.29 10.00 5.00 3.75
2 44.45 32.00 24.49 18.00 9.50 7.22
3 14.81 19.20 17.49 14.40 8.55 6.68
4 7.41 11.52 12.49 11.52 7.70 6.18
5 11.52 8.93 9.22 6.93 5.71
6 5.76 8.92 7.37 6.23 5.29
7 8.93 6.55 5.90 4.89
8 4.46 6.55 5.90 4.52
9 6.56 5.91 4.46
10 6.55 5.90 4.46
11 3.28 5.91 4.46
12 5.90 4.46
13 5.91 4.46
14 5.90 4.46
15 5.91 4.46
16 2.95 4.46
17 4.46
18 4.46
19 4.46
20 4.46
21 2.23
 Real Property Recovery Rates (%)
Month in Which Placed in Service
n = 27.5
1 2 3 4 5 6 7 8 9 10 11 12
j=1 3.485 3.182 2.879 2.576 2.273 1.970 1.667 1.364 1.061 0.758 0.455 0.152
2-9 3.636 3.636 3.636 3.636 3.636 3.636 3.636 3.636 3.636 3.636 3.636 3.636
Even 10-26 3.637 3.637 3.637 3.637 3.637 3.637 3.636 3.636 3.636 3.636 3.636 3.636
Odd 11-27 3.636 3.636 3.636 3.636 3.636 3.636 3.637 3.637 3.637 3.637 3.637 3.637
28 1.970 2.273 2.576 2.879 3.182 3.485 3.636 3.636 3.636 3.636 3.636 3.636
29 0.152 0.455 0.758 1.061 1.364 1.667
n = 39 1 2 3 4 5 6 7 8 9 10 11 12
j=1 2.461 2.247 2.033 1.819 1.605 1.391 1.177 0.963 0.749 0.535 0.321 0.107
2-39 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564
40 0.107 0.321 0.535 0.749 0.963 1.177 1.391 1.605 1.819 2.033 2.247 2.461

Land is never depreciated, only the buildings


Section 179
 Bonus Depreciation
1. Adjust basis by subtracting any Section 179
expense
2. If 50% bonus depr is allowed for year 1, then
Bonus Depr = 0.50 (Adjusted Basis)
3. Adjust basis again by subtracting the bonus
depr
4. Multiply adjusted basis by MACRS recovery
rates
 Depletion
1. Cost Depletion (CD)
a) CDj = Prodj  (Resource Cost / Lifetime Prod)
b) Resource cost excludes land
2. Percentage Depletion (PD)
a) Select depletion percentage p from table
b) Compute gross income GIj = Pricej  Prodj
c) Trialj = p GIj
d) Upperj = 50%  (GIj  Non-Depl Expensej )
e) PDj = min(Trialj , Upperj )
3. Final Depletion (FD)
a) FDj = max(CDj , PDj )
b) Except timber which uses CD only
 Percentage Depletion Allowances
Natural Resource %
Borax, carbon dioxide produced from a well, 14
granite, limestone, marble, mollusk shells,
potash, slate, and soapstone
Coal, lignite, sodium chloride 10
Gravel, sand, and stone (other than 5
dimension or ornamental stone)
Oil and natural gas (small producers) 15
Sulphur and uranium 22
U.S. production of asbestos, lead ore, mica, 22
nickel ore, and zinc ore
U.S. production of certain oil shale, copper, 15
iron ore, gold, and silver
 Taxation of Section 1231 Properties
Section 1231 assets include most project equip-

ment that is depreciated
Section 1245 mostly MACRS personal prop

Section 1250 primarily MACRS real prop

GLD = AR  BVd

For Section 1231 losses and gains during tax yr

Net1231 = Gain1231  Loss1231
If net Section 1231 loss, deduct it from OI

If net Section 1231 gain, treat as capital gain

Recaptures: treat as OI w/o further consideration

 Effects of Different ARs of 1231 Properties
 S e c t i o n 1 2 4 5
G a in 1 2 3 1 = A R - B V 0
BV0 R e c a p tu re = B V 0 - B V d

BVd R e c a p tu re = A R - B V d
Loss1231 = BVd - AR

P o s t- 1 9 8 6 S e c tio n 1 2 5 0

G a in 1 2 3 1 = A R  B V d
BVd
Loss1231 = BVd  AR
 Overview of Taxation
Tax regulations interpret the tax code

TI = OI  GLDs

Major types of taxpayers

 Individual have AGI = GI – Adjustments
OI = AGI – Deductions – Exemptions
 Corporate
OI = Revenues – Expenses
Project Expenses = Op costs + Depr + Depl
+ Sec 179 + Interest
Flow-through entities

 Sole proprietor, partnerships, and Sub S corps
 File reports, paid by individuals
Trusts and estates: usually no project activities

Individual Taxes: GI, Adjust, Deduct, and Exempt
 GI  All Individual Income + Proj Rev  Proj Exp
 AGI = GI  Adjustments
 Interest on student loans, payments into
qualified retirement plans, contributions to
cafeteria plans, alimony
 Standard deductions for 2008
 Single: $5,450 (single)
 Married, filing jointly: $10,900
 Choose max(standard, itemized)
 Exemption for 2008
 $3,500 for each dependent, including taxpayer
Individual Tax Schedule
Married Tax Schedule (Filing Jointly)
 Corporate Taxes
Only individuals have adjustments, exemptions,

and standardized or itemized deductions
OI = Revenues  Expenses, excluding GLDs
TI = OI  GLDs
If corporation has net Section 1231 losses, then

treat each project's GLD as OI
If corporation has net Section 1231 gains, little

or no error by treating each project's GLD as OI
Reasonable approach for corporations

Not case for individuals

 Corporate Tax Schedule
Between Pay Plus
0
0 15%
50,000
7,500 25%
75,000
13,750 34%
100,000
22,250 39%
335,000
113,900 34%
10,000,000
3,400,000 35%
15,000,000
5,150,000 38%
18,333,333
6,416,667 35%

Irregular progression due to compromises


Some bracket increases “delayed” and then
made up with “surcharges”
 After Tax Analyses
Use marginal rates, not average rates

Combined marginal tax rate

State deductible from fed
= TRS + TRF(1 – TRS)
Mutually deductible
= (TRS + TRF  2 TRS TRF) / (1  TRS TRF)
ATCF = BTCF  Tax payments + Tax savings

Rough estimate AT IRR  BT IRR  (1 – TR)

Analyses based on ATCF's use the AT AMRR

BTCF analyses utilize the BT AMRR.

 ATCF for Purchases
BV0
Yr BTCF Dep / BV OI Tax ATCF
0 -IC IC  Adj -IC
1 BT1 D1 BT1 D1 OI1 tOI BT1 Tax1
j BTj Dj BTj  Dj Oij tOI BTj  Taxj
n BTn Dn BTn  Dn Oin tOI BTn  Taxn
n AR BV0  Dj AR  BVn GLD tD AR TaxD

BVn GLD
 ATCF for Disposals

MV today BV today
GL0 = GLD0

Yr BTCF Dep / BV OI Tax ATCF

Sell MV BV MV - BV GL0 tD MV- TaxD,0
0 - ATCFSell
1 BT1 D1 BT1- D1 OI1 tOI BT1- Tax1
j BTj Dj BTj - Dj OIj tOI BTj - Taxj
n BTn Dn BT3 - D3 Oin tOI BTn - Taxn
n AR BV - Dj AR - BVn GLn tD AR- TaxD,n
BVn
GLn = GLDn
 Capital Gains and Losses
CGL = gains and losses on disposals of capital

assets, such as stocks or bonds
Special tax rates and rules

Net Section 1231 position  treat each project’s

GLD as a CGL
Holding period

Short-term is a year or less


Long-term is longer than a year
Sum (net) short-term and long-term separately

SNL or SNG = Short-term net loss or gain

LNL or LNG = Long-term net loss or gain

Consolidated Capital Gains (CG) and Losses (CL)
Taxes based on consolidated gains or losses

Short Long Term
Term LNL $0 LNG
LNG  SNL 
SCL
LCL = LNL LCG = LNG  SNL
SNL =
SCL = SNL
SNL SNL > LNG 
SCL = SNL  LNG
$0 LCL = LNL --- LCG = LNG
SNG  LNL 
SCG
SCG = SNG  LNL LCG = LNG
SNG =
LNL > SNG  SNG
SCG = SNG
LCL = LNL  SNG
 Capital Gains Taxes for Individuals

G/L Term Treatment

Gain Short Taxed as OI.
Gain Long First, any portion of the gain in the
OI 10% or 15% bracket is taxed at
5%. Any remainder above the OI
15% bracket is taxed at 15%.
Loss Either Up to $3,000 may be deducted from
OI in the current year, and the
remainder may be carried forward
indefinitely. A loss remains a SCL or
LCL when it is carried forward.
 Capital Gains for Corporations

G/L Term Treatment

Gain Short Taxed as OI.
Gain Long Taxed as OI, up to a maximum of 35%.
Loss Either No deduction may be made from OI.
Carry a loss back for up to 3 years to
claim refunds on any CG taxes in those
years, or carry it forward up to 5 years to
reduce a future CG. Any amount carried
back or forward always is classified as a
SCL, even if it was originally a LCL. This
is different from an individual's CL.
 Disposal Logic With Capital Gains
C a p it a l S e c t io n 1 2 4 5
A sse t o r 1 2 5 0
T yp e ?

C o m p u te C G L C o m p u t e S e c t io n 1 2 4 5 o r
o n p r o je c t 1 2 5 0 r e c a p t u r e . T a x a s O I.

C o m p u t e S e c t io n 1 2 3 1 g a in
o r lo s s o n p r o je c t .

N e t a ll C G L s
N e t S e c t io n 1 2 3 1 g a in s a n d
lo s s e s . R e c a p t u r e a n y p r io r
1 2 3 1 lo s s e s .

C o n s o lid a t e T re a t n e t 1 2 3 1 G a in N e t g a in o r
C G L s g a in a s L C G lo s s ?

L o ss
C S C G : T a xe d a t O I ra te D e d u ct n e t
S e c t io n 1 2 3 1
C L C G : In d iv - T a x e d a t C G r a t e lo s s f r o m O I
C o rp - T a xe d a t O I o r 3 5 % ra te

C S C L : In d iv - D e d u c t u p t o $ 3 , 0 0 0 a n d t h e n c a r r y a s S C L
C o rp - C a rry a s S C L
C L C L : In d iv - D e d u c t u p t o $ 3 , 0 0 0 a n d t h e n c a r r y a s L C L
C o rp - C a rry a s S C L
 Effect of Gain or Loss Position on Taxes

Gain or loss position prior to a project can affect
the amount of its tax payment or tax savings, as
well as the timing of that cash flow
If the position is known at the time of the

analysis, then it should be recognized
If position is not known

Examine likely scenarios

Always in a gains position and business as
usual, then that position is most likely
Special circumstances can simplify analyses

Corporation in 35% or less bracket w/ only

Section 1231 losses and gains, then treat any
gain or loss on disposal as OI
Pre-1986 Tax Categories for Sec 1250 Disposals
AR Tax Treatment
AR < BVd Section 1231 loss = BVd  AR
AR = BVd $0 Section 1231 gain or loss
BVd < AR  BVd + Acc Section 1250 recapture = AR  BVd
BVd + Acc < AR  BV0 Section 1250 recapture = Acc
Section 1231 gain = AR  (BVd + Acc)
Unrecaptured depreciation = AR  (BVd + Acc)
BV0 < AR Section 1250 recapture = Acc
Section 1231 gain = AR  (BVd + Acc)
Unrecaptured depreciation = BV0  (BVd + Acc)