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Taxes & Accounting

2002-08-01 11:55:00

Appreciating depreciation schedules

:  What are the current depreciation schedules for purchase of equipment for a business, over the $17,000 that can be expensed?

Larry Sell Question:  What are the current depreciation schedules for purchase of equipment for a business, over the $17,000 that can be expensed?Answer:  Taxpayers may deduct a reasonable allowance for the exhaustion, wear and tear of property used in a trade or business, or of property held for the production of income. The methods of depreciation are dependent on when the property was placed in service. The Modified Accelerated System (MACRS) applies to tangible property generally placed in service after 1986 and the Accelerated System (ACRS) applies to property placed in service after 1980 and before 1987. Under MACRS, the cost of property is recovered using (1) the applicable depreciation method, (2) the applicable recovery period, and (3) the applicable conventionApplicable depreciation methods include straight line, 150% declining balance and 200% declining balance. Applicable recovery periods include 3, 5, 7, 10, 15, 20, 27.5, 31.5 or 39 years.  Applicable conventions include mid-month, mid-quarter and mid-year.  The particular asset that is purchased will determine the available methods and the appropriate recovery period.  The date the asset is purchased and the type of asset purchased will determine the applicable conventions.  An expense deduction is provided for qualifying taxpayers who elect to treat the cost of qualifying property, called Sec. 179  property, as an expense rather than a capital expenditure.  The maximum Code Sec. 179 deduction is $24,000 for tax years beginning in 2001 and 2002. Thereafter, the maximum deduction is $25,000 per year.  There are of course limitations and special rules that apply. The Job Creation and Worker Assistance Act of 2002 (signed by President Bush on March 11, 2002) created a 30 percent additional first-year allowance for qualifying MACRS property.  The property must be acquired after September 10, 2001 and before September 11, 2004, and placed in service before January 1, 2005.Within each of the preceding paragraphs there are special rules, limitations and terms one should be familiar with to determine the actual depreciation deduction available. As an example assume the following facts:  Asset placed in service July 1, 2002Description: Computer Equipment         (New), MACRS recovery period 5 years; Convention Half Year Method 200DB, Cost $50,000.The maximum depreciation deduction for calendar 2002 would be $35,440.  This is made up of $24,000 section 179, $7,800 30% bonus and $3,640 in regular MACRS deduction.  The year 2003 depreciation amount would be $5,824 on this asset.  The new 30% bonus depreciation is mandatory unless you elect out of the provision.  What that means is that if you do not take the deduction for assets placed in service after September 10, 2001 and you do not elect out of the provision, you must reduce your tax basis by the amount of depreciation you should have taken which includes the 30% bonus.  Many affected taxpayers filed their income tax returns before this new law was passed.  These taxpayers should determine whether amended returns are appropriate. The election to "opt out" of the bonus depreciation is assumed to have been made for returns filed before May 31, 2002 if certain conditions are met.  For all returns filed after May 31, 2002 an affirmative election must be included in the income tax return.  Additionally, many states will not allow this additional deprecation for state income tax purposes.  Kansas is still debating this issue. In summary, calculating depreciation is not difficult.  However, the limitations, terminology and special rules make it a somewhat complicated area of the tax law.  Unless you have a good understanding of these rules, I suggest you seek the counsel of a competent individual that does.