Basic Non-Macrs Depreciation

All Depreciation Methods

BVj = BV0

BVj = BVj -1

BVj
Review Guide w/ Tables for Depreciation & Taxes
D1
D2
Dj
Dj
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
DB to SL Switch
MACRS

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

DST+1 =
SV
n n /DBR
= Dn = (BVST – SV ) / (n – ST)

If SV 0 or tax rate not constant, then use trialand-error to determine time to switch
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
Section 179
1. The $500,000 limit is reduced on a dollar-for-dollar
basis as total purchases during a year exceed
$2,000,000.
2. The full Section 179 expense always is subtracted from
an asset’s basis before depreciating with MACRS.
3. The MACRS depreciation charge is deducted first from
TI, and then the expense. Any portion of the expense
that would drive TI negative may be carried over to
following years.
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
MACRS Personal Property Classes
n
Examples of Assets
3
5
7
10
15
20
27.5
39
Special handling devices for food and beverage manufacture
Special tools for manufacturing fabricated metal, motor vehicles, rubber, glass
Truck tractors and racehorses
Computers and peripherals, office machinery
Research and experimentation equipment
Oil and gas drilling, construction, apparel manufacturing equipment
Cars (subject to limits), trucks, and buses
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
Docks and ship building equipment
Equipment for grain, sugar, and vegetable oil products
Durable goods manufacturing and oil refining equipment
Pipelines
Municipal wastewater treatment plants
Land improvements such as shrubbery, fences, or roads, but not land itself
Electric, gas, water and steam utilities
Residential rental property (excludes hotels and motels)
Nonresidential real property
Real Property Recovery Rates (%)
n = 27.5
Month in Which Placed in Service
4
5
6
7
8
9
1
2
3
j=1
2-9
Even 10-26
Odd 11-27
28
29
3.485
3.636
3.637
3.636
1.970
3.182
3.636
3.637
3.636
2.273
2.879
3.636
3.637
3.636
2.576
2.576
3.636
3.637
3.636
2.879
2.273
3.636
3.637
3.636
3.182
1.970
3.636
3.637
3.636
3.485
1.667
3.636
3.636
3.637
3.636
0.152
1.364
3.636
3.636
3.637
3.636
0.455
n = 39
1
2
3
4
5
6
7
8
10
11
12
1.061
3.636
3.636
3.637
3.636
0.758
0.758
3.636
3.636
3.637
3.636
1.061
0.455
3.636
3.636
3.637
3.636
1.364
0.152
3.636
3.636
3.637
3.636
1.667
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
Personal Property Recovery Rates (%)
j
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
n=3
n=5
n=7
n=10
33.33
44.45
14.81
7.41
20.00
32.00
19.20
11.52
11.52
5.76
14.29
24.49
17.49
12.49
8.93
8.92
8.93
4.46
10.00
18.00
14.40
11.52
9.22
7.37
6.55
6.55
6.56
6.55
3.28
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
n=15
n=20
5.00
9.50
8.55
7.70
6.93
6.23
5.90
5.90
5.91
5.90
5.91
5.90
5.91
5.90
5.91
2.95
3.75
7.22
6.68
6.18
5.71
5.29
4.89
4.52
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
2.23
Percentage Depletion Allowances
Natural Resource
Borax, carbon dioxide produced from a well,
granite, limestone, marble, mollusk shells,
potash, slate, and soapstone
Coal, lignite, sodium chloride
Gravel, sand, and stone (other than
dimension or ornamental stone)
Oil and natural gas (small producers)
Sulphur and uranium
U.S. production of asbestos, lead ore, mica,
nickel ore, and zinc ore
U.S. production of certain oil shale, copper,
iron ore, gold, and silver
%
14
10
5
15
22
22
15
Taxation of Section 1231 Properties

Section 1231 assets include most project equipment that is depreciated
Effects of Different ARs of 1231 Properties

Section 1245
Gain1231 = AR - BV0

Section 1245 mostly MACRS personal prop
BV0

Section 1250 primarily MACRS real prop

GLD = AR
Recapture = BV0 - BVd
Recapture = AR - BVd
BVd
BVd
Loss 1231 = BVd - AR

For Section 1231 losses and gains during tax yr
Net1231 = Gain1231
Loss1231
Post-1986 Section 1250

If net Section 1231 loss, deduct it from OI

If net Section 1231 gain, treat as capital gain
BVd

Recaptures: treat as OI w/o further consideration
Overview of Taxation
Individual Tax Schedule
0
OI
 GI
Loss 1231 = BVd
AR
All Individual Income + Proj Rev
 AGI = GI
Proj Exp
Adjustments
 Interest on student loans, payments into
qualified retirement plans, contributions to
cafeteria plans, alimony
 Standard deductions for 2011
 Single: $5,450 (single)
 Married, filing jointly: $10,900
 Choose max(standard, itemized)
 Exemption for 2011
 $3,500 for each dependent, including taxpayer
Married Tax Schedule (Filing Jointly)
Bracket
Tax
Tax
OI
17,000
10% OI
8,500)
17,000 < OI
69,000
1,700.00
+ 15% (OI 17,000)
4,750.00
+ 25% (OI
34,500)
69,000 < OI
139,350
9,500.00
+ 25% (OI 69,000)
174,400
17,025.00
+ 28% (OI
83,600)
139,350 < OI
212,300
379,150
42,449.00
+ 33% (OI
27,087.50
+ 28% (OI 139,350)
174,400)
110,016.50
+ 35% (OI
212,300 < OI
379,150
47,513.50
+ 33% (OI 212,300)
379,150)
8,500
10%
8,500 < OI
34,500
850.00
+ 15%
34,500 < OI
83,600
83,600 < OI
174,400 < OI
379,150 < OI
BVd
Individual Taxes: GI, Adjust, Deduct, and Exempt

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
Bracket
Gain1231 = AR
0
OI
(OI
379,150 < OI
102,574.00
+ 35% (OI 379,150)
Corporate Taxes
Corporate Tax Schedule

Only individuals have adjustments, exemptions,
and standardized or itemized deductions
OI = Revenues
Expenses,
TI = OI
Between
Pay
0
0
50,000
7,500
75,000
13,750
100,000
22,250
335,000
113,900
10,000,000
3,400,000
15,000,000
5,150,000
18,333,333
6,416,667
excluding GLDs
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
Plus
15%
25%
34%
39%
34%
35%
38%
35%

Irregular progression due to compromises

Not case for individuals

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
ATCF for Purchases
BV0
Yr
0
1
j
n
n
BTCF
-IC
BT1
BTj
BTn
AR
Dep / BV
IC Adj
D1
Dj
Dn
BV0 Dj
OI
BT1
BTj
BTn
AR
D1
Dj
Dn
BVn
Tax
OI1 tOI
Oij tOI
Oin tOI
GLD tD
ATCF
-IC
BT1 Tax1
BTj Taxj
BTn Taxn
AR TaxD
GLD
BVn

BTCF analyses utilize the BT AMRR.
ATCF for Disposals
MV today
Yr
Sell
0
1
j
n
n
BV today
BTCF Dep / BV
OI
BV
MV - BV
MV
BT1
BTj
BTn
AR
BVn
GL0 = GLD0
Tax
ATCF
GL0 tD MV- TaxD,0
- ATCFSell
D1
BT1- D1 OI1 tOI BT1- Tax1
Dj
BTj - Dj
OIj tOI BTj - Taxj
Dn
BT3 - D3 Oin tOI BTn - Taxn
BV - Dj AR - BVn GLn tD AR- TaxD,n
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
GLD as a CGL
treat each project’s

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
Term
LNL
Long Term
$0
LCL = LNL
SNL
SCL = SNL
$0
LNG
LNG SNL
SCL
LCG = LNG SNL
=
SNL
> LNG
SNL
SCL = SNL LNG
--- LCG = LNG
LCL = LNL
SNG LNL
SCG
SCG = SNG LNL
LCG = LNG
=
SNG
SCG = SNG
LNL > SNG
SNG
LCL = LNL SNG
Capital Gains for Corporations
Capital Gains Taxes for Individuals
G/L
Term
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.
Disposal Logic With Capital Gains
C a p ita l
Asset
G/L
Gain
Gain
Loss
Term
Treatment
Short Taxed as OI.
Long Taxed as OI, up to a maximum of 35%.
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.
Treatment
T ype?
S e c tio n 1 2 4 5
or 1250
C o m p u te C G L
o n p r o je c t
C o m p u te S e c tio n 1 2 4 5 o r
1 2 5 0 r e c a p tu r e . T a x a s O I.
C o m p u te S e c tio 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 tio n 1 2 3 1 g a in s a n d
lo s s e s . R e c a p tu 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 te
CGLs
T re a t n e t 1 2 3 1
g a in a s L C G
G a in
N e t g a in o r
lo s s ?
Loss
C S C G : T a xe d a t O I r a te
C L C G : In d iv - T a xe d a t C G r a te
C o r p - T a xe d a t O I o r 3 5 % r a te
D educt net
S e c tio n 1 2 3 1
lo s s fr o m O I
C S C L : In d iv - D e d u c t u p to $ 3 ,0 0 0 a n d th e n c a r r y a s S C L
C o rp - C a rry a s SC L
C L C L : In d iv - D e d u c t u p to $ 3 ,0 0 0 a n d th e n c a r r y a s L C L
C o rp - C a rry a s SC 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