Cost Recovery Personal Property
• Tangible Personal (business) Property –
generally, use depreciation table 7-1.
• Accelerated depreciation (versus straight line).
There is a different table for straight line.
• Half Year Convention
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3 year – racehorse
5 year – autos, copiers, computers
7 year – furniture, fixtures and equipment.
15 year – land improvements (parking lot)
Mid-Quarter Convention
• If more than 40% of tangible personal is
purchased in the last quarter of the
taxpayer’s tax year, then the mid-quarter
MACRS tables must be used.
• This means that you will be doing four
depreciation calculations for the year (one
for each quarter), and when the property is
disposed of, you would be required to use
the mid-quarter table in the year of
disposition.
Cost Recovery Real Property
• Real Property – real estate like buildings.
Generally, use table 7-9.
• Straight line (versus accelerated depreciation)
• Mid-Month Conversion – choose month in the year
of purchase and the year of sale. In month of sale,
take a half month of depreciation. For example:
» Sale in January ………. take ½ month
» Sale in March ………… take 2 ½ months
» Sale in October ………. Take 9 ½ months etc. etc.h
• Residential Real Property – 27.5 year recovery
• Nonresidential Real Property – 39 year recovery
Additional Depreciation
50% (was 30%) Additional First Year
• Applies to tangible personal property only
…… not real property.
• Applies to property acquired after
September 10, 2001 and before Jan 1, 2005.
• May 5th 2003 ……. changed to 50%
• Election may be made not to take the
additional depreciation.
• Cost is then reduced by the additional
depreciation for calculating the MACRS
deduction.
Expensing Under Section 179
• Taxpayer can elect to write-off up to
$108,000 the cost of tangible personal
property.
• Annual Limitations:
• First, reduced dollar for dollar when property
placed in service exceeds $430,000.
• Second, the amount expensed under Section 179
cannot exceed the taxable income
• Basis is reduced by 179 expense for purposes of
cost recovery.
Automobiles
• There is a limitation on the amount of depreciation
that can be taken on expensive automobiles. This
is to discourage the business use of cars like
BMW’s, Lexus and the like.
• If there is personal use of the business auto, then
the business portion must be allocated for the
deduction. (like 80% business and 20% personal).
• If business use falls below 50%, straight line
depreciation must be used (versus accelerated).
Not only that, but any accelerated depreciation
from prior years must be recaptured.
Automobiles (con’t)
• Maximum depreciation:
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•
•
•
Year 1 $2,960
Year 2 $4,800
Year 3 $2,850
Remaining Years $1,675
• Special Limitation on 179 Deduction for
nonpassenger vehicles ( > 6,000 lbs.)
• Limited to $25,000
Amortization
• Intangibles are amortized over a 15 year
period beginning in the month that the
intangible is acquired.
• Intangibles include franchises, copyrights,
patents, covenants not to compete and
goodwill.
Depletion
• Natural resources (oil, gas and timber) are
subject to depletion.
• Land cannot be depleted (nor depreciated)
• Two depletion methods:
• Cost Depletion – basis is divided by the recoverable
assets (like estimated barrels of oil) to get depletion
per unit.
• Percentage Depletion – percentage rate is applied to
gross income (multiplied by gross income) to get
depletion, but it is limited to 50% of net income of
the property being depleted.
In the Year of Sale, what factor do we use to calculate
depreciation for the partial year??
Half-Year
Convention
Mid-Quarter
Convention
Mid-Month
Convention
J
For the Year
D
1
2
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
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2.5
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3.5
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4.5
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5.5
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6.5
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7.5
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8.5
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9.5
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N
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