No Slide Title
Download
Report
Transcript No Slide Title
Chapter
7
Property Acquisitions and
Cost Recovery Deductions
Expense vs. Capitalize
Deduction permitted for all “ORDINARY
AND NECESSARY” business expenses
Deduction prohibited for “PERMANENT
improvements to increase the value of
property”
Some types of capitalized costs can be
recovered through amortization or
depreciation
Expense vs. Capitalize
Repairs and maintenance? Source of IRS dispute
due to facts.
Capitalize expenditures that increase the value or useful life
of an asset.
Environment cleanup and prevention costs: TRA1997 has a
provision allowing firms to elect to deduct rather than
capitalize expenditures to abate or control hazardous
substances at contaminated areas.
Tax Basis
Tax basis = unrecovered cost (cost - depreciation).
Starting basis generally equals COST basis:
original purchase price regardless of whether acquired by
debt, or
FMV of asset if cost more difficult to measure.
Cost recovery of
Inventory = cost of goods sold
Tangible assets = depreciation
Intangible assets = amortization
Natural resources = depletion
Cost of Goods Sold
Inventory Methods (must use accrual to
account for COGS
1) FIFO
2) specific ID
3) LIFO - If use LIFO for tax, must also use LIFO
for books.
In times of inflation, LIFO decreases book and
taxable income.
Depreciation
Depreciation applies to tangible assets (things you
can touch versus intangibles like patents, goodwill)
that:
Lose value over time due to wear and tear, obsolescence
Buildings depreciate even though real estate often increases
in value.
Have a reasonably ascertainable useful life
Artwork is not generally depreciable.
Depreciation
MACRS - Modified Accelerated Cost
Recovery System
Personalty:
DDB: 3, 5, 7, 10
150% DB:15, 20
General rule is half year convention
Realty: SL method: 27.5 years residential, 39
years non-residential (specialty realty 20, 25, 50)
Mid Month convention
Depreciation Conventions - Personalty
Table 7-2 incorporates a half-year
convention - provides only 1/2 of the regular
rate in the year the property is put in service.
Anti-Abuse provision Mid-quarter convention
: IF > 40% personalty is acquired during the last quarter
of the year, THEN
Compute depreciation separately for EACH quarter’s
acquisition using mid-quarter tables in appendix of
chapter 7
Automobiles
Maximum annual depreciation limit per
vehicle, indexed for inflation.
Year 1 $3,160 (1st yr) with bonus $11,060
Year 2 $5,100 (2nd yr)
Year 3 $3,050 (3rd yr)
Year 4 + $1,875 (4th +++ yrs).
Compute depreciation per MACRS, then
limit above.
Expensing Election – Section 179
Applies to tangible personalty. May expense
$500,000 of assets purchased before
12/31/2013 - $25,000 in 2014>
Expense cannot create a business loss.
Expense reduced $ for $ by purchases >
$2,000,000..
50% Bonus depreciation on personalty for tax
years 2012 and 2013
Planning - if buy a 3-year, 5-year and 7-year asset,
which one should you expense?
Amortization of Intangibles
Generally requires a determinable useful life.
Organizational costs & Start up costs
Immediately deduct up to $5,000
Amount over $5K amortized over 180 months.
Start-up costs & Organization costs are
defined on pg. 177.
Expansion costs may be currently
deductible.
Leasehold Costs and Improvements
Cost of acquiring lease is amortized
over the period of lease.
Improvements to leased property are
capitalized and depreciated according to
type of property.
Purchased Intangibles
Allocate lump-sum price to assets by
relative FMVs.
Residual = goodwill.
Tax = 15 years SL
GAAP = 40 years pre-2002. No GAAP
amortization post-2001 - evaluate for
impairment annually. Book-tax difference
is permanent post-2001.