depreciation tuneup powerpoint ostc

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Depreciation Tuneup

Donna M. Byrne, JD, EAAsh Creek Tax & Legal Services, LLCMonmouth, [email protected]

OutlineI. Background and Basics

II. First Year Choices

III. Cars and Other Listed Property, IRC §280F

IV. Planning Considerations

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Outline – Part I Bare Bones Basics

A.AuthoritiesB.ElementsC.Abbreviations

Polling Question #1

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Title 26, U.S. CodeEnacted by Congress

Title 26 = Internal Revenue Code◦§167 Deduction

◦§168 ACRS

◦§197 Amortization

◦§179 Election to Expense

◦§263 Capital Expenditures

Code of Federal Regulations, CFR

Promulgated by TreasuryTitle number matches Statute

Treas. Reg. §1.179‐5

Number DOT number HYPHEN number

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IRC 167 DepreciationThere shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) -

(1) of property used in the trade or business, or

(2) of property held for the production of income.

IRC 168 Accelerated Cost Recovery System(a) General ruleExcept as otherwise provided in this section, the depreciation deduction provided by section 167(a) for any tangible property shall be determined by using -(1) the applicable depreciation method,(2) the applicable recovery period, and(3) the applicable convention.

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IRC 197 Amortization of Goodwill etc.(a) General ruleA taxpayer shall be entitled to an amortization deductionwith respect to any amortizable section 197 intangible. The amount of such deduction shall be determined by amortizing the adjusted basis (for purposes of determining gain) of such intangible ratably over the 15-year period beginning with the month in which such intangible was acquired.

Code families

§169 Amortization of pollution control facilities

§178 Amortization of cost of acquiring a lease

§179 Election to expense certain . . . assets

§179A‐179E Various elections and deductions

§180 Expenditures by farmers for fertilizer etc.

§181 Qualified film and television . . .

§194 reforestation expenditures

§195 Start‐up expenditures

§198 Expensing of environmental remediation costs

§198A Expensing of qualified disaster expenses

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Polling Question #2

Elements of ACRS & MACRS

Basis

Method

Convention

Recovery Period

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Basis

Cost

Or Other (inherited, e.g.)

Before any deductions

Basis for Recovery

Basis

Minus first year extra deductions◦(179 or bonus)

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Method – some abbreviations

SL = straight line

200DB = accelerated

150DB = accelerated

200% Declining Balance

OPTIONAL DETOUR

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Start with straight line. Ignore convention for this demonstration. Example:

Cost = 200

Recovery Period = 5 years

Deduct 40 /year


Recovery Period = 5 years

Deduct 40 /year

Graph: ◦40

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Use 200% of the first year deduction!

80

◦ 40


Use the same percentage of basis each year. 80 = 40% * 200.

80

◦ 40

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Subtract deduction from Basis. Year 2 basis = 120. 40% = 48

80

◦ 40


Subtract deduction from Basis. Year 3 basis = 120‐48 = 72. And 40% = 28.8.

80

◦ 40

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Subtract deduction from Basis. Year 4 basis = 72‐29 = 43 And 40% = 17.2

80

◦ 40


Switch to Straight Line when it is better. 43 basis, 2 years. SL = 21.5/year. (vs. 17.2)

80

◦ 40

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X% Declining Balance

150% Declining Balance works the same way but starts with 150% of SL

60◦ 40

Convention

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Convention – more abbreviations

HY= Half Year

MM = Mid Month

MQ = Mid Quarter

Recovery Period Property Type 3‐year property

5‐year property

7‐year property

10‐year property

15‐year property

TEN CATEGORIES

20‐year property

Water utility property

Residential rental property

Nonresidential real property

Railroad grading or tunnel bore

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Railroad grading or tunnel bore

Polling Question #3

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Classify the Asset1. Decide what it is and what you’re using it for.

2. Find that type of property either in the statute or in Rev. Proc. 87‐56

3. Determine the Class Life, Property type, and Recovery Period

4. Sometimes this IS the challenge.

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In the statute3‐year property =

Non‐racehorses (over 12 years when placed in service)


Any automobile

Paul Hornung, MVP Corvette 1962

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Any Alaska natural gas pipeline


DEFAULT

No class life

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Class life Property type

Older concept based on “Useful life”

Rev. Proc. 87‐56

Example:

Rev. Proc. 87‐56 Asset Class 23.0Assets used in production of clothing NOT made of rubber or leather.

Class life = 9

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Manufacture of Rubber ProductsAsset Class 30.1

Assets used in manufacture of rubber products such as footwear, sundries, and tires.

Class life = 14

No mention of rubber jackets, but presumably they go here.

Production of leather productsAsset Class 31.0Assets used in production of finished leather products, such as footwear, belting, apparel, and luggage.

Class life = 11

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Mixed use ‐‐ Predominant use controls

Types of property & Recovery Periods

3-year property 3 years






Water utility property 25 years

Residential rental property 27.5 years

Nonresidential real property 39 years.

Any railroad grading or tunnel bore 50 years.

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Qualified Improvement PropertyQualified Improvement Property – 15 year property defined in 168(e)(6) as

an improvement to the INSIDE of a nonresidential building after the building is first placed in service.

(But not an elevator or escalator! Or an enlargement to the building or an improvement to the internal structural framework.)

Improvement = new assetImprovements to Buildings – an improvement or addition to a building is

treated like a new and separate asset.

same class as the building itself (whether residential or nonresidential).

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Land ImprovementsLand Improvements – are things like parking lots, sidewalks, bridges, fences, canals, and waterways. And more. See Asset class 00.3.

20 year class life, 15‐year GDS recovery period.

Buildings are not “land improvements.”

Abbreviations

GDS v. ADS

ACRS v. MACRS

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Part II ‐‐First Year Choices

A.179 ElectionB.168(k) Bonus DepreciationC.De minimis safe harbor

Election to Expense§179

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QuestionsWhere did it come from?

Which property?

Are there limits?

What are the recapture rules?

Can it create an NOL?

§179 Election to Expense Certain Depreciable Property

1. Which property?Purchased (not gifts or inheritances)

Trade or business (not investment)

Tangible personal property, off‐the‐shelf software

Generally not buildings, except single‐purpose agricultural or horticultural structures

Some improvements

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2. Making the election

Election – must affirmatively choose it

Asset by asset

Not pro‐rated by when placed in service


2. Making the election (cont’d)

Form 4562, Part I

Original return – can be late

Timely amended return

Revocation – on an amended return. Revocation is irrevocable.

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Polling Question # 4


3. Limitations

Investment LimitMaximum $ 2,950,000

Maximum is reduced if 179 property exceeds $ 10,040,000

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3. Limitations (cont’d)

Business income LimitTaxable income from all trades/businesses

Includes W2 income

§179 cannot create or increase a NOLExcess election is a §179 carryover instead


3. Limitations (cont’d more)

Business income limit (continued) Applies at entity AND individual levelsMarried couple = ONE taxpayer

SUV Limit $25,500 if NOT listed property (further limited for listed property under §280F)

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4. Carryover: Only results from the business income limitCarries forward indefinitelyReport on Form 4562Reduces SE income


4. Carryover (cont’d) Choose which assets support itUnused carryover becomes additional basis on disposition

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Bonus Depreciation§168(k)


Which property?

Are there limits?



Is it revocable?

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In particular,

Why does the software automatically deduct this?

Why it always asks whether an asset is “new”?

§168(k) Special (Bonus) AllowanceAdded in 2002; Meant to be temporary

Not optional

But can elect out.◦Election out is by Property CLASS (i.e., 3‐year, 5‐year, etc.)

◦Elect out by statement on the return.

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§168(k) Special (Bonus) Allowance100% through 2022

Decreases 20% each year after

Which property?

Recovery period 20 years of less Retail computer software

Certain film or TV productions

Certain live theatrical productions.

New or used, if it is new to you.


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§168(k) Special (Bonus) AllowanceThere is no annual limit There are special rules for passenger cars and SUVsNo AMT adjustment

§168(k) Special (Bonus) AllowanceThe 179 Expense deduction comes out first.

No bonus depreciation on an asset bought with floor plan financing debt.

Floor plan financing is used to finance the acquisition of motor vehicles held for sale or lease, and is secured by the inventory so acquired.

Other limitations apply

Other special first year rules apply to specific assets under later parts of §168

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§168(k)CAUTION:

Special rules for trees or vines bearing fruit or nuts. (Topic for next off season?)

§168(k) CAUTION:

Many states do not allow bonus depreciation at all.

Others do, but allow a smaller amount.

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De Minimis Safe Harbor§1.263(a)-1

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Which property?

Are there limits?



Is it revocable?

Capital Expenditures (backdrop)

General rule – no deduction for NEW assets or IMPROVEMENTS.

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Capital Expenditures (backdrop)

General rule – no deduction for NEW assets or IMPROVEMENTS. That create a benefit that lasts more than a year

And is not just a repair. This is a gray area.

Midland Empire Packing Company 14 TC 635 (1950)

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Repair v. Improvement

Meat packing plant in Billings, MT

Since 1917

Unfinished basement curing room

Curing ham and bacon

Water seeped in at times.But it did not matter.

Until . . .

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Yale Oil Corporation

new plant

300 yards uphill

Oil seeped into the groundwater

Into the wells

Into the basement

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Seal the basement to keep goingRepair or Improvement?

This was a BIG expense. They had to go to court,

But it was worth it.

(Repair)

What about LITTLE costs?


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Used in a trade or business

Lasts longer than a yearRecovery period?

Pricetag $1,040

Used in a trade or business

Lasts longer than a yearRecovery period?

Pricetag $1

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De minimis safe harbor, §1.263(a)‐1

A regulation!

An exception to the general rule.

No capitalization if less than $2500.


Not for inventory, land, or “rotable” spare parts.

No limit.

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Election is per taxpayer◦Not activity by activity◦Not asset by asset◦Rather, all or none

De minimis safe harbor, §1.263(a)‐1(f)

Deduct as ordinary and necessary business expense.

Upon sale, not a capital asset, not 1231 business asset.

1.263(a)‐1(f)(3)(iii) and (iv)

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Recapture?

Ordinary income on sale

Income is part of business or activity

Increases SE income in a business

Election and RevocationElect with statement on the tax return

Election at Partnership or S Corp level

General rules for election timing apply under 301.9100‐3 apply

NO revocation

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Elections Summary

§179 – Elect TO expense part/all

§1.263(a)‐1 Elect TO expense small assets

§168(k) Bonus – must elect OUT

Part III. Listed Property and Cars§280F

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Which property?

What are the limits?


Form 4562? Or Vehicle Worksheet?

“I don’t have listed property.”

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Listed property (not just luxury cars!)

Passenger cars 6000 pounds unloaded GVW or less

Other property used for transportation

Property typically used for entertainment, recreation, or amusement

Any vehicle up to 6000 GVW

Not vehicles with more than 9 passenger seats behind the driver.

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Any vehicle up to 6000 GVW

And not property used to transport unrelated people for compensation

Not computersComputers placed in service before TCJA are listed property

Placed in service in 2018 or later are NOT.

CAUTION: Regulations do not reflect the change.

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Limit – Employee useMust be for convenience of employer

TCJA suspended business deductions for most employees through 2025

Limit ‐‐ depreciationALL depreciation limited:

Regular MACRS

Bonus Depreciation

179 Expense

TOTAL first year deduction: $18,100

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Limit ‐‐ depreciationBonus Depreciation $8,000

179 Expense

TOTAL first year deduction: $18,100

WITHOUT Bonus/179, the limit is $10,100

Polling question #8

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Limit – subsequent yearsWITHOUT Bonus/179,

Year 1 $10,100

Year 2 $16,100

Year 3 $9,700

Year 4+ $5,760

Limit – subsequent yearsWITH Bonus/179, FUNKY THING! Recently fixed. What it was:

Year 1 $18,100 Year 2 $0 Year 3 $0 Year 4+ $0AFTER Recovery period: $5,760/year

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Limit – subsequent yearsWITH Bonus/179, FUNKY THING! Recently fixed.

Year 1 $18,100

Year 2 $0

Year 3 $0

Year 4+ $0

AFTER Recovery period: $5,760/year

Standard Mileage Deduction

2020 Mileage rate = 57.5 ₵ per mile

That includes 27 cents/mile for depreciation.

280F does NOT limit the standard deduction.

NO LIMIT

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Standard Mileage Deduction

27 cents/mile for depreciation reduces basis.

STILL NO LIMIT

Continue to claim standard mileage even if basis is zero.

Standard Mileage Deduction27 cents/mile for depreciation reduces basis.

STILL NO LIMIT

Continue to claim standard mileage even if basis is zero.

BUT Basis does get reduced.

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RecaptureDepreciation reduces basis.◦ Including standard mileage depreciation

◦Result is usually gain on sale

Recapture on sale means characterizing part or all of the gain as ordinary.

CARS Recap: Small, Medium, LargeSMALL – less than 6000 lbs.◦ Listed property◦ limited depreciation deductions

MEDIUM – 6000 to 14,000 pounds◦ Not listed property◦ Limited 179 deduction ◦More than 9 passengers not affected

LARGE – over 14,000 pounds◦ Not affected, normal rules apply

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Polling question #9

Form 4562

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Form 4562 ‐‐Warning

“The 4562 statement is not always required to be filed. Check “Always Print 4562 Statement” to always print the statement.”

Form 4562 Statement

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Form 4562 – Required ifA new asset is placed in service.

Amortization begins this year.

There is a 179 deduction, new or carryover

There is a deduction on listed property (all years)

There is a vehicle deduction NOT on Schedule C

If none of that applies,

Report vehicle information on the Schedule C worksheet

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IV. Planning

Planning Considerations

A.RecaptureB.CarryoversC.QBI

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RecaptureDepreciation reduces basis.◦ Including standard mileage depreciation

◦Result is usually gain on sale

Recapture on sale means characterizing part or all of the gain as ordinary.

Recapture when use changes to personal means recognizing income.

Recapture QuestionsOn a sale, does it matter which kind of depreciation we took?

It matters what kind of asset it is:

§ 1245 Personal property, certain depreciable real property

§ 1250 Most real property

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General recapture ‐‐ SaleTangible personal property MACRS Assets

Assets with Bonus Depreciation

Assets with 179

De minimis safe harbor assets

Cars with standard depreciation

General recapture ‐‐ SaleTangible personal property – Depreciation amount is ordinary

Assets with Bonus Depreciation – Bonus amount is ordinary

Assets with 179 ‐‐ 179 amount is ordinary

De minimis safe harbor assets – all proceeds ordinary

Cars with standard mileage – depreciation amount is ordinary

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General recapture – Sale, 1250 PropertyResidential Rental Property – no recapture

Nonresidential Real Property – no recapture

(Recapture Accelerated depreciation – SL, but there is no accelerated depreciation)

The unrecaptured SL depreciation portion of gain is a special form of LT capital gain. Taxed up to 25%.

Polling question #10

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Personal Use RecaptureWhen less than 50% business use

Recapture and report on Form 4797, Part IV

Applies to179Bonus depreciation on listed assets

And, for listed assets, the method changes going forward.

Other considerations179 Carryover vs. NOL

Spillover against W2 income vs. later deduction against SE

QBI deductionNet business income

UBIA

Look forward to disposition

Use elections as fine tuning tools

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depreciation tuneup powerpoint ostc

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