Slide 1DEPR., COST RECOVERY, AMORTIZATION, & DEPLETIONDepreciation and Cost RecoveryGeneral Considerations (1 of 3)General Considerations (2 of 3)General Considerations (3 of 3)Depreciation Methods (1 of 2)Depreciation Methods (2 of 2)Calculation of Depreciation §179 ExpenseCalculation of Depreciation Year of DispositionMACRS Restrictions (1 of 2)MACRS Restrictions (2 of 2)Amortization§197 IntangiblesResearch and Experimental ExpendituresComputer SoftwareDepletion, Intangible Drilling and Development Costs (1 of 2)Depletion, Intangible Drilling and Development Costs (2 of 2)Tax Planning ConsiderationsCompliance and Procedural ConsiderationsSlide 2110-1©2007 Prentice Hall, Inc.©2007 Prentice Hall, Inc.10-2DEPR., COST RECOVERY, DEPR., COST RECOVERY, AMORTIZATION, & AMORTIZATION, & DEPLETIONDEPLETIONDepreciation and cost recoveryAmortizationDepletion, intangible drilling an development costsTax planning considerationsCompliance and procedural considerations©2007 Prentice Hall, Inc.10-3Depreciation and Cost Depreciation and Cost RecoveryRecoveryGeneral considerationsDepreciation methodsCalculation of depreciationMACRS restrictions©2007 Prentice Hall, Inc.10-4General Considerations(1 of 3)Taxpayers must use specific depreciation methods depending on when an asset is placed into servicePrior to 1981After 12/30/80 and before 1/1/87 (ACRS)After 12/31/96 (MACRS)©2007 Prentice Hall, Inc.10-5General Considerations(2 of 3)Common rules to all systemsNo depreciation may claimed on land or other assets with an indefinite lifeDepreciation permitted in year asset placed into serviceApply method consistentlyBasis of property being depreciated reduced by amount of allowable depreciation each taxable year©2007 Prentice Hall, Inc.10-6General Considerations(3 of 3)Types of PropertyTangible Property (physical)Intangible Property (non-physical)Real Property Personal Property vs. Personal-Use Property©2007 Prentice Hall, Inc.10-7Depreciation Methods(1 of 2)MACRSPersonal propertyUse 3, 5, 7, 10, 15, 20 year useful lifeDDB with conversion to straight-lineHalf-year convention½ year depr in 1st year and year of dispositionMid-Quarter convention when aggregate basis of all personal property placed into service during last three months of year exceed 40%No salvage value©2007 Prentice Hall, Inc.10-8Depreciation Methods(2 of 2)MACRSReal propertyResidential rental property 27.5 yearsNonresidential rental property 39 yearsStraight-line depreciation methodMid-month convention in year of acquisition and year of disposition Straight-line or Alternate Depreciation System (ADS)©2007 Prentice Hall, Inc.10-9Calculation of Depreciation§179 ExpenseMay elect to expense up to $108K in 2006 for certain tangible personal property placed into service during the year$ for $ phaseout if qualified property placed into service during year >$430KLimited to taxable ToB income©2007 Prentice Hall, Inc.10-10Calculation of DepreciationYear of DispositionMACRS allows depreciation to be taken in year of disposition based on conventionE.g., ½ year, mid-quarter, mid-month©2007 Prentice Hall, Inc.10-11MACRS Restrictions(1 of 2)Portion of asset used for personal use is not depreciableListed property rulesMust use straight-line of business use < 50%Recapture of excess cost-recovery if MACRS claimed and business use falls below 50%©2007 Prentice Hall, Inc.10-12MACRS Restrictions(2 of 2)Luxury automobile limitationDepreciation cannot exceed ceiling limitations (see page P10-14)Trucks, vans and SUVs (>6,000 lb)More generous rulesLeased vehiclesIncome inclusion based on IRS tables to eliminate avoiding luxury auto rules©2007 Prentice Hall, Inc.10-13AmortizationAmortization§197 intangiblesResearch and experimental expendituresComputer software©2007 Prentice Hall, Inc.10-14§197 IntangiblesGoodwill and going concern value, covenants not to compete, franchise fees, trademarks, trade names, etc.Classification and disposition of intangibles§197 asset treated as depreciable prop so that § 1231 treatment accorded disposition if held > 1 year©2007 Prentice Hall, Inc.10-15Research and Experimental ExpendituresInclude experimental and laboratory costs incidental to the development of a product (see table I10-4)Tax treatment optionsExpense in year paidDefer and amortize costs over 60 mo.Capitalize and write-off when project abandoned or is worthless©2007 Prentice Hall, Inc.10-16Computer SoftwareDeveloped computer softwareCost of developing software is qualified R&E under §174Expense immediately orAmortize over 60 monthsSeparately purchased softwareStraight-line depreciation over 36 months©2007 Prentice Hall, Inc.10-17Depletion, Intangible Depletion, Intangible Drilling and Development Drilling and Development CostsCosts (1 of 2) (1 of 2)Depletion methodsCost depletionSimilar to units of activity depreciationPercentage depletionDepletion rates based on statutory percentagesCan claim depletion deductions in excess of cost over the life of the asset©2007 Prentice Hall, Inc.10-18Depletion, Intangible Depletion, Intangible Drilling and Development Drilling and Development CostsCosts (2 of 2) (2 of 2)Treatment of intangible drilling and development costsCapitalized or deducted currentlyDecision to expense or capitalize depends on taxpayer’s current positionExpected marginal tax rates©2007 Prentice Hall, Inc.10-19Tax Planning Tax Planning ConsiderationsConsiderationsAlternative depreciation under MACRSUnits of production depreciationMay use instead of MACRSStructuring a business combinationMust consider amortization of goodwill©2007 Prentice Hall, Inc.10-20Compliance and Compliance and Procedural Procedural ConsiderationsConsiderationsForm 4562 is used to report depreciation, §179 expense, depletion, and amortization deductionsComments or questions about PowerPoint Slides?Contact Dr. Richard Newmark atUniversity of Northern Colorado’sKenneth W. Monfort College of [email protected]©2007 Prentice Hall,