Chapter 8Cost RecoveryGeneral Considerations (slide 1 of 2)General Considerations (slide 2 of 2)Accelerated Cost Recovery System-PersonaltyMACRS-PersonaltyAdditional 30% Cost Recovery AllowanceExample - Additional 30% Cost Recovery AllowanceHalf-year ConventionExample-Half-year ConventionMid-quarter conventionExample - Mid-Quarter ConventionMACRS-Realty (slide 1 of 2)MACRS-Realty (slide 2 of 2)Optional Straight-line ElectionElection to Expense Assets -Section 179 (slide 1 of 5)Election to Expense Assets -Section 179 (slide 2 of 5)Election to Expense Assets -Section 179 (slide 3 of 5)Election to Expense Assets -Section 179 (slide 4 of 5)Election to Expense Assets -Section 179 (slide 5 of 5)Listed Property (slide 1 of 4)Listed Property (slide 2 of 4)Listed Property (slide 3 of 4)Listed Property (slide 4 of 4)Passenger Auto Cost Recovery Limits (slide 1 of 6)Passenger Auto Cost Recovery Limits (slide 2 of 6)Limits on Autos and Other Listed Property (slide 3 of 6)Limits on Autos and Other Listed Property (slide 4 of 6)Passenger Auto Cost Recovery Limits (slide 5 of 6)Passenger Auto Cost Recovery Limits (slide 6 of 6)Alternative Depreciation System (ADS) (slide 1 of 2)Alternative Depreciation System (ADS) (slide 2 of 2)AmortizationDepletion (slide 1 of 4)Depletion (slide 2 of 4)Depletion (slide 3 of 4)Depletion (slide 4 of 4)Intangible Drilling Costs (IDC)PowerPoint PresentationChapter 8Chapter 8Depreciation, Cost Recovery, Amortization, and DepletionDepreciation, Cost Recovery, Amortization, and DepletionCopyright ©2004 South-Western/Thomson LearningCopyright ©2004 South-Western/Thomson LearningEugene Willis, William H. Hoffman, Jr.,Eugene Willis, William H. Hoffman, Jr.,David M. Maloney and William A. RaabeDavid M. Maloney and William A. RaabeC7 - 2Cost RecoveryCost Recovery•Recovery of the cost of business or income-producing assets is through:–Cost recovery or depreciation: tangible assets–Amortization: intangible assets–Depletion: natural resources•Recovery of the cost of business or income-producing assets is through:–Cost recovery or depreciation: tangible assets–Amortization: intangible assets–Depletion: natural resourcesC7 - 3General Considerations(slide 1 of 2)General Considerations(slide 1 of 2)•Basis in an asset is reduced by the amount of cost recovery that is allowed or allowable•Basis in an asset is reduced by the amount of cost recovery that is allowed or allowableC7 - 4General Considerations(slide 2 of 2)General Considerations(slide 2 of 2)•ACRS & MACRS apply to:–Assets used in a trade or business or for the production of income–Assets subject to wear and tear, obsolescence, etc.–Assets must have a determinable useful life–Assets that are tangible personalty or realty•ACRS & MACRS apply to:–Assets used in a trade or business or for the production of income–Assets subject to wear and tear, obsolescence, etc.–Assets must have a determinable useful life–Assets that are tangible personalty or realtyC7 - 5Accelerated Cost Recovery System-PersonaltyAccelerated Cost Recovery System-Personalty•ACRS (1981-1986) characteristics:–Statutory lives of 3, 5, 10, 15 years–Assets have no salvage value–Mid-year convention–Reduce depreciable basis by 1/2 investment tax credit taken•ACRS (1981-1986) characteristics:–Statutory lives of 3, 5, 10, 15 years–Assets have no salvage value–Mid-year convention–Reduce depreciable basis by 1/2 investment tax credit takenC7 - 6MACRS-PersonaltyMACRS-Personalty•MACRS (after 1986) characteristics: MACRS Personalty Statutory lives: 3, 5, 7, 10 yrs 15, 20 yrs Method: 200% DB 150% DB Convention: Half Yr or Mid-Quarter DB = declining balance with switch to straight-lineStraight-line depreciation may be elected•MACRS (after 1986) characteristics: MACRS Personalty Statutory lives: 3, 5, 7, 10 yrs 15, 20 yrs Method: 200% DB 150% DB Convention: Half Yr or Mid-Quarter DB = declining balance with switch to straight-lineStraight-line depreciation may be electedC7 - 7Additional 30% Cost Recovery AllowanceAdditional 30% Cost Recovery Allowance•For qualified property acquired after 9/10/01 and before 9/11/04, an additional 30% cost recovery allowance is available–Qualified property includes most types of new property other than buildings–Additional 30% cost recovery taken reduces adjusted basis of property–May elect to not take the additional first-year cost recovery•For qualified property acquired after 9/10/01 and before 9/11/04, an additional 30% cost recovery allowance is available–Qualified property includes most types of new property other than buildings–Additional 30% cost recovery taken reduces adjusted basis of property–May elect to not take the additional first-year cost recoveryC7 - 8Example - Additional 30% Cost Recovery AllowanceExample - Additional 30% Cost Recovery Allowance•Corporation acquires new five-year property for $10,000 on 01/15/03–Cost recovery allowance for 2003:30% additional first-year depreciation ($10,000 X .30) $ 3,000MACRS calculation($10,000-$3,000) x .20 1,400Total Cost Recovery $ 4,400•Corporation acquires new five-year property for $10,000 on 01/15/03–Cost recovery allowance for 2003:30% additional first-year depreciation ($10,000 X .30) $ 3,000MACRS calculation($10,000-$3,000) x .20 1,400Total Cost Recovery $ 4,400C7 - 9Half-year ConventionHalf-year Convention•General rule for personalty•Assets treated as if placed in service (or disposed of) in the middle of taxable year regardless of when actually placed in service (or disposed of)•General rule for personalty•Assets treated as if placed in service (or disposed of) in the middle of taxable year regardless of when actually placed in service (or disposed of)C7 - 10Example-Half-year ConventionExample-Half-year Convention•Bought and placed an asset in service on March 15 (Tax year end is December 31)–Treated as placed in service June 30–Six months cost recovery in year 1 (and year disposed of, if within recovery period)•Bought and placed an asset in service on March 15 (Tax year end is December 31)–Treated as placed in service June 30–Six months cost recovery in year 1 (and year disposed of, if within recovery period)C7 -