Depreciation

Depreciable base

acquisition cost - residual value

Under MACRS IRS Determines the assets life usually referred to as recovery.

5 year recovery period Includes computers and peripherals automobiles trucks office machinery typewriters copiers and adding machines 7 Year recovery. Includes office furniture fixtures such as desks, files, chairs, safes and most equipments

MACRS Specifies the depreciation method for depreciable assets

- For equipment- and most land improvements uses the declining balance method but permits use of straight-line method MACRS prohibits the use of sum of the year digit method. Most companies choose declining balance method because it gives a higher depreciation write off in the early years - For buildings- MACRS requires a straight line depreciation

Depreciation of assets it is usually calculated on four factors

-Cost of asset -estimated life -residual value -the method of depreciation selected

declining balance method

An accelerated depreciation method that records more depreciation in earlier years and less depreciation in later years

Entry of dep expenses

Debit depreciation expense Credit accumulated depreciation- building Credit accumulated depreciation- Equipment Credit accumulated depreciation- vehicles Or Debit inventory WIP Credit accumulated depreciation- equipment

The units of production method of depreciation

Depreciable base/ estimated life in units, miles, hours etc = depreciation rate x output for year = Annual Depreciation

Bonus Depreciation Calculation

Let's say the property is worth $1,000,000. The bonus is subtracted from the basis after any 179 current expense deductions, and before MACRS depreciation is calculated, and is in addition to the MACRS depreciation amount.

MACRS depreciation

Modified Accelerated Cost Recovery System

Book value

Book value or net book value does not represent an assets it's fair market value. It represents the underappreciated cost of the assets as it appears on companies books and balance sheet Book value = acquisition cost - accumulated appreciation

MACRS- Not the company stipulates When an asset Is placed in service in the year of purchase regardless of the actual date of purchase. This is different from GAAP depreciation which does depend on the actual date of purchase

For depreciation of equipments and most land improvement in the year of purchase year 1 of the depreciation MACRS requires the half your convention Which means that all property machinery equipment land improvements be depreciated as if it were placed in service in the middle of the year regardless of the purchase date For depreciation of buildings MACRS imposes the midmonth convention which requires the buildings be depreciated as if purchased in the middle of the month regardless of the purchase date

Group purchase asset price formula

Specific asset fair market value (FMV)/ total FMV of all assets acquired = rate x total acquisition cost = specific asset acquisition cost

TCJA

Tax Cuts and Jobs Act

the section 179 deduction

This tax rules allow a company to expense in the year of purchase up to 10,00,000 of the cost basis of both new and used equipment and machinery

Formula of double declining balance method

1/years of estimated life = percentage straight line rate x 200%

Depreciation of buildings under MACRS

27.5 years residential rental property 39 for nonresidential or commercial property such as offices, warehouse And factories

Straight-line method of depreciation

A company that expects an asset to provide equal benefits in each year of it's estimated life should select the straight-line method To compute depreciation expense there r 2 ways Depreciate base / estimated life = equals annual depreciation To compute depreciation expense 1/Estimated life = annual depreciation rate*dep base

MACRS have no residual value

Asset is fully depreciated underMacrs

Book vs. Tax Depreciation

Book depreciation is defined by GAAP rules, while tax depreciation is defined by IRS rules. Depreciation under each of these methods can differ significantly. Companies that are required to submit to an audit or to submit financial statements to a third party (e.g., a bank) must use GAAP rules to calculate depreciation expense for financial statement purposes. IRS depreciation is for tax purpose GAAP depreciation is used mainly for financial statement Small companies can use both methods

What is depreciation?

Depreciation allocates the cost of an asset over its useful life. It also matches the cost of an asset with the revenue that asset helps to generate.

Mid-Quarter Convention

If more than 40% of the personalty is acquired in the fourth quarter, the mid-quarter convention applies to all personalty. The mid-quarter convention means that the acquisition date of the property is assumed to acquired in the middle of the quarter in which it was acquired for the purposes of depreciation.

Determining assets cost

It includes any cost incurred to acquire, transport and prepare the asset for its intended use Such as sales tax, commissions, fees transportation and installation

Determining assets residual value or scrap value

Residual value is an estimate made by a company management of the dollar amount that can be recovered for the asset at the end of its useful life when it is disposed of

Declining balance method formula

The depreciation rate for the declining balance method is a multiple of the straight line rate although any percentage maybe used the most common declining rates are 200% - 2 x straight line rate 150% - 1.5 x straight line rate 125% - 1.25 x straight line rate The most widely used rate is 200% referred to as double declining balance method. Whatever rate a company selects must be used over the entire life of the asset

Determining assets estimated life

The estimated life is the number of years the company expects that is it last or the amount of production it expect from the machine measured in hours miles units produced any other standard

Depreciation expense

The portion of the cost of a fixed assets that is used up each year is depreciation expense or depreciation

100% bonus deduction

This allows a company and opportunity to right of entire cost of machinery equipment and certain type of land improvements or buildings in the year of purchase

How depreciation is calculated under the double declining balance

Under double decline balance The depreciation rate is multiplied by the book value and not a depreciable base. Because the book value declines each year it is called the declining balance method

Book value

acquisition cost - accumulated depreciation