Tax Depreciation Myths

Mr. Handy believes that all these outlays could be depreciated for tax purposes in the seven-year MACRS class.

Taxable income includes a deduction for $40,000 of depreciation that exceeds the depreciation allowed for E&P purposes.

Depreciation Schedule Year 0 1 2 3 4 5 6 7 8 9 10 Building 10000 10000 10000 10000 10000 10000 10000 10000 10000 10000 Equip 142857.1429 142857.1 142857.1 142857.1 142857.1 142857.1 142857.1 0 0 0 Dep Exp 152857.1429 152857.1 152857.1 152857.1 152857.1 152857.1 152857.1 10000 10000 10000 Tax Credit 42800 42800 42800 42800 42800 42800 42800 2800 2800 2800

| In Year 1, depreciation is $5,000 plus 15% of the asset’s outlayFrom Year 2, depreciation is either * 30% of the asset’s book value; or * if the asset’s book value is less than $6,500, depreciation is the asset’s book value (i.e. asset is depreciated to zero once book value < $6,500)

depreciation tax savings in each year of the project’s economic life, and 3) the project’s

Depreciation is the loss in value of an asset / building over time due to wear and tear, physical deterioration and age. Depreciation is treated as an expense and is a line item on your income statement but must be applied only to the building and not the land (since land does not wear out over time). You will be able to depreciate the building over a period of 39 years using the Modified Accelerated Cost Recovery System (MACRS). IRS Publication 946 contains the rules and guidelines governing depreciation of non-residential or commercial property.

If depreciation were simply ignored, would this affect the acceptability of proposed capital projects? Explain.

1. Financial reporting purposes: straight line depreciation method is used for plant assets that have a

Charlie meets the four residents tests in s 6-5, he has a permanent place of abode in Australia, he lives permanently in Australia with his family. Charlie’s property in Yarra Valley is a CGT asset as defined by Hepples v FC of T ATC 4497, and the cost base is originally $250,000 for the land and $300,000 for the home. As Charlie purchased the property before 21 September 1999 he has the option of using either the indexation method or the discount method when determining his capital gain. (s 115-5) Due to having the value of the land and home the CGT can be calculated as separate assets. From 1990 to 1997, Charlie’s used the property for personal use only and was thus treating the property as his main residence, however, the main residence exemption only covers up to two hectares of land and in this case the property size is three hectares. Charlie is able to nominate two hectares of land to fall under the main residence exemption and the last hectare will be subject to capital gains upon the sale of the property and is apportioned according to the rules in subdivision 118-B of the Income Tax Assessment Act 1997.

Taxation is known for causing headaches, and even more so when the regulations are altered and implementation begins in the next year. An example of taxation leading to confusion and migraine pain is the issuance of final regulations related to the capitalizing expenses related to tangible property. The issuance is known as the short hand “Repair Regs” and is related to the capitalization of costs for repair and maintenance of tangible property. Capitalizing the costs means that the tax benefit of an expense is not 100% deducted out in the year of purchase but having the item begin amortizing those costs over a period of time and slowly unwinding it out once a plumber or roofer has been called in to alleviate some of the

Depreciation is the reduction in the value of certain fixed assets. It is a periodic reduction of fixed assets, usually done every year. Fixed assets are assets that add value to the company. Examples of fixed assets that can be depreciated are vehicles, buildings, machinery, equipment and fixture and fittings. The only fixed asset that is not depreciated is land, because it is not worn-out overtime, unless natural resources are being exploited. When a company buys a new fixed asset it doesn’t account for the full cost of it as one single large expense, instead the expense is spread over the life time of the asset. This is done by depreciating the asset. For example a company purchases a CNC router for €50,000 and will be used for five year. If they pay the full amount in the

v. Commissioner. Frontier Custom Builders was also using the same accounting method for tax and financial reporting and adopted the simple production method. While this case was about the real estate industry, the ruling of the case on the production and non-production expenses for custom home building provides a clear precedent that any expenses that are clearly production-related is required to be capitalized. This case also shows that any costs that were partly production-related and partly non-production-related should be allocated appropriately among deductible and capitalized

In this case, the client is operating a bakery, and he anticipates he will incur $6.000 in maintain his shop over the next 12 months. But according to the section DA 2 (1) ITA 2007, it states that deduction for any expenditure or loss to the extent that it is of a capital nature (DA 2 General limitations, 2004). Therefore, the maintenance expenditure is caught by section DA 2 (1), due to the maintenance expenditure has a capital nature. For that reason, the deferred maintenance of $6,000 is not allowed to deduct.

Depreciation in accounting concept is the gradual conversion of the cost of a tangible capital asset or fixed asset into an operational expense (called as depreciation expenses) over the asset’s estimated useful life. There have 3 objectives of the depreciation: 1) Spread a large expenditure (purchase price of the asset) proportionately over a fixed period to match the revenue received from it. 2) Reduce the taxable income by charging the amount of depreciation against the company’s total income. In effect, charging of depreciation means recovery of invested capital, by gradual sale of the asset over the years during which output or service are received from it. 3) Reflect the reduction in the book value of asset due to obsolescence or wear and tear. Depreciation normally

Now the basis for all future transactions relating to this building would also be at its cost, i.e. $12 million. For example: The depreciation would be charged on $12 million and not on $15 million. Similarly when the asset is sold in future, the profit or loss on sale would be based on the cost price actually paid for it. Since the original or