Capitalization and Cost Recovery p614

1. Section 168(b)(1): the depreciation method for cars is the 200 percent declining balance method, with a switch to straight line when straight line recovery of the remaining basis produces a larger deduction than the continued use of 200 percent declining balance.

   1. The cost recovery follows the half-year convention: if an asset is not placed in service at the very beginning of year 1, the deduction for that year should be half a year because section 168(d)(1) treats most assets as being placed in service in the middle of the year.

   2. For buildings we use the half month convention, straight line depreciation

2. Recapture rule of 1245: any gain that represents the recapture of overly generous ACRS deductions on tangible personal property will be treated as ordinary income, not capital gain. The amount treated as ordinary under 1245 is the lesser of

   1. the total gain realized on the disposition of the asset, or

   2. the ACRS deductions previously taken with respect to the asset.

      1. The recapture rule does not apply to buildings, instead use section 1250

      2. Income taxed as capital gain, using the 25% unrecapture capital gain rate.

3. If ACRS deductions understated the actual decline in value of the asset, the loss will be a 1231 loss, treated as ordinary loss

4. Steps:

   1. depreciable amount=purchase price – salvage value; usually salval = 0

   2. Determine years of depreciation (see section 168)

   3. Consult table on 1904 to determine rate (includes half-year convention)

   4. Multiply rate by depreciable amount = deduction

   5. Adjusted basis = old basis – deduction

5. Problems p620

   1. Problem 1

      1. see how railroads are classified under 168

      2. 7 year asset, use table on 1904

   2. Problem 2

      1. 45k-30k=15k ordinary gain

   3. Problem 3

      1. 5k loss, (1231 ordinary loss)

   4. Problem 4

      1. 70k ordinary gain (1245 gain), 5k capital gain

6. Section 168(k) p618

   1. For property put in service in 2013, can immediately write off 50 percent, then, the remainder of the cost is recovered under normal section 168 rules

7. Section 179 allows a taxpayer an immediate deduction of 500k for the cost of 179 property. 500k is reduced dollar for dollar, as the total cost of 179 property placed in service during the year exceeds 2 million.

   1. Combine 168(k) and 179: 600k property, 5 year straight line. Get 500k under 179, the remainder of 100k. then deduct 50k under 168(k). then normal section 168 deduction of 20%, which is 10,000.

8. 280F imposes special limitations on the deductions that may be claimed under 168 and 179. But 280F does not apply to vehicles weighing more than 3 tons. (SUV)

Non-depreciable assets

9. Land, art and antiques are non-depreciable tangible property

   1. Problem 5 p621

      1. It is eligible for ACRS so long as it is a subject to wear and tear in use. (violin, carpet)

10. An intangible business asset is also eligible for depreciation if it will be used in the business for only a limited period, the length of which can be estimated with reasonable accuracy. E.g. a taxpayer may be able to recover the cost of a patent or copyright over a shorter period than its legal life if he can prove its income-producing value will be exhausted before the legal protection has expired.

Section 197 intangibles

11. Taxpayers are allowed, under 197, to recover the cost of a wide range of purchased intangibles, including goodwill and other customer-based intangibles, on a straight line basis over 15 years. But 197 does not apply to intangibles created by...

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