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Capitalization Outline

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This is an extract of our Capitalization document, which we sell as part of our U.S. Income Tax Law Outlines collection written by the top tier of NYU School Of Law students.

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CAPITALIZATION A. Capitalization---Think of it as just another way to make income match up with deductions. Remember, SS1016 requires you to take these deductions into account
---can't double-deduct. i. Our Roadmap for Capitalization: a. SS167 o Is it property, subject to wear and tear, AND either o Used in trade/business, OR held for production of income b. If yes, then go to SS168: o Determine basis, recovery period, depreciation method, applicable convention ii. Depreciation: SS167(a) allows a deduction as depreciation for a reasonable amount of exhaustion, wear and tear for property subject to wear and tear, and that is either used in the T/B or held for production of income. Depreciation is allowed on the basis calculated under SS1011. a. SS263(a): No depreciation deductions for buildings or other permanent improvements to property. b. SS1016(a)(2) says to adjust your basis by the amount of depreciation deductions you take. So if you wind up selling a SS168 asset, and you get more for it than the accelerated depreciation system would have provided for, you wind up paying taxes on a gain b/c your adjusted basis is so low. iii. Depreciation Methods a. Straight-line: Just take the basis and divide evenly by number of years in recovery period b. Double-declining: Basically just double the straight-line amount for each year o Watch out for first year probably being a half year c. Salvage always treated as zero. So you deduct for depreciation all the way til you reach 0 asset value. But of course if you wind up selling for more than zero, you have to pay taxes on gain that that reflects (SS1016(a)(2)). iv. Accelerated Cost Recovery System (SS168(a)): For tangible property,
SS167(a) depreciation deduction should be determined by using: a. the applicable depreciation method o Except as otherwise provided, for all tangible assets, the correct method is the double declining balance method, and then switch to straight-line method in the first year in which that provides higher allowance (SS168(b)) o TP must use 150% declining method for any 15-year or 20year property, property used in farming, smart electric meters, and then switch to straight line in first year in which s-l yields a larger allowance (SS168(b)) o TP can elect to use 150% method for other property, but then must use that method for all property of that class placed in service in that tax year b. the applicable recovery period, and

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