Cap. & Depreciation

Capitalization

  1. Charact's
    1. Expenses w/Value in Future
      1. Helps prod. income & transform asset 2 another form
    2. X'ing Issue of Deductibility
    3. Types of Assets
      1. Wasting asset loses value so deduct depreciation over asset's life
      2. Nonwasting asset not wear out like land so basis act as deduction
    4. Det'ing Capital Expense
      1. Any expenditure w/subst'l value beyond taxable yr.
      2. Still arg. over subst'l improvement v. repair
  2. Capital Expense v. Deductible Expense
    1. Deductible
      1. If recurring expense, treat as ord. expense & deduct b/c effect is same
      2. Repair 4 ord. & busi. operation 2 protect against liab.
    2. Capital
      1. Costs of self prod'ed assets § 263A
      2. Start up expenditures depreciated / amortized over 5 yrs. § 195
        1. Investig. the creation / acq. of trade / busi. /
        2. Create trade / busi. / activity 4 profit
      3. Long term improvements extending life of bldg / cap. asset

Depreciation

  1. Elements
    1. Depreciable Basis & Salvage Value
    2. Useful Life of Asset
    3. Mech. 2 Calc. Depreciation
      1. Based on X of Asset's Life
      2. Straight Line / Slow Method
        1. Depreciate each yr. an equal amt. until end of asset's life
      3. Double Declining Balance (DB) / Faster Method
        1. Doubles % of straight line depreciation & subtract depreciable basis yr'ly
        2. Switch 2 straight line when that yields larger deduction 4 declined basis
    4. Acct'ing Sys.
    5. When 2 Begin Depreciate
      1. When asset 1st used 2 help trade / busi.
  2. Tangible Prop. § 168
    1. Apply As Long As Wasting Asset
    2. Applic. Depreciation Method
      1. DB of 200% switching 2 straight line when that's larger § 168)b)1
      2. DB of 150% 4 15 & 20 yr. prop.
      3. Shortcut in charts 2 multiply initial basis by % each yr. (handout 19)
      4. Can elect straight line / 150% DB 4 class which is irrevocable § 168)b)5
    3. Applic. Recov. Per. / Classif. of Prop. § 168)e
      1. Class of prop. by approx. class life shown in chart
      2. Can elect actual class life § 168)g
      3. Spec. prop. like auto given set life by § 168)e)3
    4. Applic. Convention
      1. Midyr. convention so all prop. serv'ed during midpt § 168)d)1
      2. Midquarter convention if subst'l prop. / 40% or more of agg. basis in serv. during last 3 mo. of taxable yr. § 168)d)3
    5. Salvage Value 0 § 168)b)4
      1. Depreciable basis is prop's basis
  3. Real Prop. Excl'ing Land § 168
    1. Depreciation Method
      1. Straight line 4 nonres'al & res'al bldgs § 168)b)3
    2. Applic . Recov. Per.
      1. Res'al rental if 80% / more of gross is rental income from dwelling § 168)e)2
      2. Res. rental has 27.5 yr.
      3. Nonres. real prop. has 39 yrs.
    3. Applic. Convention
      1. Mid-month convention § 168)d)2
  4. Intangible Prop. & Amortization
    1. Non X Based § 167
      1. Income forecast using % of rev. / total income
        1. Only used 4 movies, tv, records, etc.
      2. Unit of prod. using % of prod. / total prod.
    2. Intangible & Good Will § 197
      1. Amortized over 15 yrs.
      2. Amortizable goods listed § 197)d
      3. Can't amortized self created things § 197)c)2
      4. Not incl.
        1. Sports franchise if get all rts § 197)e)6
        2. Int. in film / similar 4 any K 4 less than 15 yrs. then K rt. amortized by § 167
  5. Spec. Depreciation Rules
    1. Limit Depreciation
      1. Luxury autos limited in depreciating cert. amt. only each yr. § 280F)a
      2. Busi. use less than 50% of § 280F)d)4 prop's, deduct by § 168)g / straight line depreciation § 280F)b
    2. Spec. Election 4 Small Busi. § 179
      1. Can deduct instead of depreciate if have less than $200k prop's
      2. Deduct only up 2 $17,500 of basis

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December 8, 1997

Ms. Haeji Hong
 1