Depreciation is a decrease in value due to wear and tear of the asset. For
accounting purposes this can be taken as an expense to fixed assets. Inventory,
stock in trade, land, and art work cannot be depreciated. Intangible items such
as Goodwill cannot be depreciated, but they can be amortized over 15 years.
Tax depreciation - Most income tax systems allow a tax deduction for recovery of
the cost of assets used in a business or for the production of income.
What is a Fixed asset?
It is also known as a non-current asset or as property, plant, and equipment
(PP&E), is a term used in accounting for assets and property which cannot easily
be converted into cash. This can be compared with current assets such as cash or
bank accounts, which are described as liquid assets. In most cases, only
tangible assets are referred to as fixed.
Amortization is to periodically write off as an expense, a portion of the cost
of an asset. Usually an intangible asset is amortized. Property that may be
amortized include Pollution control facilities, Certain bond premiums, Research
& experimental expenditures, Cost of acquiring a lease, Business start-up cost,
Organizational cost for a business, and Goodwill.
Half-Year - When the half-year convention is applied, a half-year of
depreciation is taken for the first year the asset is placed in service
regardless of what month the asset was placed in service. A full year's
depreciation is taken each year for the remainder of the useful life of the
asset. If the asset is disposed before the end of its useful life, a half year
of depreciation is taken for the year of disposal regardless of the month in
which the asset was disposed. If the asset is kept for the asset's entire useful
life, half a year of depreciation is taken in the year following the last year
of its useful life.
Mid-month - This convention only applies to residential rental property,
nonresidential real property, railroad gradings and tunnel bores. The asset is
considered to have been placed in service in the middle of the month and a half
a month's depreciation is calculated for the month the asset is placed in
service. If an asset is disposed before the end of its useful life, it is
considered to have been disposed in the middle of the month and half a month's
depreciation is calculated for the month in which the asset is disposed.
Mid-Quarter - When this convention is applied, depreciation is calculated as if the
asset was placed in service or disposed at the mid-point of the quarter. For
example, if an asset were placed in service in January, depreciation would be
calculated as if the asset had been placed in service in the middle of February,
the midpoint of the first quarter.
Generally, any property placed in service during the course of a year receives a
half-year's depreciation under the half-year convention. However, a special rule
applies if you place in service more than 40% of the total basis of property for
the year in the last quarter of your fiscal year. That's to avoid waiting until
the end of the year to buy the property, yet secure a deduction for the whole
year. When calculating the total basis of property placed in service, exclude
any on which you took the Section 179 expense election. For real estate, a
mid-month convention is used.
Double Declining - 150% or 200 % Method. Most of the depreciation is taking at
the beginning of the asset's life.
Straight Line - Cost divided by the asset's life. This method is usually used
for book depreciation.
ADS - Alternative Depreciation System, the depreciation is figured the same, as
MACRS except the straight-line method is used, over the ADS recovery period,
with the appropriate convention.
Instead of MACRS you can make an irrevocable election with respect to any
classification of property for any tax year to use ADS. For residential rental
and nonresidential real property, you may make this election separately for each
MACRS - The Modified Accelerated Cost Recovery System is the
current tax depreciation system in the United States. Under this system, the
capitalized cost is recovered over a specified life for depreciation. These
lives are specified by IRS in tables where the assets are grouped into classes.
MACRS uses either declining balance switching to straight, line or straight line
to calculate the depreciation.
This includes automobiles, certain other vehicles, cellular phones, certain
computers, and property used for entertainment, recreation, or amusement.
This is the remaining value of an asset after it has been fully
This allows a taxpayer to deduct the
cost of certain assets as an expense, rather than requiring the cost of the
property to be capitalized and depreciated.
There is a dollar limitation on the amount that can be taken each year. This
limit varies from year to year. See
Section 179 Limits table. The 179 deduction for any taxable year may not
exceed your income for that year; also there is a threshold dollar limitation.
There are limits on the about of depreciation that can be taken each year for
luxury automobiles. See Auto Limits
This special allowance is a deduction equal to 30, 50, or 100% of the
depreciable basis of the qualified property. You figure the amount of the
special depreciation allowance after any section 179 deduction you choose to
claim, but before figuring your regular depreciation deduction under the
Modified Accelerated Cost Recovery System (MACRS). The 100% special depreciation
allowance applies to qualified property acquired after 9/8/2010 and placed in
service before 1/1/2012.
This is usually used for MACRS, Listed or ADS depreciation methods. This is the percent
a car, computer, entertainment property, or cellular telephone is used for
business purposes versus personal usage. If the listed property business
percent is 50% or less the ADS depreciation method is required instead of MACRS.