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Taxslayer 2012Taxslayer 2012 Other Methods of Depreciation Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: How To Figure the DeductionBasis Useful Life Salvage Value Methods To UseStraight Line Method Declining Balance Method Income Forecast Method How To Change Methods DispositionsSale or exchange. Taxslayer 2012 Property not disposed of or abandoned. Taxslayer 2012 Special rule for normal retirements from item accounts. Taxslayer 2012 Abandoned property. Taxslayer 2012 Single item accounts. Taxslayer 2012 Multiple property account. Taxslayer 2012 Topics - This chapter discusses: How to figure the deduction Methods to use How to change methods Dispositions Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 551 Basis of Assets 583 Starting a Business and Keeping Records 946 How To Depreciate Property Form (and Instructions) 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization Schedule C (Form 1040) Profit or Loss From Business If your property is being depreciated under ACRS, you must continue to use rules for depreciation that applied when you placed the property in service. Taxslayer 2012 If your property qualified for MACRS, you must depreciate it under MACRS. Taxslayer 2012 See Publication 946. Taxslayer 2012 However, you cannot use MACRS for certain property because of special rules that exclude it from MACRS. Taxslayer 2012 Also, you can elect to exclude certain property from being depreciated under MACRS. Taxslayer 2012 Property that you cannot depreciate using MACRS includes: Intangible property, Property you can elect to exclude from MACRS that you properly depreciate under a method that is not based on a term of years, Certain public utility property, Any motion picture film or video tape, Any sound recording, and Certain real and personal property placed in service before 1987. Taxslayer 2012 Intangible property. Taxslayer 2012 You cannot depreciate intangible property under ACRS or MACRS. Taxslayer 2012 You depreciate intangible property using any other reasonable method, usually, the straight line method. Taxslayer 2012 Note. Taxslayer 2012 The cost of certain intangible property that you acquire after August 10, 1993, must be amortized over a 15-year period. Taxslayer 2012 For more information, see chapter 12 of Publication 535. Taxslayer 2012 Public utility property. Taxslayer 2012 The law excludes from MACRS any public utility property for which the taxpayer does not use a normalization method of accounting. Taxslayer 2012 This type of property is subject to depreciation under a special rule. Taxslayer 2012 Videocassettes. Taxslayer 2012 If you are in the videocassette rental business, you can depreciate those videocassettes purchased for rental. Taxslayer 2012 You can depreciate the cost less salvage value of those videocassettes that have a useful life over one year using either: The straight line method, or The income forecast method. Taxslayer 2012 The straight line method, salvage value, and useful life are discussed later under Methods To Use. Taxslayer 2012 You can deduct in the year of purchase as a business expense the cost of any cassette that has a useful life of one year or less. Taxslayer 2012 How To Figure the Deduction Two other reasonable methods can be used to figure your deduction for property not covered under ACRS or MACRS. Taxslayer 2012 These methods are straight line and declining balance. Taxslayer 2012 To figure depreciation using these methods, you must generally determine three things about the property you intend to depreciate. Taxslayer 2012 They are: The basis, The useful life, and The estimated salvage value at the end of its useful life. Taxslayer 2012 The amount of the deduction in any year also depends on which method of depreciation you choose. Taxslayer 2012 Basis To deduct the proper amount of depreciation each year, first determine your basis in the property you intend to depreciate. Taxslayer 2012 The basis used for figuring depreciation is the same as the basis that would be used for figuring the gain on a sale. Taxslayer 2012 Your original basis is usually the purchase price. Taxslayer 2012 However, if you acquire property in some other way, such as inheriting it, getting it as a gift, or building it yourself, you have to figure your original basis in a different way. Taxslayer 2012 Adjusted basis. Taxslayer 2012 Events will often change the basis of property. Taxslayer 2012 When this occurs, the changed basis is called the adjusted basis. Taxslayer 2012 Some events, such as improvements you make, increase basis. Taxslayer 2012 Events such as deducting casualty losses and depreciation decrease basis. Taxslayer 2012 If basis is adjusted, the depreciation deduction may also have to be changed, depending on the reason for the adjustment and the method of depreciation you are using. Taxslayer 2012 Publication 551 explains how to figure basis for property acquired in different ways. Taxslayer 2012 It also discusses what items increase and decrease basis, how to figure adjusted basis, and how to allocate cost if you buy several pieces of property at one time. Taxslayer 2012 Useful Life The useful life of a piece of property is an estimate of how long you can expect to use it in your trade or business, or to produce income. Taxslayer 2012 It is the length of time over which you will make yearly depreciation deductions of your basis in the property. Taxslayer 2012 It is how long it will continue to be useful to you, not how long the property will last. Taxslayer 2012 Many things affect the useful life of property, such as: Frequency of use, Age when acquired, Your repair policy, and Environmental conditions. Taxslayer 2012 The useful life can also be affected by technological improvements, progress in the arts, reasonably foreseeable economic changes, shifting of business centers, prohibitory laws, and other causes. Taxslayer 2012 Consider all these factors before you arrive at a useful life for your property. Taxslayer 2012 The useful life of the same type of property varies from user to user. Taxslayer 2012 When you determine the useful life of your property, keep in mind your own experience with similar property. Taxslayer 2012 You can use the general experience of the industry you are in until you are able to determine a useful life of your property from your own experience. Taxslayer 2012 Change in useful life. Taxslayer 2012 You base your estimate of useful life on certain facts. Taxslayer 2012 If these facts change significantly, you can adjust your estimate of the remaining useful life. Taxslayer 2012 However, you redetermine the estimated useful life only when the change is substantial and there is a clear reason for making the change. Taxslayer 2012 Salvage Value It is important for you to accurately determine the correct salvage value of the property you want to depreciate. Taxslayer 2012 You generally cannot depreciate property below a reasonable salvage value. Taxslayer 2012 Determining salvage value. Taxslayer 2012 Salvage value is the estimated value of property at the end of its useful life. Taxslayer 2012 It is what you expect to get for the property if you sell it after you can no longer use it productively. Taxslayer 2012 You must estimate the salvage value of a piece of property when you first acquire it. Taxslayer 2012 Salvage value is affected both by how you use the property and how long you use it. Taxslayer 2012 If it is your policy to dispose of property that is still in good operating condition, the salvage value can be relatively large. Taxslayer 2012 However, if your policy is to use property until it is no longer usable, its salvage value can be its junk value. Taxslayer 2012 Changing salvage value. Taxslayer 2012 Once you determine the salvage value for property, you should not change it merely because prices have changed. Taxslayer 2012 However, if you redetermine the useful life of property, as discussed earlier under Change in useful life, you can also redetermine the salvage value. Taxslayer 2012 When you redetermine the salvage value, take into account the facts that exist at the time. Taxslayer 2012 Net salvage. Taxslayer 2012 Net salvage is the salvage value of property minus what it costs to remove it when you dispose of it. Taxslayer 2012 You can choose either salvage value or net salvage when you figure depreciation. Taxslayer 2012 You must consistently use the one you choose and the treatment of the costs of removal must be consistent with the practice adopted. Taxslayer 2012 However, if the cost to remove the property is more than the estimated salvage value, then net salvage is zero. Taxslayer 2012 Your salvage value can never be less than zero. Taxslayer 2012 Ten percent rule. Taxslayer 2012 If you acquire personal property that has a useful life of 3 years or more, you can use an amount for salvage value that is less than your actual estimate. Taxslayer 2012 You can subtract from your estimate of salvage value an amount equal to 10% of your basis in the property. Taxslayer 2012 If salvage value is less than 10% of basis, you can ignore salvage value when you figure depreciation. Taxslayer 2012 Methods To Use Two methods of depreciation are the straight line and declining balance methods. Taxslayer 2012 If ACRS or MACRS does not apply, you can use one of these methods. Taxslayer 2012 The straight line and declining balance methods discussed in this section are not figured in the same way as straight line or declining balance methods under MACRS. Taxslayer 2012 Straight Line Method Before 1981, you could use any reasonable method for every kind of depreciable property. Taxslayer 2012 One of these methods was the straight line method. Taxslayer 2012 This method was also used for intangible property. Taxslayer 2012 It lets you deduct the same amount of depreciation each year. Taxslayer 2012 To figure your deduction, determine the adjusted basis of your property, its salvage value, and its estimated useful life. Taxslayer 2012 Subtract the salvage value, if any, from the adjusted basis. Taxslayer 2012 The balance is the total amount of depreciation you can take over the useful life of the property. Taxslayer 2012 Divide the balance by the number of years remaining in the useful life. Taxslayer 2012 This gives you the amount of your yearly depreciation deduction. Taxslayer 2012 Unless there is a big change in adjusted basis, or useful life, this amount will stay the same throughout the time you depreciate the property. Taxslayer 2012 If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use. Taxslayer 2012 Example. Taxslayer 2012 In April 1994, Frank bought a franchise for $5,600. Taxslayer 2012 It expires in 10 years. Taxslayer 2012 This property is intangible property that cannot be depreciated under MACRS. Taxslayer 2012 Frank depreciates the franchise under the straight line method, using a 10-year useful life and no salvage value. Taxslayer 2012 He takes the $5,600 basis and divides that amount by 10 years ($5,600 ÷ 10 = $560, a full year's use). Taxslayer 2012 He must prorate the $560 for his 9 months of use in 1994. Taxslayer 2012 This gives him a deduction of $420 ($560 ÷ 9/12). Taxslayer 2012 In 1995, Frank can deduct $560 for the full year. Taxslayer 2012 Declining Balance Method The declining balance method allows you to recover a larger amount of the cost of the property in the early years of your use of the property. Taxslayer 2012 The rate cannot be more than twice the straight line rate. Taxslayer 2012 Rate of depreciation. Taxslayer 2012 Under this method, you must determine your declining balance rate of depreciation. Taxslayer 2012 The initial step is to: Divide the number 1 by the useful life of your property to get a straight line rate. Taxslayer 2012 (For example, if property has a useful life of 5 years, its normal straight line rate of depreciation is ⅕, or 20%. Taxslayer 2012 ) Multiply this straight line rate by a number that is more than 1 but not more than 2 to determine the declining balance rate. Taxslayer 2012 Unless there is a change in the useful life during the time you depreciate the property, the rate of depreciation generally will not change. Taxslayer 2012 Depreciation deductions. Taxslayer 2012 After you determine the rate of depreciation, multiply the adjusted basis of the property by it. Taxslayer 2012 This gives you the amount of your deduction. Taxslayer 2012 For example, if your adjusted basis at the beginning of the first year is $10,000, and your declining balance rate is 20%, your depreciation deduction for the first year is $2,000 ($10,000 ÷ 20%). Taxslayer 2012 To figure your depreciation deduction in the second year, you must first adjust the basis for the amount of depreciation you deducted in the first year. Taxslayer 2012 Subtract the previous year's depreciation from your basis ($10,000 - $2,000 = $8,000). Taxslayer 2012 Multiply this amount by the rate of depreciation ($8,000 ÷ 20% = $1,600). Taxslayer 2012 Your depreciation deduction for the second year is $1,600. Taxslayer 2012 As you can see from this example, your adjusted basis in the property gets smaller each year. Taxslayer 2012 Also, under this method, deductions are larger in the earlier years and smaller in the later years. Taxslayer 2012 You can make a change to the straight line method without consent. Taxslayer 2012 Salvage value. Taxslayer 2012 Do not subtract salvage value when you figure your yearly depreciation deductions under the declining balance method. Taxslayer 2012 However, you cannot depreciate the property below its reasonable salvage value. Taxslayer 2012 Determine salvage value using the rules discussed earlier, including the special 10% rule. Taxslayer 2012 Example. Taxslayer 2012 If your adjusted basis has been decreased to $1,000 and the rate of depreciation is 20%, your depreciation deduction should be $200. Taxslayer 2012 But if your estimate of salvage value was $900, you can only deduct $100. Taxslayer 2012 This is because $100 is the amount that would lower your adjusted basis to equal salvage value. Taxslayer 2012 Income Forecast Method The income forecast method requires income projections for each videocassette or group of videocassettes. Taxslayer 2012 You can group the videocassettes by title for making this projection. Taxslayer 2012 You determine the depreciation by applying a fraction to the cost less salvage value of the cassette. Taxslayer 2012 The numerator is the income from the videocassette for the tax year and the denominator is the total projected income for the cassette. Taxslayer 2012 For more information on the income forecast method, see Revenue Ruling 60-358 in Cumulative Bulletin 1960, Volume 2, on page 68. Taxslayer 2012 How To Change Methods In some cases, you may change your method of depreciation for property depreciated under a reasonable method. Taxslayer 2012 If you change your method of depreciation, it is generally a change in your method of accounting. Taxslayer 2012 You must get IRS consent before making the change. Taxslayer 2012 However, you do not need permission for certain changes in your method of depreciation. Taxslayer 2012 The rules discussed in this section do not apply to property depreciated under ACRS or MACRS. Taxslayer 2012 For information on ACRS elections,see Revocation of election, in chapter 1 under Alternate ACRS Method. Taxslayer 2012 Change to the straight line method. Taxslayer 2012 You can change from the declining balance method to the straight line method at any time during the useful life of your property without IRS consent. Taxslayer 2012 However, if you have a written agreement with the IRS that prohibits a change, you must first get IRS permission. Taxslayer 2012 When the change is made, figure depreciation based on your adjusted basis in the property at that time. Taxslayer 2012 Your adjusted basis takes into account all previous depreciation deductions. Taxslayer 2012 Use the estimated remaining useful life of your property at the time of change and its estimated salvage value. Taxslayer 2012 You can change from the declining balance method to straight line only on the original tax return for the year you first use the straight line method. Taxslayer 2012 You cannot make the change on an amended return filed after the due date of the original return (including extensions). Taxslayer 2012 When you make the change, attach a statement to your tax return showing: When you acquired the property, Its original cost or other original basis, The total amount claimed for depreciation and other allowances since you acquired it, Its salvage value and remaining useful life, and A description of the property and its use. Taxslayer 2012 After you change to straight line, you cannot change back to the declining balance method or to any other method for a period of 10 years without written permission from the IRS. Taxslayer 2012 Changes that require permission. Taxslayer 2012 For most other changes in method of depreciation, you must get permission from the IRS. Taxslayer 2012 To request a change in method of depreciation, file Form 3115. Taxslayer 2012 File the application within the first 180 days of the tax year the change is to become effective. Taxslayer 2012 In most cases, there is a user fee that must accompany Form 3115. Taxslayer 2012 See the instructions for Form 3115 to determine if a fee is required. Taxslayer 2012 Changes granted automatically. Taxslayer 2012 The IRS automatically approves certain changes of a method of depreciation. Taxslayer 2012 But, you must file Form 3115 for these automatic changes. Taxslayer 2012 However, IRS can deny permission if Form 3115 is not filed on time. Taxslayer 2012 For more information on automatic changes, see Revenue Procedure 74-11, 1974-1 C. Taxslayer 2012 B. Taxslayer 2012 420. Taxslayer 2012 Changes for which approval is not automatic. Taxslayer 2012 The automatic change procedures do not apply to: Property or an account where you made a change in depreciation within the last 10 tax years (unless the change was made under the Class Life System), Class Life Asset Depreciation Range System, and Public utility property. Taxslayer 2012 You must request and receive permission for these changes. Taxslayer 2012 To make the request, file Form 3115 during the first 180 days of the tax year for which you want the change to be effective. Taxslayer 2012 Change from an improper method. Taxslayer 2012 If the IRS disallows the method you are using, you do not need permission to change to a proper method. Taxslayer 2012 You can adopt the straight line method, or any other method that would have been permitted if you had used it from the beginning. Taxslayer 2012 If you file your tax return using an improper method, but later file an amended return, you can use a proper method on the amended return without getting IRS permission. Taxslayer 2012 However, you must file the amended return before the filing date for the next tax year. Taxslayer 2012 Dispositions Retirement is the permanent withdrawal of depreciable property from use in your trade or business or for the production of income. Taxslayer 2012 You can do this by selling, exchanging, or abandoning the item of property. Taxslayer 2012 You can also withdraw it from use without disposing of it. Taxslayer 2012 For example, you could place it in a supplies or scrap account. Taxslayer 2012 Retirements can be either normal or abnormal depending on all facts and circumstances. Taxslayer 2012 The rules discussed next do not apply to MACRS and ACRS property. Taxslayer 2012 Normal retirement. Taxslayer 2012 A normal retirement is a permanent withdrawal of depreciable property from use if the following apply: The retirement is made within the useful life you estimated originally, and The property has reached a condition at which you customarily retire or would retire similar property from use. Taxslayer 2012 A retirement is generally considered normal unless you can show that you retired the property because of a reason you did not consider when you originally estimated the useful life of the property. Taxslayer 2012 Abnormal retirement. Taxslayer 2012 A retirement can be abnormal if you withdraw the property early or under other circumstances. Taxslayer 2012 For example, if the property is damaged by a fire or suddenly becomes obsolete and is now useless. Taxslayer 2012 Gain or loss on retirement. Taxslayer 2012 There are special rules for figuring the gain or loss on retirement of property. Taxslayer 2012 The gain or loss will depend on several factors. Taxslayer 2012 These include the type of withdrawal, if the withdrawal was from a single property or multiple property account, and if the retirement was normal or abnormal. Taxslayer 2012 A single property account contains only one item of property. Taxslayer 2012 A multiple property account is one in which several items have been combined with a single rate of depreciation assigned to the entire account. Taxslayer 2012 Sale or exchange. Taxslayer 2012 If property is retired by sale or exchange, you figure gain or loss by the usual rules that apply to sales or other dispositions of property. Taxslayer 2012 See Publication 544. Taxslayer 2012 Property not disposed of or abandoned. Taxslayer 2012 If property is retired permanently, but not disposed of or physically abandoned, you do not recognize gain. Taxslayer 2012 You are allowed a loss in such a case, but only if the retirement is: An abnormal retirement, A normal retirement from a single property account in which you determined the life of each item of property separately, or A normal retirement from a multiple property account in which the depreciation rate is based on the maximum expected life of the longest lived item of property and the loss occurs before the expiration of the full useful life. Taxslayer 2012 However, you are not allowed a loss if the depreciation rate is based on the average useful life of the items of property in the account. Taxslayer 2012 To figure your loss, subtract the estimated salvage or fair market value of the property at the date of retirement, whichever is more, from its adjusted basis. Taxslayer 2012 Special rule for normal retirements from item accounts. Taxslayer 2012 You can generally deduct losses upon retirement of a few depreciable items of property with similar useful lives, if: You account for each one in a separate account, and You use the average useful life to figure depreciation. Taxslayer 2012 However, you cannot deduct losses if you use the average useful life to figure depreciation and they have a wide range of useful lives. Taxslayer 2012 If you have a large number of depreciable property items and use average useful lives to figure depreciation, you cannot deduct the losses upon normal retirements from these accounts. Taxslayer 2012 Abandoned property. Taxslayer 2012 If you physically abandon property, you can deduct as a loss the adjusted basis of the property at the time of its abandonment. Taxslayer 2012 However, your intent must be to discard the property so that you will not use it again or retrieve it for sale, exchange, or other disposition. Taxslayer 2012 Basis of property retired. Taxslayer 2012 The basis for figuring gain or loss on the retirement of property is its adjusted basis at the time of retirement, as determined in the following discussions. Taxslayer 2012 Single item accounts. Taxslayer 2012 If an item of property is accounted for in a single item account, the adjusted basis is the basis you would use to figure gain or loss for a sale or exchange of the property. Taxslayer 2012 This is generally the cost or other basis of the item of property less depreciation. Taxslayer 2012 See Publication 551. Taxslayer 2012 Multiple property account. Taxslayer 2012 For a normal retirement from a multiple property account, if you figured depreciation using the average expected useful life, the adjusted basis is the salvage value estimated for the item of property when it was originally acquired. Taxslayer 2012 If you figured depreciation using the maximum expected useful life of the longest lived item of property in the account, you must use the depreciation method used for the multiple property account and a rate based on the maximum expected useful life of the item of property retired. Taxslayer 2012 You make the adjustment for depreciation for an abnormal retirement from a multiple property account at the rate that would be proper if the item of property was depreciated in a single property account. Taxslayer 2012 The method of depreciation used for the multiple property account is used. Taxslayer 2012 You base the rate on either the average expected useful life or the maximum expected useful life of the retired item of property, depending on the method used to determine the depreciation rate for the multiple property account. Taxslayer 2012 Prev Up Next Home More Online Publications
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