Depreciation & Amortization

2010 Updates

• Section 179– 2009 $250,000 ($800,000)– 2010 $250,000 ($800,000)– 2011 $25,000 ($200,000)

• Bonus Depreciation is eliminated

• Bonus Depreciation for Vehicles eliminated

• Qualified Leasehold Improvements

Choosing Correct Asset Life

• Repairs and Replacements capitalized if– Increase value of property– Increase usefulness– Lengthen Property’s Life– Adapt property to a new or different use

• De Minimus Rule

Conventions

• Half Year Convention – Treats all property as placed in service, or disposed of, at the midpoint of that tax year

• Mid-Quarter Convention – Treats all property as placed in service, or disposed of, at the mid-point of the quarter

• Mid-Month Convention – Treats all property as placed in service, or disposed of, at the mid-point of the month.

Choosing Correct Method

• Regular MACRS

• Straight Line over MACRS Recovery Period

• Straight Line over ADS recovery Period

Depreciation Methods

• Alternative Depreciation System (ADS)– Smallest Depreciation Deduction– Use straight line depreciation– Longer than MACRS– Once you choose ADS, you cannot switch

back.

Automobiles

Rules that apply to Automobiles

• Business Use Requirement – 50% and Above (MACRS)– 50% or Less (ADS), Does not Qualify for

Section 179– Must recapture depreciation if use falls below

50% in future year.

• Taxpayer cannot use standard mileage rate after using MACRS or Section 179

Rules that apply to Automobiles

• Passenger Automobiles– Four wheeled vehicles with an unloaded gross vehicle

weight of 6,000 pounds or less and manufactured primarily for use on public roads and highway

• Passenger Automobiles built on truck chassis– Trucks, Vans, SUV’s

• Qualified Non-personal Use Vehicles• Trucks and Vans with gross weight over 6,000

pounds

Rules that apply to Automobiles Depreciation Limits for Passenger Automobiles

Tax Year 2009 2010

First $10,960 *Bonus $3,060 Second 4,800 4,900 Third 2,850 2,950 Subsequent 1,775 1,775

Depreciation Limits for Trucks and Vans

Tax Year 2009 2010

First $11,160 *Bonus $3,160 Second 5,100 5,100 Third 3,050 3,050 Subsequent 1,875 1,875

Rules that apply to Automobiles

• Example: You purchased a new car in June 2010 for $31,000.

Rules that apply to Automobiles

• SUV’s, Trucks and Vans above 6,000 pounds– Not subject to Depreciation Limits– Section 179 Limit of $25,000.

Section 179• Allowed for depreciable, tangible, personal

property. (Not Real Property, Land Improvements)

• 2010 Maximum Deduction is $250,000 for all entities. (Individuals (MFJ), S Corp, Partnership and Corporation)

• Investment Limitation is $800,000 for 2009 and 2010. $200,000 for 2011.

• Dollar for Dollar decrease for amounts over limitation and loss of carry forward.

Section 179

• Total Cost that you can deduct is limited to taxable income from active conduct of any trade or business during year.

• This includes: salaries and wages, Section 1231 gains from sole proprietorship and income allocated from Partnership or S Corp with active participation.

Section 179

Example

• During 2009, the Allen Partnership places $828,000 of Section 179 property in service for use in its business. What is Allen’s maximum Section 179 deduction?

Section 179

Example

• In 2009, you purchased– $7,000 in Computer Equipment– $20,000 in Office Furniture– Both to be used 100 percent business– You have $25,000 of aggregate taxable

business income for the year.

Section 179

ExampleRobert is a 50% shareholder and full-time employee of an

S corporation. During 2009, the S corporation invests $324,000 in equipment qualifying for the Section 179 deduction. Robert also owns a sole proprietorship that constructs kitchen cabinets. The cabinet business qualifies as an active business for Robert. During 2008, he purchases $200,000 worth of equipment to use in his cabinet business. What is the maximum amount that Robert can deduct as a Section 179 expense for 2008?

Amortization

• Section 197 Intangibles- Acquired in connection with purchase of assets (15 years in month acquired)– Goodwill– Customer Base Intangibles– Patents, Copyrights– Supplier Based Intangibles– Covenant not to Compete

Amortization

• Intangibles separately acquired– Customer Based Intangibles – Amortize over

useful life– Patents – Amortized over useful life– Covenants – Amortized over Term– Supplier Based Intangibles – Amortized over

useful life

AmortizationExample: On January 1 of the current year,

Nisalke Company sells all assets used in its business to Layden Company. The assets and value are:

Real Estate (39 yrs) $10,000,000

Customer List (6 yrs) $800,000

Goodwill $500,000

Patent (10 yrs) $1,000,000

Covenant (3 yrs) $900,000

Total Purchase Price $13,200,000

Amortization

• Start Up Costs– Expenses incurred before business actually

begins– Taxpayers can elect to deduct $5,000 in first

year.– Phase out dollar for dollar when exceeds

$50,000.– Remaining balance is amortized over 15

years starting in month when business began.

Amortization

• You opened your new T-shirt business on July 1 of the current year. Your start-up expenses total $8,600.

Amortization

• Software Cost– Developed Internally

• Treat as current expenses like research and development• Capitalize and amortize over 36 months beginning with date

placed in service.

– Purchased• If Section 197 Intangible, then amortize over 15 years. • All others, capitalize and amortize over 36 months beginning

with date placed in service.

– Software bundled with Hardware• Treat as part of Hardware and depreciate