coe_construction_depreciation[1]

Internal Revenue Service Small Business and Self-Employed Taxpayer Education and Communication Tax Information for Small Businesses Internal Revenue Service Small Business and Self-Employed Taxpayer Education and Communication CONSTRUCTION Depreciation IRC Section 167(a), 168 & 179a Internal Revenue Service Small Business and Self-Employed Taxpayer Education and Communication What is Depreciation? • Property used for business • Property expected to last more than one year • Represents wear, decay, usage, obsolescence, or loss of value due to natural causes Internal Revenue Service Small Business and Self-Employed Taxpayer Education and Communication What can be Depreciated? • Real Property: – Any building or structure built on land; plants or trees grown on land; and attachments or improvements to land • Personal Property: – Cars, trucks, machinery, furniture, equipment, and all other tangible items which are not real property Internal Revenue Service Small Business and Self-Employed Taxpayer Education and Communication What cannot be Depreciated? • Property placed in service and disposed of in the same year • Inventory • Land • Repairs and replacements that do not increase the value of your property; make it more useful; or lengthen its useful life Internal Revenue Service Small Business and Self-Employed Taxpayer Education and Communication How to Figure Depreciation • Basis • Class Life • Placed in Service Date • Convention • Method Internal Revenue Service Small Business and Self-Employed Taxpayer Education and Communication Definitions • COST BASIS: Usually the purchase price, including sales tax, freight, and installation charges. • ADJUSTED BASIS: Increase cost basis by improvements. Decrease basis by depreciation deductions. Internal Revenue Service Small Business and Self-Employed Taxpayer Education and Communication Compute Basis Example: Adam bought a dump truck from a local contractor. He paid $2,000 cash, borrowed $3,000 from the bank, and agreed to dig the foundation for the contractor’s lake cabin (worth $1,000). The cost basis for the dump truck would be $5,000. Internal Revenue Service Small Business and Self-Employed Taxpayer Education and Communication Class Life • • 3-year Property – Tractor units used over the road. 5-year Property – – – – – Any construction property that does not have a class life. Automobiles, taxis, buses & trucks. Computers & peripheral equipment. Office machinery, such as typewriters, calculators, & copiers. Property used in research & experiments. • • 7-year Property – Office furniture & fixtures 15-year Property – Land improvements, such as shrubbery, fences, roads, & bridges. – Service stations, but not the pumps. • 39-year – Nonresidential real property. Internal Revenue Service Small Business and Self-Employed Taxpayer Education and Communication Placed In Service Date • Depreciation is taken when the property is ready and available for use in your trade or business, even if the property is idle or currently not in use. Internal Revenue Service Small Business and Self-Employed Taxpayer Education and Communication Conventions Half-Year: – Treat property placed in service during the year as if it started at the midpoint of the year – This convention is used for most property Mid-Month: – Treat property placed in service during a month as if it started at the middle of the month – This convention is used for real property Internal Revenue Service Small Business and Self-Employed Taxpayer Education and Communication Conventions (cont’d) Mid-Quarter Convention: • Treat personal property placed in service during a quarter as if it started at the middle of the quarter • Must be used when more than 40 percent of all personal property placed in service during the year was placed in service in the last three months of the year Internal Revenue Service Small Business and Self-Employed Taxpayer Education and Communication Computing Your Depreciation Deduction • Multiply the basis of the asset by predetermined percentages set by the class life, convention, and method. Internal Revenue Service Small Business and Self-Employed General Depreciation System (GDS); 200% Declining Balance (DB); Half-Year Convention (HY) Year 1 2 3 4 5 6 7 8 3-Year 33.33% 44.45% 14.81% 7.41% 5-Year 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% 7-Year 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46% Taxpayer Education and Communication Internal Revenue Service Small Business and Self-Employed Taxpayer Education and Communication Example Year 1998 1999 2000 2001 2002 2003 Total Cost x GDS $15,000 x 20.00% $15,000 x 32.00% $15,000 x 19.20% $15,000 x 11.52% $15,000 x 11.52% $15,000 x 5.76% Depreciation $3,000 $4,800 $2,880 $1,728 $1,728 $ 864 $15,000 Internal Revenue Service Small Business and Self-Employed Taxpayer Education and Communication Listed Property • Most four-wheeled passenger vehicle used primarily for public streets, roads, and highways that weighs 6,000 lbs or less unloaded • Entertainment, recreation, or amusement property (Includes photographic, phonographic, communication, and videorecording equipment) • Computer and related peripheral equipment • Any cellular telephone Internal Revenue Service Small Business and Self-Employed Taxpayer Education and Communication Section 179 Election • Allows you to elect to deduct all or part of the cost of certain qualifying property in the year you place it in service. Internal Revenue Service Small Business and Self-Employed Taxpayer Education and Communication Section 179 Property Includes: Property purchased new (if a trade-in is used, only the cash amount can be used) Does Not Include: Leased, real, or rented property Listed property whose business use for the year is 50% or less of the total use Internal Revenue Service Small Business and Self-Employed Taxpayer Education and Communication Deduction Limitations Maximum Dollar Limit: • For 2003 to 2005, it is $100,000. After 2005, it is scheduled to go down to $25,000. Investment Limit: • If the total cost of the Section 179 property exceeds $400,000 (the “threshold figure”), the amount of excess reduces the maximum dollar limit dollar for dollar. The threshold figure returns to $200,000 after 2005. Internal Revenue Service Small Business and Self-Employed Taxpayer Education and Communication Deduction Limitations (cont’d) Taxable Income Limit: • The amount you deduct each year cannot exceed the taxable income from all active trade or business conducted during the year. • Wages and salaries received as an employee are included. Internal Revenue Service Small Business and Self-Employed Taxpayer Education and Communication New Law • Additional 50 percent special depreciation deduction on property’s depreciable basis taken after Section 179 deduction. • Newly purchased property with class life of 20 years or less. • Acquisition Date: Purchased after 5/5/2003, but before 1/1/2005 • Placed in Service Date: Must be used in your business after 5/5/2003 and before 1/1/2005 • Original Use: Began with you after 5/5/2003 Internal Revenue Service Small Business and Self-Employed Taxpayer Education and Communication Computation Example • Property purchased 5/17/2003. • Original cost is $200,000. • Section 179 deduction taken is $100,000. • What is the special depreciation deduction? Internal Revenue Service Small Business and Self-Employed Taxpayer Education and Communication Answer Cost less Section 179 deduction multiply remaining depreciable basis by 50 percent. Special Depreciation Allowance Regular Depreciation Basis $200,000 (100,000) $100,000 X 50% $ 50,000 $ 50,000 Internal Revenue Service Small Business and Self-Employed Taxpayer Education and Communication Thank You!