option 3 accounts dep
TRANSCRIPT
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PERESENTED BY XMBA 14
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Definition The allowance for wear and tear on equipment
and machinery Amount of decreasing value in a capital asset
allowed to be deducted from a business tax return Cost Recovery
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You can depreciate property only if it meets the following requirements: It is used in business or held for the production of
income. It must be expected to last for more than one year. In
other words, it must have a useful life that extends substantially beyond the year it was placed in service.
It is property that wears out, decays, gets used up, becomes obsolete, or looses value from natural causes.
Depreciable property can be either tangible or intangible
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Purchased property you can see or touch Livestock (purchased) Machinery Buildings and improvements, fences Dams, ponds, or terraces Irrigation systems and water wells Partial business use
You can claim depreciation on the part of a vehicle used in the business (ex - 1/2 business value of a truck)
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Purchased property that has value that you cannot readily see or touch Computer Software Copyrights, Patents & Trademarks. Goodwill
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Property placed into service and disposed of in the same year.
Land (land can never be depreciated) Inventory
You cannot depreciate property held for resale in the normal course of business
Leased property The value of the lease is already showing up as a
rental expense Raised Market Livestock (Because there is no
cost to recover)
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A total of $24,000 may be taken in a section 179 deduction. Once taken, the amount can no longer be
depreciated. You can however, depreciate out the
balance if the asset is over $24,000. Starting in 2003 the amount will be
$25,000
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Begins When you “place the
property in service”. When it is ready and
available for a specific use in the business
Example When it was bought for
the business
Ends When the cost of the item
has been recovered or when it is retired from service, whichever happens first
Example When it is sold or is not
longer useable
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150% Declining Balance - Only Option
GDS - General Depreciation System
Straight Line Either Option
GDS - General Depreciation System
ADS - Alternative Depreciation System
Longer time for depreciation
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ACRS (Acellerated Cost Recovery System) Used on Property Placed
in Service before 1987 Cannot be used on
property placed in service after 1987 (you must use MACRS)
Straight Line Standard method of
depreciation with a similar amount taken out each year
Does not have the advantage of a half year convention which means you must wait to start later
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Consult the Farmer’s Tax Guide (Publication 225) to find out the specific lengths of time for depreciation Cattle (Breeding) >> 5 yrs GDS, 7 yrs ADS Hogs (Breeding) >> 3 yrs GDS, 3 yrs ADS Fences >> 7 yrs GDS, 10 yrs ADS Single use farm buildings >> 10 yrs GDS, 15 yrs
ADS Grain Bins >> 7 yrs GDS, 10 yrs ADS
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150% Declining Balance (DB) Year 1 - 15.00% Year 2 - 25.50 % Year 3 - 17.85 % Year 4 - 16.66 % Year 5 - 16.66 % Year 6 - 6.33 %
Straight Line - Half Year Year 1 - 10 % Year 2 - 20 % Year 3 - 20 % Year 4 - 20 % Year 5 - 20 % Year 6 - 10 %
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More Depreciation Claimed early in the live of the asset Year 1 would be 15 % versus 10 %SL Year 2 would be 25.5 % versus 20 % SL
***Good if you know you will have too much income (problems) immediately in the next couple of years
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More depreciation expense is claimed per year later in the life of the asset
*Good if you do not predict to have income problems (need the depreciation) in the next couple of years, but want to be safe in the future
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Allows for the depreciation to be spread out over a longer number of years.
Could be an advantage for emergency purchases, i.e. - those not made for a direct impact on income taxes (save it for later when you might need it!)
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Depreciation allows “cost recovery” on capital asset purchases in the farm business
Depreciation is a non-cash expense on your schedule F (farm profit or loss statement)
Record Depreciation on Tax Form 4562 Section 179 Deduction ($25,000 for 2003) - Allows a
1 time deduction to help on major farm purchases Two main methods - MACRS and Straight Line Know the rules - they are always changing, stay on
top of them so you can maximize your after-tax income.