Tag Archives: MACRS

New Aircraft Depreciation Schedules Could Have Long Reaching Effect

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Aircraft DepreciationA suggested modification in business aircraft depreciation schedules from 5 years to 7 years will have a negative impact on companies that own or lease planes. This change will increase the cost of ownership and thus, the cost of doing business as well. The concern here is that this will set a precedent and could lead to similar changes in other fields of business which will also result in reduced deductions and increased costs. Airline industry expert, Luis C. Seno delves into the details in an article for Forbes.

The current methodology for business aircraft, in fact for all manufactured capital assets used for business purposes, goes back to the days of the Reagan Administration and the Economic Recovery Act of 1984. The law effectively eliminated the old 10% Investment Tax Credit as well as the old longer term depreciation, with a new, more attractive shorter recovery period, referred to as the Modified Asset Cost Recovery System (MACRS).

Generally speaking, the interpretation was and still is that  aircraft that are not for hire and owned and operated by a company for business use the five-year schedule while those aircraft operated commercially for hire utilize the not-quite-as-attractive seven-year methodology.

As we all know, depreciation under the current tax code is a tax “deduction” for the benefit of the entity that has placed the asset into service for business requirements (aircraft, bulldozer, sheet metal press, combine harvester, eight-wheel tractor-trailer). The sooner the cost of the asset can be recouped, given the time value of money, the greater effect it has with respect to the amount of tax paid by the owner.  That means that lengthening the depreciation schedule marginally raises the tax bill of a company that acquired an aircraft for their business use.

Read Full Article Here:

Questions or comments about this post? We invite you to respond in the space below.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.

Improvements or Additions to Leasehold Property

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One of the emerging hot topics in tax depreciation is Leasehold Improvement Depreciation.  Lately, there seem to be many questions revolving around what qualifications there are for depreciating leasehold improvements and what guidelines must be followed when doing so.  This probably stems from the recent rules and allowances created through the initial law (Job Creation and Worker Assistance Act of 2002) through the stimulus plans of 2008 and 2009.  Below, are the general rules behind depreciating qualified leasehold improvements as well the current changes that have been put into place.

Generally, additions and improvements to leasehold property are depreciated under the same rules as the real property being improved, had that real property been placed in service at the same time as the addition or improvement.  In other words, additions or improvements to a building placed in service prior to MACRS would be depreciated under the current MACRS rules in effect at the time that the addition or improvement was placed in service.  This normally would mean a 39 year recovery period for non-residential real property under straight line with a mid-month first year convention.  However, there are many exceptions to this general rule, including how to handle Qualified Leasehold Improvements.

Here is what you need to know about Qualified Leasehold Improvements:
1)  Effective date of 10/23/2004
2)  It’s not elective if the qualifications below are met:
3)  Qualified Leasehold Improvements must:

  • A.  Be made subject to a lease with a taxpayer as either the lessee or lessor
  • B.  Be made for a lease between unrelated parties
  • C.  Be where the leased portion is only occupied by the lessee.
  • D.  Be of Section 1250 Property (structural components such as walls, plumbing or certain wiring).
  • E.  Be placed in service more than 3 years after the building was initially placed in service

4)  If these qualifications are met, the qualified leasehold improvements can be depreciated over 15 years under MACRS GDS Straight Line with Half-Year or Mid Quarter Convention.  This is opposed to the normal 39 year recovery period with Straight-Line and Mid-Month Convention.
5)  Section 179 does not apply since only Section 1245 property is allowable.
6)  Bonus Depreciation at 50% has been extended until 12/31/2009
7)  Section 1245 (Personal Property) may be depreciated under Cost Segregation Rules.  This allows for a shorter recovery period of 5 or 7 years.

*There are also important exceptions for Qualified Restaurant Property and Qualified Retail Property.  However, to keep things as simple as possible, these areas will be addressed in different posts which will be coming soon.

Hopefully this will have answered many questions about depreciating improvements or additions to leaseholds.  If there is any additional information that you would like, please feel free to ask below in the comments or on the questions page.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.

How to Use Property Class Life Tables

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In 1986, assets of different classes were given associated class lives.  These class lives are formatted into tables that are viewable on the IRS website under Publication 946.  Using these class life tables can be confusing to many.  Such confusion may occur because the tables are lengthy, some assets have no class life with assigned recovery periods, and other assets fall into multiple asset classes.  This will hopefully serve as a simplifying guide as to how to approach and use the tables.

Using Tables B-1 and B-2
As is stated on the IRS website, one needs to look at both Table B-1 and B-2 to identify the correct recovery period.  Normally, if the asset is listed under B-1, the associated recovery period there is used.  However, you must then also look at Table B-2 to see if the asset specifically matches an activity for use as listed in that table.  If it does, the recovery period from Table B-2 overrides the less specific value found in B-1.  Conversely, if there is no specific match in Table B-2, or if it is specifically excluded, the recovery period from Table B-1 stands.

What if Property is not listed under either table?
If this is the case, you should consult the end of Table B-2 to find Certain Property for Which Recovery Periods Assigned.  Normally, the recovery periods used will be 7 years when using the General Depreciation System (GDS) and 12 years under the Alternative Depreciation System (ADS).

Hopefully this gave you a basic understanding of class life tables.  Should you have any questions, please feel free to ask them here or on the questions page.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.

Determining Depreciation Recovery Periods

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Determining the correct monthly depreciation amounts for an asset requires the correct usage of recovery periods.  Under MARCS, assets are assigned to a property class such as 3 year, 5 year, 7 year, nonresidential real property, etc.  Associated with each property class is a recovery period in 12 month intervals (years).

The first actual recovery period of an asset is determined by when the asset is placed in service along with the particular convention being used.  Here is an example of an asset that is considered 7-year property with a 7-year recovery period.  Suppose the asset is acquired in 2009 and uses a half-year convention.  The recovery period would start on July 1, 2009.  Thus, because of the half-year convention, depreciation deductions can be expensed through June 30, 2016.

Additional considerations must also be given to which depreciation rules are being followed:  General MACRS Depreciation Rules (GDS) or Alternative MACRS Depreciation Rules (ADS).  Typically, the recovery periods under ADS are longer than GDS.  For example, residential rental property has a recovery period of 40 years under ADS, but just 27.5 years under GDS.  Below is a chart that provides more examples of common business assets and their associated recovery periods under GDS and ADS

Table B – 1: Common Business Assets Recovery Period (In Years)
GDS ADS
0.11 Office Furniture & Equipment 7 10
0.12 Computers & Related Equip 5 5
0.13 Office Machines 5 6
0.21 Airplane (airframe & engines) 5 6
0.22 Autos & Taxis 5 5
0.23 Buses 5 9
0.241 Light General Purpose Truck (<13k lbs) 5 5
0.242 Heavy General Purpose Truck (>13k lbs) 5 6
0.25 Railroad Car & Locomotives, except owned by a Railroad 7 15
0.26 Tractor Unit (tractor-trailer) 3 4
0.27 Trailer & Trailer Mounted Container 5 6
0.28 Vessels, Barges & Tugs 10 18
0.3 Land Improvements (1245 or 1250 Property) 15 20
0.4 Industrial Steam & Electric Generation & Distribution 15 22
B.1 Residential Rental Property 27.5 40
B.2 Nonresidential Real Property, pre 5/13/93 31.5 40
B.3 Nonresidential Real Property, post 5/12/93 39 40
B.4 Computer Software 3
B.5 Trees or Vines Bearing Fruit or Nuts 10 20
B.6 Qualified Leasehold / Restaurant Leasehold Property 15 39
B.7 New York Liberty Zone Leasehold Improvement Property 5 9

At this point, you may be asking how the actual recovery period for an asset is determined.  The answer is that the recovery period is normally established from the class life of the property.  For a more detailed understanding of class life periods, click here for the post on this topic.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.

Basic Methods for Calculating Depreciation

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There are two basic methods of depreciation to choose from when depreciating an asset.  These methods include Straight-line, and Declining Balance at either 200% or 150%.   Choosing among these methods depends on how a company wishes to receive depreciation expenses.

The Straight-Line method is generally the most commonly used method due to its simplicity and consistency of allocating depreciation evenly over the useful life of the asset.  To calculate depreciation under this method, the Cost of the Asset is reduced by the salvage or residual value to arrive at the depreciable basis.  The resulting depreciable basis is then divided by the estimated useful life.

The Double Declining Balance (200% Declining Balance) method is also commonly used, as it follows the same principles as the straight-line method, but does so at twice the rate.  Thus, if an asset has an estimated useful life of 4 years, straight-line depreciation would be at an average annual rate of 25%.  However, under this method, a 50% rate would be used.  This would be done each year until depreciation under this method is lesser than it would be under the straight line method.

Use of a 150% Declining Balance method follows the same principle as the 200% Declining Balance method, except uses 1.5 times the straight-line rate.  Thus, an average annual rate of 25% under straight-line would become 37.5% under 150% declining balance.

While the use of salvage or residual value is discussed here, please note that salvage or residual value are only used for Generally Accepted Accounting Principles (GAAP) and are not allowed for federal tax.

Choosing any of these accelerated methods has the benefit of receiving more depreciation benefits during the beginning of the asset’s useful life at the cost of receiving less later on.  However, many feel that this is more appropriate as the asset is most valuable and usable during the early stages of its life.

Here is a numerical example to illustrate the accelerated effect of double declining balance vs straight line depreciation.  For this example, consider an asset that was purchased for $1,000 with a useful life of five years.  Below are the values of depreciation determined for the five years of the asset’s life based on the two different methods:

Depeciation Calculation Using Straight-line vs 200% Declining Balance

What method(s) do you use?  We would be happy to hear what methods your company uses and any reasoning behind it.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.