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Hrblock online 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. Hrblock online Property not disposed of or abandoned. Hrblock online Special rule for normal retirements from item accounts. Hrblock online Abandoned property. Hrblock online Single item accounts. Hrblock online Multiple property account. Hrblock online 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. Hrblock online If your property qualified for MACRS, you must depreciate it under MACRS. Hrblock online See Publication 946. Hrblock online However, you cannot use MACRS for certain property because of special rules that exclude it from MACRS. Hrblock online Also, you can elect to exclude certain property from being depreciated under MACRS. Hrblock online 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. Hrblock online Intangible property. Hrblock online   You cannot depreciate intangible property under ACRS or MACRS. Hrblock online You depreciate intangible property using any other reasonable method, usually, the straight line method. Hrblock online Note. Hrblock online The cost of certain intangible property that you acquire after August 10, 1993, must be amortized over a 15-year period. Hrblock online For more information, see chapter 12 of Publication 535. Hrblock online Public utility property. Hrblock online   The law excludes from MACRS any public utility property for which the taxpayer does not use a normalization method of accounting. Hrblock online This type of property is subject to depreciation under a special rule. Hrblock online Videocassettes. Hrblock online   If you are in the videocassette rental business, you can depreciate those videocassettes purchased for rental. Hrblock online 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. Hrblock online The straight line method, salvage value, and useful life are discussed later under Methods To Use. Hrblock online 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. Hrblock online How To Figure the Deduction Two other reasonable methods can be used to figure your deduction for property not covered under ACRS or MACRS. Hrblock online These methods are straight line and declining balance. Hrblock online To figure depreciation using these methods, you must generally determine three things about the property you intend to depreciate. Hrblock online They are: The basis, The useful life, and The estimated salvage value at the end of its useful life. Hrblock online The amount of the deduction in any year also depends on which method of depreciation you choose. Hrblock online Basis To deduct the proper amount of depreciation each year, first determine your basis in the property you intend to depreciate. Hrblock online The basis used for figuring depreciation is the same as the basis that would be used for figuring the gain on a sale. Hrblock online Your original basis is usually the purchase price. Hrblock online 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. Hrblock online Adjusted basis. Hrblock online   Events will often change the basis of property. Hrblock online When this occurs, the changed basis is called the adjusted basis. Hrblock online Some events, such as improvements you make, increase basis. Hrblock online Events such as deducting casualty losses and depreciation decrease basis. Hrblock online 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. Hrblock online   Publication 551 explains how to figure basis for property acquired in different ways. Hrblock online 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. Hrblock online 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. Hrblock online It is the length of time over which you will make yearly depreciation deductions of your basis in the property. Hrblock online It is how long it will continue to be useful to you, not how long the property will last. Hrblock online Many things affect the useful life of property, such as: Frequency of use, Age when acquired, Your repair policy, and Environmental conditions. Hrblock online 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. Hrblock online Consider all these factors before you arrive at a useful life for your property. Hrblock online The useful life of the same type of property varies from user to user. Hrblock online When you determine the useful life of your property, keep in mind your own experience with similar property. Hrblock online 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. Hrblock online Change in useful life. Hrblock online   You base your estimate of useful life on certain facts. Hrblock online If these facts change significantly, you can adjust your estimate of the remaining useful life. Hrblock online However, you redetermine the estimated useful life only when the change is substantial and there is a clear reason for making the change. Hrblock online Salvage Value It is important for you to accurately determine the correct salvage value of the property you want to depreciate. Hrblock online You generally cannot depreciate property below a reasonable salvage value. Hrblock online Determining salvage value. Hrblock online   Salvage value is the estimated value of property at the end of its useful life. Hrblock online It is what you expect to get for the property if you sell it after you can no longer use it productively. Hrblock online You must estimate the salvage value of a piece of property when you first acquire it. Hrblock online   Salvage value is affected both by how you use the property and how long you use it. Hrblock online If it is your policy to dispose of property that is still in good operating condition, the salvage value can be relatively large. Hrblock online However, if your policy is to use property until it is no longer usable, its salvage value can be its junk value. Hrblock online Changing salvage value. Hrblock online   Once you determine the salvage value for property, you should not change it merely because prices have changed. Hrblock online However, if you redetermine the useful life of property, as discussed earlier under Change in useful life, you can also redetermine the salvage value. Hrblock online When you redetermine the salvage value, take into account the facts that exist at the time. Hrblock online Net salvage. Hrblock online   Net salvage is the salvage value of property minus what it costs to remove it when you dispose of it. Hrblock online You can choose either salvage value or net salvage when you figure depreciation. Hrblock online You must consistently use the one you choose and the treatment of the costs of removal must be consistent with the practice adopted. Hrblock online However, if the cost to remove the property is more than the estimated salvage value, then net salvage is zero. Hrblock online Your salvage value can never be less than zero. Hrblock online Ten percent rule. Hrblock online   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. Hrblock online You can subtract from your estimate of salvage value an amount equal to 10% of your basis in the property. Hrblock online If salvage value is less than 10% of basis, you can ignore salvage value when you figure depreciation. Hrblock online Methods To Use Two methods of depreciation are the straight line and declining balance methods. Hrblock online If ACRS or MACRS does not apply, you can use one of these methods. Hrblock online 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. Hrblock online Straight Line Method Before 1981, you could use any reasonable method for every kind of depreciable property. Hrblock online One of these methods was the straight line method. Hrblock online This method was also used for intangible property. Hrblock online It lets you deduct the same amount of depreciation each year. Hrblock online To figure your deduction, determine the adjusted basis of your property, its salvage value, and its estimated useful life. Hrblock online Subtract the salvage value, if any, from the adjusted basis. Hrblock online The balance is the total amount of depreciation you can take over the useful life of the property. Hrblock online Divide the balance by the number of years remaining in the useful life. Hrblock online This gives you the amount of your yearly depreciation deduction. Hrblock online 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. Hrblock online 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. Hrblock online Example. Hrblock online In April 1994, Frank bought a franchise for $5,600. Hrblock online It expires in 10 years. Hrblock online This property is intangible property that cannot be depreciated under MACRS. Hrblock online Frank depreciates the franchise under the straight line method, using a 10-year useful life and no salvage value. Hrblock online He takes the $5,600 basis and divides that amount by 10 years ($5,600 ÷ 10 = $560, a full year's use). Hrblock online He must prorate the $560 for his 9 months of use in 1994. Hrblock online This gives him a deduction of $420 ($560 ÷ 9/12). Hrblock online In 1995, Frank can deduct $560 for the full year. Hrblock online 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. Hrblock online The rate cannot be more than twice the straight line rate. Hrblock online Rate of depreciation. Hrblock online   Under this method, you must determine your declining balance rate of depreciation. Hrblock online The initial step is to: Divide the number 1 by the useful life of your property to get a straight line rate. Hrblock online (For example, if property has a useful life of 5 years, its normal straight line rate of depreciation is ⅕, or 20%. Hrblock online ) Multiply this straight line rate by a number that is more than 1 but not more than 2 to determine the declining balance rate. Hrblock online Unless there is a change in the useful life during the time you depreciate the property, the rate of depreciation generally will not change. Hrblock online Depreciation deductions. Hrblock online   After you determine the rate of depreciation, multiply the adjusted basis of the property by it. Hrblock online This gives you the amount of your deduction. Hrblock online 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%). Hrblock online 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. Hrblock online Subtract the previous year's depreciation from your basis ($10,000 - $2,000 = $8,000). Hrblock online Multiply this amount by the rate of depreciation ($8,000 ÷ 20% = $1,600). Hrblock online Your depreciation deduction for the second year is $1,600. Hrblock online   As you can see from this example, your adjusted basis in the property gets smaller each year. Hrblock online Also, under this method, deductions are larger in the earlier years and smaller in the later years. Hrblock online You can make a change to the straight line method without consent. Hrblock online Salvage value. Hrblock online   Do not subtract salvage value when you figure your yearly depreciation deductions under the declining balance method. Hrblock online However, you cannot depreciate the property below its reasonable salvage value. Hrblock online Determine salvage value using the rules discussed earlier, including the special 10% rule. Hrblock online Example. Hrblock online If your adjusted basis has been decreased to $1,000 and the rate of depreciation is 20%, your depreciation deduction should be $200. Hrblock online But if your estimate of salvage value was $900, you can only deduct $100. Hrblock online This is because $100 is the amount that would lower your adjusted basis to equal salvage value. Hrblock online Income Forecast Method The income forecast method requires income projections for each videocassette or group of videocassettes. Hrblock online You can group the videocassettes by title for making this projection. Hrblock online You determine the depreciation by applying a fraction to the cost less salvage value of the cassette. Hrblock online The numerator is the income from the videocassette for the tax year and the denominator is the total projected income for the cassette. Hrblock online For more information on the income forecast method, see Revenue Ruling 60-358 in Cumulative Bulletin 1960, Volume 2, on page 68. Hrblock online How To Change Methods In some cases, you may change your method of depreciation for property depreciated under a reasonable method. Hrblock online If you change your method of depreciation, it is generally a change in your method of accounting. Hrblock online You must get IRS consent before making the change. Hrblock online However, you do not need permission for certain changes in your method of depreciation. Hrblock online The rules discussed in this section do not apply to property depreciated under ACRS or MACRS. Hrblock online For information on ACRS elections,see Revocation of election, in chapter 1 under Alternate ACRS Method. Hrblock online Change to the straight line method. Hrblock online   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. Hrblock online However, if you have a written agreement with the IRS that prohibits a change, you must first get IRS permission. Hrblock online When the change is made, figure depreciation based on your adjusted basis in the property at that time. Hrblock online Your adjusted basis takes into account all previous depreciation deductions. Hrblock online Use the estimated remaining useful life of your property at the time of change and its estimated salvage value. Hrblock online   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. Hrblock online You cannot make the change on an amended return filed after the due date of the original return (including extensions). Hrblock online   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. Hrblock online   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. Hrblock online Changes that require permission. Hrblock online   For most other changes in method of depreciation, you must get permission from the IRS. Hrblock online To request a change in method of depreciation, file Form 3115. Hrblock online File the application within the first 180 days of the tax year the change is to become effective. Hrblock online In most cases, there is a user fee that must accompany Form 3115. Hrblock online See the instructions for Form 3115 to determine if a fee is required. Hrblock online Changes granted automatically. Hrblock online   The IRS automatically approves certain changes of a method of depreciation. Hrblock online But, you must file Form 3115 for these automatic changes. Hrblock online   However, IRS can deny permission if Form 3115 is not filed on time. Hrblock online For more information on automatic changes, see Revenue Procedure 74-11, 1974-1 C. Hrblock online B. Hrblock online 420. Hrblock online Changes for which approval is not automatic. Hrblock online   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. Hrblock online   You must request and receive permission for these changes. Hrblock online 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. Hrblock online Change from an improper method. Hrblock online   If the IRS disallows the method you are using, you do not need permission to change to a proper method. Hrblock online You can adopt the straight line method, or any other method that would have been permitted if you had used it from the beginning. Hrblock online 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. Hrblock online However, you must file the amended return before the filing date for the next tax year. Hrblock online Dispositions Retirement is the permanent withdrawal of depreciable property from use in your trade or business or for the production of income. Hrblock online You can do this by selling, exchanging, or abandoning the item of property. Hrblock online You can also withdraw it from use without disposing of it. Hrblock online For example, you could place it in a supplies or scrap account. Hrblock online Retirements can be either normal or abnormal depending on all facts and circumstances. Hrblock online The rules discussed next do not apply to MACRS and ACRS property. Hrblock online Normal retirement. Hrblock online   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. Hrblock online 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. Hrblock online Abnormal retirement. Hrblock online   A retirement can be abnormal if you withdraw the property early or under other circumstances. Hrblock online For example, if the property is damaged by a fire or suddenly becomes obsolete and is now useless. Hrblock online Gain or loss on retirement. Hrblock online   There are special rules for figuring the gain or loss on retirement of property. Hrblock online The gain or loss will depend on several factors. Hrblock online 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. Hrblock online A single property account contains only one item of property. Hrblock online A multiple property account is one in which several items have been combined with a single rate of depreciation assigned to the entire account. Hrblock online Sale or exchange. Hrblock online   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. Hrblock online See Publication 544. Hrblock online Property not disposed of or abandoned. Hrblock online   If property is retired permanently, but not disposed of or physically abandoned, you do not recognize gain. Hrblock online 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. Hrblock online 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. Hrblock online   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. Hrblock online Special rule for normal retirements from item accounts. Hrblock online   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. Hrblock online However, you cannot deduct losses if you use the average useful life to figure depreciation and they have a wide range of useful lives. Hrblock online   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. Hrblock online Abandoned property. Hrblock online   If you physically abandon property, you can deduct as a loss the adjusted basis of the property at the time of its abandonment. Hrblock online 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. Hrblock online Basis of property retired. Hrblock online   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. Hrblock online Single item accounts. Hrblock online   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. Hrblock online This is generally the cost or other basis of the item of property less depreciation. Hrblock online See Publication 551. Hrblock online Multiple property account. Hrblock online   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. Hrblock online 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. Hrblock online   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. Hrblock online The method of depreciation used for the multiple property account is used. Hrblock online 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. Hrblock online Prev  Up  Next   Home   More Online Publications
 

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Hrblock online Index A Accounting methods Accrual method, Accrual Method Cash method, Cash Method Change in, Change in Accounting Method Methods you can use, Methods you can use. Hrblock online Accounting periods 52-53 week tax year, 52-53-Week Tax Year Business purpose tax year, Business Purpose Tax Year Calendar year, Calendar Year Improper tax year, Improper Tax Year Partnerships, Partnership Accrual method Expenses, Expenses Income, Income Advance payments, Advance Payment for Services Sales, Advance Payment for Sales Services, Advance Payment for Services Assistance (see Tax help) B Business purpose tax year, Business Purpose Tax Year C Calendar year, Calendar Year Cash method, Income Expenses, Expenses Income, Income Change, accounting method, Change to accrual method. Hrblock online , Change in Accounting Method Comments on publication, Comments and suggestions. Hrblock online Constructive receipt of income, Constructive receipt. Hrblock online Corporation tax periods, Corporations (Other Than S Corporations and PSCs) Cost identification, Identifying Cost D Death of individual, short period return, Death of individual. Hrblock online E Economic performance, Economic Performance Excluded entities, cash method, Excluded Entities F Fiscal year, Fiscal Year Form 1128, Improper Tax Year, Change in Tax Year 8716, Making the election. Hrblock online , Making back-up election. Hrblock online 8752, Required payment for partnership or S corporation. Hrblock online , Activating election. Hrblock online 970, Adopting LIFO method. Hrblock online Free tax services, How To Get Tax Help H Help (see Tax help) I Inventories Cost identification, Identifying Cost FIFO, FIFO Method LIFO, LIFO Method Lower of cost or market, Lower of Cost or Market Method Perpetual or book, Perpetual or Book Inventory Retail method, Retail Method Specific identification, Specific Identification Method Uniform capitalization rules, Inventories. Hrblock online Valuing, Valuing Inventory M More information (see Tax help) P Partnerships, Partnership Personal service corporation, Partnerships, S Corporations, and Personal Service Corporations (PSCs) Limit, use of cash method, Qualified PSC. Hrblock online Required tax year, Partnerships, S Corporations, and Personal Service Corporations (PSCs), Personal Service Corporation (PSC) Publications (see Tax help) R Related persons, Related Persons S S corporations, S Corporation Section 444 election, Section 444 Election Short period return, Short period return. Hrblock online Short tax year, Short Tax Year Suggestions for publication, Comments and suggestions. Hrblock online T Tax help, How To Get Tax Help Tax year Change in, Change in Tax Year Corporations, Corporations (Other Than S Corporations and PSCs) Fiscal year, Fiscal Year Personal service corporation, Personal Service Corporation (PSC) S corporations, S Corporation Section 444 election, Section 444 Election Short tax year, Short Tax Year Taxpayer Advocate, Taxpayer Advocate Service. Hrblock online TTY/TDD information, How To Get Tax Help U Uniform capitalization rules Exceptions, Exceptions. Hrblock online General rules, Uniform Capitalization Rules Prev  Up     Home   More Online Publications