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Option 3 ACCOUNTS DEP

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Option 3 ACCOUNTS DEP

  1. 1. PERESENTED BY XMBA 14
  2. 2.  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
  3. 3.  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
  4. 4.  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)
  5. 5.  Purchased property that has value that you cannot readily see or touch  Computer Software  Copyrights, Patents & Trademarks.  Goodwill
  6. 6.  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)
  7. 7.  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
  8. 8.  Begins  Ends  When you “place the property  When the cost of the item has in service”. been recovered or when it is  When it is ready and available retired from service, whichever for a specific use in the happens first business  Example Example  When it is sold or is not longer  When it was bought for the useable business
  9. 9.  150% Declining Balance  Straight Line -  Either Option  Only Option  GDS - General Depreciation  GDS - General System Depreciation System  ADS - Alternative Depreciation System  Longer time for depreciation
  10. 10.  ACRS (Acellerated Cost  Straight Line Recovery System)  Standard method of  Used on Property Placed in depreciation with a similar Service before 1987 amount taken out each  Cannot be used on property placed in service after 1987 year (you must use MACRS)  Does not have the advantage of a half year convention which means you must wait to start later
  11. 11.  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
  12. 12.  150% Declining Balance (DB)  Straight Line - Half Year  Year 1 - 15.00%  Year 1 - 10 %  Year 2 - 25.50 %  Year 2 - 20 %  Year 3 - 20 %  Year 3 - 17.85 %  Year 4 - 20 %  Year 4 - 16.66 %  Year 5 - 20 %  Year 5 - 16.66 %  Year 6 - 10 %  Year 6 - 6.33 %
  13. 13.  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
  14. 14.  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
  15. 15.  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!)
  16. 16.  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.

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