Monster Media 1993 #2/Image.iso/business/sba93_3a.zip/F127.SBE

Text File | 1993-07-01 | 5KB | 113 lines

@083 CHAP 9

        ┌───────────────────────────────────────────────┐
        │      DEPRECIATING ASSETS FOR TAX PURPOSES     │
        └───────────────────────────────────────────────┘


The Tax Reform Act of 1986 put an end to the highly favor-
able "ACRS" (Asset Cost Recovery System) rules that had
been enacted in 1981. Since January 1, 1987, taxpayers have
had to learn a whole new, and more complex system of deprec-
iation.  Before then, virtually all assets a typical small
business acquired were written off over 5 years, a few,
like cars, over 3 years, and real estate over 19 years (or
15 or 18 years if acquired before May 9, 1985).  You must
still use the ACRS tables on assets placed in service be-
tween 1981 and 1986, in general, however.

Under the new MACRS depreciation system, most assets are
assigned to 3-, 5-, 7-, 10-, 15- or 20-year recovery period
categories, except for real estate, which is depreciated
over 31.5 years (27.5 years for residential rental proper-
ty).  Under the MACRS system, all personal property in the
3-, 5-, 7-, and 10-year categories is depreciated using the
old 200% declining balance method of depreciation from pre-
1981 days, and 15- and 20-year property is depreciated
under the 150% declining balance method.  Real estate may
now only be depreciated on the straight-line basis.

Assets other than real estate are mostly assigned to the
various recovery periods based on the old Asset Deprecia-
tion Range ("ADR") system "midpoint class lives" that were
published by the IRS back in the early 1970s.  The "class
life" guidelines vary from industry to industry and are
quite numerous and technical.  For the most part, you will
need to rely on your tax adviser to tell you what recovery
period applies to various depreciable assets you purchase
in your business.  However, the MACRS system does specific-
ally assign some types of assets to recovery classes, such
as autos and light trucks, which are now 5-year property
(they were 3-year property under the former ACRS rules).
Most of the "information-handling equipment" (other than
computers) used in an office, such as calculators, typewrit-
ers, etc., are 5-year property, and computers and peripher-
als are generally 7-year property.

Generally, under MACRS, a half-year of depreciation can be
taken in the year an asset is first placed in service, re-
gardless of whether it is put in service on the first day
of the tax year or the last day (except for real estate).
However, when more than 40% of such property is put in ser-
vice in the last 3 months of the tax year, you are instead
required to use a "mid-quarter" convention, which assumes
that all the assets placed in service in each calendar
quarter were placed in service at the midpoint of such
quarter.

Under recent final MACRS tax regulations [ Regs. Section
1.168(d)-1(b)()(ii) ], no depreciation is allowed at all
for property that is acquired and disposed of in the same
taxable year, regardless of which convention applies.  As
such, such assets are ignored in determining whether the
40% limit has been exceeded and thus whether the mid-
quarter convention applies to other assets acquired during
the year.

For real property, all real property that is placed in
service in a particular month is assumed to have been
placed in service at the mid-point of that month.

Small businesses are allowed to expense up to $10,000 a
year of equipment in the year of purchase, rather than de-
preciating it.  This benefit is phased out dollar for dol-
lar if you acquire more than $200,000 of eligible property
during the tax year.  If your business acquires $210,000 or
more of such eligible assets in one year, it won't be able
to elect to expense ANY of it.  Thus a large company, which
acquires a lot of personal property each year, like a
General Motors, is not able to take advantage of this tax
break (but would still be able to depreciate it).  Eligible
property is generally tangible personal property that would
have qualified for the investment tax credit under prior
law.  Note that this expensing election is not allowed if
it would create a loss for the taxpayer -- it is only al-
lowable to the extent the taxpayer has taxable income.

@CODE: CA
@CODE:NF

        ┌───────────────────────────────────────────────┐
        │      CALIFORNIA DEPRECIATION DIFFERENCES      │
        └───────────────────────────────────────────────┘

Over the years since the ACRS depreciation system came into
being for federal tax purposes, one of the most important
differences between federal and California tax law has been
with regard to depreciation.  However, in 1987 and 1988,
California finally enacted legislation to allow unincorpor-
ated businesses and S corporations to use the new MACRS
depreciation for state income tax purposes.  Even so, regu-
lar corporations subject to tax in California are still
prohibited from using either the ACRS or MACRS depreciation
systems for state tax purposes (most regular corporations
are subject to the California franchise tax, rather than
income tax, on their income).  Regular ("C") corporations
still must use the old pre-1981 methods that were used for
both federal and California purposes before 1981, unless
ACRS or MACRS deductions are considered "a reasonable
allowance."