Method of deducting the cost of tangible personal and real property (other than land) over time
Amortization
Method of deducting the cost of intangible assets over time
Depletion
Method of deducting the cost of natural resources over time
Cost Basis
An asset's cost basis includes all costs needed to purchase the asset, prepare it for use, and begin using it
Cost basis is usually the same for book and tax purposes
Special basis rules apply when personal-use assets are converted to business use and when assets are acquired through tax-deferred transactions, gifts, or inheritances
Tax Depreciation
To depreciate an asset, a business must determine original basis, depreciation method, recovery period, and depreciation convention
Half-Year Convention
One-half of a year's depreciation is allowed in the first and the last year of an asset's life
The IRS depreciation tables automatically account for the half-year convention in the acquisition year
If an asset is disposed of before it is fully depreciated, only one-half of the table's applicable depreciation percentage is allowed in the year of the disposition
Mid-Quarter Convention
The mid-quarter convention is required when more than 40% of personal property is placed in service during the fourth quarter of the tax year
Each quarter has its own depreciation table. Once the mid-quarter convention applies, the taxpayer must continue to use it over the assets' entire recovery period
If an asset is disposed of before it is fully depreciated, use the formula given to determine the allowable depreciation in the year of disposition
Real Property Depreciation
Depreciated using the straight-line method
Uses the mid-month convention
Residential property has a recovery period of 27.5 years
Nonresidential property placed in service on of after May 13, 1993 has a life of 39 years
Nonresidential property placed in service after December 31 1986 but before May 13, 1993, has a period of 31.5 years
Listed Property
When an asset is used for both personal and business use, calculate the business-use percentage
If the business-use percentage is above 50%, the allowable depreciation is limited to the business-use percentage
If a listed property's business-use percentage ever falls to or below 50%, depreciation for all previous years is retroactively restated using the MACRS straight-line method
Organizational Expenditures and Start-Up Costs
Taxpayers may immediately expense up to $5000 of organizational expenditures and $5,000 of start-up costs
The immediate expense rule has a dollar-for-dollar phase-out that begins at $50,000 for organizational expenditures and for start-up costs. Thus, when organizational expenditures or start-up costs exceed $55,000 there is no immediate expensing.