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PERESENTED BY MEDHA MITTAL

XI C
ROLL 38
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Y Definition
Ú The allowance for wear and tear on equipment and
machinery
Ú Amount of decreasing value in a capital asset allowed to be
deducted from a business tax return
Ú Cost Recovery
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Y You can depreciate property only if it meets the
following requirements:
Ú It is used in business or held for the production of income.
Ú 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.
Ú It is property that wears out, decays, gets used up, becomes
obsolete, or looses value from natural causes.
Y Depreciable property can be either tangible or
intangible

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Y Purchased property you can see or touch
Ú Livestock (purchased)
Ú Machinery
Ú Buildings and improvements, fences
Ú Dams, ponds, or terraces
Ú Irrigation systems and water wells
Ú 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)

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Y Purchased property that has value that you
cannot readily see or touch
Ú Computer Software
Ú Copyrights, patents, etc
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Y Property placed into service and disposed of in the
same year.
Y Land (land can never be depreciated)
Y Inventory
Ú You cannot depreciate property held for resale in the normal
course of business
Y Leased property
Ú The value of the lease is already showing up as a rental
expense
Y Raised Market Livestock (Because there is no cost to
recover)
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Y A total of $24,000 may be taken in a section

179 deduction.
Ú Once taken, the amount can no longer be
depreciated.
Ú You can however, depreciate out the balance if the
asset is over $24,000.
Ú Starting in 2003 the amount will be $25,000
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Y Begins Y Ends
Ú When you ´place the property Ú When the cost of the item has
in serviceµ. been recovered or when it is
Ú When it is ready and available retired from service, whichever
for a specific use in the happens first
business
Y Example
Y Example Ú When it is sold or is not longer
Ú When it was bought for the useable
business
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Y 150% Declining Balance
- Ú
Ú Only Option
GDS - General
Depreciation System
Y Straight Line
Either Option
GDS - General Depreciation
System
ADS - Alternative
Depreciation System

Longer time for
depreciation
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Y ACRS (Acellerated Cost
Recovery System)
Ú Used on Property Placed in
Service before 1987
Ú Cannot be used on property
placed in service after 1987
(you must use MACRS)
Y Straight Line
Ú Standard method of
depreciation with a similar
amount taken out each
year
Ú Does not have the
advantage of a half year
convention which means
you must wait to start
later

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Y Consult the D

 


  to
find out the specific lengths of time for depreciation
Ú Cattle (Breeding) >> 5 yrs GDS, 7 yrs ADS
Ú Hogs (Breeding) >> 3 yrs GDS, 3 yrs ADS
Ú Fences >> 7 yrs GDS, 10 yrs ADS
Ú Single use farm buildings >> 10 yrs GDS, 15 yrs ADS
Ú Grain Bins >> 7 yrs GDS, 10 yrs ADS
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Y 150% Declining Balance (DB) Y Straight Line - Half Year

Ú Year 1 - 15.00%
Ú Year 2 - 25.50 %
Ú Year 3 - 17.85 %
Ú Year 4 - 16.66 %
Ú Year 5 - 16.66 %
Ú Year 6 - 6.33 %
Ú Year 1 - 10 %
Ú Year 2 - 20 %
Ú Year 3 - 20 %
Ú Year 4 - 20 %
Ú Year 5 - 20 %
Ú Year 6 - 10 %
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Y More Depreciation Claimed early in the live of
the asset
Ú Year 1 would be 15 % versus 10 %SL
Ú 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
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Y 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
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Y Allows for the depreciation to be spread out

over a longer number of years.
Y 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!)
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Y Depreciation allows ´cost recoveryµ on capital asset purchases
in the farm business
Y Depreciation is a non-cash expense on your schedule F (farm
profit or loss statement)
Y Record Depreciation on Tax Form 4562
Y Section 179 Deduction ($25,000 for 2003) - Allows a 1 time
deduction to help on major farm purchases
Y Two main methods - MACRS and Straight Line
Y Know the rules - they are always changing, stay on top of them
so you can maximize your after-tax income.