1
Depreciation and
Section 179 Deduction
Agriculture Handbook 718,
pages 29-38
2What Is Depreciation
Depreciation is the annual deduction to recover the cost (or other basis) of business or income-producing property with a determinable useful life of more than one year
Depreciable Property
Property is depreciable if it meets the following requirements:
It has a determinable useful life
It wears out, decays, gets used up, becomes obsolete or loses value from natural causes
5
Depreciable Forestry Assets
Examples
Depreciable Land Improvements:
Bridges and culverts
Fencing
Temporary roads
Equipment and Machinery
Trucks
Power saws
6
Land and Land Improvements
Land is not depreciable
Land improvements are depreciable, for examples:
fences
temporary roads
surfaces of permanent roads
bridges, and
buildings
7
Modified Accelerated Cost Recovery
System (MACRS)
For most forestry property, use the Modified Accelerated Cost Recovery System (MACRS) to calculate depreciation
It is for most tangible property placed in service after 1986 (1986 Tax Reform Act)
8 General Depreciation System vs. Alternative
Depreciation System
General depreciation system (GDS) generally allows faster cost recovery
applicable to most properties
9
How to Figure the MACRS Deduction
To figure MACRS deduction, you must first determine the property’s info:
Its basis
Its placed in service date
Its property class and recovery period
The convention
The depreciation method
10
MACRS Property Basis
Basis is the measure of your investment in the property for tax purposes
For example, for property you buy, your original basis is usually its purchase cost
MACRS Property Information
Placed-in-service date
Depreciation begins when your property becomes ready and available for a particular use, regardless of
whether it is actually put into use at that time and
whether the use is associated with a trade or business, production of income, or a personal activity
Property
Class and Recovery PeriodEach item of property is assigned to a property class
The property class establishes the number of years over which the basis is recovered
13 Quick References
* Used by logging and sawmill operators for their own account * For property placed in service after 5/12/1993
See Table 5-1. Ag. Handbook No. 718, p.30
Computers and peripherals………… 5 5
Automobiles……….. 5 5
Office furniture………. 7 10
Logging and road building equipment*.. 5 6
Over-the-road (semi) tractors………. 3 4
Nonresidential real property*………… 39 40
Recovery Period (in Years) GDS ADS 14 Recovery Period for Land Improvements Land improvements such as Bridges Culverts Non-farm fences Temporary roads and surfaces of permanent road Recovery Period (in Years) GDS ADS 15 20 15
Conventions
Half-year convention – Treats all property as placed in service, or disposed of, at the mid-point of that tax year
Mid-quarter convention – Treats all property as placed in service, or disposed of, at the mid-point of the quarter
Mid-month convention – Treats all property as placed in service, or disposed of, at the mid-point of the month
16
Which Convention to Use?
17
Mid-Quarter Convention
If during any tax year the total depreciable bases of all MACRS property placed in service during the last 3 months of the tax year exceeds 40 percent of the total depreciable bases of all MACRS property placed in service during the tax year, you must use the mid-quarter convention
18
Which Convention to Use?
The mid-month convention is used for residential rental property and nonresidential real property
Depreciation Methods
200% declining balance method
Used for non-farm property in the 3, 5, 7 or 10 year property classes
Use the half-year or mid-quarter convention
Depreciation Methods
150% declining balance method
Used for farm business property (except real property) and all other property in the 15 and 20 year property classes
21
Depreciation Method
Straight-line method
Used for residential rental and nonresidential real property
apply the mid-month convention
22
Depreciation Methods
Straight-line election
You may elect to use the straight line method instead of using the declining balance method
Make the election by entering “S/L” in column (f) of part II of Form 4562
Once made, this election cannot be changed
23
Units-of-production Method
You may elect to exclude certain timber-related property – e.g. temporary logging roads – from MACRS and depreciate it using the units-of-production method
The property is depreciated based on the number of units of timber harvested in a tax year compared to the total number of units harvested over the life of the property
24
Units-of-production Example
A good example is costs for temporary logging roads, bridges, and culverts
constructed solely for use in harvesting a specified timber tract and
25
Units-of-production Example
Assume you spend $10,000 dollars to build a temporary road solely to harvest 480 MBF of timber. The logger harvests 300 MBF this year, and harvests the remaining 180 MBF next year. What are your depreciation deductions?
From Example 5-5, Ag. Handbook No. 718, p.35
26
Units-of-production Example
Under the units-of-production, you can depreciate the cost of the road over 2 years
$6,250 the first year: $10,000 x (300MBF/480MBF)
$3,750 the next year:
$10,000 x (180MBF/480MBF)
Calculating MACRS Deductions
You can figure the depreciation in
two options:
You can use the IRS percentage tables, or
You can compute deduction without the IRS tables
IRS Tables
There is a separate table for each
depreciation method, recovery period,
and convention
Apply the table percentages to the
unadjusted basis of the property each
29
Sample MACRS 200% Table
Half-year Convention
Year 3-Year 5-Year 7-Year
1 33.33% 20% 14.29% 2 44.45% 32% 24.49% 3 14.81% 19.2% 17.49% 4 7.41% 11.52% 12.49% 5 11.52% 8.93% 6 5.76% 8.92% 7 8.93% 8 4.46% 30
Trailer Example
Assume you buy a trailer for $12,500 that you will use entirely for your forestry operation. Calculate your depreciation using the MACRS tables.
From Example 5-4, Ag. Handbook No. 718, p.35
31
Trailer Example
First, we need to determine the recovery period:
Trailers are 5-year property
Next, determine the correct MACRS depreciation table by the convention.
Use Table A-1 for rates on a 5-year non-farm property, 200% declining balance and a half-year convention.
32
Trailer Example
Depreciation is calculated as follows, using Table A-1:
33
Mixed Use
Note: if you use the trailer only 70 percent for business purposes, you can only claim 70 percent of the above amounts
34
Bonus Depreciation
You may take a 50% depreciation, on top of regular depreciation for 2009
Applies to new property placed in service in 2009
Taken in the first year the property is placed in service only
Extended by American Recovery and Reinvestment Act of 2009 (ARRA)
Originally enacted in 2008
Section 179 Deduction
You may deduct immediately up to $250,000 in 2009of the cost of qualified personal property if your timber operation is an active trade or business.
The deduction is limited to aggregate taxable income from your active trades or businesses:
including income earned as an employee and certain timber income (Section 631 gains)
If your investment is over $800,000, however, your Sec. 179 deduction will be reduced.
Section 179 Deduction
The $250,000 max limit is extended by
the ARRA
37
Example: Section 179 Deduction
In 2009, you purchased
$7,000 in a used heavy duty truck
$20,000 in a used tractor
both to be used 100 percent for your timber business
You have $25,000 of aggregate taxable business income for the year.
38
Example: Section 179 Deduction
Your investment in section 179 property $27,000 is less than the $250,000 max deduction allowed
However, your section 179 deduction for 2009 is limited to your $25,000 of aggregate business income
You can divide it between the truck and the tractor as you choose
39
Example: Section 179 Deduction
Carry the remaining $2,000 ($27,000 – $25,000) forward to future tax years until it is used up
40
Section 179 Deduction
The deduction is reduced one dollar for each dollar of investment in section 179 property over $800,000 for 2009
For example:
You place $900,000 of section 179 property in service during 2009, your deduction is limited to $125,000
41
Section 179 Deduction Carryover
The amount of eligible cost that is not
deductible in one year due to the above
limits may be carried forward
indefinitely to later years until it can be
deducted
42
Section 179 Deduction
Property held for the production of income, such as an investment, is not eligible for the Section 179 deduction
Neither is property held by an estate or trust
Section 179 Deduction
You must elect to take the deduction for the tax year in which the property is placed in service
You can take the deduction on an amended return only within the time prescribed by law
Report the Section 179 deduction on Form 4562
Section 179 Deduction
Recapture Provisions
Generally a portion of Section 179 deduction is recaptured as ordinary income if the property is not used in business more than 50 percent of the time before the recovery period expires
45
Multiple Depreciation Example I
Taxpayer Todd in 2009 spent $20,000 for a structure (39-yr non-residential real property) which he placed in service in his timber business in July
purchased a $30,000 used skidder in September
Purchased a $60,000 used over-the-road tractor in October (4thQuarter)
His net taxable income from all his trade and businesses for 2009 exceeds $60,000. What are his total depreciation deductions for 2009?
46
Order of Taking Depreciation
Deductions
The bonus depreciation deduction was
calculated after any section 179 deduction and before the regular depreciation deduction
47
Solution
The structure does not qualify for Section 179 because it is not personal property
Since more than 40 percent of the basis in depreciable property was placed in service during the last quarter of the year, Todd must use the mid-quarter convention
48
Solution – Mid-Quarter Convention
Section 179 deduction on the skidder $ 30,000 Bonus Depreciation (elect out) $0 MACRS deduction on tractor (3-yr property)
$60,000 x 0.0833 . . . . $ 4,998 MACRS deduction on structure (39-yr property)
49
Multiple Depreciation Example II
What if Todd had placed the over-the-road tractor ($60,000) in service in September and the skidder ($30,000) in service in October?
50
Multiple Depreciation Example II
Half-Year Convention
He would calculate his depreciation deductions using the half-year convention instead of the mid-quarter convention
This would have resulted more in depreciation deductions for the tax year
Solution-Half-Year Convention
Section 179 deduction on the skidder . . . $ 30,000 Bonus depreciation (elect out) . . . $0 MACRS deduction on tractor (3-yr property)
$60,000 x 0.3333 . . . $ 19,998 MACRS deduction on structure (39-yr property)
$20,000 x 0.01177 . . . $ 235 Total depreciation & sect. 179 deductions . . . $50,233
IRS Publications Covering
Depreciation
Pub. 17, “Your Federal Income Tax”
Pub. 225, “Farmer’s Tax Guide”
Pub. 334, “Tax Guide for Small Business”
Pub. 534, “Depreciating Property Placed in Service Before 1987”
Pub. 946, “How to Depreciate Property” *
MACRS Tables
Recovery Periods by Property Class
Modified Accelerated Cost Recovery System MACRS
General Depreciation System GDS
GDS Property
Type
3
Over-the–road (semi) tractors
5
Computers and peripherals, autos; pickup trucks; logging
equipment and road building equipment used by logging and
sawmill operators for their own account
5
Portable sawmills; over-the road trailers; typewriters, calculators,
adding and accounting machines, copiers, and duplicating
equipment
7
Office furniture, fixtures and equipment; farm machinery and
equipment, such as tractors and planting machines, and farm
fences; single-purpose agricultural or horticultural structures
placed in service before 1989; any property that does not have a
class life and is otherwise not classified under Section 168 (e) (2)
or (3)
10
Single-purpose agricultural or horticultural structures placed in
service after 1988; property with a class life of 16 years or more,
but less than 20 years
15
Land improvements such as bridges, culverts, non-farm fences,
temporary roads, and surfaces of permanent roads
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Table A-1.
3-, 5-, 7-, 10-, 15-, and 20-Year Property
Half-Year Convention
Year 1 2 3 4 5 6 7 8 9 10Depreciation rate for recovery period
3-year 5-year 7-year 10-year 15-year 20-year
11 12 13 14 15 16 17 18 19 20 21 33.33% 44.45 14.81 7.41 20.00% 32.00 19.20 11.52 11.52 5.76 14.29% 24.49 17.49 12.49 8.93 8.92 8.93 4.46 10.00% 18.00 14.40 11.52 9.22 7.37 6.55 6.55 6.56 6.55 3.28 5.00% 9.50 8.55 7.70 6.93 6.23 5.90 5.90 5.91 5.90 5.91 5.90 5.91 5.90 5.91 2.95 3.750% 7.219 6.677 6.177 5.713 5.285 4.888 4.522 4.462 4.461 4.462 4.461 4.462 4.461 4.462 4.461 4.462 4.461 4.462 4.461 2.231
Table A-2.
3-, 5-, 7-, 10-, 15-, and 20-Year Property
Mid-Quarter Convention
Placed in Service in First Quarter
Year 1 2 3 4 5 6 7 8 9 10Depreciation rate for recovery period
3-year 5-year 7-year 10-year 15-year 20-year
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Table A-7. Nonresidential Real Property Mid-Month Convention Straight Line—31.5 Years
Year 1 2–7 8 9 10 11 12 13 14 15
Month property placed in service
7 8 9 10 11 12 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 6 5 4 3 2 1 0.397% 0.661% 0.926% 1.190% 1.455% 1.720% 1.984% 2.249% 2.513% 2.778% 3.042% 3.175 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 0.132% 31 32 33 3.174 1.720 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 1.984 3.175 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 2.249 3.175 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 2.778 3.175 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 0.132 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 2.513 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.042 3.175 3.175 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 0.397 3.175 3.175 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 0.926 3.175 3.175 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 1.455 3.175 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 0.661 3.175 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 1.190
Table A-7a. Nonresidential Real Property
Mid-Month Convention Straight Line—39 Years
Year 1 2–39 40
Month property placed in service
