Unit 8: Depreciation and Amortization

Listed Property

Listed property is property used in a business that can also be used for personal purposes. Examples include certain vehicles such as passenger cars, motorcycles, and boats; property used for entertainment, recreation, or amusement such as photographic or video-recording equipment.

Vehicles are excluded if they are used in the business of transporting persons (such as a tour bus or ambulance), or used as property for hire (such as a taxi cab). Large trucks or utility vans that are qualified non-personal use vehicles (such as a utility van used only for furniture delivery at a business location) are also not categorized as listed property.

Form 3115

Form 3115, Change in Accounting Method, to correct the error. It should not amend its prior returns if the error has been reported for multiple years. Form 3115 is used to correct most other depreciation errors, including the omission of depreciation. If you forget to take depreciation on an asset, and the error continues on multiple returns, the IRS treats this as the adoption of an incorrect method of accounting, which may only be corrected by filing Form 3115.

What depreciation life and convention method is used for qualified leasehold improvements of real property

15-year straight line is the depreciation life and convention method that is used for qualified leasehold improvements (QIP) of business property. A leasehold improvement usually consists of alterations made to a rental property or location in order to customize it for the specific needs of a tenant. Leasehold improvements may include something unique, such as fencing installed by a towing yard, or the installation of partitions for a call center or a dental office. There are many improvements that can qualify as leasehold improvements. Leasehold improvements typically do not include real property structures (such as a separate parking garage that is later added to a location).

Farm Assests that must be depreciated

Breeding livestock are considered fixed assets that must be depreciated. Livestock held for: "draft, breeding, sport, or dairy purposes" are typically treated as farm assets and depreciated.

Wayne is a self-employed plumber who files a Schedule C to report his business income. In the current year, he has the following purchases, all of which are 100% business use.

• New computer system: $5,600

• New multi-line phone system: $3,600

• Plumbing tools: $4,200

• Phone bill charges: $2,300

• A small warehouse to store his equipment: $43,000

He is on the cash basis. What is his allowable Section 179 deduction for these asset purchases?

The amount is figured as follows:

• New computer system: $5,600

• New multi-line phone system: $3,600

• Plumbing tools: $4,200

• Total qualifying section 179 purchases: $13,400

Section 179 only applies to certain asset purchases. The telephone bills are a regular business expense, not a capital cost or a Section 179 deduction. The warehouse is real property (real estate) and is not qualifying property for Section 179. Instead, real estate must be depreciated.

Gayle is a professional wedding photographer. She buys and places in service professional camera equipment. She pays $9,700 in cash and receives a $2,500 trade-in allowance for some used camera equipment. Both the old and the new equipment were used 80% for business and 20% for personal purposes. Gayle’s allowable section 179 deduction is:

The Section 179 deduction applies only to the amount actually paid in cash and not to the value of Gayle’s trade-in allowance, and further applies only to the portion used for business purposes. Thus, the deduction is limited to (80% business-use percentage x $9,700 cash paid) = $7,760.

Redstar Construction, Inc. purchases the following assets in 2023:

• $525,000 used heavy machinery

• $25,000 patent

• $230,000 land

• $1,500 off-the-shelf computer software

The company’s gross income is $800,000, and its net taxable business income for the year is $475,000, after applying all its other business expenses. What amount can Redstar Construction, Inc. claim for its section 179 deduction?

In this scenario, only the used machinery and the software would be “qualifying” property for the purposes of the section 179 deduction. Real property and most intangible property (the patent and the land) do not qualify for Section 179 treatment. However, the Section 179 deduction is also limited to a business’s taxable income. Therefore, Redstar, Inc.’s allowable section 179 deduction is $475,000, which is the amount of its taxable income for the year. After the application of the Section 179 deduction, the corporations' taxable income would be zero.

Farm Structures and Section 179

A greenhouse may be eligible for accelerated depreciation, because it is classified as a single-purpose agricultural structure. The tax code treats the depreciation of buildings in a special way.

Typically, commercial buildings (such as factories and office buildings) are depreciated over 39-years. Residential rentals are depreciated over 27.5-years. However, an exception to this applies to single-purpose agricultural and horticultural structures.

Single-purpose agricultural or horticultural structures include: greenhouses, hog houses, poultry barns, livestock sheds, milking parlors and similar structures.

The Section 179 deduction is a special allowance that allows a business to elect to take a full deduction for the cost of new or used property in the first year it is placed in service, rather than depreciating it over its useful life. To qualify for the Section 179 deduction, the property must meet all the following requirements:

• It must be eligible property.

• It must be acquired for business use (and used more than 50% for business in the year placed in service).

• It must have been acquired by purchase.

• It must not have been purchased from a related party, including a spouse, ancestors, or lineal descendants.

Eligible property generally includes the following:

• Tangible personal property, such as machinery and equipment.

• Property contained in, or attached to, a building (other than structural components), such as refrigerators, grocery store counters, office equipment, printing presses, testing equipment, and signs.

• Gasoline storage tanks and pumps at retail service stations.

• Livestock, including horses, cattle, hogs, sheep, goats, and mink and other furbearing animals.

• Off-the-shelf computer software.

• Single purpose agricultural or horticultural property.