Depreciation Information
Alternative Depreciation System (ADS)
Under ADS the depreciation is figured the same as MACRS except the straight line method is used over the ADS recovery period, with the appropriate convention. Instead of MACRS you can make an irrevocable election with respect to any classification of property for any tax year to use ADS. For residential rental and nonresidential real property, you may make this election separately for each property.
Amortization
Amortization is to periodically write off as an expense, a portion of the cost of an asset. Usually an intangible asset is amortized. Property that may be amortized include Pollution control facilities, Certain bond premiums, Research & experimental expenditures, Cost of acquiring a lease, Business start-up cost, Organizational cost for a business, and Goodwill.
Conventions
Half-Year - When the half-year convention is applied, a half-year of depreciation is taken for the first year the asset is placed in service regardless of what month the asset was placed in service. A full year's depreciation is taken each year for the remainder of the useful life of the asset. If the asset is disposed before the end of its useful life, a half year of depreciation is taken for the year of disposal regardless of the month in which the asset was disposed. If the asset is kept for the asset's entire useful life, half a year of depreciation is taken in the year following the last year of its useful life.
Mid-month - This convention only applies to residential rental property, nonresidential real property, railroad gradings and tunnel bores. The asset is considered to have been placed in service in the middle of the month and a half a month's depreciation is calculated for the month the asset is placed in service. If an asset is disposed before the end of its useful life, it is considered to have been disposed in the middle of the month and half a month's depreciation is calculated for the month in which the asset is disposed.
When the mid-quarter convention is applied, depreciation is calculated as if the asset was placed in service or disposed at the mid-point of the quarter. For example, if an asset were placed in service in January, depreciation would be calculated as if the asset had been placed in service in the middle of February, the midpoint of the first quarter.
Generally, any property placed in service during the course of a year receives a half-year's depreciation under the half-year convention. However, a special rule applies if you place in service more than 40% of the total basis of property for the year in the last quarter of your fiscal year. That's to avoid waiting until the end of the year to buy the property, yet secure a deduction for the whole year. When calculating the total basis of property placed in service, exclude any on which you took the Section 179 expense election. For real estate, a mid-month convention is used.
Depreciation
Depreciation is a decrease in value due to wear and tear of the asset. For accounting purposes this can be taken as an expense to fixed assets. Inventory, stock in trade, land, and art work can not be depreciated. Intangible items such as Goodwill can not be depreciated, but they can be amortized over 15 years.
Depreciation Methods
Double Declining - 150% or 200 % Method. Most of the depreciation is taking at the beginning of the asset's life.
Straight Line - Cost divided by the asset's life. This method is usually used for book depreciation.
ADS - Alternative Depreciation System, the depreciation is figured the same, as MACRS except the straight-line method is used, over the ADS recovery period, with the appropriate convention.
Listed Property
This includes automobiles, certain other vehicles, cellular phones, certain computers, and property used for entertainment, recreation, or amusement.
MACRS The modified accelerated cost recovery system. Tax method used for assets placed in service after December 31, 1986.