@083 CHAP 9 旼컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴� � DEPRECIATING ASSETS FOR TAX PURPOSES � 읕컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴� The Tax Reform Act of 1986 put an end to the highly favor- able "ACRS" (Asset Cost Recovery System) rules that had been enacted in 1981. Since January 1, 1987, taxpayers have had to learn a whole new, and more complex system of deprec- iation. Before then, virtually all assets a typical small business acquired were written off over 5 years, a few, like cars, over 3 years, and real estate over 19 years (or 15 or 18 years if acquired before May 9, 1985). You must still use the ACRS tables on assets placed in service be- tween 1981 and 1986, in general, however. Under the new MACRS depreciation system, most assets are assigned to 3-, 5-, 7-, 10-, 15- or 20-year recovery period categories, except for real estate, which is depreciated over 31.5 years (27.5 years for residential rental proper- ty). Under the MACRS system, all personal property in the 3-, 5-, 7-, and 10-year categories is depreciated using the old 200% declining balance method of depreciation from pre- 1981 days, and 15- and 20-year property is depreciated under the 150% declining balance method. Real estate may now only be depreciated on the straight-line basis. Assets other than real estate are mostly assigned to the various recovery periods based on the old Asset Deprecia- tion Range ("ADR") system "midpoint class lives" that were published by the IRS back in the early 1970s. The "class life" guidelines vary from industry to industry and are quite numerous and technical. For the most part, you will need to rely on your tax adviser to tell you what recovery period applies to various depreciable assets you purchase in your business. However, the MACRS system does specific- ally assign some types of assets to recovery classes, such as autos and light trucks, which are now 5-year property (they were 3-year property under the former ACRS rules). Most of the "information-handling equipment" (other than computers) used in an office, such as calculators, typewrit- ers, etc., are 5-year property, and computers and peripher- als are generally 7-year property. Generally, under MACRS, a half-year of depreciation can be taken in the year an asset is first placed in service, re- gardless of whether it is put in service on the first day of the tax year or the last day (except for real estate). However, when more than 40% of such property is put in ser- vice in the last 3 months of the tax year, you are instead required to use a "mid-quarter" convention, which assumes that all the assets placed in service in each calendar quarter were placed in service at the midpoint of such quarter. Under recent final MACRS tax regulations [ Regs. Section 1.168(d)-1(b)()(ii) ], no depreciation is allowed at all for property that is acquired and disposed of in the same taxable year, regardless of which convention applies. As such, such assets are ignored in determining whether the 40% limit has been exceeded and thus whether the mid- quarter convention applies to other assets acquired during the year. For real property, all real property that is placed in service in a particular month is assumed to have been placed in service at the mid-point of that month. Small businesses are allowed to expense up to $10,000 a year of equipment in the year of purchase, rather than de- preciating it. This benefit is phased out dollar for dol- lar if you acquire more than $200,000 of eligible property during the tax year. If your business acquires $210,000 or more of such eligible assets in one year, it won't be able to elect to expense ANY of it. Thus a large company, which acquires a lot of personal property each year, like a General Motors, is not able to take advantage of this tax break (but would still be able to depreciate it). Eligible property is generally tangible personal property that would have qualified for the investment tax credit under prior law. Note that this expensing election is not allowed if it would create a loss for the taxpayer -- it is only al- lowable to the extent the taxpayer has taxable income. @CODE: CA @CODE:NF 旼컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴� � CALIFORNIA DEPRECIATION DIFFERENCES � 읕컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴� Over the years since the ACRS depreciation system came into being for federal tax purposes, one of the most important differences between federal and California tax law has been with regard to depreciation. However, in 1987 and 1988, California finally enacted legislation to allow unincorpor- ated businesses and S corporations to use the new MACRS depreciation for state income tax purposes. Even so, regu- lar corporations subject to tax in California are still prohibited from using either the ACRS or MACRS depreciation systems for state tax purposes (most regular corporations are subject to the California franchise tax, rather than income tax, on their income). Regular ("C") corporations still must use the old pre-1981 methods that were used for both federal and California purposes before 1981, unless ACRS or MACRS deductions are considered "a reasonable allowance."