Re: Depreciation vs. Expensing
The IRS doesn't want you to expense it in the first year of service. They want you to take the expense spread over a period of years otherwise companies would always be filing a loss and there would be no taxes paid.
Re: Depreciation vs. Expensing
Also, you cannot take the Section 179 expense deduction if it will result in a negative income (net loss) with regards to a return.
Also, consider this example:
(well, I was going to give a detailed example, but after typing for ten minutes, figured it was too long, so I'll shorten it to this)
If you expense a large cost item in one year, it may cause you to have no income or a loss in one year, thus saving you tax dollars in that one year. Depending on your tax bracket, this can save a lot of money.
Or, you can expense it over several years, bringing down your taxable profit less, but spreading it out. Depeding on your tax bracket, that could save you thousands in the long run.
ALSO remember this!
If you sell that asset, before it's depreciable life runs out, and you've expensed the item, you MUST recapture all depreciation ALLOWED OR ALLOWABLE as ordinary income. What does that mean? If you have a $20,000 peice of equipment that you expensed (and was 7 year recovery property) and two years later, you sold that equipment, you MUST recover all Section 179 and accelerated depreciation that you claimed that exceeded what MACRS Alternate Straight-Line depreciation would have been allowed. That could mean that you would have to recover about $15,714 into taxable income in one year! That could push you into another tax percentage bracket.
Be careful taking expense deductions... they can really bite you in the ass.
Quote:If you have a $20,000 peice of equipment that you expensed (and was 7 year recovery property) and two years later, you sold that equipment, you MUST recover all Section 179 and accelerated depreciation that you claimed that exceeded what MACRS Alternate Straight-Line depreciation would have been allowed.
Note that "MACRS Alternate Straight-Line depreciation" is not the same thing as ADS depreciation. (At least, I don't think it is.)
Re: Depreciation vs. Expensing
ADS has some seriously long lives - you only have to use it with equipment used outside the country or odd situations. Also, you can't worry too much about recapture, since the basis reduction is "allowed or allowable" depreciation, i.e., if you don't take it, you still have to reduce the basis by what you could have taken.
Re: Depreciation vs. Expensing
*nods* "Allowed, or allowable" actually means that even if you never took the depreciation that you were entitled to claim, you *still* must act as if you did, when it comes to possible recaptures.
And There's really two ways to do MACRS. There's regular Modified Accelerated Cost Recovery System, then there's MACRS ADS, then there's MACRS SL. ADS uses a longer life recovery period. SL uses the same recovery period, but the percents are more even.
MACRS is 200Double Declining Balance. That is the technical term for the way the percentages are set up. *wishes she could draw on the forum the way she does in class*
Imagine a straight line across a chalk board. This is, of course, Straight Line. You take the same amount of deduction each year. Now, for MACRS, imagine a second line. It goes way up over the straight line for about half the length of the line, then, about halfway down the line, it dips, crosses the straight line, then goes way below, to wind up coming back up and meeting the straight line at the end.
MACRS takes a much larger percentage of depreciation in the first few years of an assets life, over what straight line would have been. Then, in the last few years of an asset's life, it dips below straight line and takes less than what straight line would have been. In the end, they meet again and the total taken is equal. It's just that in the first few years, you take a much higher amount, and less in later years.
The cost recover is the amount that the MACRS deduction is over the line of what straight line would have allowed... whether or not you actually took it!
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