You assign depreciation methods to an asset when you create a master record. The system performs depreciation calculations based on the established depreciation rules for each standard depreciation method.
This chapter contains these topics:
Section 16.5, "Methods 03, 04, and 05 - Declining Balance to Cross-Over,"
Section 16.6, "Method 06 - Fixed Percent on Declining Balance,"
Section 16.11, "Method 11 - Fixed Percent Luxury Cars - Foreign,"
Section 16.16, "Method 16 - Fixed Percent on Declining Balance to Cross-Over,"
The following rules apply to the predefined depreciation methods included in the Fixed Assets system:
The system does not allow accumulated depreciation to exceed the depreciable basis. The depreciable basis for an asset is the asset's original cost minus its salvage value. When the total of an asset's current depreciation and accumulated depreciation is greater than the depreciable basis, the system calculates current depreciation by subtracting the accumulated depreciation from the depreciable basis.
The system calculates a full period's depreciation for the initial period that you acquire an asset. If you do not calculate depreciation for the month you dispose of an asset, you should run the disposal before you run the depreciation. Exceptions to this rule are the mid-month, mid-quarter, and mid-year conventions.
The system calculates depreciation for the asset cost based on the standard depreciation method that you assign to an asset.
Figure 16-1 Standard Depreciation Calculation - Process Flow
The system depreciates the asset's cost (less salvage value) in equal amounts over the estimated useful life (life periods) of the asset.
When you use the straight line depreciation method, you can designate a mid-month, mid-quarter, or mid-year averaging convention. If you do not designate a convention, the system depreciates the full month for the period you place the asset in service.
When you use straight line depreciation, you must indicate one of the following computation methods:
Note:
The examples used throughout this chapter are based on the following information, unless otherwise noted: Cost = $100,000, salvage value = 0, life months = 60, and acquisition date = 08/01/98.The system applies changing fractions each year to the adjusted cost of the asset. When you use this depreciation method, you must indicate the current year-to-date (C) computation method.
The declining balance to cross-over methods use the following percentages:
Method 03 - 125%
Method 04 - 150%
Method 05 - 200%
Note:
Although the system does not consider the salvage value of an asset during the depreciation calculation, it will not depreciate an asset below its salvage value.When you use a declining balance to cross-over method to depreciate an asset, you must indicate one of the following methods of computation:
Computation Method | Description |
---|---|
Inception-to-date (I) | ((NBV * percentage) / life periods * elapsed periods) - Accumulated Depreciation = period depreciation.
For example, using method 05, yearly depreciation would be calculated as follows: 1997: (( 100,000.00 * 200%) / 60) * 5) - 0.00 = 16,666.67 1998: (( 100,000.00 - 16,666.67) * 200% / 60) * 12 = 33,333.33 The following rules apply to this depreciation calculation:
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Remaining life (R) | NBV (if greater than zero) * percentage / remaining life periods = period depreciation.
For example, yearly depreciation would be calculated as follows: 1997: 100,000.00 * 200% / 60 * 5 = 16,667.67 1998: 83,333.33 * 200% / 60 * 12 = 33,333.33 The following rules apply to this depreciation calculation:
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Alternative minimum tax (AMT) | You can use Method 04 (150% Declining Balance to Cross-over) for alternative minimum tax purposes. |
When you use the fixed percent on declining balance depreciation method, you must indicate one of the following methods of computation:
Computation Method | Description |
---|---|
Current year-to-date (C) | ((Cost - accumulated depreciation) * fixed percent) / number of normal periods = period depreciation. |
Current period (P) | The current period method of computation is the same as current year-to-date except that it does not "catch up" depreciation amounts within the year. If you run your first depreciation in March, the system calculates depreciation for March only. The system does not calculate depreciation for January and February. |
You can use the Accelerated Cost Recovery System (ACRS) method to compute the tax depreciation deduction for most tangible depreciable property that you place in service after 1980 but before 1987. Cost recovery methods and period are the same for both new and used property. The system does not use the asset's salvage value to compute ACRS allowances.
ACRS standard depreciation uses only one method of computation:
Computation Method | Description |
---|---|
Current year-to-date (C) | (Cost - accumulated depreciation) * fixed percent based on ACRS IRS table) / number of normal periods = period depreciation. |
The ACRS statutory recovery percentage for personal property that is placed in service after 1980 and before 1987 is determined by an IRS-prescribed table. The table takes into account the type of property (3-year, 5-year, 10-year, or 15-year) and the year you placed the property in service.
Generally, the adjusted basis of real property is recovered over a period of 19 years for real property that is placed in service after May 8, 1985, but before 1987. For real property that is placed in service after March 15, 1984, but before May 9, 1985, the unadjusted basis is recovered over a period of 18 years. A 15-year recovery period applies to real property that is placed in service after 1980 but before March 16, 1984, and to low-income housing.
The recovery percentages for such property other than low-income housing is similar to the use of the 175% declining balance method with a later-year switch to the straight line method.
You can use the following conventions with the ACRS depreciation method:
If you prefer a slower recovery on the cost of ACRS property than the percentages provided, you might elect to use a straight line recovery method. This method provides a longer recovery period.
The ACRS optional depreciation method uses one of two methods of computation:
The calculation for ACRS Optional is the same as Straight Line except for the following:
The system bases the depreciation calculation on the cost, rather than the adjusted cost (cost less salvage value).
The system uses the mid-year convention for personal property.
The system calculates a full month of depreciation in the month that you acquire the property and no depreciation in the month that you dispose of it for 15-year real property.
The system calculates one-half month of depreciation in the months that you acquire and dispose of 18- and 19-year real property.
If depreciation information is 04 (ACRS method with Basis Reduction), the system reduces the cost by one-half of the Income Tax Credit (ITC) amount assigned on Master Information.
When you use the units of production depreciation method, you must indicate the current year-to-date method of computation:
You must run the Units of Production Close procedure to roll current year information forward into the following year.
You must apply the following rules to this method of depreciation:
Method of computation must be current year-to-date
Life months must be 60
Convention must be mid-quarter (Q) or mid-year (Y)
You can take only a limited amount of annual depreciation on a passenger automobile for tax purposes:
Annual Depreciation | Amount |
---|---|
After 12/31/86
Before 01/01/89 |
1st year 2,560.00
2nd year 4,100.00 3rd year 2,450.00 4th year 1,475.00 |
After 12/31/88
Before 12/31/90 |
1st year 2,660.00
2nd year 4,200.00 3rd year 2,550.00 4th year 1,475.00 |
After 12/31/90
Before 12/31/91 |
1st year 2,660.00
2nd year 4,300.00 3rd year 2,550.00 4th year 1,575.00 |
After 12/31/91
Before 12/31/92 |
1st year 2,760.00
2nd year 4,400.00 3rd year 2,650.00 4th year 1,575.00 |
After 12/31/92
Before 01/01/94 |
1st year 2,860.00
2nd year 4,600.00 3rd year 2,750.00 4th year 1,675.00 |
After 12/31/93
Before 01/01/95 |
1st year 2,960.00
2nd year 4,700.00 3rd year 2,850.00 4th year 1,675.00 |
After 12/31/94
Before 01/01/96 |
1st year 3,060.00
2nd year 4,900.00 3rd year 2,950.00 4th year 1,775.00 |
Calculation: NBV * fixed percent = year's depreciation. Year's depreciation / number of normal periods = period depreciation.
The following rules apply to this method of depreciation:
You must use the current year-to-date (C) method of computation.
The depreciation amount for a year is limited to 2,000.00.
You must depreciate most tangible property that you place in service after 1986 using MACRS, for tax purposes. Depending on the type of property, you will recover the cost over a 3-, 5-, 7-, 10-, 15-, 20-, 27 1/2-, 31 1/2-, or 39-year period. You recover the cost using the applicable depreciation method, the applicable recovery period, and the applicable convention.
MACRS calculations use the following statutory recovery methods and conventions:
Recovery Method/Convention | Description |
---|---|
3-, 5-, 7-, and 10-year period calculations | The system calculates depreciation using the 200% declining balance method and the mid-year or mid-quarter convention, with a switch to the straight line method in later years. |
27 1/2-, 31 1/2 , and 39-year period calculations | The system calculates depreciation using the straight line method and the mid-month convention. |
15 and 20-year period calculations | The system calculates depreciation using the 150% declining balance method and the mid-year or mid-quarter convention, with a switch to straight line method in later years. |
To compute depreciation, the system uses MACRS depreciation tables which contain the annual percentage depreciation rates to be applied to the adjusted basis of property in each tax year. The tables include the appropriate convention and a switch from the declining balance method to the straight line method in the appropriate year.
Use one of the following conventions with this depreciation method:
You can use the MACRS alternative depreciation method for the following categories of property:
Tangible property used outside the U.S.
Property that is tax exempt
Property that is tax exempt and bond financed
Property that is imported from a foreign country for which an Executive Order is in effect because the country maintains trade restrictions or engages in other discriminatory acts
Property for which you have made an alternative MACRS election
If you use the MACRS Alternative depreciation method, you must indicate the inception-to-date (I), current period (P), or remaining life (R) method of computation. You must also indicate a mid-month, half-year, or mid-quarter convention.
You can use this depreciation method to recover costs by using a straight line method over the regular recovery period or a longer recovery period. You must make this election on your tax return for the year that you placed the property in service. The ACRS straight line depreciation tables contain the annual percentage depreciation rates. The rates are applied to the unadjusted basis of property in each tax year.
You must indicate the current year-to-date method of computation with the ACRS Alternate Real Property depreciation method.
The system calculates the fixed percent of cost depreciation method as follows:
Cost * fixed percent = year's depreciation. Year's depreciation / number of normal periods = period depreciation.
You must indicate the current year-to-date (C) or current period (P) method of computation with this depreciation method. The current period method is the same as the current year-to-date with the exception that it does not "catch up" depreciation amounts within the year. If you run your first depreciation in March, the system calculates depreciation for the month of March only. The system does not calculate depreciation for January and February.
You must indicate one of the following methods of computation
Apply the following rules to the AMT luxury autos method of depreciation:
The method of computation must be inception-to-date (I) or remaining life (R).
Life months must be 36 or 60.
Depreciation information must be mid-quarter convention (Q) or mid-year convention (Y).
The annual deduction is the amount calculated from 150% declining balance method (Method 04), subject to the cost recovery ceilings for passenger automobiles.
You can take only a limited amount of annual depreciation on a passenger automobile for tax purposes.
See Also:
Section 16.10, "Method 10 - MACRS Luxury Cars - Domestic" for the table of annual depreciation limits.
Apply the following rules to ACE Luxury Autos method of depreciation:
Method of computation must be inception-to-date (I) or remaining life (R)
Life months must be 36 or 60
Depreciation information must be mid-quarter convention (Q) or mid-year convention (Y)
The annual depreciation is the amount calculated from the straight line method (Method 01), subject to the cost recovery ceilings for passenger automobiles.
See Also:
Section 16.10, "Method 10 - MACRS Luxury Cars - Domestic" for the table of annual depreciation limits.