# Depreciation computations made easy.

Depreciation Computations Made Easy

Currently, corporations may need to perform as many as three different tax depreciation calculations for any given asset: for regular tax, alternative minimum tax (AMT) and most recently, adjusted current earnings (ACE) purposes.(1) Starting in 1990, corporations are required to make an additional AMT adjustment for 75% of the difference between ACE and Alternative Minimum Taxable Income (AMTI).(2)

Over time, while attempts have been made to simplify the actual depreciation computation, many more options and requirements exist, so that depreciation as a whole has increased in complexity during the last few years and will most likely continue to do so. Prior to 1981, the methods used to calculate depreciation for tax and financial accounting purposes were very similar. In 1981, the Accelerated Cost Recovery System (ACRS) was introduced to "simplify" the computation of depreciation for tax purposes. Recovery periods replaced estimated useful lives, salvage value was ignored for both personalty and realty, and extra computations for partial periods were essentially eliminated. The Tax Reform Act of 1986 further altered the rules for depreciation by introducing the Modified Accelerated Cost Recovery System (MACRS) for years after 1986 and creating a new depreciation "adjustment" for AMT purposes thereby increasing the burden on taxpayers and tax return preparers. As of 1990, the addition of the AMT adjustment for 75% of the difference between ACE and Alternative Minimum Taxable Income (AMTI) necessitates yet another depreciation computation.

The computation for ACE purposes creates the lowest amount of depreciation allowed for tax purposes. While this method of depreciation may be used for AMT and regular tax purposes, corporations generally try to maximize their depreciation deductions by computing a higher amount of allowed depreciation for AMT purposes and an even higher amount of depreciation for regular tax purposes. For each method of tax depreciation, the computation rules vary depending on the type of asset (personalty vs. realty) and the year in which the asset was placed in service, resulting in further complications. Although the ACE computation does not apply to noncorporate taxpayers, depreciation computations for corporate and noncorporate taxpayers are the same for regular tax and AMT purposes.

This article examines the computation methods currently allowed for each type of depreciation for the 1990 tax year and beyond. Personalty, including specific rules for regular tax, AMT and ACE are explored and broken down by the relevant time period in which the property was placed in service. Additionally, detailed illustrative examples of each depreciation calculation are included. Depreciation rules for realty are also discussed including specific rules and detailed illustrative examples. This article is not intended to be an exhaustive coverage of depreciation, but rather a basic guide to depreciation computations, options and requirements for assets placed in service within the last 10 years. Depreciation computations for assets placed in service before 1981 are not considered.

Personalty(3)

The choice of depreciation method depends in part on when the asset was placed in service. The following are rules for depreciating personalty for regular tax, AMT and ACE purposes, and for time periods relevant to changes in rules.

Regular Depreciation of

Personalty

Regular depreciation refers to the calculation made on Form 4562 for regular tax purposes. As previously stated, most corporations will want to maximize their depreciation deduction for regular tax. We will, however, discuss all possible methods below. This subsection is divided into two time periods based on when personalty was placed in service: post 1986 and 1981 through 1986.(4)

After 1986. For personalty placed in service after 1986, MACRS controls the computation of depreciation. Regular tax depreciation may be computed using either of two systems, the General Depreciation System (GDS) or the Alternative Depreciation System (ADS), both of which are part of MACRS.(5)

GDS generally provides depreciation over the shortest permissible recovery period for an asset. ADS lives are generally somewhat longer. Specific rules under each system are highlighted below: Depreciation methods available under GDS: * 200% declining balance, with

a mandatory switch to straightline

depreciation when

straight-line depreciation

would produce a higher deduction. * Straight line depreciation. Depreciation methods available under ADS: * 150% declining balance, with

a mandatory switch to straight-line

depreciation when

straight-line depreciation

would produce a higher deduction. * Straight line depreciation. Recovery periods available under GDS: * Autos, trucks, computers,

copying machines -> 5 years. * Office furniture and fixtures

-> 7 years. * Other personalty uses its

specified recovery period given

in IRC Sec. 168(e)(3) and Rev.

Proc. 8756 (1987-2 CB 674,

as modified by Rev. Proc. 88-22,

1988-1 CB 785). Recovery periods available under ADS: * Autos, light general purpose

trucks, computers -> 5 years. * Copying machines, heavy

general purpose trucks -> 6

years. * Office furniture and fixtures

-> 10 years. * Other personalty uses its

specified ADS recovery period

given in IRC Sec. 168(g)

and Rev. Proc. 87-56 (1987-2

CB 674, as modified by

Rev. Proc. 88-22, 1988-1 CB

785). Conventions to be used for both GDS and ADS: * Half-year convention: general

rule (personalty is considered

to have been in service for

one-half year in the year it is

initially placed in service, and

one-half year in the year in

which it is sold or disposed

of). * Mid-quarter convention: used

for all personalty placed in

service during the year only

if more than 40% of the value

of the personalty placed in

service that year was placed

in service during the last

quarter of the year. (Each asset

is considered to have been

placed in service midway

through the quarter of the

year it was actually placed in

service. e.g., all assets placed

in service at any time during

April, May or June in a calendar

year corporation are considered

to have been placed

in service on May 15)

The corporate taxpayer would therefore maximize its depreciation deduction by choosing the 200% declining balance option under GDS.

1981 through 1986. For personalty placed in service from 1981 through 1986, ACRS applies. The following two methods are allowed under ACRS:

* 150% declining balance, with

a mandatory switch to straight-line

depreciation when

straight-line depreciation

would produce a higher deduction.

* Straight line depreciation.

As with GDS and ADS, the recovery period for personalty under ACRS depends on the type of asset. These are: * Autos, light-duty trucks ->

3, 5, or 12 years.(6) * Heavy-duty trucks, computers,

copying machines, office

furniture and fixtures -> 5,

12, or 25 years. * Other personalty uses its

specified recovery period given

in IRC Sec. 168(c) prior to

Tax Reform Act of 1986).

The half-year convention is used under ACRS, meaning that personalty is depreciated for one-half of the year in which it is initially placed in service. However, no depreciation deduction is taking in the year in which the asset is sold or disposed.(7)

Additionally, the depreciable basis of personalty, from 1983 through 1985, was reduced by one-half of the investment tax credit (ITC) on the asset (if the full ITC of 6% or 10% was used).

Depreciation of Personalty

for the AMT Depreciation

Adjustment

Since the Tax Reform Act of 1986, depreciation of personalty has been considered a tax preference item for AMT purposes. Personalty placed in service prior to 1987, therefore, is not subject to this adjustment, and AMT depreciation is considered to be the same as regular depreciation.(8)

After 1986. For personalty placed in service after 1986, a corporate taxpayer that has taken the maximum depreciation deduction under GDS for regular tax purposes must recalculate depreciation using ADS for AMT purposes. The amount of the required AMT depreciation adjustment is the difference between AMT depreciation and regular tax depreciation.

Depreciation of Personalty

for ACE

ACE is similar in concept to Earnings and Profits (E&P). Like E&P, ACE is not defined in the Code. See IRC Code Section 56(g) for details on the calculation of ACE. Starting in 1990, corporations are required to make an additional AMT adjustment for 75% of the difference between ACE and (pre-adjustment) Alternative Minimum Taxable Income (AMTI). ACE is calculated by making certain adjustments to pre-adjustment AMTI. In reference to the ACE depreciation adjustment, Form 4626 (Corporate Alternative Minimum Tax) states that AMT depreciation should be added back to pre-adjustment AMTI, then ACE depreciation should be subtracted. The net effect of this guidance is that the difference between AMT and ACE depreciation be added to pre-adjustment AMTI if AMT and ACE depreciation be added to pre-adjustment AMTI if AMT depreciation is larger, and subtracted if ACE depreciation is larger. The depreciation rules for ACE follow.

After 1989. For personalty placed in service after 1986, the depreciation rules for purposes of ACE require use of the ADS life using straight-line depreciation.

After 1989. For personalty placed in service after 1989, the depreciation rules for purposes of ACE require use of the ADS life using straight-line depreciation.

1987 through 1989. The rules are different for assets placed in service from 1987 through 1989. Before computing ACE depreciation for these assets, two items must first be determined: * The undepreciated portion of

the asset's basis (adjusted basis)

using AMT depreciation calculations

as of the close of the

last tax year beginning before

January 1, 1990 (e.g., if

the corporation uses a calendar

year, the date as of which

the adjusted basis is to be

determined is December 31,

1989). * The remaining useful life of

the asset, using ADS lives.

Once the above items have been determined, the remaining adjusted basis is divided by the remaining ADS life of the asset (the straight-line method).

1981 through 1986. For personalty placed in service from 1981 through 1986, again the remaining adjusted basis must be divided by the remaining useful life (using ADS). Before computing ACE depreciation for these assets, two items must first be determined: * The undepreciated portion of

the asset's basis (adjusted basis)

using regular tax depreciation

calculations as of the close of

the last tax year beginning

before January 1, 1990 (e.g.,

if the corporation uses a calendar

year, the date as of which

the adjusted basis is to be determined

is December 31,

1989). * The remaining useful life of

the asset, using ADS lives.

Once the above items have been determined, the remaining adjusted basis is divided by the remaining ADS life of the asset (the straight-line method).

Table 1-3 show depreciation calculations for a piece of office furniture, e.g. a desk, for regular tax, AMT and ACE. The computation requirements differ depending on the year the office furniture was placed in service, as illustrated.

For Tables 1-3, assume the following information: * Cost: $1,000. * Purchased and placed in service

on January 1 of the designated

year. * Section 179 (immediate expensing

election) was not used

to expense the asset in the

year of purchase. * Assume corporation is on a

calendar year. * Half-year convention applies

for tax purposes.(9) * No salvage value for tax purposes.(10) * Depreciation percentages

provided by the IRS are used. * In each case, it is assumed

that the method is used which

will yield the maximum

amount of depreciation allowed

in the earliest years.

Table : Table 1

Asset (personalty) placed in service in 1990 a. For regular tax purposes, use seven-year GDS life, 200%

declining balance with a mandatory switch to straight-line

when straight-line would produce a higher deduction.

b. For AMT purposes, use 10-year ADS life, 150% declining

balance with a mandatory switch to straight-line when

straight-line would produce a higher deduction.

The AMT depreciation adjustment for 1990 would be $67.90 ($142.90 regular depreciation minus $75.00 AMT depreciation.

c. For ACE purposes, use 10-year ADS life, straight-line only.

The ACE depreciation adjustments for 1990 would be $25 ($75 AMT depreciation minus $50 ACE depreciation).(11)

Table : Table 2 Asset (personalty) placed in service from 1987-1989,

assuming 1988 in this example. a. For regular tax purposes, use seven-year GDS life, 200% declining

balance with a mandatory switch to straightline when straight-line

would produce a higher deduction. (Identical to

Table 1 a.)

b. For AMT purposes, use 10-year ADS life, 150% declining balance

with a mandatory switch to straight-line when straight-line would

produce a higher deduction. (Identical to Table 1 b.)

The AMT depreciation adjustment for 1990 would be $57 (174.90 regular depreciation minus $117.90 AMT depreciation).

c. For ACE purposes, there are three steps to take: Step 1: Figure the adjusted basis as of 12/31/89 using AMT depreciation [$1,000 x (100% (7.5% + 13.88%)) = $786.20]. Step 2: Calculate the remaining useful life under ADS lives (10 - years = 8 years.) Step 3: Compute straight-line over remaining ADS lige

The ACE depreciation adjustments for 1990 would be $19.62 ($117.90 AMT depreciation minus $98.28 depreciation).

Table : Table 3 Asset placed in service from 1981 - 1986, assuming 1986 in

this example (no investment tax credit(12).

a. For regular tax purposes, use 5-year ACRS declining balance.

b. For AMT purposes, no adjustment is required or personalty

placed in service prior to 1987.

c. For ACE purposes, there are three steps to take: Step 1: Figure the adjusted basis as of 12/31/89 using depreciation for regular tax purposes [$1,000 x (100% - (15% + 22% + 21% + 21%) ) = $210] Step 2: Calculate the remaining useful life under ADS lives (10 - 4 years = 6 years). Step 3: Compute straight-line over remaining ADS life.

The ACE depreciation adjustment for 1990 would be $175 ($210 AMT/regular depreciation minus $35 ACE depreciation).

Realty

As with personalty, the choice of depreciation method for realty depends on when the realty was placed in service. In this section, methods for depreciating realty are covered for each of the three required calculations (regular tax, AMT and ACE) and for time periods relevant to changes in rules.

Regular Depreciation of Realty

As stated earlier, regular depreciation refers to the calculation made on Form 4562 for regular tax purposes. Two time periods are relevant: post 1986, and 1981 through 1986.

After 1986. MACRS controls the computation of regular depreciation for realty placed in service after 1986. The two systems available are GDS and ADS. the specific rules of which are stated below.(13)

Methods available for realty for

both GDS and ADS:

* Straight-line depreciation

must be used. Recovery periods for realty under GDS: * Residential rental realty ->

27.5 years. * Non residential realty -> 31.5

years. Recovery periods for realty under ADS: * Residential rental realty ->

40 years. * Nonresidential realty -> 40

years. Conventions to be used for both GDS and ADS: * Mid-month convention: realty

is considered to have been in

service for one-half month in

the month it is initially placed

in service, and one-half month

in the year in which it is sold

or disposed of.

Although each system is very similar, GDS provides the shortest useful lives, and therefore, the largest depreciation deduction for corporate taxpayers that choose to maximize depreciation.

1981 through 1986. For realty placed in service from 1981 through 1986, ACRS dictates the computation of depreciation.(14) Specific rules for ACRS appear below: Depreciation methods available under ACRS: * 175% declining balance, with

a mandatory switch to straight-line

depreciation when

straight-line

would produce a higher deduction. * Straight line depreciation. Recovery periods available under ACRS: * Realty placed in service after

12/31/80 and before 3/16/84

-> 15 years. * Realty placed in service after

3/15/84 and before 5/9/85 -> 18

years. * Reality placed in service after

5/8/85 and before 1/1/87 -> 19

years. Convention to be used under ACRS: * Realty placed in service after

12/31/80 and before 6/23/84

-> full month convention

(realty is considered to have

been in service for the full

month in the month it is

initially placed in service, and

no depreciation is allowed in

the month in which it is sold

or disposed). * Realty placed in service after

6/22/84 and before 1/1/87 ->

mid month convention (realty

is considered to have been

in service for one-half month

in the month it is initially

placed in service, and one-half

month in the year in which

it is sold or disposed).

The investment tax credit was not allowed for realty.

Depreciation of Realty for

the AMT Depreciation

Adjustment

The following are methods relevant to computing depreciation for AMT purposes divided into post-1986 and pre-1987 depreciation rules.

After 1986. For realty placed in service after 1986, depreciation for AMT purposes is computed using ADS. The amount of the required AMT depreciation adjustment is the difference and AMT depreciation and regular tax depreciation.

1981 through 1986. For realty placed in service from 1981 through 1986, the realty depreciation tax preference for AMT is computed over the same recovery period used for regular depreciation purposes, but using straight-line rather than an accelerated method. The difference between ACRS (regular) depreciation and AMT depreciation on realty placed in service prior to 1987 is a tax preference item. The AMT depreciation for 15-, 18- or 19-year realty is computed using the straight-line method over the recovery period of 15, 18 or 19 years, using the same convention (full-month or mid-month) that is used for regular depreciation purposes. Once again, the AMT depreciation deduction is the difference between AMT depreciation and regular depreciation.

Depreciation of Realty for

ACE

There are three relevant time periods for ACE depreciation of realty.

After 1989. For any property placed in service after 1989, the ACE computation is simply the same as that for AMT purposes. The ADS system is used. (The result of the calculation is the depreciation deduction to be used for ACE purposes.)

1987 through 1989. Before computing depreciation for ACE purposes for assets placed in service from 1987 through 1989, two items must first be determined: * The undepreciated portion of

the asset's basis (adjusted basis)

using AMT depreciation calculations

as of the close of the

last tax year beginning before

January 1, 1990 (if the

corporation uses a calendar

year, the date as of which the

adjusted basis is to be determined

is December 31, 1989). * The remaining useful life of

the asset, using ADS lives.

Once the above items have been determined, the ACE depreciation deduction is calculated by depreciating the remaining adjusted basis over the remaining ADS life of the asset (the straight-line method).

1981 through 1986. Similarly, before computing depreciation for ACE purposes for assets placed in service from 1981 through 1986, two items must first be determined: * The undepreciated portion of

the asset's basis (adjusted basis)

using regular tax depreciation

calculations as of the close of

the last tax year beginning

before January 1, 1990 (if the

corporation uses a calendar

year, the date as of which the

adjusted basis is to be determined

is December 31, 1989). * The remaining useful life of

the asset, using ADS lives.

Once the above items have been determined, ACE depreciation is calculated by depreciation the remaining adjusted basis over the remaining ADS life of the asset (the straight-line method).

Tables 4-6 show depreciation calculations for an office building for regular tax, AMT and ACE. The computation requirements differ depending on the year the office building was placed in service as illustrated.

Table : Table 4 Asset (nonresidential ealty) placed in service in 1990

a. For regular tax purposes, use 31.5-year GDS life, straight-line depreciation.

b. For AMT purposes, use 40-year ADS ife,straight-line

depreciation.

The AMT depreciation adjustment for 1990 would be $646 ($3,042 regular depreciation minus $2,396 AMT depreciation).

c. For ACE purposes, use 40 year ADS life, straight-line depreciation.

Computation is identical to AMT computation.

The ACE depreciation adjustment for 1990 would be $-0-($2,396 AMT depreciation minus $2,396 ACE depreciation).

Table : Table 5 Asset (nonresidential realty) placed in service in 1988

a. For regular tax purposes, use 31.5-year GDS life, straight-line

depreciation.

b. For AMT purposes, use 40-year ADS life, straight-line

depreciation.

The AMT depreciation adjustment for 1990 would be $675 ($3,175 regular depreciation minus $2,500 depreciation).

c. For ACE purposes, there are three steps to take: Step 1: Figure the adjusted basis as 12/31/89 using AMT depreciation [$100,000 - ($2,396 + $2,500_ = $95,104]. Step 2: Calculate the remaining useful life under ADS lives (40 - 2 years = 38 years). Step 3: Compute straight-line over remaining ADS life.

The ACE depreciation adjustment for 1990 would be a negative adjustment of $2.74 ($2,500 AMT depreciation minus $2,502.74 ACE depreciation).

Table : Table 6

Asset (nonresidential realty) placed in service in 1986

a. For regular tax purposes, use 19-year ACRS life, 175% declining balance, with a mandatory switch to straightline depreciation when straight-line depreciation would produce a higher deduction.

b. For AMT purposes, use 19-year life, straight-line depreciation.

The AMT tax preference for depreciation for 1990 would be $1,000 ($6,300 regular depreciation minus $5,300 AMT depreciation).

c. For ACE purposes, there are three steps to take: Step 1: Figure the adjusted basis as of 12/31/89 using depreciation for regualr tax purposes ($100,000 - $20,300 accumulated depreciation = $79,100). Step 2: Calculate the remaining useful life under ADS 1 ives (40 - 4 years = 36 years). Step 3: Compute straight-line over remaining ADS life.

The ACE depreciation adjustment for 1990 would be $3,102.78 ($5,300 AMT depreciation minus $2,197.22 ACE depreciation).

For Tables 4-6, assume he following information: * Cost: $100,000 (this does not

include any portion to the

purchase price allocable to the

land). * Purchased and placed in service

on January 1 of the designated

year. * Corporation is on a calendar

year. * No salvage value for tax purposes.(15) * Depreciation percentages provided

by the IRS are used. * In each case, it is assumed

that the method is used which

will yield the maximum

amount of depreciation allowed

in the earliest years.

Conclusion

Corporations may need to perform as many as three different depreciation calculations for tax purposes for both realty and personalty. The computation for ACE purposes produces the lowest amount of depreciation allowed for tax purposes. While this method of depreciation may be elected for AMT and regular tax purposes, corporations will generally try to maximize their depreciation deductions, computing the highest possible amounts for AMT and regular tax purposes.

While the ACE computation does not apply to non-corporate taxpayers, they must generally still compute depreciation for both regular tax purposes and AMT purposes. Depreciation computations for corporate and noncorporate taxpayers are the same for regular tax and AMT purposes; ACE computations are required only for corporations. The ability to compute depreciation properly is an essential tool in tax practice. The simple step-by-step procedures discussed in this article should be substantial use to tax professionals.

Footnotes

(1) Non-corporate entities generally need to compute tax depreciation only two different ways: for regular tax and AMT purposes.

(2) This replaces the adjustment for 50% of the difference between book income and alternative minimum taxable income that was in existence in 1987, 1988 and 1989.

(3) Personalty is any tangible property other than realty. Realty is tangible property that is land and anything permanently affixed to the land, such as buildings, components of buildings or permanent additions to buildings.

(4) Some post-1980 property does NOT qualify for ACRS/MACRS treatment; see IRC Section 163(f).

(5) Revenue Procedure 87-57 (1987-2 CB 687) contains depreciation rate tables which may be used for simplicity in computation. To locate the proper table, determine the convention to be used for depreciation, then the applicable recovery period. The full depreciable basis is then multiplied by the factor from the table to achieve the year's depreciation. The tables reflect the convention used for all years, except for disposals of assets prior to the end of the recovery period. (See also IRS Publication 534.)

(6) Shortest recovery period was most commonly used.

(7) IRC Section 168(a) (prior to Tax Reform Act of 1986) contained depreciation rate tables used for computation. To locate the proper percentage to be used, the taxpayer must determine the applicable recovery period. The full depreciable basis is then multiplied by the factor from the table to achieve the year's depreciation. The tables reflect the half-year convention for all years, except for disposals of assets prior to the end of the recovery period. See also IRS Publication 534.

(8) While a tax preference for leased personalty did exist prior to 1987, this topic is beyond the scope of this article.

(9) The mid-quarter convention applies (after 1986) if more than 40% of the value of the personalty placed in service during the last quarter of the year.

(10) Salvage value is ignored for tax purposes for property placed in service after 1980.

(11) ACE is not computed for non-corporate entities.

(12) For qualified property purchased prior to 1986, the investment tax credit (ITC) was allowed, reducing the tax liability and affecting the depreciation calculation. The ITC was repealed by the Tax Reform Act of 1986.

(13) Revenue Procedure 87-57 (1987-2 CB 687) contains depreciation rate tables which may be used for simplicity in computation. To locate the proper table, determine the convention to be used for depreciation, then the applicable recovery period. The full depreciable basis is then multiplied by the factor from the table to achieve the year's depreciation. The tables reflect the convention used for all types, except for disposals of assets prior to the end of the recovery period. (See also IRS Publication 534.)

(14) IRC Section 168(a) (prior to Tax Reform Act of 1986) contained depreciation rate tables used for computation. To locate the proper percentage to be used, the taxpayer must determine the applicable recovery period. The full depreciable basis is then multiplied by the factor from the table to achieve the year's depreciation. The tables reflect the half-year convention for all years, except for disposals of assets prior to the end of the recovery period. See also IRS Publication 534.

(15) Salvage value is ignored for tax purposes for property placed in service after 1980.

Currently, corporations may need to perform as many as three different tax depreciation calculations for any given asset: for regular tax, alternative minimum tax (AMT) and most recently, adjusted current earnings (ACE) purposes.(1) Starting in 1990, corporations are required to make an additional AMT adjustment for 75% of the difference between ACE and Alternative Minimum Taxable Income (AMTI).(2)

Over time, while attempts have been made to simplify the actual depreciation computation, many more options and requirements exist, so that depreciation as a whole has increased in complexity during the last few years and will most likely continue to do so. Prior to 1981, the methods used to calculate depreciation for tax and financial accounting purposes were very similar. In 1981, the Accelerated Cost Recovery System (ACRS) was introduced to "simplify" the computation of depreciation for tax purposes. Recovery periods replaced estimated useful lives, salvage value was ignored for both personalty and realty, and extra computations for partial periods were essentially eliminated. The Tax Reform Act of 1986 further altered the rules for depreciation by introducing the Modified Accelerated Cost Recovery System (MACRS) for years after 1986 and creating a new depreciation "adjustment" for AMT purposes thereby increasing the burden on taxpayers and tax return preparers. As of 1990, the addition of the AMT adjustment for 75% of the difference between ACE and Alternative Minimum Taxable Income (AMTI) necessitates yet another depreciation computation.

The computation for ACE purposes creates the lowest amount of depreciation allowed for tax purposes. While this method of depreciation may be used for AMT and regular tax purposes, corporations generally try to maximize their depreciation deductions by computing a higher amount of allowed depreciation for AMT purposes and an even higher amount of depreciation for regular tax purposes. For each method of tax depreciation, the computation rules vary depending on the type of asset (personalty vs. realty) and the year in which the asset was placed in service, resulting in further complications. Although the ACE computation does not apply to noncorporate taxpayers, depreciation computations for corporate and noncorporate taxpayers are the same for regular tax and AMT purposes.

This article examines the computation methods currently allowed for each type of depreciation for the 1990 tax year and beyond. Personalty, including specific rules for regular tax, AMT and ACE are explored and broken down by the relevant time period in which the property was placed in service. Additionally, detailed illustrative examples of each depreciation calculation are included. Depreciation rules for realty are also discussed including specific rules and detailed illustrative examples. This article is not intended to be an exhaustive coverage of depreciation, but rather a basic guide to depreciation computations, options and requirements for assets placed in service within the last 10 years. Depreciation computations for assets placed in service before 1981 are not considered.

Personalty(3)

The choice of depreciation method depends in part on when the asset was placed in service. The following are rules for depreciating personalty for regular tax, AMT and ACE purposes, and for time periods relevant to changes in rules.

Regular Depreciation of

Personalty

Regular depreciation refers to the calculation made on Form 4562 for regular tax purposes. As previously stated, most corporations will want to maximize their depreciation deduction for regular tax. We will, however, discuss all possible methods below. This subsection is divided into two time periods based on when personalty was placed in service: post 1986 and 1981 through 1986.(4)

After 1986. For personalty placed in service after 1986, MACRS controls the computation of depreciation. Regular tax depreciation may be computed using either of two systems, the General Depreciation System (GDS) or the Alternative Depreciation System (ADS), both of which are part of MACRS.(5)

GDS generally provides depreciation over the shortest permissible recovery period for an asset. ADS lives are generally somewhat longer. Specific rules under each system are highlighted below: Depreciation methods available under GDS: * 200% declining balance, with

a mandatory switch to straightline

depreciation when

straight-line depreciation

would produce a higher deduction. * Straight line depreciation. Depreciation methods available under ADS: * 150% declining balance, with

a mandatory switch to straight-line

depreciation when

straight-line depreciation

would produce a higher deduction. * Straight line depreciation. Recovery periods available under GDS: * Autos, trucks, computers,

copying machines -> 5 years. * Office furniture and fixtures

-> 7 years. * Other personalty uses its

specified recovery period given

in IRC Sec. 168(e)(3) and Rev.

Proc. 8756 (1987-2 CB 674,

as modified by Rev. Proc. 88-22,

1988-1 CB 785). Recovery periods available under ADS: * Autos, light general purpose

trucks, computers -> 5 years. * Copying machines, heavy

general purpose trucks -> 6

years. * Office furniture and fixtures

-> 10 years. * Other personalty uses its

specified ADS recovery period

given in IRC Sec. 168(g)

and Rev. Proc. 87-56 (1987-2

CB 674, as modified by

Rev. Proc. 88-22, 1988-1 CB

785). Conventions to be used for both GDS and ADS: * Half-year convention: general

rule (personalty is considered

to have been in service for

one-half year in the year it is

initially placed in service, and

one-half year in the year in

which it is sold or disposed

of). * Mid-quarter convention: used

for all personalty placed in

service during the year only

if more than 40% of the value

of the personalty placed in

service that year was placed

in service during the last

quarter of the year. (Each asset

is considered to have been

placed in service midway

through the quarter of the

year it was actually placed in

service. e.g., all assets placed

in service at any time during

April, May or June in a calendar

year corporation are considered

to have been placed

in service on May 15)

The corporate taxpayer would therefore maximize its depreciation deduction by choosing the 200% declining balance option under GDS.

1981 through 1986. For personalty placed in service from 1981 through 1986, ACRS applies. The following two methods are allowed under ACRS:

* 150% declining balance, with

a mandatory switch to straight-line

depreciation when

straight-line depreciation

would produce a higher deduction.

* Straight line depreciation.

As with GDS and ADS, the recovery period for personalty under ACRS depends on the type of asset. These are: * Autos, light-duty trucks ->

3, 5, or 12 years.(6) * Heavy-duty trucks, computers,

copying machines, office

furniture and fixtures -> 5,

12, or 25 years. * Other personalty uses its

specified recovery period given

in IRC Sec. 168(c) prior to

Tax Reform Act of 1986).

The half-year convention is used under ACRS, meaning that personalty is depreciated for one-half of the year in which it is initially placed in service. However, no depreciation deduction is taking in the year in which the asset is sold or disposed.(7)

Additionally, the depreciable basis of personalty, from 1983 through 1985, was reduced by one-half of the investment tax credit (ITC) on the asset (if the full ITC of 6% or 10% was used).

Depreciation of Personalty

for the AMT Depreciation

Adjustment

Since the Tax Reform Act of 1986, depreciation of personalty has been considered a tax preference item for AMT purposes. Personalty placed in service prior to 1987, therefore, is not subject to this adjustment, and AMT depreciation is considered to be the same as regular depreciation.(8)

After 1986. For personalty placed in service after 1986, a corporate taxpayer that has taken the maximum depreciation deduction under GDS for regular tax purposes must recalculate depreciation using ADS for AMT purposes. The amount of the required AMT depreciation adjustment is the difference between AMT depreciation and regular tax depreciation.

Depreciation of Personalty

for ACE

ACE is similar in concept to Earnings and Profits (E&P). Like E&P, ACE is not defined in the Code. See IRC Code Section 56(g) for details on the calculation of ACE. Starting in 1990, corporations are required to make an additional AMT adjustment for 75% of the difference between ACE and (pre-adjustment) Alternative Minimum Taxable Income (AMTI). ACE is calculated by making certain adjustments to pre-adjustment AMTI. In reference to the ACE depreciation adjustment, Form 4626 (Corporate Alternative Minimum Tax) states that AMT depreciation should be added back to pre-adjustment AMTI, then ACE depreciation should be subtracted. The net effect of this guidance is that the difference between AMT and ACE depreciation be added to pre-adjustment AMTI if AMT and ACE depreciation be added to pre-adjustment AMTI if AMT depreciation is larger, and subtracted if ACE depreciation is larger. The depreciation rules for ACE follow.

After 1989. For personalty placed in service after 1986, the depreciation rules for purposes of ACE require use of the ADS life using straight-line depreciation.

After 1989. For personalty placed in service after 1989, the depreciation rules for purposes of ACE require use of the ADS life using straight-line depreciation.

1987 through 1989. The rules are different for assets placed in service from 1987 through 1989. Before computing ACE depreciation for these assets, two items must first be determined: * The undepreciated portion of

the asset's basis (adjusted basis)

using AMT depreciation calculations

as of the close of the

last tax year beginning before

January 1, 1990 (e.g., if

the corporation uses a calendar

year, the date as of which

the adjusted basis is to be

determined is December 31,

1989). * The remaining useful life of

the asset, using ADS lives.

Once the above items have been determined, the remaining adjusted basis is divided by the remaining ADS life of the asset (the straight-line method).

1981 through 1986. For personalty placed in service from 1981 through 1986, again the remaining adjusted basis must be divided by the remaining useful life (using ADS). Before computing ACE depreciation for these assets, two items must first be determined: * The undepreciated portion of

the asset's basis (adjusted basis)

using regular tax depreciation

calculations as of the close of

the last tax year beginning

before January 1, 1990 (e.g.,

if the corporation uses a calendar

year, the date as of which

the adjusted basis is to be determined

is December 31,

1989). * The remaining useful life of

the asset, using ADS lives.

Once the above items have been determined, the remaining adjusted basis is divided by the remaining ADS life of the asset (the straight-line method).

Table 1-3 show depreciation calculations for a piece of office furniture, e.g. a desk, for regular tax, AMT and ACE. The computation requirements differ depending on the year the office furniture was placed in service, as illustrated.

For Tables 1-3, assume the following information: * Cost: $1,000. * Purchased and placed in service

on January 1 of the designated

year. * Section 179 (immediate expensing

election) was not used

to expense the asset in the

year of purchase. * Assume corporation is on a

calendar year. * Half-year convention applies

for tax purposes.(9) * No salvage value for tax purposes.(10) * Depreciation percentages

provided by the IRS are used. * In each case, it is assumed

that the method is used which

will yield the maximum

amount of depreciation allowed

in the earliest years.

Table : Table 1

Asset (personalty) placed in service in 1990 a. For regular tax purposes, use seven-year GDS life, 200%

declining balance with a mandatory switch to straight-line

when straight-line would produce a higher deduction.

Deduction Calendar Year Year Calculation Deduction 1 1990 $1,000 x 14.29% = $142.90 2 1991 1,000 x 24.49% = 244.90 3 1992 1,000 x 17.49% = 174.90 4 1993 1,000 x 12.49% = 124.90 5 1994 1,000 x 8.93% = 89.30 6 1995 1,000 x 8.92% = 89.20 7 1996 1,000 x 8.93% = 89.30 8 1997 1,000 x 4.46% = 44.60

b. For AMT purposes, use 10-year ADS life, 150% declining

balance with a mandatory switch to straight-line when

straight-line would produce a higher deduction.

Deduction Calendar Year Year Calculation Deduction 1 1990 $1,000 x 7.59% = $75.00 2 1991 1,000 x 13.88% = 138.80 3 1992 1,000 x 11.79% = 117.90 4 1993 1,000 x 10.12% = 100.20 5 1994 1,000 x 8.74% = 87.40 6 1995 1,000 x 8.74% = 87.40 7 1996 1,000 x 8.74% = 87.40 8 1997 1,000 x 8.74% = 87.40 9 1998 1,000 x 8.74% = 87.40 10 1999 1,000 x 8.74% = 87.40 11 2000 1,000 x 4.37% = 43.70

The AMT depreciation adjustment for 1990 would be $67.90 ($142.90 regular depreciation minus $75.00 AMT depreciation.

c. For ACE purposes, use 10-year ADS life, straight-line only.

Deduction Calendar Year Year Calculation Deduction 1 1990 $1,000 x 5% = $50.00 2 1991 1,000 x 10% = 100.80 3 1992 1,000 x 10% = 100.00 4 1993 1,000 x 10% = 100.00 5 1994 1,000 x 10% = 100.00 6 1995 1,000 x 10% = 100.00 7 1996 1,000 x 10% = 100.00 8 1997 1,000 x 10% = 100.00 9 1998 1,000 x 10% = 100.00 10 1999 1,000 x 10% = 100.00 11 2000 1,000 x 5% = 50.00

The ACE depreciation adjustments for 1990 would be $25 ($75 AMT depreciation minus $50 ACE depreciation).(11)

Table : Table 2 Asset (personalty) placed in service from 1987-1989,

assuming 1988 in this example. a. For regular tax purposes, use seven-year GDS life, 200% declining

balance with a mandatory switch to straightline when straight-line

would produce a higher deduction. (Identical to

Table 1 a.)

Deduction Calendar Year Year Calculation Deduction 1 1988 $1,000 x 14.29% = $142.90 2 1989 1,000 x 24.49% = 244.90 3 1990 1,000 x 17.49% = 174.90 4 1991 1,000 x 12.49% = 124.90 5 1992 1,000 x 8.93% = 89.30 6 1993 1,000 x 8.92% = 89.20 7 1994 1,000 x 8.93% = 89.30 8 1995 1,000 x 4.46% = 44.60

b. For AMT purposes, use 10-year ADS life, 150% declining balance

with a mandatory switch to straight-line when straight-line would

produce a higher deduction. (Identical to Table 1 b.)

Deduction Calendar Year Year Calculation Deduction 1 1988 $1,000 x 7.5% = $75.00 2 1989 1,000 x 13.88% = 138.80 3 1990 1,000 x 11.79% = 117.90 4 1991 1,000 x 10.12% = 100.20 5 1992 1,000 x 8.74% = 87.40 6 1993 1,000 x 8.74% = 87.40 7 1994 1,000 x 8.74% = 87.40 8 1995 1,000 x 8.74% = 87.40 9 1996 1,000 x 8.74% = 87.40 10 1997 1,000 x 8.74% = 87.40 11 1998 1,000 x 4.37% = 43.70

The AMT depreciation adjustment for 1990 would be $57 (174.90 regular depreciation minus $117.90 AMT depreciation).

c. For ACE purposes, there are three steps to take: Step 1: Figure the adjusted basis as of 12/31/89 using AMT depreciation [$1,000 x (100% (7.5% + 13.88%)) = $786.20]. Step 2: Calculate the remaining useful life under ADS lives (10 - years = 8 years.) Step 3: Compute straight-line over remaining ADS lige

Deduction Calendar Year Year Calculation Deduction 1988 not applicable = 1989 not applicable = 3 1990 $786.20 x 1/8 = $98.28 4 1991 786.20 x 1/8 = 98.27 5 1992 786.20 x 1/8 = 98.28 6 1993 786.20 x 1/8 = 98.27 7 1994 786.20 x 1/8 = 98.28 8 1995 786.20 x 1/8 = 98.27 9 1996 786.20 x 1/8 = 98.28 10 1997 786.20 x 1/8 = 98.27

The ACE depreciation adjustments for 1990 would be $19.62 ($117.90 AMT depreciation minus $98.28 depreciation).

Table : Table 3 Asset placed in service from 1981 - 1986, assuming 1986 in

this example (no investment tax credit(12).

a. For regular tax purposes, use 5-year ACRS declining balance.

Deduction Calendar Year Year Calculation Deduction 1 1986 $1,000 x 15% = $150.00 2 1987 1,000 x 22% = 220.00 3 1988 1,000 x 21% = 210.00 4 1989 1,000 x 21% = 210.00 5 1990 1,000 x 21% = 210.00

b. For AMT purposes, no adjustment is required or personalty

placed in service prior to 1987.

c. For ACE purposes, there are three steps to take: Step 1: Figure the adjusted basis as of 12/31/89 using depreciation for regular tax purposes [$1,000 x (100% - (15% + 22% + 21% + 21%) ) = $210] Step 2: Calculate the remaining useful life under ADS lives (10 - 4 years = 6 years). Step 3: Compute straight-line over remaining ADS life.

Deduction Calendar Year Year Calculation Deduction 1986 not applicable 1987 not applicable 1988 not applicable 1989 not applicable 5 1990 $210 x 1/6 = $35 6 1991 210 x 1/6 = 35 7 1992 210 x 1/6 = 35 8 1993 210 x 1/6 = 35 9 1994 210 x 1/6 = 35 10 1995 210 x 1/6 = 35

The ACE depreciation adjustment for 1990 would be $175 ($210 AMT/regular depreciation minus $35 ACE depreciation).

Realty

As with personalty, the choice of depreciation method for realty depends on when the realty was placed in service. In this section, methods for depreciating realty are covered for each of the three required calculations (regular tax, AMT and ACE) and for time periods relevant to changes in rules.

Regular Depreciation of Realty

As stated earlier, regular depreciation refers to the calculation made on Form 4562 for regular tax purposes. Two time periods are relevant: post 1986, and 1981 through 1986.

After 1986. MACRS controls the computation of regular depreciation for realty placed in service after 1986. The two systems available are GDS and ADS. the specific rules of which are stated below.(13)

Methods available for realty for

both GDS and ADS:

* Straight-line depreciation

must be used. Recovery periods for realty under GDS: * Residential rental realty ->

27.5 years. * Non residential realty -> 31.5

years. Recovery periods for realty under ADS: * Residential rental realty ->

40 years. * Nonresidential realty -> 40

years. Conventions to be used for both GDS and ADS: * Mid-month convention: realty

is considered to have been in

service for one-half month in

the month it is initially placed

in service, and one-half month

in the year in which it is sold

or disposed of.

Although each system is very similar, GDS provides the shortest useful lives, and therefore, the largest depreciation deduction for corporate taxpayers that choose to maximize depreciation.

1981 through 1986. For realty placed in service from 1981 through 1986, ACRS dictates the computation of depreciation.(14) Specific rules for ACRS appear below: Depreciation methods available under ACRS: * 175% declining balance, with

a mandatory switch to straight-line

depreciation when

straight-line

would produce a higher deduction. * Straight line depreciation. Recovery periods available under ACRS: * Realty placed in service after

12/31/80 and before 3/16/84

-> 15 years. * Realty placed in service after

3/15/84 and before 5/9/85 -> 18

years. * Reality placed in service after

5/8/85 and before 1/1/87 -> 19

years. Convention to be used under ACRS: * Realty placed in service after

12/31/80 and before 6/23/84

-> full month convention

(realty is considered to have

been in service for the full

month in the month it is

initially placed in service, and

no depreciation is allowed in

the month in which it is sold

or disposed). * Realty placed in service after

6/22/84 and before 1/1/87 ->

mid month convention (realty

is considered to have been

in service for one-half month

in the month it is initially

placed in service, and one-half

month in the year in which

it is sold or disposed).

The investment tax credit was not allowed for realty.

Depreciation of Realty for

the AMT Depreciation

Adjustment

The following are methods relevant to computing depreciation for AMT purposes divided into post-1986 and pre-1987 depreciation rules.

After 1986. For realty placed in service after 1986, depreciation for AMT purposes is computed using ADS. The amount of the required AMT depreciation adjustment is the difference and AMT depreciation and regular tax depreciation.

1981 through 1986. For realty placed in service from 1981 through 1986, the realty depreciation tax preference for AMT is computed over the same recovery period used for regular depreciation purposes, but using straight-line rather than an accelerated method. The difference between ACRS (regular) depreciation and AMT depreciation on realty placed in service prior to 1987 is a tax preference item. The AMT depreciation for 15-, 18- or 19-year realty is computed using the straight-line method over the recovery period of 15, 18 or 19 years, using the same convention (full-month or mid-month) that is used for regular depreciation purposes. Once again, the AMT depreciation deduction is the difference between AMT depreciation and regular depreciation.

Depreciation of Realty for

ACE

There are three relevant time periods for ACE depreciation of realty.

After 1989. For any property placed in service after 1989, the ACE computation is simply the same as that for AMT purposes. The ADS system is used. (The result of the calculation is the depreciation deduction to be used for ACE purposes.)

1987 through 1989. Before computing depreciation for ACE purposes for assets placed in service from 1987 through 1989, two items must first be determined: * The undepreciated portion of

the asset's basis (adjusted basis)

using AMT depreciation calculations

as of the close of the

last tax year beginning before

January 1, 1990 (if the

corporation uses a calendar

year, the date as of which the

adjusted basis is to be determined

is December 31, 1989). * The remaining useful life of

the asset, using ADS lives.

Once the above items have been determined, the ACE depreciation deduction is calculated by depreciating the remaining adjusted basis over the remaining ADS life of the asset (the straight-line method).

1981 through 1986. Similarly, before computing depreciation for ACE purposes for assets placed in service from 1981 through 1986, two items must first be determined: * The undepreciated portion of

the asset's basis (adjusted basis)

using regular tax depreciation

calculations as of the close of

the last tax year beginning

before January 1, 1990 (if the

corporation uses a calendar

year, the date as of which the

adjusted basis is to be determined

is December 31, 1989). * The remaining useful life of

the asset, using ADS lives.

Once the above items have been determined, ACE depreciation is calculated by depreciation the remaining adjusted basis over the remaining ADS life of the asset (the straight-line method).

Tables 4-6 show depreciation calculations for an office building for regular tax, AMT and ACE. The computation requirements differ depending on the year the office building was placed in service as illustrated.

Table : Table 4 Asset (nonresidential ealty) placed in service in 1990

a. For regular tax purposes, use 31.5-year GDS life, straight-line depreciation.

Deduction Calendar Year Year Calculation Deduction 1990 $100,000 x 3.042% = $3,042 2 1991 100,000 x 3.175% = 3,175 3 1992 100,000 x 3.175% = 3,175 4 1993 100,000 x 3.175% = 3,175 5 1994 100,000 x 3.175% = 3,175 6 1995 100,000 x 3.175% = 3,175 7 1996 100,000 x 3.175% = 3,175 8 1997 100,000 x 3.175% = 3,175 9 1998 100,000 x 3.174% = 3,174 10 1999 100,000 x 3.175% = 3,175

b. For AMT purposes, use 40-year ADS ife,straight-line

depreciation.

Deduction Calendar Year Year Calculation 1 1990 $100,000 x 2.396% = $2,396 2 1991 100,000 x 2.500% = 2,500 3 1992 100,000 x 2.500% = 2,500 4 1993 100,000 x 2.500% = 2,500 5 1994 100,000 x 2.500% = 2,500 6 1995 100,000 x 2.500% = 2,500 7 1996 100,000 x 2.500% = 2,500 8 1997 100,000 x 2.500% = 2,500 9 1998 100,000 x 2.500% = 2,500 10 1999 100,000 x 2.500% = 2,500

The AMT depreciation adjustment for 1990 would be $646 ($3,042 regular depreciation minus $2,396 AMT depreciation).

c. For ACE purposes, use 40 year ADS life, straight-line depreciation.

Computation is identical to AMT computation.

The ACE depreciation adjustment for 1990 would be $-0-($2,396 AMT depreciation minus $2,396 ACE depreciation).

Table : Table 5 Asset (nonresidential realty) placed in service in 1988

a. For regular tax purposes, use 31.5-year GDS life, straight-line

depreciation.

Deduction Calendar Year Year Calculation Deduction 1 1988 $100,000 x 3.042% = $3,042 2 1989 100,000 x 3.175% = 3,175 3 1990 100,000 x 3.175% = 3,175 4 1991 100,000 x 3.175% = 3,175 5 1992 100,000 x 3.175% = 3,175 6 1993 100,000 x 3.175% = 3,175 7 1994 100,000 x 3.175% = 3,175 8 1995 100,000 x 3.175% = 3,175 9 1996 100,000 x 3.175% = 3,174 10 1997 100,000 x 3.175% = 3,175

b. For AMT purposes, use 40-year ADS life, straight-line

depreciation.

Deduction Calendar Year Year Calculation Deduction 1 1988 $100,000 x 2.396% = $2,396 2 1989 100,000 x 2.5% = 2,500 3 1989 100,000 x 2.5% = 2,500 4 1989 100,000 x 2.5% = 2,500 5 1989 100,000 x 2.5% = 2,500 6 1989 100,000 x 2.5% = 2,500 7 1989 100,000 x 2.5% = 2,500 8 1989 100,000 x 2.5% = 2,500 9 1989 100,000 x 2.5% = 2,500 10 1989 100,000 x 2.5% = 2,500

The AMT depreciation adjustment for 1990 would be $675 ($3,175 regular depreciation minus $2,500 depreciation).

c. For ACE purposes, there are three steps to take: Step 1: Figure the adjusted basis as 12/31/89 using AMT depreciation [$100,000 - ($2,396 + $2,500_ = $95,104]. Step 2: Calculate the remaining useful life under ADS lives (40 - 2 years = 38 years). Step 3: Compute straight-line over remaining ADS life.

Deduction Calendar Year Year Calculation Deduction 1988 not applicable 1989 not applicable 3 1990 $95,104 x 1/38 = $2,502.74 4 1991 95,104 x 1/38 = 2,502.74 5 1992 95,104 x 1/38 = 2,502.74 6 1993 95,104 x 1/38 = 2,502.74 7 1994 95,104 x 1/38 = 2,502.74 8 1995 95,104 x 1/38 = 2,502.74 9 1996 95,104 x 1/38 = 2,502.74 10 1997 95,104 x 1/38 = 2,502.74

The ACE depreciation adjustment for 1990 would be a negative adjustment of $2.74 ($2,500 AMT depreciation minus $2,502.74 ACE depreciation).

Table : Table 6

Asset (nonresidential realty) placed in service in 1986

a. For regular tax purposes, use 19-year ACRS life, 175% declining balance, with a mandatory switch to straightline depreciation when straight-line depreciation would produce a higher deduction.

Deduction Calendar Year Year Calculation Deduction 1 1986 $100,000 x 8.8% = $8,800 2 1987 100,000 x 8.4% = 8,400 3 1988 100,000 x 7.6% = 7,700 4 1989 100,000 x 6.9% = 6,900 5 1990 100,000 x 6.3% = 6,300 6 1991 100,000 x 5.7% = 5,700 7 1992 100,000 x 5.2% = 5,200 8 1993 100,000 x 4.7% = 4,700 9 1994 100,000 x 4.2% = 4,200 10 1995 100,000 x 4.2% = 4,200

b. For AMT purposes, use 19-year life, straight-line depreciation.

Deduction Calendar Year Year Calculation Deduction 1 1986 $100,000 x 5.0% = $5,000 2 1987 100,000 x 5.3% = 5,300 3 1988 100,000 x 5.3% = 5,300 4 1989 100,000 x 5.3% = 5,300 5 1990 100,000 x 5.3% = 5,300 6 1991 100,000 x 5.3% = 5,300 7 1992 100,000 x 5.3% = 5,300 8 1993 100,000 x 5.3% = 5,300 9 1994 100,000 x 5.3% = 5,300 10 1995 100,000 x 5.3% = 5,300

The AMT tax preference for depreciation for 1990 would be $1,000 ($6,300 regular depreciation minus $5,300 AMT depreciation).

c. For ACE purposes, there are three steps to take: Step 1: Figure the adjusted basis as of 12/31/89 using depreciation for regualr tax purposes ($100,000 - $20,300 accumulated depreciation = $79,100). Step 2: Calculate the remaining useful life under ADS 1 ives (40 - 4 years = 36 years). Step 3: Compute straight-line over remaining ADS life.

Deduction Calendar Year Year Calculation Deduction 1986 not applicable 1987 not applicable 1988 not applicable 1989 not applicable 5 1990 $79,100 x 1/36 = $2,197.22 6 1991 79,100 x 1/36 = 2,197.22 7 1992 79,100 x 1/36 = 2,197.22 8 1993 79,100 x 1/36 = 2,197.22 9 1994 79,100 x 1/36 = 2,197.22 10 1995 79,100 x 1/36 = 2,197.22

The ACE depreciation adjustment for 1990 would be $3,102.78 ($5,300 AMT depreciation minus $2,197.22 ACE depreciation).

For Tables 4-6, assume he following information: * Cost: $100,000 (this does not

include any portion to the

purchase price allocable to the

land). * Purchased and placed in service

on January 1 of the designated

year. * Corporation is on a calendar

year. * No salvage value for tax purposes.(15) * Depreciation percentages provided

by the IRS are used. * In each case, it is assumed

that the method is used which

will yield the maximum

amount of depreciation allowed

in the earliest years.

Conclusion

Corporations may need to perform as many as three different depreciation calculations for tax purposes for both realty and personalty. The computation for ACE purposes produces the lowest amount of depreciation allowed for tax purposes. While this method of depreciation may be elected for AMT and regular tax purposes, corporations will generally try to maximize their depreciation deductions, computing the highest possible amounts for AMT and regular tax purposes.

While the ACE computation does not apply to non-corporate taxpayers, they must generally still compute depreciation for both regular tax purposes and AMT purposes. Depreciation computations for corporate and noncorporate taxpayers are the same for regular tax and AMT purposes; ACE computations are required only for corporations. The ability to compute depreciation properly is an essential tool in tax practice. The simple step-by-step procedures discussed in this article should be substantial use to tax professionals.

Footnotes

(1) Non-corporate entities generally need to compute tax depreciation only two different ways: for regular tax and AMT purposes.

(2) This replaces the adjustment for 50% of the difference between book income and alternative minimum taxable income that was in existence in 1987, 1988 and 1989.

(3) Personalty is any tangible property other than realty. Realty is tangible property that is land and anything permanently affixed to the land, such as buildings, components of buildings or permanent additions to buildings.

(4) Some post-1980 property does NOT qualify for ACRS/MACRS treatment; see IRC Section 163(f).

(5) Revenue Procedure 87-57 (1987-2 CB 687) contains depreciation rate tables which may be used for simplicity in computation. To locate the proper table, determine the convention to be used for depreciation, then the applicable recovery period. The full depreciable basis is then multiplied by the factor from the table to achieve the year's depreciation. The tables reflect the convention used for all years, except for disposals of assets prior to the end of the recovery period. (See also IRS Publication 534.)

(6) Shortest recovery period was most commonly used.

(7) IRC Section 168(a) (prior to Tax Reform Act of 1986) contained depreciation rate tables used for computation. To locate the proper percentage to be used, the taxpayer must determine the applicable recovery period. The full depreciable basis is then multiplied by the factor from the table to achieve the year's depreciation. The tables reflect the half-year convention for all years, except for disposals of assets prior to the end of the recovery period. See also IRS Publication 534.

(8) While a tax preference for leased personalty did exist prior to 1987, this topic is beyond the scope of this article.

(9) The mid-quarter convention applies (after 1986) if more than 40% of the value of the personalty placed in service during the last quarter of the year.

(10) Salvage value is ignored for tax purposes for property placed in service after 1980.

(11) ACE is not computed for non-corporate entities.

(12) For qualified property purchased prior to 1986, the investment tax credit (ITC) was allowed, reducing the tax liability and affecting the depreciation calculation. The ITC was repealed by the Tax Reform Act of 1986.

(13) Revenue Procedure 87-57 (1987-2 CB 687) contains depreciation rate tables which may be used for simplicity in computation. To locate the proper table, determine the convention to be used for depreciation, then the applicable recovery period. The full depreciable basis is then multiplied by the factor from the table to achieve the year's depreciation. The tables reflect the convention used for all types, except for disposals of assets prior to the end of the recovery period. (See also IRS Publication 534.)

(14) IRC Section 168(a) (prior to Tax Reform Act of 1986) contained depreciation rate tables used for computation. To locate the proper percentage to be used, the taxpayer must determine the applicable recovery period. The full depreciable basis is then multiplied by the factor from the table to achieve the year's depreciation. The tables reflect the half-year convention for all years, except for disposals of assets prior to the end of the recovery period. See also IRS Publication 534.

(15) Salvage value is ignored for tax purposes for property placed in service after 1980.

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Author: | Hutton, Marguerite R.; Lockhart, Julie A. |
---|---|

Publication: | The National Public Accountant |

Date: | Mar 1, 1991 |

Words: | 5698 |

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