Table of Contents introduction & vocabulary 2

Depreciation

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  Code § 167(a). Depreciation—General rule.
  
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  Code § 167(b). Depreciation—Cross reference.
  
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  Code § 167(c). Depreciation—Basis for depreciation.
  
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  Code § 168(a). Accelerated cost recovery system—General rule.
  
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  Code § 168(b). Accelerated cost recovery system—Applicable depreciation method.
  
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  Code § 168(c). Accelerated cost recovery system—Applicable recovery period.
  
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  Code § 168(d). Accelerated cost recovery system—Applicable convention.
  
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  Code § 168(e). Accelerated cost recovery system—Classification of property.
  
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  Code § 168(g). Accelerated cost recovery system—Alternate depreciation system for certain property.
  
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  Code § 179(a). Election to expense certain depreciable business assets—Treatment as expenses.
  
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  Code § 179(b). Election to expense certain depreciable business assets—Limitations.
  
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  Code § 179(c). Election to expense certain depreciable business assets—Election.
  
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  Code § 197(a). Amortization of goodwill and certain other intangibles—General rule.
  
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  Code § 197(b). Amortization of goodwill and certain other intangibles—No other depreciation or amortization deduction allowable.
  
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  Code § 197(c). Amortization of goodwill and certain other intangibles—Amortization section 197 intangible.
  
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  Code § 197(d). Amortization of goodwill and certain other intangibles—Section 197 intangible.
  

Depreciation schedule is applied to basis (§ 1011) + any capital expenditures to that basis (§ 1016)

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  What is depreciable?
  
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    Assets that decline in value
    
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    Simons case
    
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      violinists bought an old violin bow for $30,000 and used it—tried to depreciate it over time—can’t depreciate something that is going to retain most of its value
      
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      if a normal bow costs $3,000 and he’s made this bow useless for playing perhaps he should only be able to depreciate $3,000
      
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      could deny deductions entirely—to give
      

1. 
   Ben purchases an asset on January 1, 2009 for $5,000. The asset will produce $1,300 of gross income at the end of each year for five years and will then be worthless.
   

2. 
   Christopher purchases a machine in August, 2009 for a purchase price of $150,000 that will be useful in his business for 10 years. The salvage value of the machine (the fair market value of the asset at the end of its useful life) is $10,000.
   

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  Tangible property § 168
  
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  Depreciable base § 167(c)(1)
  
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  In 2009, under § 179(b)(7) he can expense up to $250,0000—we need to know his aggregate income and he cannot have spent more than $800,000 in 2009—only lose the $250,000 to the extent that you go over $800,000—so if you spend $850,000 you can only deduct $200,000
  
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     if Christopher has spent less than $800,000 this year he can expense the full $150,000
    
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  In 2010, expense cap is $125,000
  
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     Christopher would expense $125,000
    
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    Recovery period = 5 years
    
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    § 168(b)—applicable depreciation method is 200% declining balance method—can elect to do straight line depreciation—half-year convention: you treat the investment as if it were placed in service in the middle of the year  you get half the depreciation deductions
    
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  If this were commercial real estate
  
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    § 168(b)—recovery period is 39 years—cannot elect to use straight line depreciation
    
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  Conversions:
  
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    You’ve depreciated the entire asset—5.5 years—sell for $10,000—recapture lost basis as ordinary income—§ 1245—to the extent that you have a gain that represents already recovered basis it’s an ordinary gain, NOT a capital gain
    

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  No incentive to have economic depreciation mirror effective depreciation—a lot of ways that accelerated depreciation has been
  
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  Efficiency—gives windfalls to taxpayers who would have invested already—are people actually responding to this code, or are they just taking advantage according to their usual investment habits—ways to subsidize investment outside depreciation incentives
  
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    Real estate is very heavily favored by the tax system
    
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    Does investment generate externalities? Should we incentivize savings more than wage spending, etc.?