 Income tax 2022-2023. Maker's depreciation. Which depreciation method applies? Let's do some wealth preservation with some tax preparation. Support a counting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category, further broken out by course, each course then organized in a logical reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website to follow the content on it. Most of this information comes from publication 946 How to Depreciate Property Tax Year 2022 you can find on the IRS website, irs.gov, irs.gov. Looking at the income tax formula, noting we're in line one income. Remembering the first half of the income tax formula is an essence and income statement but just to outline other forms and schedules flowing into these line items one of those the schedule C having business income minus business expenses the net business income rolling in from schedule C to line one income of the income tax formula. First page of the form 1040 noting that the schedule C flows into the schedule one flowing into the first page of the form 1040 line number eight. The schedule C is the profit or loss from business has an income statement format income minus expenses expenses is our point of focus now more specifically on depreciation remembering that if we buy equipment we might have to put it on the books as an asset deviating from a cash based system in that case even if we're using a cash based system because the tax code makes us do that and then we would have to allocate the depreciation over the useful life and the methods of allocation might be similar in concept but will be different from the tax code to book depreciation concepts we are now talking about the makers depreciation method the standard depreciation methods and then we'd have to layer on top of that the concepts of like 179 and special depreciation concepts okay so continuing on with the makers depreciation one of the major formats of depreciation for the tax code which depreciation method applies makers provides three depreciation methods under GDS the standard the usual format and one depreciation method under ADS the less usual standard okay so we've got the 200 declining balance method over a GDS that's the GDS for the makers depreciation methods that's the recovery period now when we talk about 200% if you compare that to normal depreciation theology or theory from a bookkeeping side of things then you would start with the straight line usually straight line in essence means you're going to take like the cost you're going to divide it by the useful life and then you're going to allocate that cost evenly over the useful life until the cost has been fully distributed and it has been fully depreciated but you might have some accelerated depreciation methods one of the more common ones being a double declining balance which you might call a 200% declining balance type of method and that's what we're basically talking about here it still makes rational sense from an accounting standpoint often times because you could argue that I'm using the equipment more I'm getting more out of it in the first years than the latter years I wouldn't be depreciating evenly over the time frame but rather getting more depreciation up front when I say getting more depreciation by the way that's good for taxes usually so I would like an accelerated depreciation for taxes it's bad usually for other accounting purposes in the terms of making your financial statements look as good as possible which is usually the perspective of someone reporting externally say to stockholders or something like that for taxes yes we would like the accelerated method if we can take it as opposed to a straight line method usually and that's usually what the makers gives us so then we've got the 150% declining balance method over GDS recovery period similar process it's more front loaded taking more up front than the straight line method but less than the 200% declining balance straight line method over GDS recovery period so now you've got the standard baseline method the conceptual method that should first come to mind when you're thinking about depreciation methods straight line even amount per the year for however many years apply and then you've got the straight line method over an ADS recovery period so normally if you had a choice between all four of these methods from a tax standpoint you would probably want the double declining or the 200% declining because that means we're going to get the most depreciation up front less depreciation towards the tail end of the life of the property and if we can get the benefit sooner that's usually better for taxes because of time value of money however there are exceptions for example if I think next year or in future years I'm going to have higher income than in the current year pushing me up into higher tax brackets in latter years then maybe I would like to take the straight line method and that will deduct an even amount in each year taking more of the depreciation possibly in those latter years where I might have the higher income I might get more benefit that way so again the general rule we deduct as much as possible as we can as soon as possible unless we have some rationale as to why wouldn't we do that we have to be in compliance of course with the tax code as we have that thought process in our mind so caution your property placed in service before 1999 you could have elected the 150 declining balance method using the ADS recovery periods for certain property classes if you made this election continue to use the same method and recovery periods for that property so usually the concept of consistency will apply here you can't really alter or change the methods once they've been put into place as a general rule you want consistency to allocate the depreciation over the life all right depreciation methods for foreign property remember that farming also always has their specialized kind of stuff or almost always quite often does if you deal with farming you might be having a specialized kind of area that's a specialty field you can look into so if you place personal property in service in a farming business after 1988 and before 2018 you must generally depreciate it under GDS using the 150% declining balance method unless you are a farmer who must depreciate the property under ADS using the straight line method or you elect to depreciate the property under ADS or I'm sorry GDS or ADS using the straight line method so now you get the double declining or stuck at the 150 declining unless you elect to take a straight line kind of method and so note that the straight line method is kind of usually just that it's an election oftentimes and if you have the ability to take the double declining or an accelerated method 150% in this case usually you would do that unless you have some rationale for defaulting back to like a straight line method so you can depreciate real property using the straight line method under either GDS or ADS note for 3, 5, 7 or 10 year property used in a farming business and placed in service after 2017 and tax years ending after 2017 that 150% declining balance method is no longer required however the 150 declining balance method will continue to apply to a 15 or 20 year property used in a farming business to which the straight line method does not apply or to property for which you elect the use of the 150 declining balance method alright so then we got another somewhat unusual situation I don't have I've never seen this situation myself more of a specialty area with the fruits or nut trees and vines I would like to have some fruit nut tree vines but I don't depreciate trees and vines bearing fruits nuts under GDS using straight line method over a recovery period of 10 years then you've got the ADS required for some farmers if you elect not to apply the uniform capitalization rules to any plant produced in your farming business you must use ADS you must use ADS for all property you place in service in any year the election is in effect see the regulations under section 263 A of the internal revenue code for information on the uniform capitalization rules that apply to farm property so electing a different method what if I don't like the method that you want me to do I want to elect a different so as shown in table 4-1 you can elect a different method for depreciation for certain types of property you must make the election by the due date of the return including extensions for the year you place the property in service however if you timely files your return for the year without making the election you can still make the election by filing an amended return within 6 months of the due date so if you realize you made an error you want to pick up that error soon and possibly be able to fix it with an amended return and so you can go through that caution if you elect to use a different method for one item in a property class you must apply the same method to all property in that class placed in service during the year of the election so they want some form of consistency once again you can see in this rule so however you can make the election on a property by property basis for non residential real and residential rental property and you would think that might be an exception because of the size of the nature of those property being quite large and expensive so 150 election so instead of using the 200% declining balance method over the GDS recovery period for property in the 3, 5, 7 or 10 year property classes some of the more common property class you can elect to use the 150 declining method so note that 200% would often be the biggest benefit upfront but you might say well maybe I don't want the 200 because I only want to deduct up to a certain point and I'd like to put the rest of the benefit into future periods possibly because I'm going to drop them below the next tax bracket or something so you might think well then I'd have to default to the straight line method but you still have this in between point which is 150 which might be a good method in some cases so you don't have to go from straight line all the way to 200 or 200 all the way down to straight line but you can have the middle peer here at 150 so make the election by entering 150 double db under column F in part 3 of form 4, 5, 6, 2 then you got the straight line election instead of using either the 200% or 150% declining balance method over the GDS recovery period you can elect to use the straight line method over the GDS recovery period so just to recap this remember that you're saying okay now I've got a piece of property that I cannot expense up front I think I'm going to have to put it on the books as an asset and then depreciate it then I have to see the categorization of the asset so then I look for to see does it fit under the categories of 3, 5, 7, 10 or so on these are some of the more common categorization periods 3, 5 and 7 for example that's usually going to also tell us what the useful life how long I'm going to depreciate it over we do have the added complication of then can I get a 179 or special depreciation and whether or not I want to take that depreciation up front and then we think about the method that's going to be used which is usually driven by default from makers itself which often times for 3, 5, 7, 10 year property some of the more common property is a double declining type of balance half year convention often times unless an exception applies then the question is well if I have the double declining balance the kind of default do I want to take that which is usually the most beneficial one that's why it's the default because you get more expense up front or do I want to taper that off going more towards a straight line method because I want more depreciation in later years than current year possibly because I think I'm going to have a higher tax bracket in later years due to my being higher and do I want to taper it all the way back out to straight line making an election to do that which means I have to stick to straight line after I do that or take the middle position going from double declining in essence to 150 200 to 150 okay so make the election by entering straight line if you want the straight line S slash L under column F in part 3 of form 4, 5, 6, 2 okay election of ADS as explained earlier under which depreciation system GDS or ADS applies you can elect to use ADS even though your property may come under GDS so usually your property if it's under GDS you would usually be picking that one and then be deciding under that whether or not you want the double declining the straight line or the 150 that would be more common but possibly you can elect to go to the ADS which is usually less advantageous than the GDS it might have for example a different life or because usually you can have a straight line possibly for the ADS which you might say why don't I just elect it the straight line up here with the GDS but it might have a different other convention or different life period that you might want for some reason as well which is more unusual of a situation so ADS uses the straight line method of depreciation over fixed ADS recovery periods most ADS recovery periods are listed in appendix B or see the table under recovery period under ADS earlier make the election by completing line 20 in part 3 of form 4562 we've got the 15 or 20 year farm property back to the farm property instead of using the 150 declining balance method over GDS recovery period for 15 or 20 year property you use in a farming business other than real property you can elect to depreciate it using either of the following methods the straight line method over GDS recovery the straight line method over an ADS recovery period