 Income tax 2022-2023, makers depreciation. What is the basis for depreciation? Let's do some wealth preservation with some tax preparation. Support accounting 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 and all 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. We're focused online one income remember in the first half of the income tax formula is in essence and income statement but just an outline other forms and schedules flowing into these line items. One of those the schedule see having business income minus business expenses giving us the business net income from the schedule see in essence rolling into line one income of the income tax formula. Page one of the 1040 noting that the schedule see would roll into the schedule one rolling into the form 1040 page one line number eight. The schedule see is the profit or loss from business which has an income statement format income minus expenses were focused on the expenses and more particularly or precisely on the depreciation expense. Remembering that we may have to deviate even if using a cash based system to an accrual concept when we make purchases of the depreciation and then we're subject not to generally accepted accounting rules but to the tax code where we have different objectives for depreciation. Our objective as the tax preparer and the taxpayer is usually to try to depreciate as much as we legally can up front because that's usually best for taxes a different objective than what we might have for the bookkeeping side of things. Okay, that said, what is the basis for depreciation we can think of the basis as similar to kind of like the cost of the adjusted cost of some kind. So the basis for depreciation of makers property is the properties cost or other basis multiplied by the percentage of basis investment use, meaning obviously if we use the thing 100% for business, then that would be basically in essence the cost or basis. But if we use it partially for business and something else like personal use, then we might have to allocate which is for business versus personal which gets a little bit more messy. For a discussion of business investment use, see the partial business or investment used under property used in your business or income producing activity in chapter one. Reduce that amount by any credits and deductions allowable to the property. The following are examples of some credits and deductions that reduce the basis. Now as a general rule, remember that when we buy something if we just bought equipment, let's say it was 100% for business, that would in essence be the cost or basis, the basis or cost being good in essence, in that we want to be able to get the deduction related to that basis or cost, which under normal depreciation would be like an expense from a straight line standpoint, it would just be an equal amount over the life of the asset. What we would like to do is get more benefit from that basis, that cost upfront. If we do get more benefit upfront, then we get the benefit right of the expense upfront, but we also have to decrease the basis or adjusted cost, which means that we're going to have a lesser benefit going out in the future. We're eating up the benefit upfront. We want to eat that cost or that basis faster usually because that's going to be the best strategy for taxes because we get the tax benefit sooner. So for example, if we had a deduction for section 179 property, you can kind of think of that as though we got a whole lot of depreciation, possibly the whole thing in year one, similar to as if we just got to expense it in year one. Why do I have to go through this whole capitalization business in the first place if you're just going to let me expense the whole thing? It might be your thought process in this case and in this situation, but then you would think, okay, now I got the depreciation in year one. I no longer have any basis left over to take in future years, which is okay because I would rather take it in the first year usually anyways. You've got any deduction under the section 179B of the internal revenue code for capital cost to comply with environmental protection agencies, sulfur regulations, similar concept. Any deduction under 179D, similar situation of the internal revenue code for certain energy efficient commercial building property. Any deduction for removal of barriers to the disabled and the elderly. Why would this one be here? Well, you might get like a benefit from it. So if you get like a credit from doing it or something like that, then you would think that you already got kind of a benefit from it. And if you also got the expense, maybe that would be kind of double dipping. So you might have a situation where that comes into play. Any disabled access credit, enhanced oil recovery credit or credit for employer provided childcare facilities and services. So notice that if you do something, you put in a piece of equipment or something like that and you do so because you're incentivized by the tax code to do it. And they're going to give you a credit for doing it, right? Now if they didn't give you the credit then and you did it and you did it anyway for business purposes or whatever, you would still you would think get the deduction. But notice that if they give you a credit for it, the credit is of course better than a deduction, right? Because if you get the credit, $1 of credit versus $1 of deduction means the credit $1 would be a dollar for dollar benefit. A deduction in the form of an expense depreciation dollar would only reduce your taxable income. You would only get a benefit then based on the tax rate. So then the question is, well, if they're going to give you this credit, which is better than the deduction, do you also get the deduction? And that's where the problem comes in. Possibly not. Possibly they're going to say, no, you need to decrease the basis of your property so that you can allocate the adjusted basis of the property. Those are kind of the thought process that might come into that. So any special depreciation allowance, similar with the $1.79, you can kind of think of the special depreciation as the IRS basically saying, the politician saying, we want to give more depreciation upfront for whatever reason. We want to stimulate the economy, or most likely because it's quite popular. And that makes the politicians, they like to be able to say, they're going to put a special depreciation in. Similar kind of thing. If you get the depreciation upfront, then you would think, in essence, your basis is going to be lower. You can take less of the cost to be allocated in future years. Basis adjustment for investment credit property under section 50C of the Internal Revenue Code. So for additional credits and deductions that affect basis C section 1016 of the Internal Revenue Code, enter the basis for depreciation under column C and part three of form 4562 for information about how to determine the cost or other basis of property. See what is the basis of the depreciation property in chapter one. So just as a general rule, the general idea would be the cost is somewhat kind of the basis. You might have to allocate that between personal and business use, but if it's fully business used property, then you want the benefit of that cost, which would allocate over the useful life under normal depreciation kind of rules, but you can't depreciate more than the cost of the property, which is kind of like the basis of the property, because the idea is that you're allocating the cost over the useful life. If you get the depreciation more and current in the first few years, great 179 deduction, special depreciation, great. But that does mean that you can't get, you can't just keep depreciation. After future years, you're going to have to lower the basis or the adjusted basis, the amount that you're going to be able to apply out into into the future. That's basically the trade off. So basis in essence is good. We want to have a higher basis because that means that we might be able to depreciate in the future and we might be able to sell it or if we were to sell it, we would have a lesser of a gain or a greater loss. However, the basis also represents in essence a deduction that we're going to get to take at some point in time. And the earlier we can take that deduction, the better usually because we'd rather have the expense today than tomorrow because of the time value of money. Although there are exceptions. For example, if we think we're going to have more income in the future, then we might say, hey, that's going to increase my tax brackets in the future. And in that case, maybe you take the deduction in the future because you think you're going to get a better tax benefit at that point. But general rule basis, we want to take the deduction sooner than later.