 Income tax 2022-2023, makers depreciation, which property class applies under GDS otherwise known as General Depreciation System. Let's do some wealth preservation with some tax preparation. Most of this information comes from Publication 946, how to depreciate property tax year 2022. You can find the IRS website, irs.gov, irs.gov.gov. 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. You can 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. The income tax formula noting we're online one income remember and the first half of the income tax formula is in essence and income statement. Although just an outline of scaffolding other forms and schedules rolling in flowing into these line items. One of those the schedule C which has business income minus business expenses gives us the net business income. Schedule C net income in essence flowing into line one income of our income tax formula page one of the form 1040. Remembering the schedule C flows into the schedule one which flows into the first page of the form 1040 line number eight. The schedule C is called the profit or loss from business income statement format having income minus expenses. We're focused on the expenses here and more particularly more precisely on the depreciation expense. Remembering that as you have property planting equipment, even if you're on a cash based system, you're going to have to do an accrual concept thing. Put it on the books as an asset in essence allocating the cost then over its useful life from an accounting standpoint. That would be in order to try to match the use of the item and the expense related to it reflecting that usage in the same period that the income was generated from the usage of the item. Although of course the tax code is a little bit strange because the tax code sometimes follows accounting concepts but then deviates from them possibly using accelerated depreciation methods which still kind of line up with accounting concepts but possibly also using things like a 179 deduction or special depreciation that are more economically driven and politically driven items. Our goal as taxpayers is to try to usually get the deduction as early as possible. So we want the biggest deduction as early as possible with the cost of equipment. That would mean it's a big purchase item. We would like to deduct it sooner rather than later if the tax code lets us do that. That said, we touched on the property classes last time. We're going to review that and then go into them in more detail. So which property class applies under GDS? GDS is the general depreciation system under makers. These are some of the most common kind of classifications. So the following is a list of the nine property classifications under GDS and examples of the types of property included in each class. Now remember when we look at the tax code, we are more restricted in terms of having to categorize whatever type of equipment we have in particular classes. The tax code needing to be more restrictive because we have an incentive on the tax side of things to try to take the depreciation sooner which is different than the incentives we have on the financial statement side of things which for large companies might be governed by generally accepted accounting principles. Okay, so these property classes are also listed under column A in section B of part three of form 4562. So you can go there when you're looking up and you're referencing things as you're adding something as a piece of equipment. The thought process usually looks something like this. You say, hey, is this something, usually a large dollar item, something that I should be expensing or should I put it on the books as an asset? If you're going to put it on the books as an asset and then need to depreciate it, then the question is, well, what's the classification that I'm going to be using to be recording the depreciation? There could be a difference between the book basis you're going to be using and the tax basis that you're going to be using and the tax software often has the capacity to do that difference to do both of those calculations. So small businesses that are also faced with the question of do I want a different depreciation structure for book versus taxes, which you may want because the book depreciation is more accurate for the purpose of bookkeeping. Whereas the tax depreciation, your objective, of course, is to take as much depreciation as possible as soon as possible, usually in order to maximize your tax benefits. So you might want to discuss that, the pros and cons with a tax professional related to that. Any case for details information on property classes, see Appendix B, Table of Class Lives and Recovery Periods in this publication. Okay, so common classifications. We've got the three-year property, the three-year property, tractor units for over-the-road use, any racehorse over two years old when placed in service. Obviously, racehorses were probably a bigger thing back in the day, but I'd still like to have a racehorse that I can bring on out to the old track. Any case, any other horse other than a racehorse over 12 years old when placed in service and qualified rent to own property defined later. Then we've got the five-year property, another very popular category. We've got, of course, the automobiles, taxis, buses, and trucks, which are quite popular depreciable type of items, which might have their own special kind of rules related to depreciation we talk about in a future time. Any qualified technological equipment, office machinery such as typewriters, calculators, copiers, another quite common categorization. Any property used to research and experimentation, breeding cattle and dairy cattle, appliances, carpets, furniture, et cetera, used in a residential rental real estate activity. Also, you would think fairly common categorization, certain geothermal, solar and wind energy property, and any machinery equipment other than any grain bin, cotton gin, asset fence or other land improvement used in a farming business and placed in service after 2017. In tax years ending after 2017, the farming situation, remember, have their own often kind of rules and regulations due to the special area of farming. So if you deal with farming, then you might, you can specialize in that area, for example. Number seven year property, another common category where we have office furniture and fixtures such as desks, file cabinets, saves, very common. Used agricultural machinery and equipment placed in service after 2017, grain bins, cotton gin, and assets, and fences used in farming business, railroad track, any property that does not have a class life and has not been designated by law as being in any other category. Clearly, when we look at these categorizations, you might be thinking, well, this is, this is a daunting task because there's no way the IRS can completely identify everything that some business might use, given the fact that businesses are all different and whatnot. So you're going to have to have this kind of catch all type of category as they're trying to differentiate things. So if you don't find something that fits into a particular category, sometimes you might need to do more research on it, possibly going from the code itself to other resources to see where that would lead in terms of the proper categorization. So certain motor sports entertainment complex property and any natural gas gathering line placed in service after April 11, 2005, see natural gas gathering line and electric transmission property later. Then we've got the 10 year property. So vessels, barges, tugs, and a similar water transportation equipment, which for most people would be more of a specialized type of area. Notice we're getting into the longer depreciation lives here with the 10 year property. Most of like the equipment stuff would fall under these main categories. These are the three, five, and seven years are probably the most common, right? So now we're going out to 10 year. Vessels, barges, tugs, and then we've got any single purpose agricultural or hydro agricultural structure. Any tree or vine bearing fruits or nuts and qualified small electric metter and qualified smart electric grid system defined later placed in service on or after October 3, 2008, somewhat more specialized categories there. Then we've got the 15 year property. So certain improvements may directly to land or added to it. So these are going to be the improvements to land 15 years somewhat. You might see that fairly, you know, could be fairly more common, such as shrubbery fences, roads, sidewalks and bridges. Any retail motor fuels outlet defined later, such as convenience store, any municipal wastewater treatment plant. So that's a specialized thing there. Initial clearing and grading land improvements for gas utility property, electric transmission property. It gets kind of messed up when I have it all one word on three lines there. Property that is section 1245 property used in the transmission of 69 or more kilovolts of electricity placed in service after April 11, 2005. So we're getting quite specific. If you fall into that category, you can see natural gas gathering line and electric transmission on property later. Any natural gas distribution line placed in service after April 11, 2005 and before January 1, 2011, any telephone distribution plant and comparable equipment used for two way exchange of voice and data communications, qualified improvement property defined later placed in service after 2017. Moving up to 20 year property now, 20 year property, farm building, other than single purpose agricultural or heterocultural structures, municipal sewers not classifies as 25 year property. And then we've got initial clearing and grading land improvements for electric utility transmission and distribution plants. 25 year property. This class is water utility property, which is either of the following property that is an integral part of the gathering treatment or commercial distribution of water. And that without regard to this provision would be 20 year property, municipal sewer other than property placed in service under a binding contract in effect at all times since June 9, 1996. So highly specialized category there, possibly not applying to a lot of people. Then we get into the items which a lot of people might see a little bit more, which is the residential rental property. So this is any building or structure such as rental home, including a mobile home, if 80% of more of its gross rental income for the tax year is from dwelling units. And now you've got the rental property, a dwelling unit as a house or apartment used to provide living accommodations in a building or structure. It does not include a unit in a hotel, motel or other establishment where more than half the units are used on a transient basis. So the residential rental property is going to be of course a more common kind of thing because people might own property if you're doing usually higher income tax returns. We're going to distinguish them from the hotels and motels, which sometimes can be somewhat of a gray area that you'd have to parse out. So if you occupy any part of the building or structure for personal use, its gross rental income includes the fair rental value of the part you occupy. So then we end up with the situation where we could have structures that have multiple uses to them and you would expect then that you would have to do some kind of allocation method. We might dive into that more obviously rental property as its own animal, its own beast that we can dive into and possibly will in future courses or sections. Nine, non-residential real properties or non-residential. This is section 1250 property such as an office building, store or warehouse. So you might be rented it out or something like that, but it's not for residential or personal use, but rather non-residential. When I say personal use, I mean rented it out to like families versus non-residential to 1250. So this is section 1250 property such as office building, store or warehouse that is neither residential rental property nor property with a class life of less than 27.5 years. Next we have the category of qualified rent to own property. Qualified rent to own property is property held by a rent to own dealer for purposes of being subject to a rent to own contract. So now you've got the contract which is a little bit different than normal. Usually you have a rental contract where the property is going to be going back to the original person that's renting it. Or you have a contract that you're purchasing something possibly financing the purchase, but the loan is different than the bank doesn't own the property. They have a financing to the property. Now you have a contract which is a rent to own type of contract. So it is tangible personal property generally used in the home for personal use and includes computers and peripheral equipment, television, video cassette recorders. That's kind of an old stereos, camcorders, appliances, furniture, washing machines and dryers, refrigerators and other similar consumer durable property. Consumer durable property does not include real property, aircraft, so the real property would be the actual structure of the building, aircraft, boats, motor vehicles or trailers. My trailer is your trailer. So if some of the property you rent to others under a rent to own agreement is of a type that may be used by the renters for either personal or business purposes, you can still treat this property as qualified property as long as it does not represent a significant portion of your lease of your leasing property. However, if this dual use property does represent a significant portion of your leasing property, you must prove that this property is qualified rent to own property. So somewhat of an unusual kind of structure with the rent to own rent to own dealer. So you are a rent to own dealer if you meet all of the following requirements. You regularly enter into rent to own contracts defined below in the ordinary course of your business for the use of consumer property. A substantial portion of these contracts end with the customer returning the property before making all the payments required to transfer ownership. The property is tangible personal property of a type generally used within the home for personal use. Rent to own contract. So this is any lease for the use of consumer property between rent to own dealer and a customer who is an individual which meets all the following requirements. Is title rent to own agreement lease agreement with ownership option or other similar language provides a beginning date and a maximum period of time. Not to exceed 165 weeks or 36 months from the beginning date for which the contract can be in effect including renewals or options to extend provides for regular periodic weekly or monthly payments that can be either level or decreasing. If the payments are decreasing no payment can be less than 40% of the largest payment provides the total payments that generally exceed the normal retail price of the property plus interest provides for total payments that do not exceed $10,000 for each item of property. Provides that the customer has no legal obligation to make all payments outlined in the contract and that at the end of each weekly or monthly payment period. The customer can either continue to use the property by making the next payment or return the property in good working order with no further obligations and no entitlement to a return of any prior payments. Provides the legal title to the property remains with the rent to own a dealer until the customer makes either all the required payments or the early purchase payment required under the contract to acquire legal title. And finally provides that the customer has no right to sell sub lease mortgage pawn pledge or otherwise dispose of the property until all contract payments have been made. Okay motor sports entertainment complex again somewhat of an unusual category here with going through kind of the main ones at this point. So this is a racing track facility permanently situated on land that hosts one or more racing events for automobiles trucks and motor motorcycles during the 36 month period after the first day of the month in which in which the facility is placed in service. So the events must be open to the public for the price of admission. Okay admission $20. Then we've got the qualified smart electric grid system. Once again probably not the category that most people are dealing with more of a specialized categorization here. A qualified smart electric grid system means any smart grid property used as part of a system for electric distribution grid communications monitoring and management placed in service after October 3. 2008 by a taxpayer who is a who is a supplier of electric electrical energy or a provider of electrical energy services. Smart grid property includes electronics and related equipment that is capable of sensing collecting and monitoring data of or from all portions of a utilities electric distribution grid providing real time two way communications to monitor or to manage the grid and providing real time analysis of an event prediction based on collected data that can be used to provide electric distribution system reliability reliability quality and performance. Now again obviously these categories are getting more abstract now and you can see one of the issues with the tax code that they have as they try to basically kind of force people to do the categories. For every basic item so then the categorizations become quite complex. However it does mean that you should be able to basically research the category of the item that you're looking for and properly find the category which is what's going to happen. In most cases so oftentimes the categories that come up most often you'll have an idea of the types of businesses you work with often you'll have an idea of the categories that are less common. You should be able to research and find the category the proper category. So retail motor fuels outlet. Real property is a retail motor fuel outlet if it is used to a substantial extent and the retail marketing of petroleum or petroleum products whether or not it is used to sell food or other convenience items and meets any of the following three tests. It is not larger than 1400 square feet 50% or more of the gross revenue generated from the property are derived from petroleum sales 50% or more of the floor space is property and devoted to petroleum marketing sales. A retail motor fuel outlet does not include any facility related to petroleum and natural gas trunk pipelines. Okay so qualified improvement property. This is one that may come up more often than some of the more abstract kind of categories we've seen here. Generally this is any improvement to an interior part of a building that is non residential real property and the improvement is section 1250 property. That's the property that's non residential is made by you and is placed in service by you after 2017 and after the date the building was first placed in service by any person. However, a qualified improvement does not include any improvement for which the expand expenditure is attributable to any of the following the enlargement of the building any elevator or escalator. The internal structure frame structural framework of the building. Okay so then we got the qualified smart electric meter that once more more of an abstract kind of system here a category that might be not be as common to most people. So a qualified smart electric meter is any time based meter and related communication equipment which is placed in service by a supplier of electric energy or a provider of electric energy services and which is capable of being used by you as part of a system that meets all of the following requirements. I won't go through all of the requirements for that one here because somewhat more abstract. We then have the natural gas gathering line and electric transmission property also more of an unusual type of property. I'm not going to go through the description because that's going to be more of an unusual property as well.