 Income tax 2022-2023. Maker's depreciation tax software examples. Let's do some wealth preservation with some tax preparation. Here we are in our example. Form 1040 populated using LISERT tax software. You don't need tax software to follow along but it's a great tool to run scenarios with. You can also get access to the Form 1040 related forms and schedules at the IRS website, irs.gov, irs.gov, single filer, Mr. Anderson living in Beverly Hills 90210. No W-2 income but instead we have the Schedule C business income flowing in. Let's recap that flow process. We got the Schedule C which is the profit or loss from business and income statement format. Income minus expenses. The net income then flowing into the Schedule 1 online 3 business income which flows into the Form 1040 online number 8. We also know that there's going to be self-employment tax which flows from the Schedule C. The net income 100,000 in this case is going to then be flowing to the Schedule SE self-employment tax used to calculate the self-employment tax at 14129 in this case which flows to Schedule 2. So if we go to Schedule 2 14129 line 4 part 2 which flows to the 1040 page number 2 not the income tax but the self-employment tax. We also know half of that is going to be an above the line deduction adjustment to income that shown by the flow from the Schedule C bottom line which flows into the Schedule SE bottom Schedule SE is the 14129 half of that 7065 and above the line deduction which flows into Schedule 1 page number 2 7065 which flows into the Form 1040 and there's the above the line deduction 7065 getting us to the AGI 92 936. Then we have the standard deduction at the 12,950 which is standard and then we've got the qualified business income deduction Form 8995. This worksheet shows the calculation. I'm not going to dive into that in detail because our focus is on the depreciation but that gets us to our taxable income tax calculated on page 2 plus the self-employment tax minus any payments that we made gets us to the overpayment in this case. Okay our main focus here is on of course the Schedule SE and the depreciation are related to it. So if I go back to the Schedule SE we note that we have an income statement here. Let's get rid of some of these check marks. We've got an income statement and we're focusing in here on the depreciation so focusing right there on the depreciation. So when we buy equipment for example the question that often comes up is can I just expense what I purchased which means it might be like supplies or something or do I have to put it on the books as an asset and if you have to put it on the books as an asset then you might have to depreciate it over the useful life of the asset is the general rule although you might also be able to still basically depreciate it in year one if you get access to the 179 or bonus special depreciation which we'll talk more about in future presentations our major focus here is to get an understanding of the underlying makers depreciation methods and then you can kind of tack on the bonus depreciation concepts on top of that. So remember the general idea is that the accounting for the taxes is similar in nature with depreciation to what you have for normal accrual accounting concepts generally accepted accounting concepts in that if it's if it's over a certain dollar amount you want to have a matching principle and therefore you want to have to put it on the books as an asset instead of expensing it even if you're on a cashed based system because there's such a big difference between the time that you actually use what you purchased in order to generate revenue that we have to deviate from that cashed based system that's the general idea and that lines up with the general bookkeeping idea of an accrual concept but then you might want to front load the depreciation with an accelerated depreciation like a double declining balance which still kind of lines up to normal accounting because you might for example use machinery more in the first years than the latter years so you might want to think that it makes sense to get more depreciation in the first years the latter years but then it totally deviates from bookkeeping principles with the 179 and special depreciation kind of items which are designed to kind of stimulate the economy type of type of deductions so now we're left with this weird situation where you might have things that you would have been able to expense on a cashed based system but you may they made you do an accrual thing putting them books putting them on the books as an asset but then they then they turn around and still give you the expense up front as if you just wrote them off up front as an expense by giving you the 179 and special depreciation deductions but those things could change you know in the future are more likely to change and the thing that seems stable as you're always going to have the underlying depreciation concepts which are basically the makers depreciation tables at this time which line up to normal depreciation concepts and then they would fluctuate you would think 179 special depreciation depending on the politics and on the economy so that's the general idea so if I determined that something that needed to be depreciated then I can consider the lives of the depreciation and you'll recall from prior presentations that usually we're going to be using the GDS and that's usually going to provide us with the double declining kind of method and we have the normal categories are the are the three five and seven year are often the common categories for you know like most of the things that are on there and then we can elect if we want to move from a double declining to like a 150 or a straight line which we would only do on kind of unusual situations where we want to take more depreciation like in future periods so let's put on a piece of equipment and just check this out so I'm going to call it equipment one now notice when I put equipment on here I'm going to be quite generic but in practice you want to be quite specific because as the depreciation tables get longer then you want to be able to actually assign what's on the depreciation schedule to what's on your books so that if you dispose of something you can determine which thing you disposed of and handle it properly on the depreciation schedules so I'm going to say this is going to go to the form schedule C we're going to say it's going to be a category let's say it's going to be let's say it's it's going to be machinery and equipment date placed in service let's say it's 0202 22 tax year 2022 is where we're at so it's in February of 2022 let's say the cost of it was 10,000 for an even number and then we've got the 179 deductions do we have any 179 I'm going to remove the 179 well let's let's keep the 179 for now so you can see the default and then we'll talk more about 179 and special depreciations later I'm going to say the method then for the machinery notice this kind of lists out the software in a similar fashion as the table so once I get a general idea of the depreciation methods that apply the software will kind of help me out to figure out the depreciation that I need to be taking and so I'm going to say that this is going to be then we're going to go with the five year office equipment here now notice with the five years you've got all these different items because you could go to straight line which is still makers and and then we could switch over to auto and so on with these other kind of restrictions but we're going to say it's not an auto it's going to be I'm going to try to use the normal makers which would be the double declining half year okay so I'm not going to do anything to the prior section 179 or the special let's just check that out and see what it does right now so we've got the 10,000 that pulled in over here if I look at the depreciation schedules you can see that that it basically defaulted to be able to take the special depreciation which is that big lump sum so that's where it looks kind of funny we're oftentimes you're saying well why did they force me to put it on the books as an asset if you're still just going to let me expense the entire thing in year one well that's because they did the special depreciation and the 179 type of thing let's remove that so that we get to the normal makers depreciation without the special depreciation so now if I go back on over we can see the calculation of the equipment and I'll go to the I know this one small will zoom in hopefully to so we can see this one but it's easier to see the full thing here so the acquisition date the cost is 10,000 notice what it says here 200 db that's double declining balance of 200 double declining half year convention meaning it's going to assume we purchased it in the middle of the year even though I purchased it in February to do the calculation so if you did so if I did this calculation you might think hey this looks like straight line depreciation because I might say 10,000 divided by five is 2,000 but it's not straight line it's double declining half year convention so that's where it gets a little bit messy on that first year because it's really going to be it's going to be like if I figured that the rate it would be 10,000 divided by five and if I take that divided by the original 10,000 hold on 2,000 divided by 10,000 it would be 0.2 you can also get that by saying one over five the number of years one over the number of years 0.2 if I multiply that times two is there's the double declining rate 40 percent and if I take the 40 percent times the 10,000 I would of course get twice as much 4,000 but then I use the half year convention meaning I bought it in the middle of the year divided by two and that gets me back to the 2,000 that's where it gets a little messy you could see that by going to the depreciation for the the following year and you could see it's not straight line because if it was straight line that would still be the same dollar amount of 10,000 divided by five it's actually higher in the second year because in year two you got a full second year's worth of depreciation so so that's going to be that one and then we could we could select and say well what if I don't want that full amount so for example if I went to my schedule C and I say well what if for whatever reason I don't want the full 2,000 because maybe I think my my tax brackets will be higher next year because I'm going to earn more money next year so maybe I want to elect to take like the straight line method so I could go over here and say look I want to take the straight line method instead of instead of the double declining and so now it's at the 1,000 so the 1,000 I could see calculated down here and that would simply be the straight line rate which would be 10,000 divided by five let's say would be 2,000 divided by two for the half-year convention 1,000 and in year the next year now we've got 2,000 which you would expect because it's a full year of depreciation in year two versus one year and year three so it would be 2,000 for the following years until the last year of depreciation where it would go back down to to the 1,000 for the half-year convention if you if you held on to it for the life of the property so now let's say it was seven-year property let's imagine it with seven-year property which is here so I'm going to go back to the double declining for seven years the normal makers office office furniture and whatnot and then if I go back on over now I can see that for 2020 let's say 2022 we've got let's go down to the regular one again 10,000 and and then it's only 500 being deducted so if I was to think about that if it was double declining if it was straight line it would be 10,000 divided by seven years would be that much 1,000 428 that's why seven years is a little bit more messy if I took that and divided by 10,000 I get to the 14.28 about which I can also get by taking one divided by the number of years seven that would be 14.28 percent about and then if I multiply that times two I would get the double declining rate and then I can multiply that times the 10,000 and that would be the amount for the first year if I didn't have a half-year convention but I have a half year convention so I'm going to take that and divide it by two and I should get to that but I didn't because I got a I put it on the straight line method which I thought that looked low let's put this back on a seven year let's put it on the seven year not the straight line okay so so now there we go so there's the 1,490 429 and if I bring it back to the straight line if I go back to the straight line for seven year and bring it back on over there this was the seven year straight line okay I think I had the complete wrong year there for a second sorry about that 10,000 divided by seven would be that divided by two for the half-year convention would be that so that would be the general the general idea okay let's take a look at this example where they they do deal with the 179 real quick so on Sandra and Frank Allen calendar your taxpayers bought placed in service their business a new item it's seven year property it costs 39,000 and they elected section 179 deduction of 24,000 they also made an election under 168k7 not to deduct special so we got 179 but not special their unadjusted basis after the section 179 deduction is 15 so just to give you an idea of how that 179 kind of messes things up a bit here let's just mirror that that example we're going to say it was on the books for for 39,000 but we're going to have some 179 deduction now again in practice oftentimes small businesses might take the full special or 179 deduction if they could right but as we go forward we're going to get the concept concept of how the 179 deduction kind of fits in to this whole process so you can see what basically happened here if i said 24,000 is 179 deduction what happened is the we've got the 39,000 dollar cost and then they said this is the current 179 deduction which brings the basis down to 15,000 and then they're calculating the makers and this in this case straight line let's let's change this to non-straight line seven-year property makers and so then they calculated the normal depreciation based on the adjusted basis now which is the 15,000 so in other words you might think that the 179 they should calculate as basically depreciation but they kind of calculated as adjusting the basis right if i look at what happens on the schedule c then we're going to see that the full amount of the 26,144 is here that is going to be if i go back on over the 179 that was taken 24,000 plus the 2144 26,144 and so there we get the 26,144 so obviously the 179 is substantial because it's taking these big equipment that usually we would depreciate under normal accounting and taking it in year one but it's kind of important to note how they basically account for it for adjusting the basis here now let's just look at this worksheet real quick so we can kind of apply this out to what we're doing in the actual software so this is the maker system that we're using usually we're defaulting to the GDS maker system that applies based on the property class which is which we're going to determine based on the type so if it's equipment five or seven years usually defaulting to the GDS as we saw the recovery period will be determined by the class of the property typically the method and convention will be determined by the what we selected prior to that if we purchased a lot of stuff at the end of the year we might have a mid quarter convention instead of half year and the depreciation rate here so then the calculation as we saw kind of the cost or basis is up top the business investment meaning we could have some that's that was personal and business use but if it's fully business use then it would be here then you can see we deducted the 179 deduction to get to the subtotal deducting the special deduction to get to that subtotal and then we calculate the depreciation okay let's take a look at another example you bought office furniture seven-year property for 10 000 and placed it in service august 11 2022 you use furniture only for by the way that last example we were just kind of thinking about the basis calculation with it to get to that to get to that 15 000 to see how the 179 works okay so this so this is the only property you placed in service this year you did not elect 179 deduction the property is not qualified property for purposes of claiming a special depreciation allowance so the property's unadjusted basis is 10 000 so you use gds and a half-year convention to figure your depreciation you refer to the makers percentage table guide in appendix a to find it okay and so if i go back on over here here's basically our worksheet so let's plug this into uh our our system so it was what was it seven-year property 10 000 and we put it on the books on uh went on 8 11 22 so we're going to say okay so if i do and then i'm not going to have any 179 take that out delete that okay so i've got the 10 000 data input and we pull that we pull that over now obviously the the system will do the calculation let's just check the check what it does compared to the to the problem here so 10 000 uh cost we've got the depreciation here it's going to be the double declining half-year convention and the life is the seven-year so the rate then it's using is that 0.1429 so if i can compare that to the table here the maker system it's the gds that's the default system property class seven-year because that's the type of property we put on there which was the furniture date placed in service 8 11 seven-year property based on the class that the method being used 200 double uh declining or double balance half-year convention and then there's the rate so we took the 10 000 it's not personal use all business 100 percent 10 000 is the basis no 179 no special and then we just multiply at times the rate so notice these tables can be useful because if i look at the rest of the tables then it'll calculate and project out into the future notice that if i look at my software i'm somewhat limited because i can go to i can go to the depreciation for the next year here and i can see what's going to happen next year and and that's great because i can tie that out if i work this out for the tables but usually the the tax software is geared towards calculating the current year and projections to make your estimated payments in the following year so so you might not have as much information on the on the rest of the item so these tables can be useful to like to project out further than one year into the future and then you can use the software to kind of double check as we've seen here years one and two right so there's the two four four nine for year two there's the two four four nine uh four year two all right let's do another one you bought a building this time and land for 120 000 and placed it in service on march 8th the sales contract shows that the building cost 100 000 and the land cost 20 000 so we're going to put the building is the depreciable part so it is non-residential real property the building's unadjusted basis is uh its original cost 100 000 so the maker refers to maker's percentage table okay so march 3rd so the multiply the builders percent okay so so now we're going to put this on the books non-residential real property so i'm going to go back on over now we're dealing with in essence real estate or something i'm going to say building we might want the address and of course be more specific than just saying building in practice but we're going to say it's in the category of building and we have a mid month convention so it's going to make a difference to make sure we put the proper month in here the amount is going to be 100 000 for the building not including the land and the method is going to be and you can see the methods are kind of listed out oftentimes in software so we're looking at the the real estate and this is the non-residential so you've got the 31.5 39 straight line non-residential real property so i'm going to say all right that's the one and let's go back on over and so now we've got our calculation of the 100 000 it's going to be the straight line mid month 39 is the life and there's the rate now if i compare that to the tables again i can see if i used the tables i'd have to find the table with the right month to get all the percentages correct but there's the there's the the rate and the 2033 i can kind of compare the first two calculations in my software because the software is designed to project a year into the future typically so there's the 22564 and year 22564 you can also try to calculate these you know in excel you can do the actual double declining method calculation but it does get a little bit more messy because you have to flip the straight line after the straight line is higher and so on but you can get a pretty good easy estimate by you know putting in doing the calculations in excel let's do that mid month convention in excel just to test it out so if i said if i said for example the cost was 100 000 for just the building the years uh i'm going to say years is going to be 39 years if it was straight line then the dp per year for an entire year not given that partial year in the first year 100 000 divided by 39 is going to be that amount and then we've got the the partial depreciation which we can do a couple different ways because we have a mid month convention so we purchased it in the middle of uh march so i could say okay well when i purchased the month of purchase purchase i could say is gen is uh is january and february two full months plus a half month because i purchased it in the middle of march so it'd be like 2.5 let's add a decimal on that one and i could then think well i could divide that by 12 let's do it this way first i could take that and divide by months in year which are 12 and i'm going to put an underline here and then divide that out so the fraction that we didn't depreciate would be because these are the two months before it was on the books that i wasn't depreciation could subtract that amount out it's going to be 2.5 divided by 12 and let's make that a percent add some decimals so that means if i multiply this out this is the depreciation i'm not going to get which would be this times this so that's the amount of depreciation that isn't i need to pull out of this one so i'm going to say this is going to be this minus this and there's the 2030 which is slightly different than over here because we didn't use the tables to do this we did it a calculation now the other way you could do it is you might say okay let's think about the months in a year are 12 and then so the month of purchase is 2.5 given the mid month convention so if i subtract those two out subtracting them this time i'm going to say 9.5 is the number of months that i should get credit for for the depreciation because i'm i'm depreciating for 9.5 months in essence so then i can compare that to the to the fraction 9.5 divided by the 12 let's make that a percent add some decimals and then i can multiply this depreciation for the year times this right and i get to that same uh 2033 this way so so a couple different ways you can you're just using you're trying to find that fraction of a year including you know the mid month convention