 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 and the first half of the income tax formula is in essence and income statement although it's just an outline a scaffolding other forms and schedules flowing into these line items one of those the schedule see business income in essence and income statement in and of itself with business income minus business expenses the net business income rolling into line one of the income tax formula page one 1040 noting the schedule see would roll into the schedule one which would roll into the first page of the form 1040 line number eight the schedule see format is the profit or loss from business has an income section and expenses section like an income statement we're focused on the expenses in particular the depreciation remembering that even if you're on a cash based system you will have to do an accrual based type thing when you purchase property plant and equipment because of the big difference between the time in which you consumed the goods in order to help generate revenue and the time that it's that you paid for it possibly so even if you use a cash based system we have to have that deviation generally so once we do that then we have to think about our depreciation schedules how we're going to be depreciating these fixed assets over their useful life which lines up to some degree with accounting concepts but remember the tax code will deviate from the accounting concepts so we have to use the tax code to figure this stuff out sometimes we'll have similar concepts the makers methods now will be similar to like a double declining balance oftentimes possibly using some kind of half year or mid quarter convention or something like that and sometimes the tax code will input some things that aren't bookkeeping conceptual ideas to stimulate the economy or do whatever they're trying to do those are represented with like 179 deductions and special deductions all right so now our focus is figuring depreciation under makers now that's going to be one of the general kind of conceptual frameworks for calculating depreciation under the tax law system noting that you always want to think about this as first starting from I would think about it first starting conceptually from a straight line kind of depreciation method and then layer on top of that some of these other concepts accelerated depreciation methods double decline in often in a makers kind of situation and then other tax kind of related things to that which would be the 179 deductions and the special depreciation and that kind of stuff so introduction the modified accelerated cost recovery system the main kind of system you'll be dealing with oftentimes with taxes is used to recover the basis of most business and investment property placed in service after 1986 makers consists of two depreciation systems the general depreciation system the gds and the alternative depreciation system the ads generally these systems provide different methods and recovery periods to use in figuring depreciation deductions so if you have experience from a bookkeeping standpoint generally accepted accounting principles you might have more leeway in those cases to kind of figure what the useful life is for a particular piece of property and the related depreciation methods you're going to use straight line double declining and so on your objective there is to get your financial statements correctly aligned for reporting purposes and decision making both in turtle and x turtle oftentimes for management and for external investors or banks or whatever as well the tax code however you're concerned generally from a taxpayer standpoint to get as big a deduction as soon as possible and from the tax code side of things then what they're going to do is try to limit you in terms of assigning more strictly what kind of depreciation is available to you so that the obviously the incentives are a little bit different that also means that we might have different depreciation methods from a book standpoint and a tax standpoint small business needing to decide whether or not they want to have their depreciation just line up to the tax code or whether they want to have different depreciation methods tax software often having the capacity to calculate both book and tax depreciation so that's just something to keep in mind when talking to your tax professional or doing taxes and kind of integrating the bookkeeping side of it all right so which depreciation system gds or ads applies so your use of either the general depreciation system otherwise known as the gds or the alternative depreciation system the ads to depreciate property under makers determines what depreciation method and recovery period you use you must generally use gds unless you are specifically required by law to use ads or you elect to use ads so like the default then is going to be the gds general depreciation system unless you're required to deviate that or make an election to do so if you place your property in service in 2022 complete part three a form 4562 to report depreciation using makers complete section b of part three to report depreciation using gds and complete select section c of part three to report depreciation using ads if you place your property in service before 2021 and are required to file form 4562 report depreciation using either gds or ads online 17 of part three okay required use of ads you must use ads this is the deviation when we have to use ads would might that be the case you must use ads for the following property non-residential real property residential real property and qualified improvement property held by the electing real property trade or business so that's so that's going to be as defined in section 163 j7b of the internal revenue code for more information see the revenue procedure 2019-8 on page 347 of internal revenue bulletin 2019-3 available at the IRS website so any property with a recovery period of 10 years or more under gds held by an electing farming business so farming also have these kind of exceptions that could be applied as defined in section 163 j7c of the internal revenue code for more information there you can see the revenue procedure 2019-8 obviously we're going to put some more of our focus on some of the more normal calculations for for most people so we won't going to deviate too much on on a lot of the special kind of circumstances but you can of course research those on your own any tax exempt use property any tax exempt bond financed property all property use predominantly in a farming business and placed in service in any tax year doing which an election not to apply the uniform capitalism rules to certain farming costs is in effect any property imported from a foreign country for which an executive order is in effect because the country maintains trade restrictions or engages in other discriminatory acts so any tangible property used predominantly outside the united states during the tax year and any listed property used 50% or less in a qualified business used during the tax year discussed later all right caution if you are required to use a ds to depreciate your property you cannot claim any special depreciation allowance we talked about special depreciation in a prior presentation or two discussed in chapter three for property