 Income tax 2022-2023, depreciation, office, home, land, exempted property, and basis adjustment. 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 on line one income. Remember in the first half of the income tax formula is in essence an income statement but just an outline of scaffolding other forms and schedules flowing into these line items including the Schedule C basically an income statement in and of itself business income minus business expenses given us net business income which would flow into line one income here of the income tax formula. The first page of the form 1040 noting that the schedule C would flow into the schedule one flowing into the first page of form 1040 line number eight. The schedule C is a profit or loss from business form having an income statement format of income minus expenses. We're focusing this time on the expenses specifically on the depreciation. Remembering that even if you're in a cash based system, if you have large purchases, you're going to have to deviate from the cash based system. Why? Because the tax code forces you to generally to put them on the books as an asset which you can't see in the tax return because we only have an income statement if you're talking about a schedule C. But we're going to be able to depreciate them using the depreciation schedules allocating the cost over the useful life in accordance with the matching principle and a cruel concept. Although the tax code can get crazy and start deviating from that concept by using accelerated depreciation methods 179 special depreciation and so forth. All right, that given let's talk about an office in the home. We've got an office in the home. If you use part of your home as an office, you may be able to deduct depreciation on that part based on its business use. So meaning now we have a home. We've got an office in the home. That's a business part of the home. The question then is going to be, do I get to deduct the home office? So there's multiple things related to the deduction of the home office because you might have the utility bill that's paid for the entire home. You might have other, you know, water bill and so on that's paid for the entire home. But you might be able to allocate a portion of it to the office. You would think because it would be an ordinary and necessary business expense if you're allowed to have the home office. The other portion of that that might be applicable is depreciation because normally the home is a personal asset and for our income tax normal tax standards. Then we would think the only thing you'd get to deduct normally are those expenses that you incurred in order to generate revenue. There's a lot of exceptions to that general rule. When we think about a schedule A, for example, where we might be able to deduct the home mortgage interest and things like that, the property taxes and things like charitable deductions. Those are all kind of weird type of deductions that are deviations from the general rule of deducting something that was consumed in order to generate revenue. But the personal home is personal. So you would think in general you wouldn't be able to deduct the depreciation related to it. But if you use the home as an office, you would think you would get a portion of that depreciation as depreciation expense. So right here we're focused on the depreciation expense itself as part of in dovetailing on to that concept of a home office. Notice that if someone was renting a home, then the rent itself that they're paying might be part of the home office deduction. They wouldn't have depreciation. It's only if they owned the home that then you've got this depreciation that might add into or factor into this home office kind of situation. So for more information about depreciating your home office, you could see publication 587. So what property cannot be depreciated certain property cannot be depreciation. This includes land and certain exempted property. So normally when we think about things that are going to be depreciated, we're putting them on the books as an asset as opposed to expensing them because they're going to be a long lived type of items. And we want to allocate the cost to the period that it's being consumed. However, when we think about land, it's not being consumed in human lifetimes because the land doesn't deteriorate as the building that sits on the land does as does every other kind of thing that we buy for business. Typically like equipment, for example, furniture and so on. So terms you may need to know the glossary. We've got amortization similar to depreciation amortizing over time a basis that's kind of like the cost in essence of the property. Goodwill. This is an intention type of intangible concept intangible property intangible property can't touch it. It still has value, but it's intangible because you can't touch it remainder interest and term interest. Okay, given that, let's jump into it land. You cannot depreciate the cost of land because land does not wear out, become obsolete or get used up. So although we are using the land to help generate revenue, the land hasn't been consumed. It's not going away to help generate revenue. And that's kind of the argument as to why we're not going to allocate the cost of land over the useful life. Because in theory, the land's useful life is beyond our human useful life. So the cost of land generally includes the cost of clearing, grading, planting and landscaping. So now you get into the issue of what is land versus building type of issue, which can be kind of confusing. Because what if I bought a piece of land with a building on it? Well, if you plan on using the building, then you're going to have to basically allocate between the land and the building. But if you plan on just clearing the building off the land, I bought the land for the land. And there happened to be a building on the surface of my land. Then if you just tear down the building, then the building isn't what you wanted. So that might be as part of the cost of the land in that case. That's part of your cost possibly. So you get a little bit of unusualness in that. So once again, the cost of land generally includes the cost of clearing, grading, planting and landscaping. Although you cannot depreciate land, you can depreciate certain land proportion costs, preparation costs, such as landscaping costs incurred in preparing land for business use. So when you're tending to the land, then the question is, well, obviously you're not really improving the land as just a piece of dirt that's going to be there for some time. You would expect maybe you'd be able to expense the costs of landscaping and so on, which aren't things that are going to be eternal. Eternal love and eternal wealth. As the piece of rock that's below the land is, at least for human lifetimes, you would think. These costs must be so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property in that case. You can determine the life of the property if you're going to be depreciating the property, which is one of the requirements for depreciation. Example, you constructed a new building for use in your business and paid for grading, clearing, seeding, and planting bushes and trees. Some of the bushes and trees were planted right next to the building while others were planted around the outer border of the lot. So if you replaced the building, you would have to destroy the bushes and trees right next to it. So these bushes and trees are closely associated with the building, so they have a determinable useful life. So notice how you see how that kind of works. They're saying, well, they're trees and bushes. That's part of the land, you would think, generally. But because they're right next to the building and you'd have to tear them out, if you destroyed the building, then maybe you can have them have a depreciable life, which would generally be better than having to call them just land because then you might be able to get the expense of depreciation related to them. Therefore, you can depreciate them, add your other land preparation costs to the basis of your land because they have no determinable life and cannot be depreciated and you cannot depreciate them. Okay, accepted property. Even if the requirements explained in the preceding discussion are met, you cannot depreciate the following property. You've got property placed and serviced and disposed of in the same year. So you put it in there, it's supposed to be a long-term type of thing. If you disposed of it in the same year, it doesn't seem like it's a long-term thing. That's something funny happened in that case. So determining when property is placed and serviced is explained later. Equipment used to build capital improvements. So you must add otherwise allowable depreciation on the equipment during the period of construction. So basis construction to the basis of your improvements. See uniform capitalization rules. That's in publication 551. Section 197 intangibles. You must amortize these costs. Section 197 intangibles are discussed in detail in chapter 8 of publication 535. If you want to dive into them in more detail, intangible properties such as certain computer software that is not section 197 intangible property can be depreciated if it meets certain requirements. See intangible property later. So intangible property being property that has value, but it's not tangible, not something you could touch or kick or whatever, then can get a little bit more confusing, right? So now you're dealing with these intangible properties, some of which might have value to them due to like laws, for example. So certain term interests. Okay. So certain term interest in property. You cannot depreciate a term interest in property created or acquired after July 27 1989 for any period during which the remainder interest is held directly or indirectly by a person related to you. A term interest in property means a life interest in property and interest in property for a term of years or an income interest in trust. So now you've got, when you're thinking about property and the ownership of the property, you've got a bit of a confusion in terms of ownership of the property for a term kind of situation. So that kind of muddies up the waters in terms of what does it mean for ownership and therefore the related depreciation rules. All right. Basis, that's more of an unusual situation, of course. Basis adjustments. So if you would be allowed a depreciation deduction for a term interest in property, except that the holder of the remainder interest is related to you, you must generally reduce your basis in the term interest by any depreciation or amortization not allowed. If you held the remainder interest, you must generally increase your basis in that interest by the depreciation not allowed to the term interest holder. However, do not increase your basis for depreciation not allowed for periods during which either of the following situations apply. The term interest is held by an organization exempt from tax. The term interest is held by a non resident alien individual or foreign corporation and the income from the term interest is not effectively connected with the conduct of a trade or business in the United States. Exceptions. The above rules do not apply to the holder of a term interest and property acquired by gift, bequest or inheritance. They also do not apply to the holder of dividend rights that were separated from any stripped preferred stock if the rights were purchased after April 30, 1993, or to a person whose basis in the stock is determined by reference to the basis in the hands of the purchaser.