 Income tax 2022 2023 depreciation makers overview 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 then 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 could find on the IRS website irs.gov irs.gov looking at the income tax formula we're focused on line 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 8 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 cashed based system you will have to do an accrual based type thing when you purchase property plants 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 cashed 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 alright so now our focus is figuring depreciation under makers now that's going to be one of the general kind of conceptual frameworks for calculated 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 declining 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 total and external 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 that's just something to keep in mind when talking to your tax professional or doing taxes and kind of integrate in the bookkeeping side of it alright 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 and 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 3 of form 4562 to report depreciation using makers complete section B of part 3 to report depreciation using GDS and complete select section C of part 3 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 3 okay required use of ADS you must use ADS this is the deviation when we have to use ADS when 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 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 ADS 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 so electing ADS so again this would be deviating from the the general stamp standard to the ADS doing it this time not because you're required to but because you're electing to do that although your property may qualify for GDS you can't elect to use ADS the elect the election must generally cover all property in the same property class that you placed in service during the year so you got it you can't you have to kind of be somewhat uniform within that year however the election for residential property and non-residential real property can be made on a property by property basis once you make this election you can never revoke it which kind of makes sense because we're trying to depreciate something over its useful life so you would think that you're going to kind of lock into it and you can't really kind of deviate from depreciation method once you're once you're going so you want to make sure that you make any elections you want to make in the first year generally you make the election by completing form four five six two part three line 20 so which property class applies under GDS the following is a list of nine property classifications under GDS and examples of the types of property included in each class so note this is a little bit different once again then you might be used to if you do accounting for generally accepted accounting principles because for the tax code they're going to be much more strict in terms of this is the classes that you need to be classifying things under because again the incentives are different with regards to taxes and people have an incentive to try to increase the the deductions upfront for the taxes so they kind of have to be more strict in terms of what you can do with them so so these property classes are also listed under column a in section b of part three of form four five six two so you could check them out there for reference when you're working on taxes take a look at the form four five six two to look at the classes for detailed information on property classes see appendix b table of class lives and recovery periods in this publication so you've got then one you've got the three-year property so three-year property includes a tractor units for over-the-road use b any racehorse over two years old when placed in service so i like to deal with that horse flesh myself at the old track any case see any other horse other than a racehorse over 12 years old when placed in service qualified rent to own property defined later and then we have five-year property five-year property automobiles taxis buses and trucks any qualified technical equipment office machinery such as typewriters calculators and copiers so this is a common property type number of property years so then we have d any property used in research and experimentation and breeding cattle and dairy dairy cattle appliances carpets furniture etc used in a residential rental real estate activity certain geothermal solar and wind energy property and finally any machinery equipment other than any grain bin cotton uh ginning asset fence or other land improvement used in a farming business and placed in service after 2017 in tax years ending after 2017 the original use of the property must begin with you after 2017 then we have another common categorization of seven-year property that includes office furniture and fixtures such as desks files and safes we have used agricultural machinery and equipment placed in service after 2017 grain bins cotton ginning assets or fences used in farming business but no other land improvements you got railroad track any property that does not have a class life and has not been designated by law as being in any other class now you can see obviously the iris has this need to try to be more stringent about classifications here uh so that people don't kind of take advantage and try to get more deductions you know upfront and whatnot but clearly they can't list every single thing imaginable so you've got this kind of bucket group that you would expect to be happening in some cases you might have that gray area where you're trying to determine if something should be three year five year seven year and sometimes you can find that directly in the code here uh in the publications and whatnot and sometimes you would need to do more research possibly uh on that so so in any case certain motorsports entertainment complex property defined later and finally any natural gas gathering line placed in service after april 11 2005 see natural gas gathering line and electric transmission property later