 Income tax 2022-2023, depreciation, patents and copyrights, computer software and certain intangibles. 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 online one income. Remember in the first half of the income tax formula is in essence and income statement but just an outline of scaffolding other forms and schedules flowing into it for example the schedule C which is in essence an income statement in and of itself business income minus business expenses gives us the business net income would flow into line one income of our income tax formula. This is page one of a form 1040 where we can recognize that the schedule C would flow into the schedule one which would flow into line eight of the form 1040 schedule C profit or loss from business income statement format income minus expenses were focused here on the expenses in particular those related to depreciable property where we have to deviate from a cash based system even if we're using a cash based system doing and a cruel thing putting these items on the books as an asset allocating the cost or possibly amortizing the cost in the case of intangible assets over the useful life why because the tax code tells us that's what we have to do. Alright so patents and copyrights these were the ones that were deviations if you recall from prior presentations to the normal makers rules so most of the times when we talk about normal depreciable property property plants and equipment equipment for example we put it on the books usually using makers rules makers rules is going to be a format of double declining balance usually with like a half year convention or something like that but we have exceptions with other types of depreciable items or amortizable items intangible items oftentimes like patents and copyrights so if you can depreciate the cost of a patent or copyright use the straight line method over the useful life. Now the straight line method is like the standard or baseline method when you're thinking about any kind of depreciation in concept so in concept we would think okay what is the useful life of my patent or copyright which is a type of intangible asset that is given through law it's a legal kind of thing right that's why we have it we've got restrictions in place that are legal restrictions they're not physical they're not tangible things but they have value and so we can basically think how long are these things going to last they're going to end at some point in time possibly and so we can then try to take the value over the useful life so if I bought for example a patent or a copyright then I may have a good idea in that case in terms of how much I paid for it obviously which would hopefully be the market value you would think if it was an orange length transaction I know how long the patent or copyright might last and therefore I can take the cost divided by the years that it's going to be allocated to and then allocate the expense or amortization depreciation over the life that I'm getting a benefit from that asset would be the general idea notice that when we get to the makers depreciation and we look at accelerated depreciation methods the idea would be that we're going to get more depreciation in the first years than the latter years which could make sense even from an accounting standpoint not just a tax weirdness standpoint because if it was equipment you might get more benefit from the early years than the latter years if you're talking like a patent or a copyright that's not so true you might get the same benefit going forward depending on what the patent or copyright is for because if you didn't have the patent that's when you would think you'd get all the benefit upfront until other people you know got into the market or something like that right so so so straight line kind of makes sense conceptually but some reason we deviate from from something that makes sense conceptually isn't always that it doesn't make sense conceptually from an accounting standpoint like 179 deduction and special depreciation for example don't really make sense conceptually that's the government doing something weird to to stimulate the economy or something like that so the useful life of a patent or a copyright is the lesser of the life granted to it by the government or the remaining life when you acquired it however so obviously if the government granted it and you got it from the start then whatever the useful life is when you bought it clearly the life that is still remaining where the law is in place for the patent or copyright would be the useful life at the point in time you purchased it however if the patent or copyright becomes a value list before the end of its useful life you can deduct it you can deduct in that year any of its remaining costs or other bases so that would be kind of similar to a situation where you had a piece of equipment like we talked about in a prior presentation which you disposed of because it's no longer useful you just threw it away you still have bases in it that you didn't fully depreciate similar situation here you got a patent or copyright it became useful the patent or copyright became obsolete or something like that you're not getting any value from it anymore but you still have that basis that hadn't fully been depreciated so you might have a situation where you think you'd get a benefit from it at the point in time that it becomes obsolete considering it's you paid for it in the past and you're no longer allocating that cost to revenue in the future so computer software computer software is generally a section 197 intangible and cannot be depreciated if you acquire it in connection with the acquisition of assets constituting a business or a substantial part of a business so obviously computer software is becoming a bigger and bigger kind of issue for different kind of different kind of individuals as they start their businesses so you got to have the special rules with regards to computer software so however computer software is not a section 197 intangible and can be depreciated even if acquired in connection with the acquisition of a business if it meets all of the following tests so it is readily available for purchase by the general public it is subject to a non-exclusive license it has not been substantially modified so if the software meets the tests above it may also qualify for the section 179 deduction which is an accelerated type of deduction which we'll talk about later and the special depreciation allowance which is another kind of special depreciation deduction allowing you to get more of the deduction upfront so just as a general rule we think about the straight line as our baseline calculation make just from a conceptual standpoint meaning we're going to take the cost and we're going to allocate it over the useful life so that we consume we show the cost being consumed as an expense in the period that helped to generate revenue and then we deviate that either for bookkeeping sensible standpoints like an accelerated method because we get more use from a forklift in the first year than the last year or for reasons that aren't sensible from a bookkeeping standpoint but possibly from an economic standpoint or lawmaking standpoint like you want to stimulate the economy such as a 179 deduction front-loading massively or special depreciation front-loading massively the amount of depreciation you can take in the first year or so so that's discussed later we'll get into it if you can depreciate the cost of computer software use the straight line method over a useful life of 36 months so tax exempt use property subject to a lease the useful life of computer software leased leased under a lease agreement entered into after March 12 2024 for a tax exempt organization governmental unit or foreign person or entity other than partnership cannot be cannot be less than 125% of the lease term so certain created intangibles so you can amortize certain intangibles created on or before December 31st 2003 over a 15 year period using the straight line method and no salvage value so straight line method the standard method salvage value is considered to be the value at the end of the depreciation period so if it was a piece of equipment then you would think the salvage value at the end of a forklift for examples life of let's say five years or whatever it's still gonna have a salvage value at the end of that that time period which might be just scrapping the forklift or whatever so it's so then you can you can take that into consideration when you're calculating the straight line but we're saying no salvage value in this case even though they have a useful life that cannot be estimated with reasonable accuracy so for example amounts paid to acquire membership or privileges of of in defined duration such as trade association membership are eligible costs so the following are not eligible any intangible asset acquired from another person created financial interests any intangible asset that has a useful life that can be estimated with reasonable accuracy so any intangible asset that has an amortization period or limited useful life that is specifically prescribed or prohibited by the code regulations or other publication IRS guidance any amount paid to facility to facilitate an acquisition of a trade or business a change in the capital structure of a business entity and certain other transactions you must also increase the 15 year safe harbor amortization period to 25 year period for certain intangibles related to benefits arising from the provision production or improvement of real property so note just as a general rule that the tax code is kind of telling us what how many years we have to depreciate something over for example and oftentimes what method we have to be using if we were looking at a bookkeeping standpoint from like generally accepted accounting principles or something like that on the financial side of things we might have more leeway to choose how long we're going to depreciate something because our incentive structures not to try to reduce our taxes in that case but try to report accurately for decision-making purposes either internal or external so for tax purposes of course the shorter the duration of the depreciation the better usually because that means we get to depreciate more earlier as opposed to a longer duration which means we'd have to wait before we get to depreciate more that's just a general rule you want to kind of keep in mind and also as a general rule we would like to have accelerated depreciation methods as opposed to straight line method if we can get it because again that front loads the depreciation so we have the same life possibly but we're going to have far more depreciation in the beginning years than in the latter years and if we can depreciate everything up from in year one that's usually but not always beneficial why wouldn't it be beneficial because possibly it'll it'll it'll it'll change our progressive tax structure so it might be a case where in the following year for example we expect to have more income which means from a progressive tax system we're going to have higher rates and therefore it could be beneficial to to have more deduction in a following year in some cases you would think so for this purpose real property includes property that will remain attached to the real property for an indefinite period of time such as roads bridges tunnels pavements and pollution control facilities