 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 focused online, one income, remember in the first half of the income tax formula, in essence, an income statement, although just an outline, other forms and schedules flowing into these line items. One of those, the Schedule C, having business income minus business expenses, giving the business net income flowing from the Schedule C to line one of income on the income tax formula. Looking at the page one of the Form 1040, remember in the Schedule C, we'll flow into the Schedule 1, flowing into page one of Form 1040, line number eight. The Schedule C is a profit or loss from business outlined in an income statement format, having income and expense sections. We're focused on the expense side of things and more precisely on the depreciation side of things. Remembering that even if you're on a cash-based system, you will generally have to deviate to an accrual concept when it comes to property, plant and equipment, depreciable assets. And now we're focusing in on those main categorizations of depreciable assets, generally those makers standards. And we have to layer on top of that the concepts of using say, 179 deductions and the special depreciation which we talked about in prior presentations. Okay, so how is depreciation deduction figured in any case then? To figure your depreciation deduction under makers, which is the standard depreciation kind of method, you first determine the depreciation system, property class, placed in service date, basis amount, recovery period, convention and depreciation method to apply to your property. That sounds quite complex, but it's really if you have some concept of depreciation like a straight line type of method as your baseline of what you're doing and then you alter that to comply with the tax code, it's not too bad really. So you're gonna first determine the depreciation system that you're going to be using. So normally if you're in practice you're usually gonna be saying, okay, here's this item, can I just expense it at this point in time as supplies or something? Or do I have to put it on the books as a depreciable asset? If you have to put it on the books as a depreciable asset, then you gotta think about what kind of depreciation system you're going to be using. Oftentimes most types of equipment are gonna be like a maker's depreciation system. Oftentimes the property class, because remember that you do not have as much leeway as you would under a bookkeeping kind of system or even generally accepted accounting principles from the accounting side to choose the life span that you're gonna depreciate over or the method that you're going to use, you have to fall into the categories of the tax code and that in part is due to the incentives being different for taxes than financial reporting purposes. Our goal is to lower our taxes as much as possible which means we wanna depreciate as much upfront as we can as a general rule. So we gotta find what class our property falls into. Placed in service dates, so we need to know when we put it in service close to when we bought it oftentimes but when we put the thing in service, the basis amount, in essence the cost of it basically because that's the cost that we're gonna be allocating over that's the more simplified term for basis but it could be a little bit more complex in certain cases but the general idea. And then the recovery period which is going to be determined in part by the property type, the property class because that's gonna be dictated to us in terms of the system we used and the property class that we're gonna have. So how long, how many years are we gonna depreciate this over? And then the convention which also is basically gonna be dictated by the conditions in place that we've chosen before meaning is it half year, is it mid month, is it mid quarter and depreciation method that will apply to double declining 150% or the straight line oftentimes we're gonna choose the default which will be the highest depreciation method that we can take which would be the double declining if we have access to that usually and then there's 179 special that kind of tops on top of that. All right, so then you are ready to figure your depreciation deduction. All right, tax software helps with this of course. You can figure it using percentage tables provided by IRS or you can figure it yourself without using the tables. Again, software is usually gonna be necessary when we get depreciable items because they'll help us to track those depreciable items on a fixed assets worksheet depreciation schedules. So using makers percentage table to help you figure your depreciation under makers the IRS has established percentage tables that incorporate the applicable convention. And depreciation method, these percentage tables are in appendage A near the end of this publication. Sometimes that's useful to kind of project out into the future if you're trying to think about whether you're gonna use say double declining or whether you're gonna use a straight line if you wanna change the convention or something like that as opposed to just picking the default of double declining and hopefully helping the software helping you to calculate it because the tables help you to kind of see out into the future possibly a little bit more clearly than software unless you have software designed specifically for projections. All right, which table to use? Appendix A contains the makers percentage table guide which is designed to help you locate the correct percentage table to use for depreciating your property. The percentage tables immediately follow the guide. So rules covering the use of the tables the following rules cover the use of the percentage tables. Number one, you must apply the rates and the percentage tables to your property on an adjusted basis. Number two, you cannot use the percentage tables for a short tax year. See figure in the deduction for a short tax year later for information on the short tax year rules. Number three, once you start using the percentage tables for any item of property, you must generally continue to use them for the entire recovery period of the property consistency. Once again, being a standard rule for tax as well as accounting in general. Four, you must stop using the tables if you adjust the basis of the property for any reason other than A, depreciation allowed or allowable or B, an addition or improvement to that property that is depreciated as a separate item of property. All right, basis adjustments other than those made due to the items listed in four include an increase in basis for the recapture of a clean fuel deduction or credit and a reduction in basis for a casualty loss. So those are kind of more unusual type of situations where you might have some other benefit that is happening and you might have some interplay like we saw in prior presentations between the basis, the adjusted cost that you're allocating the basis being something that you're gonna get a deduction for hopefully at some point in the future. And then if they give you some other benefit like a credit or something, that could adjust the basis. Otherwise you'd kind of be double dipping, getting an expense and a credit. All right, so basis adjustments due to recapture of clean fuel vehicle deduction or credit. I'm not gonna go into that in detail because it's somewhat of an unusual situation. Depreciation methods. So you got the GDS, the methods using 200% double declining. So notice this is gonna be a maker's depreciation. The GDS under makers, 200% DB is that double declining, that accelerated method. The one by default we would typically be using generally. So types of property, non-form, three, five, seven and 10 year property. So that's some of the more common ones right there. And then the form, three, five, seven and 10 year property there. Benefit provides a greater deduction during the earlier years, which is what we want. That's why we're gonna do it for the default on our side for the taxpayer. Usually that's the benefit. Changes to straight line when that method provides an equal or greater deduction. Meaning if you calculate the double declining balance, it's kind of a funny calculation because you're kind of taking the straight line method and doubling it and then using a double declining percent instead of a straight line percent, which doesn't work out to be perfect. So then you kind of at the tail end of the depreciation system, you kind of convert, you might convert back to straight line to get it to fully depreciate exactly evenly by the end point, which is a little strange, but it works.