University:
California State University, Northridge
Course:
MSE 300 | Engineering Technology Economy
Academic year:

2024
Views:

259

Pages:

33
Author:

Gewitzelb5a

Construction Accounting and Financial Management Chapter 05 Depreciation Use of Depreciation • Financial statements • Cost allocation of equipment • Taxes Variables (1 of 2) • P = Purchase price • F = Salvage Value – Zero for tax purposes • N = Recovery period (years) – Set by code for tax purposes Variables (2 of 2) • Rm = Percentage of depreciation taken in year m • Dm = Depreciation for year m • BVm = Book value at the end of year m – Book value equals the purchase price less the depreciation recorded to date Straight-Line (1 of 3) • Depreciates uniformly over the life of the asset • Annual depreciation P−F Dm = N Straight-Line (2 of 3) • Book Value BVm= P − m(Dm ) -or= BVm BVm−1 − Dm Straight-Line (3 of 3) Table 5.1 Depreciation Schedule for Example 5-1 Sum-of-the-Years (1 of 3) • Accelerates depreciation • Annual depreciation D= (P − F )Rm m (N − m + 1) Rm = SOY N (N + 1) SOY = 2 Sum-of-the-Years (2 of 3) • Book Value BVm BVm−1 − Dm = Sum-of-the-Years (3 of 3) Table 5.2 Depreciation Schedule for Example 5-2 Declining-Balance Method (1 of 2) • Accelerates depreciation • Annual depreciation Dm = (BVm−1 )Rm  Rm = 2.00/N for 200% declining-balance  Rm = 1.50/N for 150% declining-balance • Book Value = BVm BVm−1 − Dm Declining-Balance Method (2 of 2) • Does not automatically reach salvage value • Must stop depreciation at salvage value when book value goes below salvage value - or • Must switch to straight-line depreciation when the straightline depreciation for the remaining years is greater than declining-balance depreciation Stopping at Salvage Value ($20,000) Figure 5.2 Stopping the Declining-Balance Depreciation at the Salvage Value Switching to Straight Line (F = 0) Figure 5.1 Switching to Straight-Line Depreciation When Straight-Line Depreciation Exceeds Declining-Balance Depreciation 200% Declining-Balance Method Table 5.3 Depreciation Schedule for Example 5-3 Comparison of Methods Figure 5.3 Comparison of Depreciation Methods MACRS • Modified accelerated cost recovery system • The IRS’s rules for depreciation • Depreciation methods used: – 200% declining balance – 150% declining balance – Straight line • Includes rules for placing and removing assets from service Placing in Service • Half-year – General rule • Mid-quarter – Must use when placing 40% or more of assets in service during the last quarter • Mid-month – For real estate Midquarter Convention Table 5-4 Depreciation Percentages for the Midquarter Convention Midmonth Convention Table 5.5 Depreciation Percentages for the Midmonth Convention IRS Recovery Periods (1 of 2) • Three-year: Rent-to-own property and tractors • Five-year: Automobiles, light general propose trucks, calculators, copiers, computer equipment, concrete trucks, heavy general purpose trucks, trailers, and other construction assets • Seven-year: Office furniture, office equipment, and railroad tracks • Ten-year: Vessels, barges, tugs, and other water transportation equipment • Fifteen-year: Retail motor fuel outlets IRS Recovery Periods (2 of 2) • Twenty-year: Farm buildings • Twenty-five-year: Municipal sewers, water treatment plants, and water distribution lines • Twenty-seven-and-a-half-year: Residential real estate where more than 80% of the rent is derived from the dwelling units • Thirty-nine-year: Non-residential real estate • Fifty-year: Railroad roadbeds, right-of-ways, and tunnels Use of Depreciation Tables (1 of 2) • Find correct table • Find correct recovery period for asset across top of table • Percentages are percentage of asset value depreciated during the year – not the percent of the previous year’s book value Use of Depreciation Tables (2 of 2) Table 5.6 Depreciation Rates for 200% Declining Balance Using the Half-Year Convention Commercial Building Depreciation Table 5-14 Depreciation Schedule for Example 5-6 Cost Segregation (1 of 4) • IRS allows building costs to be segregated by recovery period • Accelerates depreciation • Requires cost segregation study Cost Segregation (2 of 4) • Group into four classes – Personal property (5 or 7 year) – Land improvements (15-year recovery period and 150% declining balance) – Building (39 or 27.5 years) – Land (cannot depreciate) Cost Segregation (3 of 4) • Personal property – Equipment specific for the operation of the business, but not the operation of the building – Furnishings (e.g., restaurant booths, counters) – Interior theme décor – Decorative light fixtures – Strippable wallpaper and floorcovering – MEP that services equipment classified as personal property Cost Segregation (4 of 4) • Land improvements – Roads, parking lots, curbs and gutters, sidewalks, fencing, monument signs, light poles, freestanding waste receptacles • Building – Everything not classified elsewhere • Land – Purchase of the land – Clearing, grubbing, and landscaping not associated with land improvements or building Bonus Depreciation (1 of 2) • Allows companies to write off qualified property – 100% September 28, 2017 to 2022 – 80% in 2023 – 60% in 2024 – 40% in 2025 – 20% in 2026 – 0% in 2027 and beyond Bonus Depreciation (2 of 2) • Qualified property – MACRS property with a recovery period of 20 years or less (computer systems, vehicles, machinery, equipment, office furniture, etc.) – Software – Qualified improvement property (improvements to the interior portions of a nonresidential building except improvement that enlarge the building, addition of an elevator or escalator, and modification to the structural framework) Section 179 • Can expense up to $1,000,000 of equipment without depreciation • Deduction is reduced if you place more than $2,500,000 of Section 179 property in service during the year • Amounts adjusted for inflation annually Tax vs Financial Depreciation Figure 5.4 Book Values Comparison for Examples 5-4 and 5-8

Chapter 05. Depreciation

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