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Depreciation and Expensing Rules

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Depreciation and Expensing Rules

Depreciation and Expensing Rules


General rules for depreciation of business or rental property
 
  
Real property can be depreciated over the following lives and methods:
  

Description
Life in years
Fastest Method
Optional method
Commercial buildings
39
Straight Line
N/A
Residential buildings
27.5
Straight Line
N/A
Land improvements
15
150% of straight line
Straight line

  
  
Personal property is defined as property that is not real property.  Common lives and methods for personal property other than automobiles and trucks are:
  

Description
Life in years
Fastest Method
Optional method
Computers
5
200% of straight line
Straight line
Assets used in rentals
5
200% of straight line
Straight line
Office equipment
7
200% of straight line
Straight line

  
Automobiles and trucks are depreciated similar to other personal property; however, there are limitations on the amount of the depreciation that can be claimed in any year. For 2008 those limitations on a $30,000 vehicle (based on 100% business use) are:
  
  

  
Light car
Light truck
SUV/Truck over 6,000 pounds
Fastest Method
Optional method
2008
2,960
3,160
6,000
200% of straight line
Straight line
2009
4,800
5,100
9,600
  
  
2010
2,850
3,050
5,760
  
  
2011
1,775
1,875
3,456
  
  

  
For 2008 only, 50% bonus depreciation is available with the following limits. Note that the first use of the property must be by you (cannot be used).
  

Description
Limit
Land improvements
No limit
Personal property (non-vehicle)
No limit
Light cars
7,800
Light trucks
8,000
Heavy truck / SUV (cost = $30,000)
12,000

  
Expensing of personal property (non-auto) is also allowed for 2008 up to a limit of $250,000 for all such personal property.  If either bonus depreciation or expensing is used, then the regular depreciation would be less because the bonus or expensing is deducted from the cost of the item before computing regular depreciation.
  
Depreciation under alternative minimum tax can be different with respect to both the life of the asset and the method.  Generally, alternative minimum tax depreciation is slower.  Both bonus depreciation and expensing are allowed for alternative minimum tax.
  
Rules for California and other state taxes are not identical to the federal rules.
  
Possible elections:
  • To use the optional straight line method instead of faster depreciation
  • To expense all or a portion of qualifying property
  • To take 50% bonus depreciation
  
Election not to use either bonus depreciation or expensing should be considered when:
  
  1. The current year tax benefit is less than expected future year tax benefit after considering the time value of money
  2. The asset is an auto (see below)
  
The election to use straight line depreciation instead of the 150% or 200% method should be considered when
  
  1. Alternative minimum tax is an issue
  2. The asset is an auto.  If any accelerated depreciation including bonus and expensing are used, then the vehicle deduction can never be based on the standard mileage rate and actual cost would have to be used in all future years.
  
Please call us if you have any questions about this election.
  

 

Morre & Company, LLP

Certified Public Accountants
1682 Novato Blvd, Suite 300
Novato, CA 94947
Phone: (415) 382-5600

Toll Free: (888) 414-7104
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Morre & Company, LLP 1682 Novato Blvd, Suite 300 Novato, CA  94947
Phone: (415) 382-5600 | Fax: (415) 382-5605
lpanichelli@morrecpa.com
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