M3A1: Depreciation and Nontaxable Property Discussion

1. M3A1 Depreciation and Nontaxable Property

Gary Ray posted Feb 25, 2018 5:04 PM

Cost recovery benefits a company by the after-tax cost in which the time period of an asset depreciates and the company capitalize of the depreciation of the assets. In the case of depreciation, the method only applies to the Lose value over time because of wear and tear, physical deterioration, or obsolescence and a reasonably ascertainable useful life. In a recovery period congress decides to refine the act to the Modified Accelerated Cost Recovery System (MACRS) in 1981. This act defined all assets to a x number of periods that the assets will depreciate. The period of declining of tangible good help to define the depreciation method and help with the understanding of how the taxpayers depreciate assets overtime. The requirements of a nontaxable exchange property are the fact of exchange of similar properties with another company. The properties that can be swapped without taxes are based on the requirements of the IRC section of corporate taxes. If money is involved with the transaction, then in some cases the gains or loss can be deferred. If a firm's asset fair market value is higher than the basis and the firm that is swapping assets fair market value is higher than its basis but lower than the other firm than the firm that must give x amount of dollars may be realized as a loss and may be able to defer payments to future years of taxation. Now, the firm that receiving the cash is receiving a boot. The boot is not nontaxable exchange because money is received from the firm with the higher fair market value. If the firm received a large amount with in the swap, then the it would be in the best interest of the firm to receive the boot even though the firm would have to pay taxes on the boot received.

Reference

Sally Jones, Shelly Rhoades-catanach (1997) principle of taxation for business and investment. retrieve. https://digitalbookshelf.argosy.edu/#/books/1259562867/cfi/6/16!/4/2/2@0:0 

2. M3A1 Depreciation and Nontaxable Property

Christopher Copenhaver posted Feb 25, 2018 8:42 AM

Adjust automatic marking as read setting

Depreciation is an income tax that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration or obsolescence of the property. Depreciation is allowed for most tangible assets that are used in a trade or business or held for the production of income and that have a useful life greater than one year, including realty, which is land or buildings or other permanent structures on land, and personalty, which includes all other tangible assets.  An example of this is say you bought a computer in 20017 for $5000.00 less the depreciation of $1000.00 taken in 2017 leaves a net income of $4000.00 and it increases your assets on your balance sheet by the same $4000.00. Any third party looking t the business’ financial statements likes to see an increased net income and an increase in assets over liabilities.

The requirements to qualify for a nontaxable exchange of property include; the form of the transaction is an exchange, both the property that is being transferred and that is being received is equally held either for purposes of productivity in a set trade or business or investments. The taxpayer should be able to meet the specific timing requirements.

 A company may opt out of qualifying for the nontaxable exchange if it is the event of the conception of the set independent company. This can either be through the process of selling or distribution of the new shares of the current firm. An example would be that if you owned your own land and was selling it for $120,000.00 and the land has depreciated in value to $95,000.00 You ask $95,000.00 for the fair market value of the land but Johnnie from another company purchases the land for $100,000.00.

 

Murray, Jean. August 30, 2017. How Depreciation benefits your business. Retrieved from https://www.thebalance.com/depreciation-benefits-business-397882

Internal Revenue Service. (2018, February 13). A brief overview of depreciation. Retrieved from https://www.irs.gov/businesses/small-businesses-self-employed/a-brief-overview-of-depreciation

 

Internal Revenue Service. (2017, February 9). Sales and other dispositions of assets. Retrieved from https://www.irs.gov/pub/irs-pdf/p544.pdf