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Checking a Depreciation Calculation


carolynm

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I have a client who bought a vehicle in 2003 for $42,000, it wasn't subject to restrictions and they elected to claim a SEC 179 deduction of $30,000 that year.

Business use has been 90% up until 2005 (yes I'm doing a 2005 return), when it dropped to 55%.

When I enter the miles etc. ATX is not computing and depreciation in 2005 because it is calculating .55x42,000 =21,000 then looking at the SEC 179 of $30,000 and telling me there is no remaining basis. I'm thinking this is wrong. The 2005 use is 55% but 2004 and 2003 were 90%. It should have a remaining basis at the end of 2004 and that's my start for 2005 no matter what my new business use is.

I'm overriding the fields to calculate a depreciation and just thought I'd double check that I'm not missing something here.

Thanks all, glad to see THIS board is still going strong.

Carolyn

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>>it is calculating .55x42,000 =21,000 then looking at the SEC 179 of $30,000<<

That doesn't sound right. Did you proforma from one year to the next? But I don't see much basis for 2005 anyway, assuming double declining balance (regular MACRS) half year convention purchased after 5/5/03.

First there was $30,000 Sec. 179, leaving $12000 basis. 90% of that is $10800. Half went to bonus depreciation, leaving $5400. 20% of that in the first year was a $1080 deduction.

In the second year, subtracting the $5400 and the $1080 from the original $12000 leaves $5520, and 90% of that is $4968. The second year of DDB is 40%, or $1987 deduction for 2004.

That leaves an unrecovered basis of $3533, and 55% of that is only $1943.

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Thanks for the reply -there was no bonus depreciation taken (this truck was bought right at the beginning of the 2003). So there was $10,800 left over at the end 0f 2003.

So would the following be correct:

2003: 10,800x.2=2160x.9=1944

2004: 10800x.32=3456x.9=3110

2005: 10800x.192=2074x.55=1141

ATX calculated 0 depreciation in 2005 and I get the above. Can someone stick the numbers in their program and let me know what result you get? I find this perturbing.

Thanks

Carolyn

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>>stick the numbers in their program and let me know what result you get<<

Unless you have a good understanding of what algorithms your particular software uses, you can't just "stick the numbers in."

For one thing, bonus depreciation was mandatory (30% before May), unless there was a formal opt-out election attached to the 2003 return. The software may not know whether it was or should have been taken. It also may not know whether the vehicle is subject to depreciation limits

The way Double Declining Balance works is the prior deductions are subtracted from the deductible basis each year. You will get a different answer depending on whether you apply the 90% to the adjusted basis and then take twice the straight line amount, or apply it to the deduction amount derived from the MACRS table percentage. As far as I know, NO software uses the tables.

You and I both started the depreciation schedule from $10800. But according to Pub 946, you must apply the 90% business-use percentage BEFORE taking Section 179, so the depreciable basis for 2003 was actually only $7800. In that IRS interpretation, you have indeed already deducted more than 55% of the original basis, and there is nothing more available for 2005 when the business usage dropped.

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Unless you have a good understanding of what algorithms your particular software uses, you can't just "stick the numbers in."

I agree wholeheartedly here. And when I do have to override something it makes me questions what I'm doing hence this post. I just was wondering if I am entering something wrong, or if the program is calculating something wrong..or I am not calculating something correctly.

You and I both started the depreciation schedule from $10800. But according to Pub 946, you must apply the 90% business-use percentage BEFORE taking Section 179, so the depreciable basis for 2003 was actually only $7800

Yes you're right basis would be $7800 for 2003.

In that IRS interpretation, you have indeed already deducted more than 55% of the original basis, and there is nothing more available for 2005 when the business usage dropped.

And this is where I'm not sure I understand the rules.. Business use declined to 55% in 2006, so do we have to recalculate the Sec 179 limit using the 06 percentage? I know if we did fall to 50% or below we'd have to recapture excess sec 179.

So is this what is going on:

$42000x.55=23100

Oops we've already taken $30,000 in SEc 179 so are not allowed depreciation?

I think I may be beginning to see the light on this...

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>>I think I may be beginning to see the light on this...<<

I started the same way as you, using different math but the same assumptions. It was when I noticed that Quickfinder took the business percentage first, before any other calculation, that I turned to Pub 946. I don't usually rely on the pubs but I was hoping they had an example. They didn't but they did have an ordered list that showed what they wanted.

It does make sense. Here's an asset with an un-adjusted basis of $23100 for 2005. Basis reductions (but not below zero) include Section 179 and depreciation allowed or allowable. That's all there is; there ain't no more.

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