1. All Rights of Use and Reproduction Reserved
Copyright © 2016 Marks Paneth LLP
ACCELERATED COST RECOVERY
DEPRECIATION REFRESHER
Michael W. Hurwitz, CPA, MST
January 17, 2017

2. CAPITALIZED COSTS V. PERIODIC OPERATING EXPENSES
BALANCE SHEET V. INCOME STATEMENT
2
WHAT ARE WE TALKING ABOUT TODAY?
• Operating expenses (do not increase value)
• Abandoned dead deal costs
• Natural resources
• Organizational and start-up costs (180 months)
• Acquisition costs
• Lease termination fees
• Betterment, restoration or adaptation (repair regulations)
Property that is depreciated is tangible property used in a trade or
business or held for the production of income that has a determinable
exhaustible useful life!

3. DEPRECIATION – MAJOR LEGISLATION
INTERNAL REVENUE CODE SECTION 168
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• Before 1981, tax depreciation methods closely resembled financial
accounting methods which required businesses to determine “Salvage
Values” and “Useful Lives”.
• In 1981, Accelerated Cost Recovery System (ACRS) was introduced to
depreciate assets over predetermined, fixed recovery periods.
• Pursuant to the Tax Reform Act of 1986, today businesses calculate their
tax depreciation using the Modified Accelerated Cost Recovery (MACRS).
Consider looking over Publication 946 (How to Depreciate Property) for a
complete discussion on MACRS; not applicable to assets placed in service
pre-1987!

4. DEPRECIATION - SOME TERMINOLOGY
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• Cost recovery [tax purpose]
• Adjusted tax basis - depreciation expense and rolling of assets
• New Repair Regulations - finalized on 9/17/2013
• Section 1245 Property: 1/2 year or mid 1/4 convention for personal property
• Section 1250 Property: straight-line mid-month for real property
• Depreciation methods
• Immediate expensing - Section 179 expense
• Bonus depreciation
• Cost segregation studies
Revenue Procedure 87-56; a detailed list of recovery classes, class lives and periods
assigned to property added by the Tax Reform Act of 1986!

5. COST RECOVERY
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Businesses must capitalize certain costs / expenditures for assets with
useful life of more than one year onto the balance sheet rather than to
expense the costs currently on the income statement. Different methods to
recover theses costs apply to different assets (depends on the nature of the
underlying asset.
• Depreciation: deducting the cost of tangible personal (Section 1245)
and real (Section 1250; other than land) property over a specific
period of time.
• Amortization: deducting the cost of intangible personal and real
property (other than land) over a specific period of time.
• Depletion: deducting the cost of natural resources over time.
Business use these methods to recover cost of assets due to wear, tear and
obsolescence of assets.

6. ADJUSTED TAX BASIS
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• Once the use of purchased assets is started / it’s placed in service,
recouping the cost of assets also begins.
• Cost basis is reduced when cost is recovered through cost recovery
deductions; the assets adjusted basis and / or net tax basis remains.
• Assets adjusted basis equals the assets initial cost or historical basis plus
additions minus accumulated depreciation (amortization or depletion) and
dispositions.
Who maintains and tracks detailed schedules [cost basis and accumulated
depreciation]? Why is this important?!?

7. ADJUSTED TAX BASIS
7
To compute MACRS depreciation expense for an asset, the following
information needs to be known:
1. asset’s original / initial cost basis,
2. applicable depreciation method,
3. asset’s recovery period (or depreciable life), and the
4. applicable depreciation convention

8. REPAIR REGULATIONS
8
IRC Section 162 allows one to deduct all the ordinary and necessary
expenses you incur during the taxable year in carrying on your trade or
business, including the costs of certain materials, supplies, repairs, and
maintenance. That said, IRC Section 263(a) requires you to capitalize the
costs of acquiring, producing, and improving tangible property, regardless of
the size or the cost incurred. The tax law has long required you to determine
whether expenditures related to tangible property are currently deductible
business expenses or non-deductible capital expenditures. The final tangibles
regulations (commonly referred to as the Repair Regulations) combine the
existing case law, prior administrative rulings and other authorities into a
framework to help taxpayers determine whether certain costs / expenditures
are currently deductible or must be capitalized and recovered through
depreciation. The final tangibles regulations contain several simplifying
provisions that are elective and prospective in application.

9. REPAIR REGULATIONS
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• De Minimis safe harbor election; Notice 2015-82 increased threshold from
$500 to $2,500 per item without applicable financial statements (in
accordance with clients written accounting procedures – policy) / yearly
statement is to be incorporated in the federal filing: Section 1.263(a)-1(f)
• Yearly election to utilize the safe harbor for small taxpayers [gross receipts
less than $10M, buildings unadjusted tax basis is $1M or less and the cost
of expenditures do not exceed the lesser of 2% of the basis of the eligible
property or $10K] - - I do not see this being applicable for our landlord
• Election to capitalize repairs and maintenance costs in accordance with the
taxpayers books and records [administrative convenience]
• Not required to capitalize routine maintenance expenditures

10. REPAIR REGULATIONS
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The improvement analysis for distinguishing a capital improvement from a
deductible repair applies to the building structure and each of the key building
systems (unit of property). The key building systems are the:
1. plumbing system,
2. electrical system,
3. HVAC system,
4. elevator system,
5. escalator system,
6. fire protection and alarm system,
7. gas distribution system, and
8. the security system
Let’s discuss lobby’s, roofs, parking lots and the outer building shell!

11. REPAIR REGULATIONS
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A unit of tangible property is improved only if the amounts paid is for :
1. A betterment pursuant to Treasury Regulation Section 1.263(a)-3(j)
2. A restoration pursuant to Treasury Regulation Section 1.263(a)-3(k) or
3. An adaptation pursuant to Treasury Regulation Section 1.263(a)-3(l)
Review the definitions of these words…

12. DEPRECIATION METHODS
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Depreciation Methods: three acceptable methods for depreciating property
1. 200 percent (double) declining balance (personal property - Section 1245
/ class life’s of 3, 5, 7 and 10 years): applicable for all tangible property
such as computers, automobiles, furniture, machinery and equipment,
other than real property; note: personal property (not real property) and
personal use property (used for personal purposes) not the same!
2. 150 percent declining balance (land improvements / class life of 15 years)
3. straight-line (real property - Section 1250: both commercial and residential
of class life’s of 39 years and 27.5 years, respectively)

13. DEPRECIATION: PERSONAL PROPERTY
HALF-YEAR CONVENTION
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• Half year’s depreciation expense is allowed in first and last year of an
asset’s life.
• The IRS depreciation tables automatically account for the half-year
convention.
• If an asset is disposed of before it is fully depreciated, only one-half of
the table’s applicable depreciation percentage is allowed in the year of
disposition.

14. DEPRECIATION: PERSONAL PROPERTY
MID-QUARTER CONVENTION
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Steps to determine whether the mid–quarter convention applies
1st add up the total basis of tangible personal property that was placed in
service during the entire year;
2nd add up the total basis of tangible personal property that was placed in
service during the 4th quarter of the year;
Divide step (2) by step (1); if the quotient is more than 40%; then the
business must use the mid-quarter convention!

15. DEPRECIATION: REAL PROPERTY
MID-MONTH CONVENTION
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Real Property uses the mid-month convention which required using a
straight line method over specific number of years:
• Residential real property is recovered over 27.5 years
• Nonresidential real property is recovered over 39 years*
Note * property placed in service post May 13, 1993 is recovered over 39
years; property placed in service prior to said date is recovered over 31.5
years (have any of you seen assets being recovered over 31.5 years)?

16. IMMEDIATE EXPENSING
IRC SECTION 179 DEDUCTION
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The Protecting Americans from Tax Hikes (the PATH Act) was passed and
signed into law on December 18, 2015. This bill expanded and made
permanent the Section 179 deduction to $500,000. This amount will be
indexed to inflation in $10,000 increments in future years. Taxpayers
exceeding a total of $2 million of purchases of qualifying property have the
deduction phased-out dollar-for-dollar and completely eliminated above
$2.5 million. Qualifying property must be purchased and put into service
during the year in which the deduction is being taken. Qualifying property
includes, machinery, office furniture, equipment, computers, software and
even property attached to the building as long as it’s not a structural
component of the building.

17. BONUS DEPRECIATION
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To stimulate the economy, policy makers occasionally implement bonus
depreciation; an incentive for taxpayers to purchase assets. The PATH Act
also extends bonus depreciation for property placed in service through
2019*. Bonus Depreciation is a method of accelerated depreciation which
allows a taxpayer to take an additional deduction of 50% (for 2016) of the
cost of qualifying property that meet the following requirements:
• New MACRS property with recover period of 20 years
• Qualified improvement property {replaced qualified leasehold
improvement property however, its a much broader definition}
• Original use must begin with the taxpayer and
• Placed in service before January 1, 2020
* The bonus deduction amount will be at 50% 2017, reduced to 40% for
2018 and further reduced to 30% for 2019.

18. DEPRECIATION AND AMORTIZATION
AN ANNUAL DEDUCTION ON FEDERAL FORM 4562
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19. DEPRECIATION SAMPLE TABLE
HALF-YEAR CONVENTION
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20. DEPRECIATION SAMPLE TABLE
MID-QUARTER CONVENTION – 4TH
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21. DEPRECIATION SAMPLE TABLE
MID-QUARTER CONVENTION – 1ST
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22. DEPRECIATION SAMPLE TABLE
STRAIGHT LINE – 27.5 YEARS [RESIDENTIAL PROPERTY]
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23. EXAMPLES: CALCULATING DEPRECIATION
INPUTTING INFORMATION INTO PROFX
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Input and calculate depreciation in ProFX for current acquisitions:
1) Various personal property placed in service throughout the year
[$10,000 furniture in January and $10,000 furniture in August]
2) An A+ residential office building in NYC
[40,000,000 in March]
3) Demonstrate the Section 179 deduction
[$25,000 equipment in January]
4) Demonstrate the bonus depreciation
[$150,000 in September]

24. EXAMPLES: CALCULATING DEPRECIATION
PROFX OUTPUT OF INFORMATION
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25. EXAMPLES: CALCULATING DEPRECIATION
FEDERAL FORM 4562
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26. COST SEGREGATION STUDIES
WHAT ARE THEY?
26
The process of identifying personal property assets that are grouped in with
real property assets; the goal of which is to reclassifying these costs to
ultimately accelerate current depreciation deductions!
Advantages:
• Enhanced depreciation benefits (more deductions sooner than later)
• Front loads depreciation
• Time value money
• Easily identifies assets to be written-off
Disadvantages:
• Cost of study
• Early disposition of property triggers recapture of tax benefits
• Improper engineering studies- severe tax penalties

27. COST SEGREGATION STUDIES
PROPERTY ELIGIBILITY
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Includes buildings purchased or constructed, expanded or remodeled since
1987; most efficient for newly constructed buildings; many time results
uncover retroactive tax deductions from older assets…
Properties eligible for cost segregation study:
1 - Hotels
2 - Nursing Homes
3 - Office Buildings
4 - Shopping Centers
5 - Apartment Complexes
6 - the list goes on…

28. All Rights of Use and Reproduction Reserved
Copyright © 2016 Marks Paneth LLP
ACCELERATED COST RECOVERY
DEPRECIATION REFRESHER
Michael W. Hurwitz, CPA, MST
January 17, 2017