: The total of all income from revenue producing sources.
: All the costs incurred by a corporation
in transaction of its
(TI) : The amount upon which
taxes are calculated.
TI = GI - E -Depreciation
: A % of TI owed in taxes.
GI = Business Revenue + Other
GI=Salaries & wages + Interest & dividends
+ Other Income
TI = Gross
TI = Gross Income-Personal
Standard Itemized Deductions
Tax = TI (Tax
Tax = TI (Tax Rate)
We are concerned
with corporate tax ramifications in this class. The higher the
operating expenses and depreciation, the lower the corporate
So, what is
The accounting for a reduction in value of an asset due to
age, wear and obsolescence.
Over its lifeHalf-year convention: Assumes assets are placed into
service or disposed of in mid-year regardless of when they really occurred.
- Use government approved rules, rates
- Depreciation Charge: Dt(For any year t)
Land is real property but not depreciable.
- First Cost (Unadjusted Basis)(B): Cost of the asset including purchase, delivery
- Book value (BVt): The remaining,
investment on the books after total depreciation to date has been subtracted
- Recovery Period (n): The depreciable
life of an asset for depreciation and tax purposes.
- Market value: Estimated amount if asset is sold on open
market. It may be more or less than BV.
- Depreciation Rate (Recovery Rate)(dt):
Fraction of first cost removed by depreciation each year.
- Salvage Value (S): Market value at end of useful life of
- Personal Property : Income producing, tangible possessions of a corporation
used to conduct business.
machinery, computers, office furniture, etc.
- Real Property : Real estate and improvements
- Straight line method (SL)
Since the book value decreases linearly over time, d = 1/n.
Any year 1/nth of the value will "elapse".
Hence Dt =
(B-Sv)d or (B-Sv)/n and the book value at any year is
BVt = B-tDt
Example: An asset with a first cost
of $80,000 has a salvage value of $20,000 after 6 years. What is the
depreciation each year and BV after each
S=$20,000 n =
d = 1/6 =
Dt = (B-S)d = (80,000-20,000)0.1667 =
Many conflicts between owner and IRS on
what is really S .
Dt = Amount deductible from GI.
As a check: BV3 =
B-tDt = $80,000
- 3(10,000) = $50,000
- Declining Balance
d = Fixed Percentage of BV at beginning of
The maximum rate allowed is twice the SL
value is used.
Thus, if n = 10 years, then d = 1/n = 1/10 = 0.10
If the maximum is used then d = 2(0.10%) = 0.20
- Double Declining Balance (DDB)
When twice d is used it is called the Double Declining Balance.
Since in DB or DDB, d is
applied at beginning of
d(1-d)t-1 --- Relative to 1st cost (B)
and the depreciation for any year is : Dt =
for any year is : BVt = B(1-d)t =
BVt-1-Dt = BVt-1-d(BVt-1)
Note that BV does not decline to 0. An implied salvage value exists
after n years of time.
Implied S = BVn =
And with an implied S, an implied d can be
Implied d = 1- (Implied S / B)1/n
Example: Again 1st cost = $80,000, SV = $20,000, N =
6years. Using DOB method, find :
1)Depreciation and book value after 2 years.
2)Implied SV6 usind DDB.
First find the DDB rate: d = 2(1/n) = 2/6 = 1/3 =
BV2 = B(1-d)t =
Implied SV = BVn = B(1-d)n =
But, SV =
$20,000 @ 6 years.
BVn is not equal
to SV BVn is the amount of worth due to
loss of value and
SV is the amount for which the item can actually be sold for.
If BVn < SV, then no
depreciation can be allowed after BVt goes less than SV.
Here is what would happen in our example when the
depreciation schedule is calculated.
It is rare that the SV is known for the end of an asset's life. We will see
what happens for the usual case in the
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Last updated: April 26, 2002.
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