Depreciation

[Kurly]

Question?

Can I interpret Actual Depreciation as Straight Line Depreciation and
accelerated depreciation as MACRS? This not an official method, but what I trying to tell my
nephew, who has painting business and a thick head.

Thanks

Kurly

[ATSMAN]

Question?

Can I interpret Actual Depreciation as Straight Line Depreciation and
accelerated depreciation as MACRS? This not an official method, but what I trying to tell my
nephew, who has painting business and a thick head.

Thanks

Kurly

Without knowing exactly where your nephew has the hangup (what depreciation is or various methods of depreciation) I would say:

After 1986 we are suppose to use the MACRS method. As you know MACRS is madeup of GDS and ADS systems.

The declining balance and straight line are both part of MACRS.

Show him table 4-1 in pub 946 to help him understand.

[Gary2]

If you're just trying to get off the ground explaining it to your nephew, you're going about it the wrong way. He doesn't care about jargon or acronyms. He's in the painting business, not the tax or bookkeeping business, though he will need to devote either time or money to both.

Instead, just tell him he has a choice between taking the deductions early or spreading it out over the "lifetime" of the item (where the IRS dictates the lifetime). If he expects his income to grow while the expenses remain flat, he may be better off spreading it out. But if he really needs the cash flow now, he may be better off taking the deduction now. (Don't forget the 179 and any bonus depreciation.) I'd suggest pointing out some of the risks if taking it sooner, such as having to recover any 179 deductions if it stops being business use, but many people starting out in business are blindly optimistic and won't give any thought to the possibility of failing within three years.

[ATSMAN]

What happens when assets are sold

Another thing I try to drill into my clients is that if a business asset is sold on which depreciation or S179 was claimed there will be a taxable gain in most cases. It is very hard for the lay person to understand why a (depreciated) truck they paid $10,000 sold for $2000 is going to show a $2000 gain. It just blows their mind!