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Penalties For Late Tax Returns

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Penalties For Late Tax Returns

Penalties for late tax returns Other Methods of Depreciation Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: How To Figure the DeductionBasis Useful Life Salvage Value Methods To UseStraight Line Method Declining Balance Method Income Forecast Method How To Change Methods DispositionsSale or exchange. Penalties for late tax returns Property not disposed of or abandoned. Penalties for late tax returns Special rule for normal retirements from item accounts. Penalties for late tax returns Abandoned property. Penalties for late tax returns Single item accounts. Penalties for late tax returns Multiple property account. Penalties for late tax returns Topics - This chapter discusses: How to figure the deduction Methods to use How to change methods Dispositions Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 551 Basis of Assets 583 Starting a Business and Keeping Records 946 How To Depreciate Property Form (and Instructions) 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization Schedule C (Form 1040) Profit or Loss From Business If your property is being depreciated under ACRS, you must continue to use rules for depreciation that applied when you placed the property in service. Penalties for late tax returns If your property qualified for MACRS, you must depreciate it under MACRS. Penalties for late tax returns See Publication 946. Penalties for late tax returns However, you cannot use MACRS for certain property because of special rules that exclude it from MACRS. Penalties for late tax returns Also, you can elect to exclude certain property from being depreciated under MACRS. Penalties for late tax returns Property that you cannot depreciate using MACRS includes: Intangible property, Property you can elect to exclude from MACRS that you properly depreciate under a method that is not based on a term of years, Certain public utility property, Any motion picture film or video tape, Any sound recording, and Certain real and personal property placed in service before 1987. Penalties for late tax returns Intangible property. Penalties for late tax returns   You cannot depreciate intangible property under ACRS or MACRS. Penalties for late tax returns You depreciate intangible property using any other reasonable method, usually, the straight line method. Penalties for late tax returns Note. Penalties for late tax returns The cost of certain intangible property that you acquire after August 10, 1993, must be amortized over a 15-year period. Penalties for late tax returns For more information, see chapter 12 of Publication 535. Penalties for late tax returns Public utility property. Penalties for late tax returns   The law excludes from MACRS any public utility property for which the taxpayer does not use a normalization method of accounting. Penalties for late tax returns This type of property is subject to depreciation under a special rule. Penalties for late tax returns Videocassettes. Penalties for late tax returns   If you are in the videocassette rental business, you can depreciate those videocassettes purchased for rental. Penalties for late tax returns You can depreciate the cost less salvage value of those videocassettes that have a useful life over one year using either: The straight line method, or The income forecast method. Penalties for late tax returns The straight line method, salvage value, and useful life are discussed later under Methods To Use. Penalties for late tax returns You can deduct in the year of purchase as a business expense the cost of any cassette that has a useful life of one year or less. Penalties for late tax returns How To Figure the Deduction Two other reasonable methods can be used to figure your deduction for property not covered under ACRS or MACRS. Penalties for late tax returns These methods are straight line and declining balance. Penalties for late tax returns To figure depreciation using these methods, you must generally determine three things about the property you intend to depreciate. Penalties for late tax returns They are: The basis, The useful life, and The estimated salvage value at the end of its useful life. Penalties for late tax returns The amount of the deduction in any year also depends on which method of depreciation you choose. Penalties for late tax returns Basis To deduct the proper amount of depreciation each year, first determine your basis in the property you intend to depreciate. Penalties for late tax returns The basis used for figuring depreciation is the same as the basis that would be used for figuring the gain on a sale. Penalties for late tax returns Your original basis is usually the purchase price. Penalties for late tax returns However, if you acquire property in some other way, such as inheriting it, getting it as a gift, or building it yourself, you have to figure your original basis in a different way. Penalties for late tax returns Adjusted basis. Penalties for late tax returns   Events will often change the basis of property. Penalties for late tax returns When this occurs, the changed basis is called the adjusted basis. Penalties for late tax returns Some events, such as improvements you make, increase basis. Penalties for late tax returns Events such as deducting casualty losses and depreciation decrease basis. Penalties for late tax returns If basis is adjusted, the depreciation deduction may also have to be changed, depending on the reason for the adjustment and the method of depreciation you are using. Penalties for late tax returns   Publication 551 explains how to figure basis for property acquired in different ways. Penalties for late tax returns It also discusses what items increase and decrease basis, how to figure adjusted basis, and how to allocate cost if you buy several pieces of property at one time. Penalties for late tax returns Useful Life The useful life of a piece of property is an estimate of how long you can expect to use it in your trade or business, or to produce income. Penalties for late tax returns It is the length of time over which you will make yearly depreciation deductions of your basis in the property. Penalties for late tax returns It is how long it will continue to be useful to you, not how long the property will last. Penalties for late tax returns Many things affect the useful life of property, such as: Frequency of use, Age when acquired, Your repair policy, and Environmental conditions. Penalties for late tax returns The useful life can also be affected by technological improvements, progress in the arts, reasonably foreseeable economic changes, shifting of business centers, prohibitory laws, and other causes. Penalties for late tax returns Consider all these factors before you arrive at a useful life for your property. Penalties for late tax returns The useful life of the same type of property varies from user to user. Penalties for late tax returns When you determine the useful life of your property, keep in mind your own experience with similar property. Penalties for late tax returns You can use the general experience of the industry you are in until you are able to determine a useful life of your property from your own experience. Penalties for late tax returns Change in useful life. Penalties for late tax returns   You base your estimate of useful life on certain facts. Penalties for late tax returns If these facts change significantly, you can adjust your estimate of the remaining useful life. Penalties for late tax returns However, you redetermine the estimated useful life only when the change is substantial and there is a clear reason for making the change. Penalties for late tax returns Salvage Value It is important for you to accurately determine the correct salvage value of the property you want to depreciate. Penalties for late tax returns You generally cannot depreciate property below a reasonable salvage value. Penalties for late tax returns Determining salvage value. Penalties for late tax returns   Salvage value is the estimated value of property at the end of its useful life. Penalties for late tax returns It is what you expect to get for the property if you sell it after you can no longer use it productively. Penalties for late tax returns You must estimate the salvage value of a piece of property when you first acquire it. Penalties for late tax returns   Salvage value is affected both by how you use the property and how long you use it. Penalties for late tax returns If it is your policy to dispose of property that is still in good operating condition, the salvage value can be relatively large. Penalties for late tax returns However, if your policy is to use property until it is no longer usable, its salvage value can be its junk value. Penalties for late tax returns Changing salvage value. Penalties for late tax returns   Once you determine the salvage value for property, you should not change it merely because prices have changed. Penalties for late tax returns However, if you redetermine the useful life of property, as discussed earlier under Change in useful life, you can also redetermine the salvage value. Penalties for late tax returns When you redetermine the salvage value, take into account the facts that exist at the time. Penalties for late tax returns Net salvage. Penalties for late tax returns   Net salvage is the salvage value of property minus what it costs to remove it when you dispose of it. Penalties for late tax returns You can choose either salvage value or net salvage when you figure depreciation. Penalties for late tax returns You must consistently use the one you choose and the treatment of the costs of removal must be consistent with the practice adopted. Penalties for late tax returns However, if the cost to remove the property is more than the estimated salvage value, then net salvage is zero. Penalties for late tax returns Your salvage value can never be less than zero. Penalties for late tax returns Ten percent rule. Penalties for late tax returns   If you acquire personal property that has a useful life of 3 years or more, you can use an amount for salvage value that is less than your actual estimate. Penalties for late tax returns You can subtract from your estimate of salvage value an amount equal to 10% of your basis in the property. Penalties for late tax returns If salvage value is less than 10% of basis, you can ignore salvage value when you figure depreciation. Penalties for late tax returns Methods To Use Two methods of depreciation are the straight line and declining balance methods. Penalties for late tax returns If ACRS or MACRS does not apply, you can use one of these methods. Penalties for late tax returns The straight line and declining balance methods discussed in this section are not figured in the same way as straight line or declining balance methods under MACRS. Penalties for late tax returns Straight Line Method Before 1981, you could use any reasonable method for every kind of depreciable property. Penalties for late tax returns One of these methods was the straight line method. Penalties for late tax returns This method was also used for intangible property. Penalties for late tax returns It lets you deduct the same amount of depreciation each year. Penalties for late tax returns To figure your deduction, determine the adjusted basis of your property, its salvage value, and its estimated useful life. Penalties for late tax returns Subtract the salvage value, if any, from the adjusted basis. Penalties for late tax returns The balance is the total amount of depreciation you can take over the useful life of the property. Penalties for late tax returns Divide the balance by the number of years remaining in the useful life. Penalties for late tax returns This gives you the amount of your yearly depreciation deduction. Penalties for late tax returns Unless there is a big change in adjusted basis, or useful life, this amount will stay the same throughout the time you depreciate the property. Penalties for late tax returns If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use. Penalties for late tax returns Example. Penalties for late tax returns In April 1994, Frank bought a franchise for $5,600. Penalties for late tax returns It expires in 10 years. Penalties for late tax returns This property is intangible property that cannot be depreciated under MACRS. Penalties for late tax returns Frank depreciates the franchise under the straight line method, using a 10-year useful life and no salvage value. Penalties for late tax returns He takes the $5,600 basis and divides that amount by 10 years ($5,600 ÷ 10 = $560, a full year's use). Penalties for late tax returns He must prorate the $560 for his 9 months of use in 1994. Penalties for late tax returns This gives him a deduction of $420 ($560 ÷ 9/12). Penalties for late tax returns In 1995, Frank can deduct $560 for the full year. Penalties for late tax returns Declining Balance Method The declining balance method allows you to recover a larger amount of the cost of the property in the early years of your use of the property. Penalties for late tax returns The rate cannot be more than twice the straight line rate. Penalties for late tax returns Rate of depreciation. Penalties for late tax returns   Under this method, you must determine your declining balance rate of depreciation. Penalties for late tax returns The initial step is to: Divide the number 1 by the useful life of your property to get a straight line rate. Penalties for late tax returns (For example, if property has a useful life of 5 years, its normal straight line rate of depreciation is ⅕, or 20%. Penalties for late tax returns ) Multiply this straight line rate by a number that is more than 1 but not more than 2 to determine the declining balance rate. Penalties for late tax returns Unless there is a change in the useful life during the time you depreciate the property, the rate of depreciation generally will not change. Penalties for late tax returns Depreciation deductions. Penalties for late tax returns   After you determine the rate of depreciation, multiply the adjusted basis of the property by it. Penalties for late tax returns This gives you the amount of your deduction. Penalties for late tax returns For example, if your adjusted basis at the beginning of the first year is $10,000, and your declining balance rate is 20%, your depreciation deduction for the first year is $2,000 ($10,000 ÷ 20%). Penalties for late tax returns To figure your depreciation deduction in the second year, you must first adjust the basis for the amount of depreciation you deducted in the first year. Penalties for late tax returns Subtract the previous year's depreciation from your basis ($10,000 - $2,000 = $8,000). Penalties for late tax returns Multiply this amount by the rate of depreciation ($8,000 ÷ 20% = $1,600). Penalties for late tax returns Your depreciation deduction for the second year is $1,600. Penalties for late tax returns   As you can see from this example, your adjusted basis in the property gets smaller each year. Penalties for late tax returns Also, under this method, deductions are larger in the earlier years and smaller in the later years. Penalties for late tax returns You can make a change to the straight line method without consent. Penalties for late tax returns Salvage value. Penalties for late tax returns   Do not subtract salvage value when you figure your yearly depreciation deductions under the declining balance method. Penalties for late tax returns However, you cannot depreciate the property below its reasonable salvage value. Penalties for late tax returns Determine salvage value using the rules discussed earlier, including the special 10% rule. Penalties for late tax returns Example. Penalties for late tax returns If your adjusted basis has been decreased to $1,000 and the rate of depreciation is 20%, your depreciation deduction should be $200. Penalties for late tax returns But if your estimate of salvage value was $900, you can only deduct $100. Penalties for late tax returns This is because $100 is the amount that would lower your adjusted basis to equal salvage value. Penalties for late tax returns Income Forecast Method The income forecast method requires income projections for each videocassette or group of videocassettes. Penalties for late tax returns You can group the videocassettes by title for making this projection. Penalties for late tax returns You determine the depreciation by applying a fraction to the cost less salvage value of the cassette. Penalties for late tax returns The numerator is the income from the videocassette for the tax year and the denominator is the total projected income for the cassette. Penalties for late tax returns For more information on the income forecast method, see Revenue Ruling 60-358 in Cumulative Bulletin 1960, Volume 2, on page 68. Penalties for late tax returns How To Change Methods In some cases, you may change your method of depreciation for property depreciated under a reasonable method. Penalties for late tax returns If you change your method of depreciation, it is generally a change in your method of accounting. Penalties for late tax returns You must get IRS consent before making the change. Penalties for late tax returns However, you do not need permission for certain changes in your method of depreciation. Penalties for late tax returns The rules discussed in this section do not apply to property depreciated under ACRS or MACRS. Penalties for late tax returns For information on ACRS elections,see Revocation of election, in chapter 1 under Alternate ACRS Method. Penalties for late tax returns Change to the straight line method. Penalties for late tax returns   You can change from the declining balance method to the straight line method at any time during the useful life of your property without IRS consent. Penalties for late tax returns However, if you have a written agreement with the IRS that prohibits a change, you must first get IRS permission. Penalties for late tax returns When the change is made, figure depreciation based on your adjusted basis in the property at that time. Penalties for late tax returns Your adjusted basis takes into account all previous depreciation deductions. Penalties for late tax returns Use the estimated remaining useful life of your property at the time of change and its estimated salvage value. Penalties for late tax returns   You can change from the declining balance method to straight line only on the original tax return for the year you first use the straight line method. Penalties for late tax returns You cannot make the change on an amended return filed after the due date of the original return (including extensions). Penalties for late tax returns   When you make the change, attach a statement to your tax return showing: When you acquired the property, Its original cost or other original basis, The total amount claimed for depreciation and other allowances since you acquired it, Its salvage value and remaining useful life, and A description of the property and its use. Penalties for late tax returns   After you change to straight line, you cannot change back to the declining balance method or to any other method for a period of 10 years without written permission from the IRS. Penalties for late tax returns Changes that require permission. Penalties for late tax returns   For most other changes in method of depreciation, you must get permission from the IRS. Penalties for late tax returns To request a change in method of depreciation, file Form 3115. Penalties for late tax returns File the application within the first 180 days of the tax year the change is to become effective. Penalties for late tax returns In most cases, there is a user fee that must accompany Form 3115. Penalties for late tax returns See the instructions for Form 3115 to determine if a fee is required. Penalties for late tax returns Changes granted automatically. Penalties for late tax returns   The IRS automatically approves certain changes of a method of depreciation. Penalties for late tax returns But, you must file Form 3115 for these automatic changes. Penalties for late tax returns   However, IRS can deny permission if Form 3115 is not filed on time. Penalties for late tax returns For more information on automatic changes, see Revenue Procedure 74-11, 1974-1 C. Penalties for late tax returns B. Penalties for late tax returns 420. Penalties for late tax returns Changes for which approval is not automatic. Penalties for late tax returns   The automatic change procedures do not apply to: Property or an account where you made a change in depreciation within the last 10 tax years (unless the change was made under the Class Life System), Class Life Asset Depreciation Range System, and Public utility property. Penalties for late tax returns   You must request and receive permission for these changes. Penalties for late tax returns To make the request, file Form 3115 during the first 180 days of the tax year for which you want the change to be effective. Penalties for late tax returns Change from an improper method. Penalties for late tax returns   If the IRS disallows the method you are using, you do not need permission to change to a proper method. Penalties for late tax returns You can adopt the straight line method, or any other method that would have been permitted if you had used it from the beginning. Penalties for late tax returns If you file your tax return using an improper method, but later file an amended return, you can use a proper method on the amended return without getting IRS permission. Penalties for late tax returns However, you must file the amended return before the filing date for the next tax year. Penalties for late tax returns Dispositions Retirement is the permanent withdrawal of depreciable property from use in your trade or business or for the production of income. Penalties for late tax returns You can do this by selling, exchanging, or abandoning the item of property. Penalties for late tax returns You can also withdraw it from use without disposing of it. Penalties for late tax returns For example, you could place it in a supplies or scrap account. Penalties for late tax returns Retirements can be either normal or abnormal depending on all facts and circumstances. Penalties for late tax returns The rules discussed next do not apply to MACRS and ACRS property. Penalties for late tax returns Normal retirement. Penalties for late tax returns   A normal retirement is a permanent withdrawal of depreciable property from use if the following apply: The retirement is made within the useful life you estimated originally, and The property has reached a condition at which you customarily retire or would retire similar property from use. Penalties for late tax returns A retirement is generally considered normal unless you can show that you retired the property because of a reason you did not consider when you originally estimated the useful life of the property. Penalties for late tax returns Abnormal retirement. Penalties for late tax returns   A retirement can be abnormal if you withdraw the property early or under other circumstances. Penalties for late tax returns For example, if the property is damaged by a fire or suddenly becomes obsolete and is now useless. Penalties for late tax returns Gain or loss on retirement. Penalties for late tax returns   There are special rules for figuring the gain or loss on retirement of property. Penalties for late tax returns The gain or loss will depend on several factors. Penalties for late tax returns These include the type of withdrawal, if the withdrawal was from a single property or multiple property account, and if the retirement was normal or abnormal. Penalties for late tax returns A single property account contains only one item of property. Penalties for late tax returns A multiple property account is one in which several items have been combined with a single rate of depreciation assigned to the entire account. Penalties for late tax returns Sale or exchange. Penalties for late tax returns   If property is retired by sale or exchange, you figure gain or loss by the usual rules that apply to sales or other dispositions of property. Penalties for late tax returns See Publication 544. Penalties for late tax returns Property not disposed of or abandoned. Penalties for late tax returns   If property is retired permanently, but not disposed of or physically abandoned, you do not recognize gain. Penalties for late tax returns You are allowed a loss in such a case, but only if the retirement is: An abnormal retirement, A normal retirement from a single property account in which you determined the life of each item of property separately, or A normal retirement from a multiple property account in which the depreciation rate is based on the maximum expected life of the longest lived item of property and the loss occurs before the expiration of the full useful life. Penalties for late tax returns However, you are not allowed a loss if the depreciation rate is based on the average useful life of the items of property in the account. Penalties for late tax returns   To figure your loss, subtract the estimated salvage or fair market value of the property at the date of retirement, whichever is more, from its adjusted basis. Penalties for late tax returns Special rule for normal retirements from item accounts. Penalties for late tax returns   You can generally deduct losses upon retirement of a few depreciable items of property with similar useful lives, if: You account for each one in a separate account, and You use the average useful life to figure depreciation. Penalties for late tax returns However, you cannot deduct losses if you use the average useful life to figure depreciation and they have a wide range of useful lives. Penalties for late tax returns   If you have a large number of depreciable property items and use average useful lives to figure depreciation, you cannot deduct the losses upon normal retirements from these accounts. Penalties for late tax returns Abandoned property. Penalties for late tax returns   If you physically abandon property, you can deduct as a loss the adjusted basis of the property at the time of its abandonment. Penalties for late tax returns However, your intent must be to discard the property so that you will not use it again or retrieve it for sale, exchange, or other disposition. Penalties for late tax returns Basis of property retired. Penalties for late tax returns   The basis for figuring gain or loss on the retirement of property is its adjusted basis at the time of retirement, as determined in the following discussions. Penalties for late tax returns Single item accounts. Penalties for late tax returns   If an item of property is accounted for in a single item account, the adjusted basis is the basis you would use to figure gain or loss for a sale or exchange of the property. Penalties for late tax returns This is generally the cost or other basis of the item of property less depreciation. Penalties for late tax returns See Publication 551. Penalties for late tax returns Multiple property account. Penalties for late tax returns   For a normal retirement from a multiple property account, if you figured depreciation using the average expected useful life, the adjusted basis is the salvage value estimated for the item of property when it was originally acquired. Penalties for late tax returns If you figured depreciation using the maximum expected useful life of the longest lived item of property in the account, you must use the depreciation method used for the multiple property account and a rate based on the maximum expected useful life of the item of property retired. Penalties for late tax returns   You make the adjustment for depreciation for an abnormal retirement from a multiple property account at the rate that would be proper if the item of property was depreciated in a single property account. Penalties for late tax returns The method of depreciation used for the multiple property account is used. Penalties for late tax returns You base the rate on either the average expected useful life or the maximum expected useful life of the retired item of property, depending on the method used to determine the depreciation rate for the multiple property account. Penalties for late tax returns Prev  Up  Next   Home   More Online Publications
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The Penalties For Late Tax Returns

Penalties for late tax returns Publication 560 - Additional Material This image is too large to be displayed in the current screen. Penalties for late tax returns Please click the link to view the image. Penalties for late tax returns Tax Publications Prev  Up  Next   Home   More Online Publications