Depreciation Pitfalls to Avoid

Are there any pitfalls to avoid when doing depreciation?

Yes.

Here are 4 things to be aware of:

#1 Incorrect depreciation method: This can distort financials, impacting calculations for income tax and capital gains tax, and possibly leading to unfavorable audit outcomes.

#2 Inaccurate useful life estimation: This can lead to miscalculated depreciation expenses, affecting corporate income tax liabilities and financial ratios used in financial analysis.

#3 Inadequate record-keeping: This increases the risk of penalties for non-compliance, and makes substantiating claims or deductions during an IRS audit challenging.

#4 Overlooking depreciation recapture: This results in unexpected increases in taxable income during the disposal of assets, potentially impacting the business's overall tax strategy and liabilities.

To calculate depreciation accurately, be sure to include various information about the asset.

Such items include:

? Purchase price (basis)

? Date placed in service

? Percentage of business use

? Class life

? Depreciation method

? Depreciation convention

Time horizons to consider with depreciation:

Half-Year:

• Treats property as being placed in service at year midpoint
• Allowed one-half the depreciation allowed in the first year
• Not allowed for real/residential property

Mid-Month:

• Treats property as being placed in service at the month midpoint
• Allowed one-half the depreciation allowed in the first month
• Real property, residential rental, and railroad

Mid-Quarter:

• Treats property as being placed in service at the quarter midpoint
• Allowed one-half the depreciation allowed in the quarter
• Typically only used when greater than 40% of the assets are purchased in the last quarter of the tax year

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