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12 Cards in this Set
- Front
- Back
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Expenses
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Part of regular business operations
Examples: labor, utilities, materials, insurance,… “Subtracted from business revenues as they occur Reduce income taxes- written off when they occur |
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Capital Investments
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Large and intended to enhance business over extended period,
Examples: building, plants, machines,… If sold, they would have value so not immediately written off “Depreciated” over time |
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Depreciation
Taxes = (Income-Deductions) × Tax Rate |
Defined as a decrease in value
Decline in market value of an asset due to deterioration 退化 or obsolescence过时 Capital investments of a corporation are held as assets 资产 on the financial books Depreciation is the accounting method used to reflect the decline in “Book Value” Unrelated to payment terms By itself, depreciation is not a cash flow Depreciation is a tax-allowed deduction in most industrialized countries, lowering taxes in multiple years |
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Depreciation Accounting
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Assumed “good” for the economy for business to invest in new plant and equipment
If capital expenditures had to be treated as expenses in the year purchased Income in one year would appear very low; high in others Could discourage investment if shareholders focus on short term profits, not assets Depreciation allows the cost to be “smoothed” over multiple years |
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BVt Cost basis (B)- Dj
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Dollar amount being depreciated (including the asset’s purchase price and any other costs necessary to make the asset “ready to use”)
Dj: Accumulated depreciation charges from time 1 to j |
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Tax Policy
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Governments use tax policies to encourage or discourage behaviors
In sluggish economic times, there’s a desire to encourage businesses to invest more Tax policies regarding depreciation in US changed to accelerate near-term depreciation expenses (decreasing near-term taxes) “Time Value of Money” tells you this is good and makes investment more attractive |
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Depreciation Methods(Pre-1981 (USA) historical methods:
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Straight-line (SL) –
[linear over useful life “Accelerated” methods ] Sum-of-the-years’-digits (SOYD) Declining Balance (DB) Most common- “Double Declining Balance” |
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Since 1986, required tax depreciation method in United States
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Recovery period for “Property Classes” defined
Assume entire Basis Value (B) will be recovered (eliminated projection of salvage value) “Half year Convention” for first and last year of ownership No matter when purchase is made during the year |
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MACRS
GDS ADS |
Modified Accelerated Cost Recovery System(MACRS)
General Depreciation System [Based on declining balance method (with switch to straight-line depreciation)] Alternative Depreciation System [ADS may be elected- provides a longer recovery period and uses straight-line depreciation if early tax break not desired Can’t switch over to GDS, once chosen ADS must be used for Tangible property used primarily outside the United States Property that is tax exempt ] |
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Depreciation and Asset Disposal
[When a depreciable asset is disposed of, and the market value is different than the book value, the difference must be treated as:] |
Depreciation recapture (ordinary gains):[ Occurs when an asset is sold for more than its current book value, but less than the original cost basis.]
Losses:[ A loss occurs when an asset is sold for less than its current book value.] Capital gains: [Capital gain occur when an asset is sold for more than its original cost basis. Capital gains may be taxed at lower rate than ordinary gains.] |
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Depletion
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Methods to represent the the decreasing value of an irreplaceable natural resource as it’s removed
Cost Depletion Unit of Production |
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Gross Income
(Wages, salary, etc Interest Income Dividends Capital Gains Unemployment Compensation + Other Incomes ) |
Gross Income - Retirement Contribution - Other adjustments =Adjusted Gross Income (AGI)
Adjusted Gross Income (AGI) - Personal Exemption(s) - Itemized or Std. Deduction = Taxable Income Gross Income-All expenditures except capital expenditures-Depreciation and depletion charges=Taxable Income |
