Introduction Methods

Depreciation

• Supplemental Depreciation

LeasePak Depreciation Methods

Depreciation is an annual tax deduction intended to reflect the decline of an asset's value over time. This decline in value can be caused by physical deterioration due to usage, obsolescence, etc. Depreciation also serves to distribute the cost of an asset over the period of its use. Therefore, not only does depreciation reduce a company's taxable income, it also helps to give a more accurate picture of a company's worth.

The components of depreciation are:

• NET COST
  How much is the asset worth when it starts being depreciated?

• USEFUL LIFE
  What should the useful life of the asset be?

• SALVAGE VALUE
  What is a good estimate of the asset's value at the end of its useful life?

• DEPRECIATION METHOD
  How should the depreciation be spread out over the asset's useful life?

All these terms are defined for accounting (book) purposes, and may or may not exactly portray the true useful life, salvage value, etc. of the asset.

The NET COST less the SALVAGE VALUE is the allowable depreciation amount. In other words, that difference is the total amount of depreciation claimed over the useful life of the asset. In federal depreciation methods beginning with the Accelerated Cost Recovery System (ACRS) established under the Economic Recovery Tax Act of 1981 (ERTA), SALVAGE VALUE is always considered to be zero. In other words, the allowable depreciation amount is the NET COST of the asset.

The NET COST of an asset subtracted from its accumulated (life-to-date) depreciation yields the book value of the asset. Therefore, the book value for a given item depends on the DEPRECIATION METHOD that is chosen.

Book value should never fall below the SALVAGE VALUE. Book value reaches the SALVAGE VALUE if and only if all the allowable depreciation has been taken. All allowable depreciation is taken by the end of the asset's USEFUL LIFE.

 

Depreciation Methods

• Accelerated Cost Recovery System (ACRS)



• ADR 150% Declining Balance
• ADR 200% (Double) Declining Balance
• ADR Straight Line
• ADR Sum of the Years' Digits (SOYD)



• Bypass



• Declining Balance 125%
• Declining Balance 150%
• Declining Balance 175%
• (Double) Declining Balance 200%



• DVA1 and DVA2 (Australian)



• Modified Accelerated Cost Recovery System (MACRS)
  • Half-Year Convention
  • Mid-Quarter Convention
    • First Quarter
    • Second Quarter
    • Third Quarter
    • Fourth Quarter
  
  
  
  • MACRS Bonus Depreciation



• Straight Line
• Straight Line Half Year Convention
• Straight Line Mid-month Convention
• Sum of the Years' Digits (SOYD)

 

Accelerated Cost Recovery System (ACRS)

CR03	ACRS 3Y
CR05	ACRS 5Y
CR10	ACRS 10Y
CR15	ACRS 15Y

SF05	ACRS S HRBR 5Y
SF08	ACRS S HRBR 8Y
SF15	ACRS S HRBR 15Y

This is the federal depreciation method established by the Economic Recovery Tax Act of 1981 and amended by the Tax Equity and Fiscal Responsibility Act of 1982. It applies to all tangible property placed in service after December 31, 1980.

Under this method, all assets are placed in one of the following classes:

• 3-year property
  This class includes property with a present class life for 4 years or less, such as automobiles, light-duty trucks, and tractor units for use over-the-road.
  
  
• 5-year property
  This class includes property that is not 3-year, 10-year, or 15-year public utility property, such as computers and peripherals, office furniture and fixtures, office equipment, etc.
  
  
• 10-year property
  This class includes property with a present class life of 12.5 years or less, such as utility property, mobile homes, manufactured homes, railroad tank cars, etc.
  
  
• 15-year property
  This class includes property with a present class life of more than 12.5 years, such as buildings that do not fall under the 5- or 10-year property category.

An asset is entitled to depreciation for a year if it is active at any time during that year and is not disposed of during that same year. There is no salvage value required for assets under ACRS. That is, all assets are depreciated to a zero book value.

The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) introduced the concept of reducing the taxable basis of an asset if the full amount of Investment Tax Credit available is retained by the lessor. This concept is discussed in detail in the Investment Tax Credit section.

Like the Modified Accelerated Cost Recovery System (MACRS), this method uses predetermined percentage tables to calculate the amount of depreciation to record each year. The percentage table is based upon the recovery period of the lease. These recovery periods also determine the amount of Investment Tax Credit ITC that may be claimed.

The following table shows the depreciation percentage of the taxable basis allowable under the ACRS method for each of the four class lives:

	ACRS METHOD RECOVERY PERIOD
Year	3	5	10	15
1	25	15	8	5
2	38	22	14	10
3	37	21	12	9
4		21	10	8
5		21	10	7
6			10	7
7			9	6
8			9	6
9			9	6
10			9	6
11				6
12				6
13				6
14				6
15				6

 

ADR 150% Declining Balance

A503	ADR DBL 150  3Y
A505	ADR DBL 150  5Y
A507	ADR DBL 150  7Y
A510	ADR DBL 150 10Y

ADR 150% Declining Balance is an accelerated depreciation method. That is, a higher amount of depreciation is earned in the earlier stages of the asset's life. The rate of depreciation earned is one and one-half times the straight line rate.

This method differs from the 150% Declining Balance method in that it does not recalculate the life-to-date depreciation each month. Instead, it calculates the monthly depreciation and adds it to the year-to-date and life-to- date figures. This is done because, under ADR methods, the depreciation method may be changed during the asset's life. If a change occurs, life-to- date depreciation cannot be reconstructed by LeasePak. Another ramification of the ADR computational method is that catch-up depreciation accruals are not possible.

The ADR 150% Declining Balance method is calculated on a month-to- month basis.

 

ADR 200% (Double) Declining Balance

A203	ADR DBL 200  3Y
A204	ADR DBL 200  4Y
A205	ADR DBL 200  5Y
A206	ADR DBL 200  6Y
A207	ADR DBL 200  7Y
A208	ADR DBL 200  8Y
A209	ADR DBL 200  9Y
A210	ADR DBL 200 10Y
A212	ADR DBL 200 12Y

ADR 200% (Double) Declining Balance is an accelerated depreciation method. That is, a higher amount of depreciation is earned in the earlier stages of the asset's life. The rate of depreciation earned is twice the straight line rate.

This method differs from the 200% (Double) Declining Balance method in that it does not recalculate the life-to-date depreciation each month. Instead, it calculates the monthly depreciation and adds it to the year-to-date and life-to-date figures. This is done because, under ADR methods, the depreciation method may be changed during the asset's life. If a change occurs,

life-to-date depreciation cannot be reconstructed by LeasePak. Another ramification of the ADR computational method is that catch-up depreciation accruals are not possible.

The ADR 200% Declining Balance method is calculated on a month-to- month basis.

 

ADR Straight Line

AS03	ADR STR LINE 3Y
AS05	ADR STR LINE 5Y
AS07	ADR STR LINE 7Y
AS10	ADR STR LINE10Y

SLAB	ADR STR LN BK BS 5Y

ADR Straight Line is one of the most conservative depreciation methods. An equal amount of depreciation is earned in each stage of the asset's life.

This method differs from the Straight Line method in that it does not recalculate the life-to-date depreciation each month. Instead, it calculates the monthly depreciation and adds it to the year-to-date and life-to-date figures. This is done because, under ADR methods, the depreciation method may be changed during the asset's life. If a change occurs, life-to-date depreciation cannot be reconstructed by LeasePak. Another ramification of the ADR computational method is that catch-up depreciation accruals are not possible.

The Straight Line method is calculated on a month-to-month basis.

 

ADR Sum of the Years' Digits (SOYD)

AD03	ADR SOYD     3Y
AD05	ADR SOYD     5Y
AD07	ADR SOYD     7Y
AD10	ADR SOYD 10Y

ADR Sum of the Years' Digits (SOYD) is an accelerated depreciation method. That is, a higher amount of depreciation is earned in the earlier stages of the asset's life.

This method differs from the Sum of the Years' Digits (SOYD) method in that it does not recalculate the life-to-date depreciation each month. Instead, it calculates the monthly depreciation and adds it to the year-to-date and life-to-date figures. This is done because, under ADR methods, the depreciation method may be changed during the asset's life. If a change occurs, life-to-date depreciation cannot be reconstructed by LeasePak. Another ramification of the ADR computational method is that catch-up depreciation accruals are not possible.

The ADR Sum of the Years' Digits (SOYD) method is calculated on a month-to-month basis.

 

Bypass

BY03	BYPAS CLASS  3Y
BY05	BYPAS CLASS  5Y
BY07	BYPAS CLASS  7Y
BY10	BYPAS CLASS 10Y
BY15	BYPAS CLASS 15Y
BY20	BYPAS CLASS 20Y

Depreciation calculations may be bypassed for an asset by using this method. Tax-exempt, conditional sales, or loan transactions can be handled in LeasePak by bypassing the depreciation calculations.

 

Declining Balance 125%

D103	DCL BAL 125  3Y
D105	DCL BAL 125  5Y
D107	DCL BAL 125  7Y
D110	DCL BAL 125 10Y

125% Declining Balance is an accelerated depreciation method. That is, a higher amount of depreciation is earned in the earlier stages of the asset's life. The rate of depreciation earned is one and one-quarter times the straight line rate.

This method recalculates the life-to-date depreciation each month (based upon the in service date and the current date) in order to determine the month-to-date and year-to-date depreciation.

The 125% Declining Balance method is calculated as follows:

Tax Basis	* 1.25 / Useful Life	1st Year
(Tax Basis - 1st Year Depreciation)	* 1.25 / Useful Life	2nd Year
... ... ...
(Tax Basis - nth Year Depreciation)	* 1.25 / Useful Life	n+1th Year

The calculation:

Tax Basis minus nth Year Depreciation

cannot be less than the Salvage Value. Tax Basis is the amount from which depreciation is deducted. This is usually the original purchase price. Salvage Value is the value of an asset at the end of its useful life. "nth" Year Depreciation is the depreciation calculated during the nth year.

 

Declining Balance 150%

D203	DCL BAL 150  3Y
D205	DCL BAL 150  5Y
D207	DCL BAL 150  7Y
D210	DCL BAL 150 10Y

150% Declining Balance is an accelerated depreciation method. That is, a higher amount of depreciation is earned in the earlier stages of the asset's life. The rate of depreciation earned is one and one-half times the straight line rate.

This method differs from the ADR 150% Declining Balance method in that it recalculates the life-to-date depreciation each month (based upon the in service date and the current date) in order to determine the month-to-date and year-to-date depreciation. The ADR group of depreciation methods do not recalculate life-to-date depreciation. Refer to the section on the ADR methods for more information.

The 150% Declining Balance method is calculated as follows:

Tax Basis	* 1.5 / Useful Life	1st Year
(Tax Basis - 1st Year Depreciation)	* 1.5 / Useful Life	2nd Year
... ... ...
(Tax Basis - nth Year Depreciation)	* 1.5 / Useful Life	n+1th Year

The calculation:

Tax Basis minus nth Year Depreciation

cannot be less than the Salvage Value. Tax Basis is the amount from which depreciation is deducted. This is usually the original purchase price. Salvage Value is the value of an asset at the end of its useful life. "nth" Year Depreciation is the depreciation calculated during the nth year.

 

Declining Balance 175%

D303	DCL BAL 175  3Y
D305	DCL BAL 175  5Y
D307	DCL BAL 175  7Y
D310	DCL BAL 175 10Y

175% Declining Balance is an accelerated depreciation method. That is, a higher amount of depreciation is earned in the earlier stages of the asset's life. The rate of depreciation earned is one and three-quarters times the straight line rate.

This method recalculates the life-to-date depreciation each month (based upon the in service date and the current date) in order to determine the month-to-date and year-to-date depreciation.

The 175% Declining Balance method is calculated as follows:

Tax Basis	* 1.75 / Useful Life	1st Year
(Tax Basis - 1st Year Depreciation)	* 1.75 / Useful Life	2nd Year
... ... ...
(Tax Basis - nth Year Depreciation)	* 1.75 / Useful Life	n+1th Year

The calculation:

Tax Basis minus nth Year Depreciation

cannot be less than the Salvage Value. Tax Basis is the amount from which depreciation is deducted. This is usually the original purchase price. Salvage Value is the value of an asset at the end of its useful life. "nth" Year Depreciation is the depreciation calculated during the nth year.

 

(Double) Declining Balance 200%

D403	DCL BAL 200  3Y
D404	DCL BAL 200  4Y
D405	DCL BAL 200  5Y
D406	DCL BAL 200  6Y
D407	DCL BAL 200  7Y
D408	DCL BAL 200  8Y
D409	DCL BAL 200  9Y
D410	DCL BAL 200 10Y
D411	DCL BAL 200 11Y
D412	DCL BAL 200 12Y
D413	DCL BAL 200 13Y
D414	DCL BAL 200 14Y
D415	DCL BAL 200 15Y
D417	DCL BAL 200 17Y
D418	DCL BAL 200 18Y
D420	DCL BAL 200 20Y
D445	DCL BAL 200 45Y
D450	DCL BAL 200 50Y

200% Declining Balance is an accelerated depreciation method. That is, a higher amount of depreciation is earned in the earlier stages of the asset's life. The rate of depreciation earned is twice the straight line rate.

This method differs from the ADR 200% (Double) Declining Balance method in that it recalculates the life-to-date depreciation each month (based upon the in service date and the current date) in order to determine the month-to-date and year-to-date depreciation. The ADR group of depreciation methods do not recalculate life-to-date depreciation. Refer to the section on the ADR methods for more information.

The 200% Declining Balance method is calculated as follows:

Tax Basis	* 2 / Useful Life	1st Year
(Tax Basis - 1st Year Depreciation)	* 2 / Useful Life	2nd Year
... ... ...
(Tax Basis - nth Year Depreciation)	* 2 / Useful Life	n+1th Year

The calculation:

Tax Basis minus nth Year Depreciation

cannot be less than the Salvage Value. Tax Basis is the amount from which depreciation is deducted. This is usually the original purchase price. Salvage Value is the value of an asset at the end of its useful life. "nth" Year Depreciation is the depreciation calculated during the nth year.

 

DVA1 and DVA2 (Australian)

DVA1	DIMINISHING VAL AUS1
DVA2	DIMINISHING VAL AUS2

These methods are characterized as diminishing value methods for Book and Federal depreciation. The two methods are primarily used to depreciate the maximum cost of an asset.

DVA1 Diminishing Value

This is a customized variation of the DVA2 method below.

For Asset Cost = 10,000.00:

Diminishing Rate = 10%
Fiscal year End = 3/31
Asset In-service Date = 1/98

In the first year, DVA1 method takes 6 months worth of depreciation spread evenly over the first fiscal year from the asset in-service date. After the first fiscal year, it follows the rule of DVA2

First Fiscal Year

Jan 98 depreciation = 10,000 x 10% /12 x 6/3 = 166.67
6 = six months worth of depreciation
3 = three months left in the current fiscal year, Jan, Feb and Mar.
Feb 98 depreciation = 10,000 x 10% /12 x 6/3 = 166.67
Mar 98 depreciation = 10,000 x 10% /12 x 6/3 = 166.67

Total depreciation in the 1st fiscal year depreciation is 3 x 166.67 = 500.00

Second Fiscal Year

April 98 depreciation = (10,000 - 1st fiscal year depreciation) x 10% /12= (10,000 - 500) x 10% /12 = 79.17
May 98 depreciation = (10,000 - 500) x 10% /12 = 79.17
June 98 depreciation = (10,000 - 500) x 10% /12 = 79.17
(depreciation amount from April 98 to March 99 will have the same amount of 79.17)

Total depreciation in the 2nd fiscal year is 79.17 x 12 = 950.04

Third Fiscal Year

April 99 = (10,000 -1st fiscal yr. dep. - 2nd fiscal yr dep) x 10% /12= (10,000 - 500 - 950.04) x 10% /12 = 8549.96 x 10% /12= 71.25
May 99 = (10,000 - 500 - 950.04) x 10% /12 = 71.25
June 99 = (10,000 - 500 - 950.04) x 10% /12 = 71.25
(depreciation amount for April 99 to March 00 will be the same at 71.25)

 

DVA2 Standard Diminishing Value

This is the standard Australian method.

For Asset Cost = $10,000, Diminishing Value Rate = 10%

(Fiscal year-end and Asset in-service date are not elements of DVA2 calculation.)

1st month = 10,000.00 x 10%/12) = 83.33
2nd month = 10,000.00 x 10%/12) = 83.33
3rd month = 10,000.00 x 10% /12) = 83.33
(1st to 12th month Depreciation has the same amount)
1st year depreciation = 12 x 83.33=999.96

13th month depreciation = (10,000.00 - 1st year) x 10% / 12 = (10,000.00 - 999.96) x 10% /12= 75.00
14th month depreciation = (10.000.00 - 999.96) x 10% /12 = 75.00
(13th and 24th month has the same amount)
2nd year depreciation = 12 x 75.00 = 900.00

25th month depreciation = (10,000.00 - 1st year depreciation - 2nd year depreciation) x 10% /12 = (10,000.00 - 999.96 - 9000.00) x 10% /12 = 67.50}
(25th to 36th month depreciation has the same amount of 67.50)

 

Modified Accelerated Cost Recovery System (MACRS)

• Half-Year Convention
  
  
• Mid-Quarter Convention
  • First Quarter
  • Second Quarter
  • Third Quarter
  • Fourth Quarter
    
    
• Bonus Depreciation

This federal depreciation method was established by the Tax Reform Act of 1986. It replaced the Accelerated Cost Recovery System (ACRS) method, established by the Economic Recovery Tax Act of 1981 as amended by the Tax Equity and Fiscal Responsibility Act of 1982. MACRS applies to all tangible property placed in service after December 31, 1986. However, it may be elected for property placed in service after July 31, 1986, on an asset-by-asset determination.

Under this method, all assets are placed in one of the following classes:

• 3-year property
  This class includes property with an ADR class life of 4 years or less, such as tractor units for use over-the-road.
  
  
• 5-year property
  This class includes property with an ADR class life of more than 4 but less than 10 years, such as automobiles, light general purpose trucks, computers and peripherals, office machinery, etc.

• 7-year property
  This class includes property with an ADR class life of more than 10 but less than 16 years, such as office furniture and fixtures, etc. This class also includes any property which does not have a class life.

• 10-year property
  This class includes property with an ADR class life of more than 16 but less than 20 years, such as vessels, barges, tugs, etc.

• 15-year property
  This class includes property with an ADR class life of more than 20 but less than 25 years, such as municipal wastewater treatment plants, etc.

• 20-year property
  This class includes property with an ADR class life of 25 years or more, such as farm buildings, etc.

This method uses predetermined percentage tables to calculate the amount of depreciation to record each year. The basis for the tables is as follows:

• For property in a 3-, 5-, 7-, or 10-year class, use the 200% (Double)Declining Balance method (with a half-year convention). At the optimum point, switch to a straight line method. The optimum point is the first tax year when the straight line method yields a larger deduction than the 200% (Double) Declining Balance method.
  
  
• For property in a 15- or 20-year class, use the 150% Declining Balance method (with a half-year convention). At the optimum point, also switch to a straight line method.

There is no salvage value required for assets under MACRS. That is, all assets are depreciated to a zero book value.

 

Half-year Convention

MH03	MACRS 1/2YR 3Y
MH05	MACRS 1/2YR 5Y
MH07	MACRS 1/2YR 7Y
MH10	MACRS 1/2YR 10Y
MH15	MACRS 1/2YR 15Y
MH20	MACRS 1/2YR 20Y

The half-year convention normalizes the in-service date of assets to the mid-point of the tax year. In other words, it treats an asset placed in service during the year as if it was placed in service in the middle of the tax year. It does this by:

Allowing a half-year of depreciation in the first year the asset is placed in service. Assets placed in service in January and December are allowed the same amount of depreciation (a half-year's worth).

• For each following year of the recovery period, a full year's worth of depreciation is allowed.
• If the asset is held for the entire recovery period, a half-year of depreciation is allowed for the year following the end of the recovery period (e.g., the fourth year of 3-year property).
• If, however, the asset is disposed of in the first recovery year, no depreciation is taken.
• For assets disposed of in subsequent years, only a half year of depreciation would be accounted for in the year of disposition.

Applicable Depreciation Method: 200% or 150% Declining Balance Switching to Straight Line Applicable Recovery Periods: 3, 5, 7, 10, 15, 20 years. Applicable Convention: Half-year.
If the Recovery Year is:	and the Recovery Period is:
	3- year	5-year	7-year	10-year	15-year	20-year
1	33.33	20.00	14.29	10.00	5.00	3.750
2	44.45	32.00	24.49	18.00	9.50	7.219
3	14.81	19.20	17.49	14.40	8.55	6.677
4	7.41	11.52	12.49	11.52	7.70	6.177
5		11.52	8.93	9.22	6.93	5.713
6		5.76	8.92	7.37	6.23	5.285
7		8.93	6.55	6.55	4.888	8.93
8			4.46	6.55	5.90	4.522
9				6.56	5.91	4.462
10				6.55	5.90	4.461
11				3.28	5.91	4.462
12					5.90	4.461
13					5.91	4.462
14					5.90	4.461
15					5.91	4.462
16					2.95	4.461
17						4.462
18						4.461
19						4.462
20						4.461
21						2.231

 

Mid-quarter Convention

• First Quarter
• Second Quarter
• Third Quarter
• Fourth Quarter

The MACRS method also provides for a mid-quarter convention. If during any one tax year the total of all property placed in service in the last three months of the fiscal year exceeds 40% of the total of all property placed in service during the whole year, the mid-quarter convention must be used instead of the half-year convention. Like the half-year convention, the mid- quarter convention normalizes the in-service date of assets to the mid-point of the quarter. It does this by:

• Allowing a mid-quarter of depreciation for the quarter the asset is placed in service during the first year. For example, an asset placed in service on December using mid-quarter fourth quarter convention would account for a total of 4 and a half months of depreciation in the first year.
• For each following year of the recovery period, a full year's worth of depreciation is allowed.
• If the asset is held for the entire recovery period, a half-quarter depreciation is allowed for the last quarter of the year following the end of the recovery period. For example, asset placed in service on December using mid-quarter in fourth quarter convention of a 3-year property, the fourth year depreciation would only account for 10 1/2 months of depreciation.
• If, however, the asset is disposed of in the first recovery year, no depreciation is taken.

For assets disposed of in the subsequent years the following rules apply:

The following percentages apply towards the full year's depreciation amount.

Quarter of the Tax Year	%
First	12.5%
Second	37.5%
Third	62.5%
Fourth	87.5%

 

Depreciation Method.	Quarter	Last Year's %
M1xx	>= 1	100.00%
M2xx	1	33.33%
M2xx	>= 2	100.00%
M3xx	1	20.00%
M3xx	2	60.00%
M3xx	>= 3	100.00%
M4xx	1	14.29%
M4xx	2	42.86%
M4xx	3	71.43%
M4xx	4	100.00%

The following tables show the depreciation percentage of the taxable basis allowable under the MACRS method for each of the six class lives.

 

MACRS: Mid-Quarter (in service first quarter)

M103	MACRS MQTR1  3Y
M105	MACRS MQTR1  5Y
M107	MACRS MQTR1  7Y
M110	MACRS MQTR1 10Y
M115	MACRS MQTR1 15Y
M120	MACRS MQTR1 20Y

Applicable Depreciation Method: 200% or 150% Declining Balance Switching to Straight Line Applicable Recovery Periods: 3, 5, 7, 10, 15, 20 years. Applicable Convention: Mid-quarter (property placed in service in first quarter).
If the Recovery Year is:	and the Recovery Period is:
	3- year	5-year	7-year	10-year	15-year	20-year
1	58.33	35.00	25.00	17.50	8.75	6.563
2	27.78	26.00	21.43	16.50	9.13	7.000
3	12.35	15.60	15.31	13.20	8.21	6.482
4	1.54	11.01	10.93	10.56	7.39	5.996
5		11.01	8.75	8.45	6.65	5.546
6		1.38	8.74	6.76	5.99	5.130
7			8.75	6.55	5.90	4.746
8			1.09	6.55	5.91	4.459
9				6.56	5.90	4.459
10				6.55	5.91	4.459
11				0.82	5.90	4.459
12					5.91	4.460
13					5.90	4.459
14					5.91	4.459
15					5.90	4.460
17						4.459
18						4.460
19						4.459
20						4.460
21						0.565

 

MACRS: Mid-Quarter (in service second quarter)

M203	MACRS MQTR2  3Y
M205	MACRS MQTR2  5Y
M207	MACRS MQTR2  7Y
M210	MACRS MQTR2 10Y
M215	MACRS MQTR2 15Y
M220	MACRS MQTR2 20Y

Applicable Depreciation Method: 200% or 150% Declining Balance Switching to Straight Line Applicable Recovery Periods: 3, 5, 7, 10, 15, 20 years. Applicable Convention: Mid-quarter (property placed in service in second quarter).
If the Recovery Year is:	and the Recovery Period is:
	3- year	5-year	7-year	10-year	15-year	20-year
1	41.67	25.00	17.85	12.50	6.25	4.688
2	38.89	30.00	23.47	17.50	9.38	7.148
3	14.14	18.00	16.76	14.00	8.44	6.612
4	5.30	11.37	11.97	11.20	7.59	6.116
5		11.37	8.87	8.96	6.83	5.658
6		4.26	8.87	7.17	6.15	5.233
7			8.87	6.55	5.91	4.841
8			3.34	6.55	5.90	4.478
9				6.56	5.91	4.463
10				6.55	5.90	4.463
11				2.46	5.91	4.463
12					5.90	4.463
13					5.91	4.463
14					5.90	4.463
15					5.91	4.462
16					2.21	4.463
17						4.462
18						4.463
19						4.462
20						4.463
21						1.673

 

MACRS: Mid-Quarter (in service third quarter)

M303	MACRS MQTR3  3Y
M305	MACRS MQTR3  5Y
M307	MACRS MQTR3  7Y
M310	MACRS MQTR3 10Y
M315	MACRS MQTR3 15Y
M320	MACRS MQTR3 20Y

Applicable Depreciation Method: 200% or 150% Declining Balance Switching to Straight Line Applicable Recovery Periods: 3, 5, 7, 10, 15, 20 years. Applicable Convention: Mid-quarter (property placed in service in third quarter).
If the Recovery Year is:	and the Recovery Period is:
	3- year	5-year	7-year	10-year	15-year	20-year
1	25.00	15.00	10.71	7.50	3.75	2.813
2	50.00	34.00	25.51	18.50	9.63	7.289
3	16.67	20.40	18.22	14.80	8.66	6.742
4	8.33	12.24	13.02	11.84	7.80	6.237
5		11.30	9.30	9.47	7.02	5.769
6		7.06	8.85	7.58	6.31	5.336
7			8.86	6.55	5.90	4.936
8			5.53	6.55	5.90	4.566
9				6.56	5.91	4.460
10				6.55	5.90	4.460
11				4.10	5.91	4.460
12					5.90	4.460
13					5.91	4.461
14					5.90	4.460
15					5.91	4.461
16					3.69	4.460
17						4.461
18						4.460
19						4.461
20						4.460
21						2.788

 

MACRS: Mid-Quarter (in service fourth quarter)

M403	MACRS MQTR4  3Y
M405	MACRS MQTR4  5Y
M407	MACRS MQTR4  7Y
M410	MACRS MQTR4 10Y
M415	MACRS MQTR4 15Y
M420	MACRS MQTR4 20Y

Applicable Depreciation Method: 200% or 150% Declining Balance Switching to Straight Line Applicable Recovery Periods: 3, 5, 7, 10, 15, 20 years. Applicable Convention: Mid-quarter (property placed in service in fourth quarter).
If the Recovery Year is:	and the Recovery Period is:
	3- year	5-year	7-year	10-year	15-year	20-year
1	8.33	5.00	3.57	2.50	1.25	0.938
2	61.11	38.00	27.55	19.50	9.88	7.430
3	20.37	22.80	19.68	15.60	8.89	6.872
4	10.19	13.68	14.06	12.48	8.00	6.357
5		10.94	10.04	9.98	7.20	5.880
6		9.58	8.73	7.99	6.48	5.439
7			8.73	6.55	5.90	5.031
8			7.64	6.55	5.90	4.654
9				6.56	5.90	4.458
10				6.55	5.91	4.458
11				5.74	5.90	4.458
12					5.91	4.458
13					5.90	4.458
14					5.91	4.458
15					5.90	4.458
16					5.17	4.458
17						4.458
18						4.459
19						4.458
20						4.459
21						3.901

 

MACRS: Bonus Depreciation

Under the Job Creation and Workers Assistance Act of 2002, taxpayers are now entitled to an additional first-year depreciation deduction equal to 30% of the adjusted basis of qualified property. LeasePak has 123 new methods that will allow the 30% bonus to be taken during the first year. The eligible property includes:

• Property depreciated under MACRS with a recovery period of 20 years or less;
• Water utility property;
• Computer software other than software that must be amortized over 15 years;
• Qualified leasehold improvements (generally a non-structural, non-expansion improvement to an interior portion of an existing nonresidential building).
  

In order to qualify, the property must be acquired after September 10, 2001, and before September 11, . First use of the property must begin on or after September 11, 2001 and be placed in service before January 1, 2005. The additional first-year depreciation is allowed for both regular tax and AMT purposes for the tax year in which the property was placed in service. The basis of the property is reduced by the additional first-year depreciation.

The Federal Depreciation Report [R0304a] will reflect the Bonus Depreciation in the Depreciation Expense YTD column, as well as the YTD depreciation (calculated on the Federal Basis less the Bonus) for the first year only. Depreciation Expense YTD will be cleared at Year End.

The Accum Deprec LTD will contain the Bonus Depreciation. It will NOT be cleared at Year End. The YTD AMT Depr Diff will reflect the Bonus Depreciation.

The Federal Tax Basis will remain the same for the report; however, the depreciation will be calculated on the Federal Tax Basis less the 30% Bonus Depreciation. Gain/Loss Report [R0311] will reflect the Bonus Depreciation. If the Federal Depreciation Basis is reduced and the Accum Deprec LTD both reflects the Bonus Depreciation, the Gain/Loss will be overstated.

Because some states have not enacted the IRS provisions, the State Depreciation Report [R0304b] will not calculate the 30% bonus; it will remain as is. The user will have the ability to change the method to/from the Bonus depreciation, DURING THE CURRENT YEAR ONLY, through U0120, Change Depreciation.

Depreciation Adjustments Regular

 

Depreciation Adjustments AMT

 

Straight Line

SL01	STR LINE     1Y
SL02	STR LINE     2Y
SL03	STR LINE     3Y
SL04	STR LINE     4Y
SL05	STR LINE     5Y
SL06	STR LINE     6Y
SL07	STR LINE     7Y
SL08	STR LINE     8Y
SL09	STR LINE     9Y
SL10	STR LINE    10Y
SL11	STR LINE    11Y
SL12	STR LINE    12Y
SL13	STR LINE    13Y
SL14	STR LINE    14Y
SL15	STR LINE    15Y
SL16	STR LINE    16Y
SL17	STR LINE    17Y
SL18	STR LINE    18Y
SL19	STR LINE    19Y
SL20	STR LINE    20Y
SL21	STR LINE    21Y
SL22	STR LINE    22Y
SL23	STR LINE    23Y
SL24	STR LINE    24Y
SL25	STR LINE    25Y

SLBB	STR LINE BK BASIS 5Y
SLDD	STR LN DBL BK BS 5Y

ST10	STR LINE 100% TRM
ST12	STR LINE 125% TRM

Straight Line is one of the most conservative depreciation methods. An equal amount of depreciation is earned in each stage of the asset's life.

This method differs from the ADR Straight Line method in that it recalculates the life-to-date depreciation each month (based upon the in service date and the current date) in order to determine the month-to-date and year- to-date depreciation. The ADR group of depreciation methods do not recalculate life-to-date depreciation. Refer to the section on the ADR methods for more information.

The Straight Line method is calculated as follows:

AGE * (TAX BASIS - SALVAGE VALUE) / USEFUL LIFE

Age is the number of months from the in-service date to the accrued to date. Tax Basis is the amount from which depreciation is deducted. This is usually the original purchase price. Salvage Value is the value of an asset at the end of its useful life. Useful Life is the recovery period of the asset. For the straight line over term method, useful life is the actual term of the lease.

 

Straight Line Half Year Convention

SH03	SL 1/2Y CNV  3Y
SH04	SL 1/2Y CNV  4Y
SH05	SL 1/2Y CNV  5Y
SH06	SL 1/2Y CNV  6Y
SH07	SL 1/2Y CNV  7Y
SH08	SL 1/2Y CNV  8Y
SH09	SL 1/2Y CNV  9Y
SH10	SL 1/2Y CNV 10Y
SH11	SL 1/2Y CNV 11Y
SH12	SL 1/2Y CNV 12Y
SH13	SL 1/2Y CNV 13Y
SH15	SL 1/2Y CNV 15Y
SH17	SL 1/2Y CNV 17Y
SH20	SL 1/2Y CNV 20Y

Straight Line Half Year Convention is one of the most conservative depreciation methods. An equal amount of depreciation is earned in each stage of the asset's life.

This method differs from the ADR Straight Line method in that it recalculates the life-to-date depreciation each month (based upon the in service date and the current date) in order to determine the month-to-date and year- to-date depreciation. The ADR group of depreciation methods do not recalculate life-to-date depreciation. Refer to the section on the ADR methods for more information.

The Straight Line method is calculated as follows during the first fiscal year:

(TAX BASIS - SALVAGE VALUE) / USEFUL LIFE) * (AGE / MONTHS) * 6

Tax Basis is the amount from which depreciation is deducted. This is usually the original purchase price. Salvage Value is the value of an asset at the end of its useful life. Useful Life is the recovery period of the asset. Age is the number of months from the in-service date to the accrued to date. Months is the number of months the asset is in-service during the first fiscal year.

After the first fiscal year the following calculation is used for the Straight Line method:

AGE * (TAX BASIS - SALVAGE VALUE) / USEFUL LIFE

Age is the number of months from the in-service date to the accrued to date. Tax Basis is the amount from which depreciation is deducted. This is usually the original purchase price. Salvage Value is the value of an asset at the end of its useful life. Useful Life is the recovery period of the asset.

 

Straight Line Mid-month Convention

SM39	STR LINE MM 39Y
SM40	STR LINE MM 40Y

 

Sum of the Years' Digits (SOYD)

SD03	SOYD         3Y
SD05	SOYD         5Y
SD07	SOYD         7Y
SD10	SOYD        10Y

Sum of the Years' Digits (SOYD) is an accelerated depreciation method. That is, a higher amount of depreciation is earned in the earlier stages of the asset's life.

This method differs from the ADR Sum of the Years' Digits (SOYD) method in that it recalculates the life-to-date depreciation each month (based upon the in service date and the current date) in order to determine the month-to-date and year-to-date depreciation. The ADR group of depreciation methods do not recalculate life-to-date depreciation. Refer to the section on the ADR methods for more information.

The Sum of the Years' Digits (SOYD) method is calculated as follows:

(TAX BASIS - SALVAGE VALUE) * (REMAINING LIFE / SUM USEFUL LIFE)

Tax Basis is the amount from which depreciation is deducted. This is usually the original purchase price. Salvage Value is the value of an asset at the end of its useful life. Remaining Life is the number of years remaining in the useful life of the property. Sum Useful Life is the sum of the useful life years. For example, the Sum Useful Life is 15 for an asset with a useful life of 5 years (1 + 2 + 3 + 4 + 5 = 15).

 

Supplemental Depreciation

The monthly update will calculate the supplemental depreciation and creates general ledger transactions for the asset(s) that have been setup for supplemental depreciation through U0120 Change Asset→Supplemental Depreciation. The general ledger entry can be negative.

Supplemental Depreciation Calculation:

((Supplemental depreciation basis - supplemental depreciation salvage value) - supplemental depreciation accumulated amount) / number of remaining months to depreciate.

Where: The number of months remaining to depreciate = (number of month supplemental depreciation - number of months already depreciated)

Number of months already depreciated = (Today - supplemental depreciation start date)

LeasePak will use the following formula for supplemental depreciation calculation:

Number of months (supplemental depreciation months) > than 0 and where the number of months is > than the number of months already depreciated.

LeasePak creates the following general ledger transaction if the supplemental depreciation is calculated to be positive:

General Ledger Account	Amount
DR - SUPPLEMENTAL DEPRECIATION EXPENSE	SUPPLEMENTAL DEPRECIATION
CR - ACCUMULATED SUPPLEMENTAL DEPRECIATION

If calculated supplemental depreciation amount is negative then the following general ledger entry will be produced:

General Ledger Account	Amount
DR - ACCUMULATED SUPPLEMENTAL DEPRECIATION	SUPPLEMENTAL DEPRECIATION
CR - SUPPLEMENTAL DEPRECIATION

 

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