Section 168
Overview
Section 168 of the Internal Revenue Code (IRC) deals with the Accelerated Cost Recovery System (ACRS) and Modified Accelerated Cost Recovery System (MACRS), which are methods used for computing depreciation for tax purposes. These systems allow property owners to deduct the depreciation of their property over a specific period, thereby spreading out the purchase cost of an asset over its useful life.
Key Components
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Accelerated Cost Recovery System (ACRS): Introduced in 1981, ACRS was one of the first significant reforms aimed at simplifying and accelerating the way depreciation was calculated for tax purposes.
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Modified Accelerated Cost Recovery System (MACRS): Implemented further reforms through the Tax Reform Act of 1986. MACRS is the current depreciation system in the United States and allows different methods and periods for calculating depreciation based on the type of property.
Depreciation Methods
Under Section 168, there are specific methods for different types of property:
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Residential Rental Property: Typically depreciated using the straight-line method over a 27.5-year period.
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Commercial Real Estate: Depreciated over a 39-year period using the straight-line method.
Examples
Example 1: Residential Rental Property
A residential rental property, such as an apartment building, would be depreciated using the straight-line method over 27.5 years. If the initial cost of the building is $275,000, the annual depreciation expense would be: \[ \text{Annual Depreciation} = \frac{\text{$275,000}}{27.5} = $10,000 \]
Example 2: Commercial Real Estate
Commercial real estate, like a shopping mall, will be depreciated over a 39-year span using the straight-line method. If the property was purchased for $780,000, the annual depreciation would be: \[ \text{Annual Depreciation} = \frac{\text{$780,000}}{39} \approx $20,000 \]
Frequently Asked Questions
Q1: What property qualifies for MACRS depreciation under Section 168?
- Any tangible property used in your business or income-producing activity qualifies, provided it can be depreciated. This includes buildings, machinery, vehicles, furniture, and other equipment.
Q2: Can land be depreciated under Section 168?
- No, the cost of land is not depreciable. Only the structures placed upon the land are subject to depreciation.
Q3: What is the main difference between ACRS and MACRS?
- ACRS was a simpler system with fewer categories and depreciation periods. MACRS, while still accelerated, provides more detail and specific categories for different types of property, making it more flexible.
Q4: Can capital improvements be depreciated?
- Yes, capital improvements that add value to the property, extend its useful life, or adapt it to new uses can be depreciated under Section 168.
Related Terms
- Straight-Line Depreciation: A method for calculating depreciation where the asset’s cost is divided equally over its useful life.
- Internal Revenue Code (IRC): The body of law that encompasses all federal tax regulations in the United States.
- Capital Improvements: Enhancements that increase the value or extend the useful life of real property.
- Section 179: A tax code provision allowing businesses to expense certain types of property upfront, rather than depreciating them over time.
Online Resources
- IRS Publication 946: How to Depreciate Property
- IRS Schedule E: Supplemental Income and Loss
- Overview of MACRS: Official IRS explanation of the Modified Accelerated Cost Recovery System
References
- Internal Revenue Code Section 168
- IRS Publication 946: How to Depreciate Property
- Tax Reform Act of 1986
Suggested Books for Further Study
- “Tax Depreciation Guide” by CCH Tax Law Editors
- “Depreciation: Fundamental Building Blocks” by Gerard M. Zack
- “Real Estate Taxation” by Richard Sonenberg
