The taxman cometh; ACRS depreciation with the IBM PC. (Accelerated Cost Recovery System) Linda Broudy; Sid Broudy.
"In this world," Benjamin Franklin observed, "nothing is certain but death and taxes." Well, old Ben was able to avoid the grim reaper for some 84 years, but, as Archie Goodwin reminded his boss, super-sleuth Nero Wolfe in the film version of Rex Stout's The Doorbell Rang, in April "the Tax Man cometh". Don't we know it!
The harbinger of tax time is the sudden metamorphosis of every previously vacant little store on Main Street into a "Tax Preparation Center." (The effect of this on the human pysche is a lot like Christmas in reverse.)
Nobody (at least nobdoy we know) looks forward to paying taxes. It is just one of those remainders of our "mere mortal" status. As we calculate our taxes, we ty not to overlook ways to keep more of our hard earned dollars for ourselves. Indeed, it is our right to take advantage of legal tax deductions. One of those legal tax deductions is depreciation of business property.
It is not the purpose of this article to be a mini-treatise on depreciation. What we intend to do is briefly survey the relatively new method of depreciation known as ACRS, and present a program which will enable your personal computer to helop you figure your ACRS deductions. Background On ACRS Depreciation
According to the IRS, if you have qualifying property your use in business or hold for the production of income, you are allowed to deduct a part of the duction is called depreciation. Depreciation begins when you place the property in service. It ends when you take the property out of service or when you have recovered all of your cost.
the Economic Recovery Tax Act of 1981, as you are probably aware, brought about a number of changes in the law--and language--of depreciation. The Act created a new method of depreciation, the Accelerated Cost Recovery System (ACRS).
Under this new system, the in-crowd no longer speaks of "depreciable property"; it is now "recovery property." The term "depreciation" seems to be going the way of the nickel Coke--the new lingo speaks of "recovery amount."
In general, you must use ACRS and its listed percentages for all assets you place in service after December 31, 1980. (However, you may elect to use an alternate method of figuring your deductions. This method is based on the straight line method and is used in place of the prescribed ACRS percentages.) Property placed in service before January 1, 1981, will continue to be depreciated in the same manner as in prior years.
Under ACRS, tangible depreciable property is depreciated over a 3-year, 5-year, 10-year, or 15-year recovery period, depending on the type of property it is. (The first three types of properties will be discussed later in this article. The fourth type, 15-year property, includes all real property, such as buildings, other than any designed as 10-year property. Since it is outside the area of concern of the average reader of this piece, 15-year property has not been included in the ACRS program.)
Let's now turn to the ACRS program itself, which calculates the ACRS deduction for the first three types of properties based on the percentages given in the IRS tables. The program will enable your computer to figure out, save to disk, and print out your ACRS deduction records. In the example we will use to guide you through the program, we will even allow your computer to be the star of the show. The ACRS program (see listing, below) was written for an IBM Personal Computer, but it can be modified without too much difficulty for most other micros. After you have entered the program and saved it to disk (perhaps as ACRS.BAS), we will run through the program together. Ready? Then let's go. Running The Program
When you run the program, the first thing you will see on your screen are the words DEPRECIATION (ACRS) PROGRAM in inverse video. (We wanted to come on with a catchy phrase, like
"You are standing at the end of a road before a small brick building," but decided against it.)
You are first asked if you would like to read data from disk. Since this is the first time you are running the program, you obviously have no data to read yet, so answer N. You are next asked to type in your name, followed by a comma, and then your social security number. Let's do that: John Q. Public, 000-0-0000.
Now you are queried as to the item you wish to depreciate. As promised, we will enter the computer itself as the leading man (or, if you pefer, prima donna): IBM Personal Computer System.
You are now questioned as to the "recovery period" for the IBM Personal Computer System--3, 5, or 10 years. In general, 3-year property is personal property that has a midpoint class life of 4 years or less (e.g., automobiles, light duty trucks, and certain special tools), or is used for reserach and experimentation.
Ten-year property includes certain real property (such as theme park structres and certain public utility property), as well as manufactured homes.
Five-year property, says the IRS, is personal property "that is not 3-year property or 10-year property or 15-year public utility property." How's that for a catchall?
The 5-year group thus includes most other tangible depreciable personal property, such as the majority of equipment and machinery.
It appears from the above that the computer would be 5-year property, so let's enter 5. When you enter this number, the computer will keep it in mind and automatically do its depreciation figuring based on the right set of percentages. (The percentages contained in the program listing for 3-year property [lines 410-460], 5-year property [lines 470-520] and 10-year property [lines 530-600] are those set forth under the 1981 Tax Act for assets placed in service from 1981-1984).
You are now asked for the unadjusted basis of the item. For property that you buy, your original basis is usually its cost to you. Assume that the purchase price for the computer system was $3000. Therefore, let's enter that amount (either as 3000 or 300.00).
Next you are requested to supply the date the item was placed in service. Since the recovery deduction for personal property is not prorated for number of months in service the first year, it would probably be sufficient simply to enter 1982. However, if you prefer, the program allows you to make a full entry of month, date, and year (1-1-82).
Let's assume that the computer system is used for business purposes. Therefore, you enter 100 for the percentage of business use.
Finally, you are requested to enter the "depreciation year." In other words, you are being asked whether this is the first year of depreciation for this item, the second year, the third year, etc. In our example, this is the first year, so we'll enter 1. Well, that's all the information the computer needs; it is now ready to get to work.
The program now asks you if you wish a printout. Let's type Y to see what it looks like. (It should look like the printout apprearing at the end of this article.) Notice that the printout is headed 5-YEAR DEPRECIATION (ACRS) WORKSHEET and includes your name and social security number. The computer has automatically performed the ACRS depreciation calculations for you at the prescribed rate of 15% (the first year rate for 5-year property), and pegged your deduction at $450.
You are then given the opportunity to look at another depreciation year (e.g., year "2") for the same item, or to enter information for a completely new item. (although either or both of these options may be tempting, let's enter N for now.)
Finally, you are given the change to save the depreciation information you entered earlier to disk. This is something you are urged to do. First, it will give you a permanent recored of this information, and make it unnecessary to enter it again when you depreciate the item next year. (Remember that, unless Congress changes it mind, the percentages in this program should apply at least through 1984.)
Second, if you decide to depreciate anything else this year, you just "read from disk" at the beginning of the program, and are spared the task of reentering such information as your name and social security number. You can then not only enter another item (up to 10), but review any items you have entered previously. So let's type Y to save our data.
After that you are asked to name the file which will contain this data. Be sure you don't exceed eight alphanumeric symbols, as the extension. TAX will automatically be added to the file by the program. So let's save our data now as ACRS82. Comments and Caveats
Well, there you have it--a program to help you with ACRS depreciation. After entering, saving, and runnng the program, you will be prepared to transfer the information to your tax return. (Form 4562 ("Depreciation"), Schedule A ("Itemized Dedeuctions"--miscellaneous deduction if a qualified unreimbursed employee expense), Schedule C ("Profit or Loss From Business or Profession--Sole Proprietorship"), and/or Schedule E ("Supplemental Income Schedule") are the forms on which depreciation (recovery) amounts are usually recorded.)
There are two other provisions of the Economic Recovery Tax Act of 1981 that may be of interest to you. The first concerns "investment credit." If you buy certain tangible personal property for use (or partial use) in your trade or business, you may be able to claim an investment credit of up to 10% of the cost.
For assets placed in service after 1980, the eligible investment depends on the recovery period of the property under ACRS. (Investment credit is computed on Form 3468.) However, beginning in 1983 (i.e., for assets placed in service after 1982), you would have to subtract half the amount of the investment credit from the basis of the asset before computing the depreciation deduction, unless you are willing to reduce the credit by 2 percentage points.
The second provision of the 1981 Tax Act that relates closely to ACRS involves expensing. Under this provision, the taxpayer may currently elect to expense (deduct) up to $5000 of the cost of certain qualified property all in one year. The deduction is in lieu of the ACRS recovery amount and investment credit that would otherwise be allowed.
It goes without saying that it is vital to your financial well-being to review carefully all tax provisions which may affect you, and read up one any new tax items that may come down the pike, before figuring your depreciation deductions or, for that matter, your taxes as a whole. Professional counsel should, of course, be consulted regarding your individual tax situation.
We hope that this article--and program--will serve to remove at least some of the pain from April. Sure, Archie goodwin was right, the Tax Man cometh--but at least we know that those flowers of May await us just a short way down the road.