197 and Depreciation Issues

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1 Chapter and Depreciation Issues Unusual way to 197 Fitch, TC Memo June 2003 F sold accounting practice for $900,000 due to poor health Reported capital gain on 2003 return October 2003, buyer suffered seizure and sold practice back to F for $900,000 F recorded purchased assets as including $600,000 of 197 intangibles amortizable over 15 years IRS disallowed False testimony and documents too brief; details missing. Is a rescission; parties go back to original position. Self-created intangibles not amortizable under

2 Unusual way to continued Fitch, TC Memo Court all were valid transactions without tax motives Found the sale and repurchase agreements to be genuine and trustworthy. Ok under circumstances and long relationship between buyer and seller to work details out later. No evidence parties tried to undo earlier sale; purchase by Fitch was separate transaction. F did not receive practice back in same condition as when sold. sale and repurchase transactions are not related transactions, and therefore the rules generally disallowing the amortization of self-created intangibles do not apply Medical conditions were not made up history and future 2008 and and beyond Dollar limit $250,000 $500,000 $ 25,000 Reduction in dollar limit starts at $800,000 $2 million $200,

3 179 and Certain Real Property Notice Guidance some of the complexities of 179(f) regarding allocating the 179 deduction between real property and other 179 property, recapture treatment (the 179 deduction portion of any real property gain is treated as 1245 gain), and carryovers due to taxable income limits. Making election for prior year. Some examples are included Cost Seg 13-6 Peco Foods, Inc. & Subs (11 th Cir. 2013) Aff d Tax Court Cannot unilaterally change original purchase price agreement with seller Post-acquisition, P hired appraiser to do cost seg Too much 39-year property Can get $5 million more of depreciation! Ct too late! Danielson rule 160

4 Meaning of placed in service Brown, TC Memo (12/3/13) $22 million plane purchased 12/30/03 Insurance sales Testimony conference table and screen necessary These items not added until 2004 until an asset is available for full service, it hasn t been placed in service. An asset must instead be available for its intended use on a regular, ongoing basis before we can find it placed in service in the tax year in question. See updates for more details. 161 Senator Baucus Proposal - 1 Discussion draft - 11/21/13 Modernize depreciation and amortization rules Simplification Generate revenue to reduce corporate tax rate 179 $1 million expensing; $2 million threshold Adjusted for inflation Includes 179 property, software, 1245 property, R&D, advertising expenditures, qualified extraction Pooled property system for depreciable property replaces MACRS No need to depreciate assets separately Real property 43 years SL 162

5 Senator Baucus Proposal life extended to 20 years (from 15) Anti-churning rule repealed 174 R&D capitalize and amortize over 5 years Includes software development If abandon within 5 years, no deduction Repeal 181 film and TV productions, and others New 177 on advertising Deduct 50% in year incurred; balance over 5 years Repeal 1031 Not needed under pooling system of depreciation Changes to oil and gas, repeal intangible drilling cost deduction and % depletion 163 Senator Baucus Proposal - 3 Limit cash method to businesses with average annual GR over 3 year period < $10 million Also exempt from inventory accounting and 263A Change to some farming exceptions Repeal LT contract exception for certain home construction contracts LIFO and LCM repealed Consolidate 195, 248 and 709 Immediately expense $10,000 (rather than $5,000) Phased our for excess of $60K (rather than $50K) Balance amortize over 20 years (rather than 15) Seeking comments by 1/17/14 164