In this session, we discuss property acquisitions and dispositions. In financial accounting, the acquisition of assets means that specific procedures will be followed, including computing the depreciable cost of the asset and estimating its useful life. These steps are required to compute the depreciation for the acquired asset. The accounting treatment options vary including the use of Straight Line, Units of Production, or an accelerated method such as Declining Balance or Sum of the Years’ digits. (Heintz & Parry, 2017) If the asset is later sold before being fully depreciated, there may be an accounting gain or loss on disposal, depending on the circumstances. If assets are disposed of under the tax code, such disposal might trigger depreciation recapture. The deductions allowed under section 1231 allow for tax savings while reducing the taxpayer basis in the asset. Such a reduction in basis might be connected to a realized gain on the disposal of such an asset and allow the taxpayer to treat such a gain as a long-term capital gain that would produce substantial tax savings. Therefore, the tax savings recognized during the depreciation period and the potential for tax savings on disposal represent a potential for “double dipping on tax savings,” and therefore the section 1231 recapture provisions treat the gain on disposal as ordinary income, in whole or in part. With that in mind, please respond to the following in your initial post: Please identify and describe tax treatment for acquisition of assets and their depreciation specified when using the MACRS approach. How does the accounting treatment differ from section 179 under the IRS tax code? Describe how depreciation recapture impacts the disposal of assets.

Auditing: A Risk Based-Approach (MindTap Course List)

11th Edition

ISBN:9781337619455

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter12: Auditing Long-lived Assets And Merger And Acquisition Activity

Section: Chapter Questions

Problem 20CYBK

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In this session, we discuss property acquisitions and dispositions. In financial accounting, the acquisition of assets means that specific procedures will be followed, including computing the depreciable cost of the asset and estimating its useful life. These steps are required to compute the depreciation for the acquired asset. The accounting treatment options vary including the use of Straight Line, Units of Production, or an accelerated method such as Declining Balance or Sum of the Years’ digits. (Heintz & Parry, 2017) If the asset is later sold before being fully depreciated, there may be an accounting gain or loss on disposal, depending on the circumstances. If assets are disposed of under the tax code, such disposal might trigger depreciation recapture. The deductions allowed under section 1231 allow for tax savings while reducing the taxpayer basis in the asset. Such a reduction in basis might be connected to a realized gain on the disposal of such an asset and allow the taxpayer to treat such a gain as a long-term capital gain that would produce substantial tax savings. Therefore, the tax savings recognized during the depreciation period and the potential for tax savings on disposal represent a potential for “double dipping on tax savings,” and therefore the section 1231 recapture provisions treat the gain on disposal as ordinary income, in whole or in part. With that in mind, please respond to the following in your initial post: Please identify and describe tax treatment for acquisition of assets and their depreciation specified when using the MACRS approach. How does the accounting treatment differ from section 179 under the IRS tax code? Describe how depreciation recapture impacts the disposal of assets.

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