1. Cost Recovery

2. Shoemaker example

3. Depreciation systems are of enormous practical and theoretical importance. Generally the province of accountants. Accelerated cost recovery system (ACRS) governs most tangible assets. “Amortization” is term used for intangible assets.

4. Depreciation deductions serve three very different purposes. Tax deductions for economic loss in value. To recover investment. To encourage investment.

5. Depreciation deductions are an exception to the realization requirement. These deductions reduce income. They also adjust basis.

6. ACRS is pro-taxpayer. It is front-loaded or accelerated. Allowing more than economic depreciation in early years serves as incentive to investment in equipment.

7. ACRS has six statutory recovery periods for personal property. Three, five, seven and ten year property uses the 200% declining balance method. Fifteen and twenty year property uses the 150% declining balance method. These methods treat all property as being put into service in the middle of the taxpayer’s year.

8. Different rules apply to real property. Real property uses the straight-line method. Real property uses the mid-month convention. The recovery period is 27.5 years for residential real property. The recovery period is 39 years for commercial property.

9. Section 197 governs intangibles. It applies to copyrights, patents, and know-how. It allows 15-year amortization.

10. See example in Handouts.

11. Gilliam: Ordinary and necessary expenses.