My company bought a new factory building last tax filing year (in 2004) for $10,000,000. Due to computer crashes, hurricanes and a string of ill-begotten issues, we are just now finalizing that year's accounting and tax entries, as well as this year's (2005). We are fortunate to have the necessary federal extensions.
What would be your advice as far as depreciation and cost recovery? What do these concepts mean and how do they compare to amortization and depletion?
Considering that the building was purchased in 2004, what would be the cost recovery deduction for the year 2005? Would anything change if the current tax filing year was 2006?
Would there be differences when considering the accounting perspective, and when considering the tax perspective? Compare and contrast this.
The first issue is basis of the building. The land must be segregated from the building using either an appraisal or the tax valuation for the county in which the property is located. Use the percentage of land to the total and apply that percentage to your purchase price.
Second issue is to decide whether cost segregation will be used to determine the personal property portions of the building as opposed to the structural components. The Tax Court has acquiesced after Hospital Corporation of America, 109 TC 21, Dec. 52.163. The purpose of this study would be to list certain items ...
The 405 word solution presents a good discussion of the concepts in the problem in addition to alternative treatments and other information about allocation of basis for depreciation. There are separate paragraphs for amortization and depletion with examples followed by a brief discussion of timing differences with examples.