RE: Depreciation...

Reeve,

Well said, again.

One small correction.  It is true that the IRS gains revenue quicker, when a
company spends money but depreciates it over time, rather than expense the
whole thing when the cash is layed out.

However, the intent behind depreciation is not to allow the USG to get the
money sooner, or to even out the revenue streams.  But that, indeed, is the
effect.

I was a dual-major, at the local community college, and didn't get as far in
accounting.  But what I did learn was that the intent by depreciation is
simply to match up expenses (cash outlays) with the matching revenue (cash
income).

It's a concept that has been standardized.  There is a standards committee
that issues FASBs (Faz-buz), which are simply statements by the Financial
Accounting Standards Board on what precisely makes up GAA (Generally
Accepted Accounting) procedures.  Bean-counting being around for millenia,
they noticed that there are a variety of ways to count the beans.  So they
came up with a committee to decide what are more even-handed, and less
even-handed ways of doing it.  Accounting scripture, so to speak.

So if you plunk down $1B on some machinery to make something, you could
account for it as a loss the first year.  Then each year you sell something,
all that money would be pure income.  The second year, that income might
make it appear that the $1B was a great investment, because the company
would be in the black in year 2.  The FASBs say that it makes more sense to
allocate that $1B against that revenue, somehow.  So depreciation is a
concept that allows a company to more accurately determine if they're making
money on that $1B, or not.

The IRS issues their rulings on how to collect taxes, based on FASBs.  Sort
of like fatwahs...;-)


This is my understanding, but IANAB.  Understand something of the concepts..
that's all...

jt


> -----Original Message-----
> From: midrange-l-admin@midrange.com
> [mailto:midrange-l-admin@midrange.com]On Behalf Of Reeve Fritchman
> Sent: Saturday, November 10, 2001 10:13 AM
> To: Midrange-L@Midrange. Com
> Subject: Depreciation...
>
>
> This is a multi-part message in MIME format.
> --
> [ Picked text/plain from multipart/alternative ]
> …is basically a tax gimmick.
>
> With your $25,000 business exemption, you can reduce your taxable
> revenue by
> “expensing” (deducting) item(s) that have a useful life of > 1
> year.  Stuff
> with a useful life of less than one year (toner cartridges, etc.)
> is always
> expensed.
>
> When you depreciate something over 10 years using the
> straight-line method,
> you can “expense” (reduce/offset taxable income) 10% of the asset’s price
> each year; it’s all about the IRS getting money sooner than
> later.  The IRS
> offers some flexibility with computers, but I think you can go as short as
> three years; the depreciation basis decision is made by the IRS
> based on the
> expected economic life of the asset.  Since land “never” wears out, it
> depreciates slowly.  If depreciation went away suddenly and everything was
> expensed, the Feds would have a catastrophic reduction in tax collections
> that first year, then everything would be back to “normal” with one
> exception: depreciation is a way to smooth the tax stream to the Feds.
> Without depreciation, business tax revenues would vary wildly.
>
> I’d suspect hardware and software on the iSeries should be
> grouped into one
> depreciation category, since one doesn’t work without the other; I don’t
> know what the IRS rules are regarding software vs. hardware depreciation.
> But most other software and hardware could be depreciated differently on a
> practical basis, since an Office 97 installation is independent of the
> hardware platform.  You could keep O97 running on at least two
> price-performance generations of hardware, but I don’t know if the IRS
> allows (or requires) this.  And then you have application software
> (ERP-size) vs. database managers (on PC’s) vs. OS software.
>
> Usually, the goal is to depreciate an asset as quickly as possible so you
> get a bigger tax deduction each year.  But if you’re not making money,
> depreciation doesn’t help.  That’s why accountants play games: they’re
> juggling profits vs. depreciation vs. time, and that’s why there
> are lots of
> complicated rules about switching depreciation methods.  Even intangible
> assets (goodwill) and depleting assets (oil reserves) can be depreciated,
> except it’s called “amortization”.
>
> This stuff is almost as boring as programming!
> --
>
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