Order of Depreciation and Depletion

Lesson: Order of Depreciation and Depletion

In this lesson, Nick Palazzolo, CPA, breaks down the intricacies of depreciation deductions, focusing on the proper order and application. He kicks things off by highlighting the primary option of Section 179 expensing and then guides through the nuances of bonus depreciation and the Modified Accelerated Cost Recovery System (MACRS). Throughout the lesson, Nick clarifies the limitations and qualifications for each method using practical examples that showcase how to apply these rules in real-world scenarios. Additionally, he dedicates a segment to depletion, explaining its similarities to depreciation and its specific application to natural resources. Though depletion is being phased out of the exam, Nick includes a discussion on this topic for a more comprehensive understanding of the depreciation landscape. The lesson is stuffed with helpful markers for remembering limits and exceptions, ensuring a firmer grasp of the material.

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Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Order of depreciation. We've got different types of depreciation and there is an order to it. So as we saw, first off, you want to try to get that section 179. But if you can't get the full amount, then you go back to regular makers. So we see order of depreciation. What is the priority level? You start with 179. And let's say you're a massive business. You can't really deal with 179. You probably skip that step overall and go to the next step. Now we'll talk about bonus depreciation in a second when we get to it. When a taxpayer acquires new personal property, tangible assets, because you've got to depreciate those for use in their business, they have the opportunity to claim depreciation deductions. As we've seen, this is pretty much it. These are the full amounts. We'll see an example here as well. The depreciation deductions are applied in a specific order. We've got section 179, expensing, bonus depreciation, and then makers, which is just everything else. The rest, the normal depreciation. Now, just to recap here, since we kind of covered that a lot, under section 179 of the IRC, a taxpayer can elect to expense the cost of qualifying property up to a specific limit, which is adjusted for inflation each year. The property must be used in an active trade or business. And the deduction is subject to an investment limit and a taxable income limit. For example, if a taxpayer purchases a piece of equipment for $60,000, they could potentially expense that entire cost up to our limits. And all those limits that do change year to year will be included for you to memorize. Bonus depreciation. After applying a 179 expensing, taxpayers can claim bonus depreciation on the remaining depreciable

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