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Former Member

Error in TAX Depreciation after Changing Useful Life

Hello all --

This post is purely regarding TAX depreciation - book is not affected by any means.

For book purposes, an asset is classified as a building. However because of special rules for tax purposes, the asset was erroneously depreciated using a MACRS 39-year life when they should have been on a shorter life (i.e. 5-year or 7-year). Said another way, the asset is classified as a building for book purposes, but it can be broken out into a 5-year life for tax purposes (through a cost segregation study).

Asset Information:

Placed In-Service Date: 8/21/2007

Acquisition Value: 55,112

Original Life: 39 years

Original Method: Straight-Line Acquisition, Mid-Month

New Life: 5 years

New Method: MACRS Half-Year Convention, DDB 200%

MACRS 5-year Percentages - 20%, 32%, 19.20%, 11.52%, 11.52%, 5.76%

I don't plan on opening prior fiscal years to make adjustments so that the old incorrect information can be preserved. My plan was to change the depreciation key and useful life in AS02 and then post unplanned tax depreciation in 2010 to get to the correct net book value at the end of 2010. Thereafter, the 2011 and 2012 depreciation and net book values should theoretically reflect the correct amounts.

The depreciation scenario tables are below:

Current - What SAP currently reflects in production

Year	Ordinary	Accumulated 	NBV
2007	 529.92 	 529.92 	 54,582.08 
2008	 1,413.13 	 1,943.05 	 53,168.95 
2009	 1,413.13 	 3,356.18 	 51,755.82 
2010	 1,413.13 	 4,769.31 	 50,342.69 
2011	 1,413.13 	 6,182.44 	 48,929.56 
2012	 1,413.13 	 7,595.56 	 47,516.44

Correct Application - If the useful life and depreciation key were correct from the onset, this is what SAP would reflect

Year	Ordinary	Accumulated	NBV
2007	 11,022.40 	 11,022.40 	 44,089.60 
2008	 17,635.84 	 28,658.24 	 26,453.76 
2009	 10,581.50 	 39,239.74 	 15,872.26 
2010	 6,348.90 	 45,588.65 	 9,523.35 
2011	 6,348.90 	 51,937.55 	 3,174.45 
2012	 3,174.45 	 55,112.00 	 -

Proper Adjustment - previously posted depreciation amounts are retained

Year	Ordinary 	Accumulated 	NBV
2007	 529.92 	 529.92 	 54,582.08 
2008	 1,413.13 	 1,943.05 	 53,168.95 
2009	 1,413.13 	 3,356.18 	 51,755.82 
Unplanned 35,883.56 	 39,239.74 	 15,872.26 
2010	 6,348.90 	 45,588.64 	 9,523.36 
2011	 6,348.90 	 51,937.54 	 3,174.46 
2012	 3,174.45 	 55,112.00 	 0.00

When I actually tested the scenarios, I get the following results:

When I actually tested the scenarios, the depreciation amounts for 2010 and beyond were inflated. If I only made the change to depreciation key and useful life without posting unplanned tax depreciation, I get the following result:

Actual Result - 200% DDB based on ending 2009 NBV - The depreciation that should have been taken (35,883.56) is spread over the remaining life

Year	Ordinary	Accumulated	NBV
2007	 529.92 	 529.92 	 54,582.08 
2008	 1,413.13 	 1,943.05 	 53,168.95 
2009	 1,413.13 	 3,356.18 	 51,755.82 
2010	 20,702.33 	 24,058.51 	 31,053.49 
2011	 19,109.84 	 43,168.35 	 11,943.65 
2012	 11,943.65 	 55,112.00 	 0.00

Actual Result with Unplanned/Special Depreciation - Tested with special depreciation booked in the middle of 2010. Result was that ordinary depreciation was ending too early, with the last year being 2010. Instead, the ordinary depreciation should have been calculated from using the MACRS percentage for that useful life year and multiplied by the original acquisition cost. Ordinary depreciation should not adjust for the catch-up depreciation. Posting unplanned depreciation in 2010 resulted in the same thing.

Year	Ordinary	Accumulated	NBV
2007	 529.92 	 529.92 	 54,582.08 
2008	 1,413.13 	 1,943.05 	 53,168.95 
2009	 1,413.13 	 3,356.18 	 51,755.82 
Special Depr 35,883.56 		
2010	 15,872.26 	 55,112.00 	 0.00 
2011	 -   	         55,112.00 	 0.00 
2012	 -   	         55,112.00 	 0.00

It seems as if the ordinary depreciation is being calculated first. After the special depreciation is applied, the system takes the remainder of the NBV since the special depreciation value was took out of the ordinary depreciation planned for 2010.

Is there some sort of configuration to avoid the depreciation being spread in the special year? I know that there's a configuration for book purposes to avoid "smoothing" the depreciation. But is there one for tax as well?

Please advise. I would be extremely grateful for anyone who could help me resolve this matter or lead me in the right direction.

Best Regards,

Kay

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1 Answer

  • avatar image
    Former Member
    Sep 21, 2010 at 05:16 PM

    Please disregard - moving this question to Asset Accounting

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