Accounting in cooperation with the Internal Revenue Service can achieve both outcomes by generating both book and tax financial statements. As this relates to depreciation, the bookkeeper must keep schedules for both sets of books. This function of maintaining depreciation schedules is daily operations duty. This article explains the two variations of depreciation schedules – book and tax depreciation. In Lesson 52 I explain how the profit is calculated for both book and tax depreciation and the corresponding impact on income tax.
When a fixed asset is purchased depreciation is used to allocate its cost over time to the income statement. Most low-end accounting software programs do have fixed assets module which generate depreciation schedules. In lieu of this, I encourage bookkeepers to use an Excel spreadsheet. Create a ‘Master Depreciation – 20XX’ workbook. For this article the year is 2015. The workbook will have three separate sections as follows:
1) Cumulative Summary of All Depreciation
. – Book
. – Tax
. – Book to Tax Basis Analysis
2) Cumulative Summary by Year (Book and Tax)
3) One spreadsheet per fixed asset identifying book, tax depreciation and source entry codes
To assist you in understanding the entire depreciation schedule format this article is divided into three sections related to the above items. Sections two and three build on the prior sections.
Single Asset Book Depreciation Schedule
The core calculations start with the individual assets. A bookkeeper creates the book depreciation schedules based on the organization’s depreciation policies. These policies indicate the preferred depreciation method for the respective individual and groups of assets. Here is an example:
Policy: Depreciation Methods for Respective Assets
This policy is designed to fairly present the financial value of utility related to the respective fixed assets used at ABC Inc. In general those assets used in the
field are depreciated using accelerated depreciation. Assets specifically engineered for production are depreciated using a units of production method. Office technology and other office assets should be expensed under the straight line methods. A written note from management attached as a PDF document to the source entry for the respective asset is required. It must indicate the authorized depreciation method and justification for any departure from the planned method identified below.
All assets shall have depreciation start in the month the asset is placed in service under the mid-month convention.
The following is a table identifying the more common assets and the respective depreciation method promulgated by management.
. Physical Assets | Depreciation Method_________
- Trucks (Light Hauls <2,000 Lbs) Sum-of-the-Year’s-Digits
- Heavy Trucks (Dump, Dually, Tractor) Double Declining Balance
- Skid Steers, Bucket Loaders Double Declining Balance
- Cranes Hours of Production
- Fuel Transfer Pumps/Tankers Units of Production/Miles Per Unit
- Hand Tools (Non Powered) Three Years Straight Line
- Power Tools Five Years Straight Line
- Office Technology Five Years Straight Line
- Furniture and Fixtures Seven Years Straight Line
In addition to the method the policy indicates the preferred ‘convention’. Convention refers to the starting point of depreciation. In the ideal world, all fixed assets would be purchased on January 1 of each year allowing for a full year of depreciation in the year of purchase. Of course this is unrealistic. Since assets are bought at various times throughout the year; a mathematical starting point is required. The following are the basic conventions used with depreciation:
. Half Year (HY) – No matter when the asset is purchased during the accounting the year, the asset’s depreciation starts at the beginning of the seventh month.
. Quarterly (Q) – Depreciation begins in the quarter the asset is placed in service. Effectively, all three months of depreciation are included even if the asset is bought on the last day of the quarter.
. Monthly (M) – Similar to quarterly except the depreciation starts at the beginning of the month the asset is placed in service no matter the day in that month placed in service.
. Mid-Month (MM) – The most accurate of the conventions whereby one-half of a month’s depreciation is assigned during the month the asset is placed in service.
Now for the critical part of the convention application to depreciation. No matter which one of the conventions used, depreciation is mathematically spread over one additional accounting year. So a 5 year depreciation period takes 6 accounting years to fully depreciate.
To illustrate, suppose the asset is purchased in June and the accounting year is a calendar year. The convention used is half-year (HY); so depreciation starts July of the year of purchase. During the first accounting year the asset has partial depreciation applied (only one half of one year). During accounting years two through five, the asset is assigned 12 months of depreciation per year. In the sixth year, depreciation exists for months January through June. The depreciation allocation looks like this:
YEAR # OF MONTHS RUNNING BALANCE
. 1 6 (July – December) 6
. 2 12 (Full Year) 18
. 3 12 30
. 4 12 42
. 5 12 54
. 6 6 (January – June) 60
Again, this accounting period math works with all conventions. So a seven-year method with a mid-month convention starting in August has 4.5 months of depreciation in the calendar year of purchase and 7.5 months (January through mid August) in the eighth year of depreciation.
Within the master depreciation workbook a separate tab is created for each piece of equipment. The tab is given a schedule ID number as a reference point for journal entries and asset tracking. I suggest using a logical letter identifier for the respective groupings as found on the balance sheet. Here are some suggestions:
Letter Code Group of Assets
. ‘T’ Transportation (Trucks and Trailers)
. ‘S’ Site Equipment such as Graders, Cranes, Excavators
. ‘P’ Power Equipment, Generators, Power Tools
. ‘D’ Dump Trucks, Grain Haulers
. ‘0’ Office Items, Computers, Printers, Copier
. ‘F’ Furniture and Fixtures
Each asset is given a unique letter code and numerical identifier to distinguish the asset from others. For this example I’m going to use a fuel transfer pump which is grouped with power tools. Its tab is identified as follows:
‘P-17 Fuel Pump’
On the spreadsheet, a title identifies the year, make and model. The second line identifies the serial number and the third line is date of purchase. The next line describes the asset. A fifth line is included identifying its location. Here is the title section of the spreadsheet:
R1-Indstad 19-HP Fuel Transfer Pump (2014)
Serial Number: XYT-4A173127 Purchase Date 3/17/15
Description: A 22 gallon per minute fuel transfer pump with a quad parallel filter stack and 57′ hose, w/250 gallon holding tank
Location: Mobile piece usually on-site at major projects
Other information is included and often links to supporting documents. Examples of supporting documents include original purchase receipt (PDF), loan number assigned (if applicable), custody (employee assigned), and a connector link to the maintenance schedule.
Since this is a power tool, the depreciation policy indicates that power tools are depreciated using straight line depreciation.
The following is the actual straight line depreciation method along with the mid-month (MM) convention for the fuel transfer pump, asset P-17.
Purchase Item Depreciation
Date Description Method Years Convention
03/17/15 Fuel Transfer Pump Straight Line 5 MM
Depreciation Amounts .
Basis 2015 2015 Monthly Full Year
$6,494 $54.12 $974.10 $108.23 $1,298.80
Book Depreciation Schedule
Year $ Amount Accumulated Deprc Remaining Basis
2015 $1,028.22 $1,028.22 $5,465.78
2016 1,298.80 2,327.02 4,166.98
2017 1,298.80 3,625.82 2,868.18
2018 1,298.80 4,924.62 1,569.38
2019 1,298.80 6,223.42 270.58
2020 270.58 $6,494.00 -0-
In the final year, 2020, months of January and February are assigned $108.23 each. In March, one-half (54.12) of a full month’s depreciation is assigned just as in the very first month of ownership. Again, depreciation takes six accounting years to fully depreciate the asset.
The last column in the schedule identifies the undepreciated balance for this respective asset. It is merely the cost value less accumulated depreciation.
A similar depreciation schedule is generated for tax purposes.
Single Asset Tax Depreciation Schedule
This schedule is very similar to the book depreciation schedule above. There are several differences though. The primary difference is that the tax code allows for accelerated depreciation. IRS Code Section 168 allows a business to use the Modified Accelerated Cost Recovery System (MACRS for short) as the method to calculate depreciation. This schedule’s formula allows for greater depreciation during the first half of the asset’s expected life and lesser amounts in the second half.
For tax purposes, depreciation is greater early on reducing taxable income and the associated income tax. This is true regardless of the legal or tax entity status. The difference between the two dollar amounts is called either a ‘tax preference’ item/value or ‘tax difference’ amount.
There are several different attributes that exist with tax depreciation over book depreciation. They include:
A) Convention – In general most assets use the half-year convention for tax purposes. There are special rules for listed property (vehicles, computers, cell phones etc.).
B) Special Deductions – The Internal Revenue Code goes further by allowing special one time up front deductions of 30 or 50% depending on the nature of the asset prior to implementing MACRS.
C) Section 179 – This accelerated depreciation deduction value changes each year depending on what Congress authorizes. It is a one time special deduction of the entire cost of the fixed asset purchased during that tax year up to the amount. It is designed to facilitate economic growth.
D) Alternative Minimum Tax – A third set of depreciation schedules is also calculated for the purpose of determining Alternative Minimum Tax (AMT). This article does not go into this subject matter as it is best left to the CPA or tax preparer to address.
As a bookkeeper, it is not your job to calculate these tax depreciation amounts. The bookkeeper is responsible to forward the asset information and book depreciation amounts to the CPA. The CPA in turn sends back to you the respective tax schedules for you to insert into your spreadsheet. Then you simply calculate the tax difference between the book and tax amounts as illustrated for the fuel pump below.
P-17 Fuel Pump – Tax Preference Schedule
. Book Book Tax Tax Tax Cumulative
Year Deprc Basis Deprc Basis Preference Value Tax Preference
2015 $1,028 $5,466 $694 $5,800 ($334) ($334)
2016 1,299 4,167 2,320 3,480 1,021 687
2017 1,299 2,868 1,392 2,088 93 780
2018 1,299 1,569 835 1,253 (464) 316
2019 1,299 270 835 418 (464) (148)
2020 270 -0- 418 -0- 148 -0-
. $6,494 $6,494 -0-
The final step in preparing this asset’s spreadsheet is to create the book journal entry to record the depreciation. Almost all accounting software packages allow for a recurring entry process to enter the monthly depreciation amount. For P-17, the entry schedule is as follows:
Book Entries – 2015
Month Journal ID Code $ Amount Split Account
March Fixed Assets P-17/03 54.12 COS-Depreciation
April Fixed Assets P-17/04 108.23 COS-Depreciation
May Fixed Assets P-17/05 108.23 COS-Depreciation
June Fixed Assets P-17/06 108.23 COS-Depreciation
July Fixed Assets P-17/07 108.23 COS-Depreciation
August Fixed Assets P-17/08 108.23 COS-Depreciation
September Fixed Assets P-17/09 108.23 COS-Depreciation
October Fixed Assets P-17/10 108.23 COS-Depreciation
November Fixed Assets P-17/11 108.23 COS-Depreciation
December Fixed Assets P-17/12 108.23 COS-Depreciation
Take note of the distinct identifier code that identifies the unique asset and the corresponding month of the entry. This same code model is used with all assets.
On this tab for this one asset are five separate groups of information:
1) Asset Information – identifier, description, location, etc.
2) Book Depreciation Schedule
3) Tax Depreciation Schedule
4) Tax Preference Schedule
5) Book Entry Information – source journal entry information
Cumulative Summary by Year Per Group
Continuing with the fuel pump, it is one asset within Group ‘P’ – Power Tools. This entire group is summed up on a separate tab for power tools. Identify the tab as ‘P – Power Tools Group’. Create a schedule for book depreciation as follows:
Power Tools Group Depreciation Summary
Asset Cost Basis 2015 Depreciation 12/31/15 Accum Deprc Remaining Basis
P-1 $Z,ZZZ $ZZZ $Z,ZZZ $ZZZ
P-2 ZZ,ZZZ Z,ZZZ ZZ,ZZZ Z,ZZZ
P-3 Z,ZZZ ZZZ Z,ZZZ ZZZ
… ZZZ,ZZZ ZZ,ZZZ ZZ,ZZZ ZZ,ZZZ
P-17 6,494 1,028 1,028 5,466
P-18 Z,ZZZ ZZZ ZZZ Z,ZZZ
. $ZZZ,ZZZ $ZZ,ZZZ $ZZZ,ZZZ $ZZ,ZZZ
Take note of the following:
1) There is a separate spreadsheet for each asset that directly follows this summation tab.
2) Cost basis matches cost basis as reported for power tools on the trial balance and of course on the balance sheet.
3) The year of depreciation column will match the total depreciation for power tools as reported on the book’s income statement (trial balance) value for power tools.
4) Accumulated depreciation is summed with other groups for the total accumulated depreciation to determine the value as reported in the trial balance.
5) Similar to accumulated depreciation, remaining basis is summed with other asset group values to match Net Fixed Assets as reported on the balance sheet.
In addition to book depreciation, you should have a summary for tax depreciation and the tax preference schedule. Often the tax schedules are not available until after the close of the calendar year. Insertion of these schedules is usually a function of closing out the year as explained in other articles in this category (Regular Operations) of bookkeeping.
Now that you have a summary spreadsheet for each group of assets, it is time to create a single summary spreadsheet for all fixed assets.
Fixed Assets Summary Spreadsheet
Earlier I identified that a small business typically has several groups of assets. So you’ll have several summation sheets for the respective groups. Larger small businesses with fixed assets of more than $10 million will create a separate workbook for each group and one master summary workbook combining all the asset groups. Remember, there are three summation schedules – book, tax and tax differences. Allow me to illustrate the summation book depreciation schedule.
SUMMATION BOOK DEPRECIATION 2015
Reference Cost Depreciation Accumulated Asset
Asset Group Spreadsheet Basis 2015 Amount Depreciation Basis
T-Transportation T-Group $219,717 $37,209 $171,201 $48,516
D-Heavy Trucks D-Group 441,793 76,118 316,433 125,360
S-Site Equipment S-Group 992,210 102,114 642,577 349,633
P-Power Tools P-Group 163,045 22,721 143,609 19,436
R-Real Estate R-1 308,220 11,208 129,781 178,439
L-Land (E) None 80,000 -0- -0- 80,000
0-Office 0-Group 62,105 4,008 53,772 8,333
F-Furniture & Fix F-Group 21,006 1,019 17,955 3,051
$2,288,096 $254,397 $1,475,328 $812,768
Notes (A) (B) (C) (D)
(A) Cost basis ties to the total fixed assets as reported on the balance sheet, see below.
(B) Depreciation is reported in two separate accounts on the income statement as determined here: Costs of Construction – $238,162 (Groups T,D,S & P) Expenses Depreciation – $16,235 (Groups R,0 & F)
(C) Accumulated depreciation consists of lifetime depreciation to date per the following schedule:
Depreciation Year $ Amount
Prior Years 530,004
Total Accumulated Depr $1,475,328
(D) Asset basis equals net fixed assets as reported on the balance sheet.
(E) Land is not depreciated, review Lesson 50.
The following is the presentation format on the balance sheet in both summary and detailed form:
FIXED ASSETS SUMMARY FORMAT
Land and Buildings $388,220
Construction Equipment 1,816,765
Office Technology and Furniture 83,111
Cost Basis Fixed Assets $2,288,096
Accumulated Depreciation (1,475,328)
Net Fixed Assets $812,768
FIXED ASSETS DETAILED FORMAT
Land and Buildings:
. Land $80,000
. Real Estate 308,220
. Sub-Total Land & Buildings $388,220
. Transportation $219,717
. Heavy Trucks 441,793
. Site Equipment 992,210
. Power Tools 163,045
. Sub-Total Construction Equipment 1,816,765
Office Technology and Furniture:
. Office Technology $62,105
. Furniture & Fixtures 21,006
. Sub-Total Office Technology and Furniture 83,111
Total all Fixed Assets $2,288,096
Accumulated Depreciation (1,475,328)
Net Fixed Assets $812,768
Notice how the schedule ties to the balance sheet? A similar schedule exists for tax purposes.
Books and tax depreciation schedules exist to assist management in understanding both the book/tax basis of each asset and the primary driver of reduced profit for tax purposes. The bookkeeper is responsible for creating both book and tax schedules for each asset, asset group and for all fixed assets in summation. The key to success is a well organized depreciation workbook in Excel or as a function of the accounting software. Act on Knowledge.
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