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H&R Block, Inc. Message Board

  • stamo stamo Sep 16, 2003 8:47 PM Flag

    Depreciation

    Can someone please explain what is meant by
    "depreciation allowed or allowable?"
    What is the difference between them?

    I know that depreciation has to be recaptured
    even if it wasn't taken (allowed?) but I'm not
    sure how allowable is handled.

    Any help will be appreciated.

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    • You've gotten good responses. I'd just like to mention that one thing some people think they can pull is to not take depreciation in order to boost income to a level that would increase their EITC or other tax benefits. This is not allowed under the "depreciation allowed or allowable" rules. In particular, this sometimes comes into play when people want to claim a home office but dont' want to claim depreciation on that portion of the home.

    • "Can someone please explain what is meant by
      'depreciation allowed or allowable?' What is the difference between them?" (stamo)
      --

      Suppose several years ago you purchased a business asset for $1000. And, after using it in your business each year, you sell that asset for $1000.

      (1) Further suppose that each year you properly claimed the correct amount of depreciatiion. The total you claimed from purchase date to the date you sold the asset was $400. Therefore, $400 of depreciation was both allowed (because you claimed it) and allowable (because $400 was the correct amount to claim).
      The gain on the sale is $400.

      (2) Now suppose over the years you messed up and only claimed $200 of depreciation, when the proper amount was $400. The depreciation allowed was only $200, but the allowable amount was $400.
      The gain is still $400. In computing basis for gain (or loss) purposes, you have to use the larger of the depreciation allowed or allowable. [This rule would also apply if you had claimed $500 (allowed), rather than the $400 allowable. (However, basis can go below zero.)]

      (Note: If the years you didn't claim the proper amount of depreciation are still open, you could file amended returns to claim the depreciation that you should have claimed. Or, if qualified, you might be able to use the "catch up" provision.)
      -----

      Does this help?

      • 3 Replies to cf20502000
      • You did a great job of explaining. I get it now.

        Thank you very much

      • "(However, basis can go below zero.)"
        --

        That should read "(However, basis can NEVER go below zero.)"

      • Allowed v allowable depreciation.
        --

        The allowed or allowable rule must be used when gain or loss is computed on a depreciable asset.
        But it does not apply for computing how much of the gain is ordinary income in most cases. For example, in the second example of my previous post, you might have $200 of ordinary gain and $200 of Section 1231 gain. (This assumes, of course, that the $200 of allowable (but not allowed) depreciation would not be claimed on an amended return, etc.)

        Also, I suspect that the allowed or allowable rule does not apply under IRC Section 121 (exclusion of gain for the sale of a primary residence), comments in Block's tax seminars to the contrary. I haven't ever seen a good discussion of this.

 
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