0:00:00.719,0:00:03.040

All right. We're done with all the

0:00:01.680,0:00:05.120

methods, now let's talk about

0:00:03.040,0:00:07.600

depreciation for tax reporting purposes.

0:00:05.120,0:00:09.360

Okay. Much like an inventory where you

0:00:07.600,0:00:10.719

can choose to do one method for

0:00:09.360,0:00:12.799

financial reporting and one method for

0:00:10.719,0:00:16.160

tax reporting same thing can go for

0:00:12.799,0:00:17.520

long-term uh assets and depreciation, uh

0:00:16.160,0:00:19.439

so again many companies use

0:00:17.520,0:00:21.520

just pre accelerated depreciation for

0:00:19.439,0:00:23.600

competing taxable income

0:00:21.520,0:00:26.080

because it allows them to push back uh

0:00:23.600,0:00:28.480

the tax that they have to pay.

0:00:26.080,0:00:30.160

But for taxes what we use we use what's

0:00:28.480,0:00:32.480

called modified accelerated cost

0:00:30.160,0:00:35.760

recovery systems or what's called makers

0:00:32.480,0:00:37.680

macrs. Okay. And what that does is it

0:00:35.760,0:00:39.760

allows it gives us the ability and

0:00:37.680,0:00:41.040

a very easy ability to calculate how

0:00:39.760,0:00:42.079

much we're going to have to or how much

0:00:41.040,0:00:43.520

we're going to depreciate

0:00:42.079,0:00:45.680

therefore calculating how much we have

0:00:43.520,0:00:48.800

to pay in taxes taking it out for

0:00:45.680,0:00:51.039

of our net income but there's a big

0:00:48.800,0:00:52.640

thing about makers that's a huge benefit

0:00:51.039,0:00:54.559

to us,

0:00:52.640,0:00:56.640

most kind of assets require accelerated

0:00:54.559,0:00:58.480

depreciation while others are while

0:00:56.640,0:01:00.079

allowing a few to use straight line

0:00:58.480,0:01:01.680

we're going to use this again for tax

0:01:00.079,0:01:03.520

reporting purposes

0:01:01.680,0:01:04.879

but it's not acceptable for financial

0:01:03.520,0:01:06.400

reporting purposes because

0:01:04.879,0:01:08.080

it often spreads the cost over an

0:01:06.400,0:01:09.200

arbitrary period and fails to estimate

0:01:08.080,0:01:11.360

the salvage value,

0:01:09.200,0:01:13.119

that's the biggest key to this. Is that

0:01:11.360,0:01:14.880

for tax reporting purposes

0:01:13.119,0:01:16.320

or let me just take a step back for

0:01:14.880,0:01:18.880

financial reporting purposes

0:01:16.320,0:01:20.640

I have to keep up with my useful life

0:01:18.880,0:01:22.560

and my salvage value because remember

0:01:20.640,0:01:23.119

that depreciable base I can't go past

0:01:22.560,0:01:25.360

that,

0:01:23.119,0:01:26.479

so that's tac minus savage value. When it

0:01:25.360,0:01:28.640

comes to taxes

0:01:26.479,0:01:30.079

I'm able to depreciate the entire tax I

0:01:28.640,0:01:31.520

don't have to worry about the salvage

0:01:30.079,0:01:34.000

value so I get 100

0:01:31.520,0:01:35.840

of the cost of the asset I'm able to

0:01:34.000,0:01:37.920

depreciate for the purpose of taxes

0:01:35.840,0:01:39.360

which is really nice. Now how do we use

0:01:37.920,0:01:40.880

makers? Well first we've got to figure

0:01:39.360,0:01:43.360

out what our arbitrary period is

0:01:40.880,0:01:44.079

it's not what we choose is we look at a

0:01:43.360,0:01:46.880

a

0:01:44.079,0:01:48.000

schedule we look at a table and find out

0:01:46.880,0:01:48.960

what it is and this is what the table

0:01:48.000,0:01:50.399

looks like,

0:01:48.960,0:01:51.920

at three year, five years,L seven year, ten

0:01:50.399,0:01:53.280

year 15 year there's other properties in

0:01:51.920,0:01:54.240

there but these are the most common ones

0:01:53.280,0:01:55.680

and you just find out what you're

0:01:54.240,0:01:57.119

looking for, so if you have a computer

0:01:55.680,0:01:59.280

and you look out there and see us okay

0:01:57.119,0:02:00.000

five year property I know that I'm going

0:01:59.280,0:02:02.000

to have

0:02:00.000,0:02:04.079

to depreciate this over five years or it

0:02:02.000,0:02:05.840

is as a five-year property

0:02:04.079,0:02:07.439

once I have figured out what property is

0:02:05.840,0:02:08.879

then I look at another table

0:02:07.439,0:02:11.280

and this is what it looks like so then I

0:02:08.879,0:02:13.120

would say, okay five year property column

0:02:11.280,0:02:15.360

notice I'm going to depreciate it over

0:02:13.120,0:02:18.080

six years why because the assumption is

0:02:15.360,0:02:19.280

I didn't pay for it on january 1st

0:02:18.080,0:02:20.879

everything pretty much up to this point

0:02:19.280,0:02:21.680

has been january 1st but that's not how

0:02:20.879,0:02:23.120

it's going to happen

0:02:21.680,0:02:25.520

so we just kind of assume some kind of

0:02:23.120,0:02:27.200

half year convention.

0:02:25.520,0:02:28.959

But I'm going to take my tack and

0:02:27.200,0:02:30.160

multiply it by the 20 in the first year

0:02:28.959,0:02:31.840

and then by the 32

0:02:30.160,0:02:34.000

in the second year by the 19.2 in the

0:02:31.840,0:02:36.879

third year and so on and so forth

0:02:34.000,0:02:37.200

and I get the entire 100 uh being able

0:02:36.879,0:02:38.720

to

0:02:37.200,0:02:40.800

to depreciate it for tax reporting

0:02:38.720,0:02:41.840

purposes, so this chart makes it super

0:02:40.800,0:02:45.040

easy

0:02:41.840,0:02:45.840

uh that is makers. So in the next one

0:02:45.040,0:02:47.800

we're going to talk about

0:02:45.840,0:02:50.800

what happens when we have to change the

0:02:47.800,0:02:50.800

estimates.