15
STAR*TECH JOURNAL/DECEMBER 1982
asset for $9,000, he will have ordinary, fully-
taxable income of $1,500 ($9,000 minus
adjusted basis or book value of$7 ,500 ($10,000
cost less $2,500 depreciation]). Ifhe sells it for
$12,000 he will have ordinary income of
$2,500 ( depreciation deducted) and Section
1231 gain of $2,000 that could possibly be
taxed at lower capital gain tax rates.
When it comes to the early disposition of
that investment tax credit property, the tax for
the year of disposal is increased by the amount
of the credit that is recaptured. The actual
amount recaptured is a percentage of the
original credit claimed, depending on how long
the property is held before recapture is required.
For property within the three-year class,
the recapture percentage is 100 percent if
recapture is required within the first full year
after placement in service, 66 percent within
the second full year, 3 3 percent within the third
full year, and zero thereafter. The recapture
percentage for all other classes of recovery
property are: 100 percent within the first full
year after placement in service, 80 percent
within the second full year, 60 percent within
the third full year, 40 percent within the fourth
full year, 20 percent within the fifth full year
and zero thereafter.
That, at least, was how matters stood until
the passage of the Tax Equity Bill of 1982.
While the basics remain unchanged, the
changes under the new law are worth noting.
Probably the most noteworthy feature of
the new tax law is the fact that the law repeals
future accelerated methods of depreciation.
Under the 1981 law, ACRS was scheduled to
rise from the 150 percent declining-balance
method of depreciation ( with a change to
straight-line) to 175 percent declining balance
(with a later change to sum-of-the-years-digits)
for equipment acquired in 1985. A further
increase based on 200 percent declining-balance
depreciation was scheduled to apply after 1985.
Now, the 150 percent declining balance method
remains in effect - at least until the passage of
the next tax law.
Of course not all of the new law's provisions
are concerned with taking away future benefits.
Or more immediate importance, the new rules
will require a basis reduction for tax credits
claimed.
In the past the investment tax credit or any
other tax credit could be claimed and the entire
cost of the asset or equipment remained avail-
able for depreciation purposes. Beginning in
1983, however, the basis or book value of an
asset must be reduced by 50 percent of the
regular investment tax credit, energy credit,
etc. Thus, a $10,000 asset that produces a
$1,000 tax credit becomes a $9,500 asset for
depreciation purposes.
In lieu of reducing an asset's basis, a coin-
op game operator can choose to reduce his or
her regular investment tax credit percentage by
two points. Thus, the reduced credit is 8
percent for recovery property other than three-
year category property and 4 percent for
property in the three-year category.
This option to take a reduced investment
tax credit is intended to deal with situations in
which an operator would not be entitled to
claim all of its regular tax credits because of the
limitation on how much credit would offset tax
liability. In other words, if the credit reduction
election were not available, the operator would
have to reduce the basis of an asset despite the
fact that it might not receive any current tax
benefit from the unused credit.
Also beginning next year, a coin-operated
amusement business may use its investment
tax credit to offset its first $25,000 of taxable
income plus 85 percent of the tax liability
above $25,000. The limit for 1982 permits the
credit to offset the first $25,000 of taxes plus
90 percent of tax liability.
After January 1, 1983, if there is an early
disposition requiring the recapture of invest-
ment tax credit for which there was a downward
basis adjustment, the basis must be increased
by 50 percent of the recapture amount. Since
the upward adjustment in basis or book value is
made immediately before the event resulting in
recapture, there are no changes needed on tax
returns for previous years.
SERVICE BUIJ.E11N
CEmPEDE U.R. TRAC·BAll
PROB: SHOOTER MISTRACKING,
PLAYER HAS POOR CONTROL
SOL: NEW IMPROVED
TRAC BALL ROLLERS
RESEARCH AT
ANSCOT INDUSTRIES
HAS DETERMINED THAT OUR
"NEW-IMPROVED" ROLLERS
OUTLAST THE COMPETITION'S
$22.50
BY 70'/.AND AT
PER SET COST
50'!. lDSl
SEND CH ECK OR MONEY ORDER
TO
ANSCOT INDUffllES
15235 GRAND RIVER
DETROIT, MICHIGAN 48227
313/270-1907
RI
In essence, to the extent that the operator
does not receive a tax benefit from an invest-
ment tax credit because of recapture where
there is an early disposition of property, an
"offset" (upward basis adjustment) is made to
restore to basis the applicable portion of the
initial downward basis adjustment.
When it comes to determining the amount
of gain that is recaptured as ordinary, fully-
taxable income on a sale or disposition of
depreciable property or equipment, the amount
of the investment tax credit downward basis
adjustment is treated as a deduction allowed
for depreciation. Accordingly, the amount of
that basis adjustment is treated as depreciation,
subject to ordinary income recapture.
For those in the coin-op amusements
industry whose tax pictures are so dismal that
unused credit carryovers are foreseeable for
many years to come, there is now a special
deduction for unused tax credits. From now on,
where an investment credit for which a down-
ward basis adjustment was made does not
result in a tax benefit because it remains
unused at the end of the 15-year carryover
period, a deduction is allowed to the firm for 50
percent of the unused credit. The deduction
would equal that portion of the investment
credit downward basis adjustment attributable
to the unused credit. This deduction is taken in
the first tax year after the expiration of the
credit carryover period.
Since 15 years is a long time for a business
to stagger along, Congress also added a provi-
sion stating that if a taxpayer dies or ceases to
exist before the expiration of the credit carry-
over period, the deduction is available in the
year in which death or cessation occurs.
That, at least until the Technical Corrections
Bill of 1982 wends its way through Congress, is
how matters stand with depreciation. Unless,
of course, either a regular or a so-called "safe
harbor" lease is involved. But, then, that's
another story.
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