Question: You have had several items in recent columns on depreciation and the investment tax credit. What is the investment tax credit? How does it affect the amount of depreciation that can be taken?
Answer: The investment tax credit (ITC) is a tax break initiated by Congress some years ago to encourage business and industry to upgrade and modernize equipment and machinery.
ITC might be defined as a reduction in tax liability based on the acquisition of tangible personal property placed in service in a trade or business or for the production of income during the tax year.
I use the word "acquisition" rather than "purchase" because in some cases you may claim the credit for business machinery or equipment you lease, if the owner-lessor agrees to pass it on to you.
Intangible property doesn't qualify, nor do real property, buildings or structural components. But machinery or equipment installed inside a building, or even physically attached to it--like a lathe bolted to a concrete floor--may be eligible for the ITC.
Inclusion of the phrase "for the production of income" effectively means that you may claim the ITC even if you're not technically "in business." For example, if you manage your own investment portfolio you may qualify for a credit for the purchase of a desk, file cabinet or calculator, or perhaps even a computer if it is purchased for use in that portfolio management function.
For purchases made in tax years through 1982, you were not required to consider the investment tax credit when calculating the annual depreciation. That is, you could depreciate against the total cost without having to deduct the ITC first.
Starting with property placed in service in 1983, however, ITC does affect depreciation. There are two options--and which way to go depends on your particular circumstances.
You can reduce the cost basis--the amount on which you figure the depreciation--by 50 percent of the amount of ITC taken. Or you can reduce the ITC itself by two percentage points and leave the cost basis unchanged.
Confused? Don't feel badly--you have plenty of company. Take a look at IRS Form 3468 and Publication 572, "Investment Credit," if you want more details.
The Treasury Department reported that sales of Series EE bonds jumped substantially following the introduction of a market-based interest rate late last year.
Beginning Nov. 1, 1982, all new Series EE bonds held at least five years earn 85 percent of the average rate paid on five-year Treasury market securities for the period. Older Series EE and most Series EE bonds (except the old Series E that have run out of extensions and no longer earn interest) also qualify for the market rate if held at least five yers after the Nov. 1, 1982, starting date.
The market interest rate is set every six months, changing on each April 1 and Nov. 1. The rate for the first six-month period (through March 31, 1983) was set at 11.09 percent.
With all the discussion about the horrendous deficits expected in coming years, some anxious taxpayers might like to do their part to help reduce the national debt.
If you want to make a voluntary contribution for this purpose, you can include a separate check with your 1982 tax return. The check may be for any amount you wish, made payable to the "Bureau of the Public Debt."
If you itemize on your 1983 return, whatever payment you make will be deductible on Schedule A as a contribution.
If you owe additional tax you must include two separate checks with your return. If you are due a refund, the IRS will not deduct a contribution from the amount of the refund. But you can enclose a separate check in the same envelope with your return. The IRS will see to it that it gets to the Bureau of the Public Debt.