When the dot com bubble burst many accounting myths were laid bare. One was that depreciation, especially in tech and office products, operates on a straight line. In California's Silicon Valley, as companies failed en masse and their profligacy became the stuff of legend, the fact that second hand technology and office equipment has little value became painfully clear. Office clearance companies were selling e.g. chairs, still in their original plastic wrapping, bought in anticipation of rapid expansion, for 10% of their list price. Obviously, they had paid much less than that for them. Undersea cable companies, unable to raise more fuel for their burn rate, found sold their wiring to, often, Indian companies for - again - 10% of its book value. Everyone knows the old adage that a car loses up to 30% of its value as it's driven off the dealer's forecourt.

But accounting practices bordering on the fraudulent have, amongst other things, long maintained the fiction that business purchases lose a set percentage of their value over the (theoretical) life of the product. This fiction keeps company valuations artificially high. This means that in year three a piece of equipment that has little or no resale value shows in the assets of the company as being worth 60% of its purchase price. This results in the value being overstated in the accounts and artificially inflating the value of the company. That means that those buying shares are not getting what they pay for.

This behaviour is condoned by tax authorities which use the fiction to their advantage because it is the theoretical depreciation that is charged to tax not the actual reduction in value. So tax relief in the hands of the company is capped at, say, 20% of the value of the good. That means that the state doesn't get a large set-off for an item.

When an item is disposed of, its actual depreciation is calculated and adjustments made in the books. But where a company is insolvent, the artificial value means there is even less available for creditors than they expected.

So, what the changes mean are that businesses which claim 100% tax relief on goods purchased for business purposes will pay less tax in the year of purchase but more tax over the theoretical depreciation period (usually five years). It also means that, when goods are disposed of, the price obtained is added back and treated as revenue for tax purposes. This is the reality of the position and is what all tax authorities should impose.

The USA's IRS describes it as follows: "The deduction applies to qualifying property acquired and placed in service after 27 Sept., 2017. The final regulations provide clarifying guidance on the requirements that must be met for property to qualify for the deduction, including used property. The final regulations also provide rules for qualified film, television and live theatrical productions.

"Additionally, in the proposed regulations, the Treasury Department and IRS propose rules regarding (i) certain property not eligible for the additional first year depreciation deduction, (ii) a de minimis use rule for determining whether a taxpayer previously used property; (iii) components acquired after Sept. 27, 2017, of larger property for which construction began before Sept. 28, 2017; and (iv) other aspects not dealt with in the previous August 2018 proposed regulations. The proposed regulations also withdraw and re-propose rules regarding application of the used property acquisition requirements (i) to consolidated groups, and (ii) to a series of related transactions."

But there's a problem and it's a recipe for confusion.

The new system is at the option of the company. It should be compulsory. So far as tax management is concerned, it's the logical and correct approach and to leave whether to adopt it in the hands of those who have designed the fictionalisation of accounting is foolish.

For details on claiming the deduction or electing out of claiming it, see the final regulations or the instructions to Form 4562 [ https://www.irs.gov/forms-pubs... ], Depreciation and Amortization (Including Information on Listed Property). For tax years that include Sept. 28, 2017, see Rev. Proc. 2019-33 [ https://www.irs.gov/pub/irs-dr... ] for further information about making a late election or revoking an election.

Taxpayers who elect out of the 100% depreciation deduction must do so on a timely-filed return. Those who have already timely filed their 2018 return and did not elect out but still wish to do so have six months from the original deadline, without an extension, to file an amended return.