ACCELERATED COST RECOVERY FOR PROPERTY ON INDIAN RESERVATIONS: DEPRECIATION RULES.

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A.	Depreciable Periods for Indian reservation property
	IRS Code Section 168 provides for faster write-offs for certain property on Indian reservations placed in service after 1993 and before 2008. These special MACRS recovery periods apply for purposes of computing MACRS depreciation for both regular tax and alternative minimum tax purposes. Section 168(j)(1) states that recovery periods shall be determined using this table: this does not appear to be an election, but a mandatory method
Property Class ----- Recovery Period ------ 3-year property ................................................................... 2 years 5-year property ................................................................... 3 years 7-year property ................................................................... 4 years 10-year property ................................................................... 6 years 15-year property ................................................................... 9 years 20-year property ................................................................... 12 years Non-residential real property .................................................. 22 years
	1.	Eligible property includes MACRS 3-, 5-, 7-, 10-, 15-, 20-year property and nonresidential real property that is:
		a.	Used predominantly in the active conduct of a trade or business within an Indian reservation;
		b.	Not used or located outside an Indian reservation on a regular basis;
		c.	Not acquired (directly or indirectly) from a related person (as defined in Code Sec. 465(b)(3)(C)); and
		d.	Not used for certain gaming purposes
	2.	For this purpose, the Code treats rental of real property located within a reservation as active conduct of a trade or business within an Indian reservation; however, it does not appear to include residential rental property (27.5 year property).
	3.	Property acquired for use outside the United States, tax-exempt use property, or property financed by tax-exempt bonds does not qualify for a faster write-off. Also, business owners electing the MACRS alternative depreciation system cannot use these rates.
C.	Qualified Infrastructure Property
	1.		"Infrastructure" means property such as roads, power lines, water systems, railroad spurs, and communications facilities.
	2.	Qualified infrastructure property means property that is depreciable under MACRS, benefits the tribal infrastructure, is available to the general public, and is placed in service in connection with the taxpayer's active conduct of a trade or business within a reservation.
	3.	Qualified infrastructure property located outside an Indian reservation may be eligible for faster write-offs if the purpose of such property is to connect with qualified infrastructure property located within the reservation.
	4.	For this purpose, the Code defines an Indian reservation using section 3(d) of the Indian Financing Act of 1974 (25 U.S.C. 1452(d)) or section 4(10) of the Indian Child Welfare Act of 1978 (25 U.S.C. 1903(10)), as in effect on August 10, 1993.
	5.	The definition is modified by the Taxpayer Relief Act of 1997, which clarifies the meaning of "former reservations in Oklahoma."
D.	MACRS Class Lives
	1.	The IRS Code assigns property depreciable under MACoRS to one of the following classes: 3-, 5-, 7-, 10-, 15-, 20-, 27.5-, 31.5-, 39- or 50-year property, depending on the type of property. The special MACRS rules discussed above apply to property placed on Indian reservations.
	2.	Trade or business assets have a "class." This is a grouping of similar assets used for similar purposes. Each class is assigned a "class life" by the IRS Code, which is the amount of time an asset is expected to provide service to the owner. The Code provides an alphabetical list of assets for taxpayers to use to determine depreciation lives.
		a.	3-year property reduced to 2 years These assets have a three-year recovery period and include property with an Asset Depreciation Range (ADR) System class life of four years or less. This includes tractor units for use over the road, breeding hogs, and various special tools and handling devices used in specified manufacturing activities. Also, racehorses may be included under certain circumstances.
		b.	5-year property reduced to 3 years This type of property includes property with an ADR class life of more than four years and less than 10 years. This includes heavy general-purpose trucks with actual unloaded weight of 13,000 pounds or more, computers and peripheral equipment, and office equipment such as typewriters, copiers or calculators. Cars and light general-purpose trucks are five-year property. In addition, five-year property includes tangible high technology equipment. This means (1) any computer or its peripheral equipment, (2) any high technology telephone station equipment installed on the customer's premises, and (3) any high technology medical equipment.
		c.	7-year property reduced to 4 years Seven-year recovery property includes assets with an ADR class life of 10 years or more but less than 16 years. Office furniture and fixtures such as desks and files and assets used in manufacturing processes qualify as seven-year property.
		d.	10-year property reduced to 6 years Generally, 10-year property has a 10-year recovery period and includes property with an ADR class life of 16 years or more but less than 20 years. It includes vessels, barges, tugs, and other water transportation equipment. This is especially important for the eastern part of the state. Single-purpose agricultural or horticultural structures and fruit- or nut-bearing trees and vines qualify as 10-year property class if placed in service after 1988.
		e.	15-year property reduced to 9 years This type of property has a 15-year recovery period and includes property with an ADR class life of 20 years or more but less than 25 years. Specifically included in this class are municipal wastewater treatment plants and telephone distribution plants and other equipment used by non-telephone companies for two-way exchanges of voice and data communications. Such equipment does not include cable television equipment used primarily for one-way communication.
		f.	20-year property reduced to 12 years This type of property has a 20-year recovery period and includes property with an ADR class life of 25 years or more, other than Code Sec. 1250 real property with an ADR midpoint of 27.5 years or more. Power generation and delivery systems use this class life. Also, oil and gas pipelines and plants are 20-year property.
		g.	Non-residential rental property. 39 years reduced to 22 years. Nonresidential real property is Code Sec. 1250 real property that is not (1) residential rental property or (2) property with a class life of less than 27.5 years. The Conference Committee Report to the Tax Reform Act of 1986 stated that this class includes property that either has no ADR class life or the class life of which is 27.5 years or more, including elevators and escalators.
E.	Examples The following examples illustrate the savings using the rapid write-off allowable on former Indian reservations.
	1.	Builder A, a sole proprietor, purchases a grader for $100,000 (considered as 7-year property). Assume a federal tax rate of 28% tand state tax rate of 7% and assume 1/2-year convention. (This example does not include tax savings from self-employment tax.)
Accelerated Tax Depreciation: MACRS MACRS Difference Savings Year 1 $ 14,290 $ 25,000 $ 10,710 $ 3,748 Year 2 24,490 37,500 13,010 4,553 Year 3 17,490 18,750 1,260 441 Year 4 12,490 9,375 -3,115 - 1090 Year 5 8,930 9,375 445 156 Totals $ 77,690 $100,000 $ 22,310 $ 7,808 This example does not include tax savings from self-employment tax.

2. New manufacturing facility with a building cost of $5,000,000. Placed in service on July 1st. Assume corporate tax rates of 34% federal and 6% state, for 40% total corporate taxes.

	Accelerated		Tax
Depreciation:	MACRS	MACRS	Difference	Deferrals
Year 1	$ 58,850	$ 113,650	$ 54,800	$ 21,920
Year 2-22	2,692,200	4,772,700	2,080,500	832,200
Year 23	128,200	113,650	- 14,550	- 5,820
Totals	$2,879,250	$5,000,000	$2,120,750	$ 848,300

 

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