MACRS depreciation for property placed in service in short tax years.

• Author: Mikuta, Richard J.
• Position: Modified accelerated cost recovery system

General rules

See. 168 determines the amount of depreciation allowed on property placed in service after Dec. 31, 1986. However, of practical importance {and which is absent from the statute)is the effect of a short tax year on the depreciation allowed. This amount affects not only the short tax year but all of the years that follow it.

To calculate the depreciation allowance, the following formula can be used:

Applicable Adjusted x depreciation basis rate Number of months x deemed in service 12 The property's adjusted basis is the same amount used in computing depreciation for other purposes. The applicable depreciation rate is either the 2.00% declining-balance method the 150% declining-balance method, or the straight-line method generally depending on the class life of the property. For example, office furniture has a class life of 10 years and a depreciable recovery period of seven years.

Alter determining the class life or type of property, it must be determined whether the mid-month convention, mid-quarter convention or half-year convention applies. If the mid-quarter or half year convention applies, the number of months deemed in service must be determined. For a short tax year that begins on the first day of a month or ends on the last day of a month, the tax year consists of the number of months in the tax year. Also, if the short tax year consists of part of a month, the entire month generally is ineluded. For example, if the short tax year begins on April 20 and ends on December 31, the tax year is nine months.

However, according to Rev. Proc. 89-15, no month will be taken into account more than once. For example, with two successive short tax years, April 1 through September 15 and September 16 through December 31, the first short tax year consists of five months and the second short tax year consists of four months.

Mid-quarter convention

The mid-quarter convention will apply if more than 40% of the aggregate basis of property is placed in service in the last three months of the tax year. Nonresidential real property, residential real property, railroad grading or tunnel bore, and any property placed in service and disposed of during the same tax year are not considered when determining if the mid-quarter convention applies. If it does, the tax year must be divided into four quarters. If the short tax year consists of four or eight full calendar months, the quarters are determined based on whole months. For other short tax years, determine the number of days in the tax year and divide by four. Then to determine the midpoint of the quarter, divide the number of days in each quarter by two. If the midpoint is a day other than the first or midpoint of a month, property is deemed placed in service or disposed of on the nearest preceding first or midpoint of the month. If...