Publication 946 |
2000 Tax Year |
How To Figure the Deduction Without Using the Tables
Instead of using the rates in the percentage tables to figure
depreciation, you can compute the depreciation deduction each year
yourself.
Figuring MACRS deductions without using the tables will generally
result in a slightly different amount than using the tables.
When figuring your deduction without using the tables, you must
reduce your adjusted basis each year by the depreciation claimed in
the previous year.
Declining Balance Method
When using a declining balance method, you must apply the
appropriate convention and you must switch to the straight line method
in the first year for which it will give an equal or greater
deduction. The conventions are explained later under Applying the
Convention. The straight line method is explained later under
Straight Line Method.
You figure depreciation for the year you place property in service
as follows.
- Multiply your adjusted basis in the property by the
declining balance rate (explained later).
- Apply the appropriate convention.
You figure depreciation for all other years (before the year you
switch to the straight line method) as follows.
- Reduce your adjusted basis in the property by the
depreciation claimed in earlier years.
- Multiply this new adjusted basis by the same declining
balance rate used in earlier years.
If you dispose of property before the end of its recovery period,
see Early Dispositions, later, for information on how to
figure depreciation for the year you dispose of it.
Figuring depreciation under both the declining balance method and
the straight line method is illustrated in the example following
Straight Line Method, later.
Declining Balance Rates
To figure your MACRS deduction, first determine your declining
balance rate. You do this by dividing the specified declining balance
percentage (150% or 200% changed to a decimal) by the number of years
in the recovery period. For example, for 3-year property depreciated
using the 200% declining balance rate, divide 2.00 (200%) by 3 to get
0.6667, or 66.67%. For 15-year property that is depreciated at the
150% declining balance rate, divide 1.50 (150%) by 15 to get 0.10, or
10%.
The following table shows the declining balance rate for each
property class and the first year for which the straight line method
gives a greater deduction.
Property Class |
Method |
Declining Balance Rate |
Year |
3-year |
200% DB |
66.67% |
3rd |
5-year |
200% DB |
40.0 |
4th |
7-year |
200% DB |
28.57 |
5th |
10-year |
200% DB |
20.0 |
7th |
15-year |
150% DB |
10.0 |
7th |
20-year |
150% DB |
7.5 |
9th |
Straight Line Method
When using the straight line method, you must determine a new
depreciation rate for each tax year. Also, you must apply the
appropriate convention in the year you place the property in service
and the year you dispose of the property. The conventions are
explained later under Applying the Convention.
You determine the straight line depreciation rate for any tax year
by dividing the number 1 by the years remaining in the recovery period
at the beginning of your tax year. When figuring the number of years
remaining, you must take into account the convention used in the year
you placed the property in service. If the number of years remaining
is less than 1, the depreciation rate for that tax year is 1.0 (100%).
You figure depreciation for the year you place property in service
as follows.
- Multiply your adjusted basis in the property by the
depreciation rate (as explained earlier).
- Apply the appropriate convention.
You figure depreciation for all other years (including the year you
switch from the declining balance method to the straight line method)
as follows.
- Reduce your adjusted basis in the property by the
depreciation claimed in earlier years (under any method).
- Determine the depreciation rate for the year as explained
earlier (taking into account the convention used in the year you
placed the property in service).
- Multiply the adjusted basis figured in (1) by the
depreciation rate figured in (2).
If you dispose of property before the end of its recovery period,
see Early Dispositions, later, for information on how to
figure depreciation for the year you dispose of it.
Example.
Karen Bell's tax year is the calendar year. In February, Karen
placed in service depreciable property with a 5-year recovery period
and a basis of $1,000. She does not elect to take the section 179
deduction. There were no adjustments to the basis of the property
between the time she bought it and the time she placed it in service.
She uses the 200% declining balance (DB) method to figure
depreciation. Because she did not place any property in service in the
last three months of the year, she must use the half-year convention.
First year. Karen figures the depreciation rate under
the 200% DB method by dividing 2 (200%) by 5 (the number of years in
the recovery period). The result is 40%. Karen figures the
depreciation rate for the first year under the straight line (SL)
method by dividing 1 by 5, the number of years in the recovery period.
The result is 20%.
Karen multiplies the adjusted basis of the property ($1,000) by the
40% DB rate. She applies the half-year convention by dividing the
result ($400) by 2. Depreciation for the first year under the 200% DB
method is $200.
Karen multiplies the adjusted basis ($1,000) by the SL rate (20%).
She applies the half-year convention by dividing the result ($200) by
2. Depreciation for the first year under the SL method is $100.
Because the DB method provides a larger deduction, Karen deducts
the $200 figured under the 200% DB method.
Second year. Karen reduces the adjusted basis ($1,000)
by the depreciation claimed in the first year ($200). She multiplies
the result ($800) by the DB rate (40%). Depreciation for the second
year under the 200% DB method is $320.
Karen figures the SL depreciation rate for the second year by
dividing 1 by 4.5, the number of years remaining in the recovery
period. (Because of the half-year convention, Karen used only half a
year of the recovery period in the first year.) Karen multiplies the
reduced adjusted basis ($800) by the result (22.22%). Depreciation
under the SL method for the second year is $178.
Because the DB method provides a larger deduction, Karen deducts
the $320 figured under the 200% DB method.
Third year. Karen reduces the adjusted basis ($800) by
the depreciation claimed in the second year ($320). She multiplies the
result ($480) by the DB rate (40%). Depreciation for the third year
under the 200% DB method is $192.
Karen figures the SL depreciation rate for the third year by
dividing 1 by 3.5. She multiplies the reduced adjusted basis ($480) by
the result (28.57%). Depreciation under the SL method for the third
year is $137.
Because the DB method provides a larger deduction, Karen deducts
the $192 figured under the 200% DB method.
Fourth year. Karen reduces the adjusted basis ($480) by
the depreciation claimed in the third year ($192). She multiplies the
result ($288) by the DB rate (40%). Depreciation for the fourth year
under the 200% DB method is $115.
Karen figures the SL depreciation rate for the fourth year by
dividing 1 by 2.5. She multiplies the reduced adjusted basis ($288) by
the result (40%). Depreciation under the SL method for the fourth year
is $115.
Because both methods provide the same deduction, it does not matter
which Karen chooses. Her depreciation deduction for the fourth year is
$115.
Fifth year. Karen reduces the adjusted basis ($288) by
the depreciation claimed in the fourth year ($115). She multiplies the
result ($173) by the DB rate (40%). Depreciation for the fourth year
under the 200% DB method is $69.
Karen figures the SL depreciation rate for the fifth year by
dividing 1 by 1.5. She multiplies the reduced adjusted basis ($173) by
the result (66.67%). Depreciation under the SL method for the fifth
year is $115.
Because the SL method provides a larger deduction, Karen switches
to the SL method and deducts the $115.
Sixth year. Karen reduces the adjusted basis ($173) by
the depreciation claimed in the fifth year ($115). Because there is
less than one year remaining in the recovery period, the depreciation
rate for the sixth year is 100%. She multiplies the reduced adjusted
basis ($58) by 100% to arrive at the depreciation deduction for the
sixth year ($58).
Applying the Convention
You must apply the appropriate convention in the following years.
- The year in which you place property in service.
- The year you dispose of property if it is before the end of
the recovery period.
Half-Year Convention
Generally, you use the half-year convention for property other than
nonresidential real and residential rental property.
Under this convention, you treat property as placed in service (or
disposed of) in the middle of the year. A half-year of depreciation is
allowable for the year you place the property in service. This applies
regardless of when during the year you place the property in service.
Unless you dispose of the property before the end of the recovery
period, you take a full year of depreciation in each of your tax years
that includes 12 full months of the recovery period. If you hold the
property for the entire recovery period, you take a half-year of
depreciation (any unrecovered basis) in your tax year that includes
the final 6 months of the recovery period.
If you dispose of the property before the end of the recovery
period, a half-year of depreciation is allowable for the year of
disposition. This applies regardless of when during the year you
dispose of the property.
First, figure the depreciation for a full year using the method you
select. Then you apply the half-year convention by dividing the full
amount of depreciation by 2. The result is your depreciation deduction
for the year in which you place the property in service or for the
year of disposal.
Mid-Quarter Convention
Under the mid-quarter convention, you treat property placed in
service (or disposed of) during any quarter as placed in service (or
disposed of) in the middle of the quarter.
You must use the mid-quarter convention when the total depreciable
bases of MACRS property you placed in service during the last three
months of your tax year are more than 40% of the total depreciable
bases of all MACRS property you placed in service during the entire
year. For information on how to determine if you must use the
mid-quarter convention, see The Mid-Quarter Convention
under Conventions, earlier.
A quarter of a full 12-month tax year is a period of three months.
The first quarter in a year begins on the first day of the tax year.
The second quarter begins on the first day of the fourth month of the
tax year. The third quarter begins on the first day of the seventh
month of the tax year. The fourth quarter begins on the first day of
the tenth month of the tax year. A calendar year is divided into the
following quarters.
Quarter |
Months |
First |
January, February, March |
Second |
April, May, June |
Third |
July, August, September |
Fourth |
October, November, December |
To figure your MACRS deduction using the mid-quarter convention,
you must first figure your depreciation for the full year. Then
multiply that amount by the percentage listed below for the quarter of
the year the property is placed in service.
Quarter |
Percentage |
First |
87.5% |
Second |
62.5 |
Third |
37.5 |
Fourth |
12.5 |
Mid-Month Convention
You use the mid-month convention for the following types of
property.
- Nonresidential real property.
- Residential rental property.
Under this convention, you treat property placed in service (or
disposed of) in any month as placed in service (or disposed of) in the
middle of the month. To figure your MACRS deduction using the
mid-month convention, first figure the depreciation for a full year
using the straight line method. Then multiply this amount by a
fraction. The numerator of the fraction is the number of full months
in the year that the property is in service plus 1/2 (or
0.5). The denominator is 12.
Example.
You use the calendar year and place nonresidential real property in
service in August. The property is in service 4 full months
(September, October, November, and December). Your numerator is 4.5 (4
full months plus 0.5).
Examples (Figuring MACRS Without Percentage Tables)
The following examples show how to figure depreciation under MACRS
without using the percentage tables. Figures are rounded for purposes
of the examples. Assume for all the examples that you use a calendar
year as your tax year.
Example 1 -- half-year convention.
You bought for $10,000 and placed in service in March an item of
7-year property. You do not elect a section 179 deduction for this
property. The adjusted basis of the property is $10,000. You use GDS
to figure your depreciation. Because you did not place any property in
service during the last three months of the year, you apply the
half-year convention.
The 200% declining balance rate for 7-year property is 28.57%. You
determine this by dividing 2.00 (200%) by 7 years. The result is .2857
or 28.57%.
You multiply the adjusted basis of $10,000 by .2857. This gives you
a full year's depreciation, $2,857. You then apply the half-year
convention by dividing $2,857 by 2. This gives you a depreciation
deduction for the first year of $1,429.
For the second year, your depreciation deduction is $2,449. You
figure this by subtracting $1,429 from $10,000 to get the adjusted
basis of $8,571 for the property. Then you multiply $8,571 by .2857
(the full year rate for 7-year property using 200% DB).
For the third and fourth years, you follow the same procedure. Your
deduction for the third year will be $1,749 [$6,122 ($8,571
- $2,449) x .2857]. Your deduction for the fourth
year will be $1,249 [$4,373 ($6,122 - $1,749) x
.2857].
For the fifth year of the recovery period, you change to the
straight line method. You divide 1 by 3.5 (remaining years) to get
.2857. That is the same as the 200% declining balance rate. Your
deduction will be $893 [$3,124 ($4,373 - $1,249) x
.2857].
For the sixth year, you figure a straight line rate of .40 (1
divided by 2.5 remaining years). Your deduction will be $892
[$2,231 ($3,124 - $893) x .40].
For the seventh year, you figure a straight line rate of .6667 (1
divided by 1.5 remaining years). Your deduction will be $893
[$1,339 ($2,231 - $892) x .6667].
For the eighth year, your deduction will be your remaining basis of
$446 ($1,339 - $893). At the beginning of this year the
remaining recovery period (a half year) will be less than one year.
The straight line rate is 100%.
Example 2 -- mid-month convention.
In January you bought and placed in service a building for $100,000
that is nonresidential real property. The adjusted basis of the
building is its cost of $100,000. You figure your MACRS depreciation
for the building by dividing 1 by 39 years to get the straight line
depreciation rate for a full year of .02564. The depreciation for a
full year is $2,564 ($100,000 x .02564). Under the mid-month
convention, you treat the property as placed in service in the middle
of January. You would get 11.5 months of depreciation for the year.
Expressed as a decimal, the fraction of 11.5 months divided by 12
months is .958. Your first year depreciation for the building is
$2,456 ($2,564 x .958).
For the second year, you subtract $2,456 from $100,000 to get your
unrecovered basis of $97,544 for the building. The straight line rate
for the second year will be .02629. This is 1 divided by the remaining
recovery period of 38.04 years. The remaining recovery period is the
recovery period of 39 years reduced by 11.5 months or .958 and rounded
to 38.04 years. Your depreciation for the building for the second year
will be $2,564 ($97,544 x .02629).
For the third year, the unrecovered basis will be $94,980 ($97,544
- $2,564). The straight line rate will be .027 (1 divided by
37.04 remaining years). Your depreciation for the third year will be
$2,564 ($94,980 x .027).
Example 3 -- mid-quarter convention.
During the year you bought and placed in service in your business
the following items.
Item |
Month Placed in Service |
Cost |
Safe |
January |
$4,000 |
Office furniture |
September |
1,000 |
Computer (not listed property) |
October |
5,000 |
You do not elect a section 179 deduction. You use GDS to
figure the depreciation. The total bases of all property you placed in
service this year is $10,000. Because the basis of the computer
($5,000) is more than 40% of the total bases of all property ($10,000)
placed in service during the year, you must use the mid-quarter
convention. This convention will apply for all three items of
property. The safe and office furniture are in the 7-year property
class and the computer is in the 5-year property class.
The 200% declining balance rate for 7-year property is .2857. You
determine this by dividing 2.00 (200%) by 7 years. The result is .2857
or 28.57%. The depreciation for the safe for a full year is $1,143
($4,000 x .2857). Because you placed the safe in service in the
first quarter of your tax year, you multiply $1,143 by 87.5%
(mid-quarter percentage for the first quarter). The result is your
deduction of $1,000 for depreciation on the safe for the first year.
For the second year, you must first figure your adjusted basis of
the safe. You do this by subtracting the first year's depreciation
($1,000) from the basis of the safe ($4,000). Your depreciation
deduction for the second year is $857 [$3,000 ($4,000 -
$1,000) x .2857].
Because the furniture is also 7-year property, you use the same
200% declining balance rate of .2857. You multiply the basis of the
furniture ($1,000) by .2857 to get the depreciation of $286 for the
full year. Because you placed the furniture in service in the third
quarter of your tax year, you multiply $286 by 37.5% (mid-quarter
percentage for the third quarter). The result is your deduction of
$107 for depreciation on the furniture for the first year.
For the second year, you must first figure your adjusted basis of
the furniture. You do this by subtracting the first year's
depreciation ($107) from the basis of the furniture ($1,000). Your
depreciation for the second year will be $255 [$893 ($1,000
- $107) x .2857].
The 200% declining balance rate for 5-year property is .40. You
determine this by dividing 2.00 (200%) by 5 years. The result is .40
or 40%. The depreciation for the computer for a full year is $2,000
($5,000 x .40). Because you placed the computer in service in
the fourth quarter of your tax year, you multiply the $2,000 by 12.5%
(mid-quarter percentage for the fourth quarter). The result is your
deduction of $250 for depreciation on the computer for the first year.
For the second year, you must first figure the adjusted basis for
the computer. You do this by subtracting the first year's depreciation
($250) from the basis ($5,000). Your depreciation deduction for the
second year will be $1,900 [$4,750 ($5,000 - $250) x
.40].
Example 4 -- mid-quarter convention.
Last year, in October, you bought and placed in service in your
business an item of 7-year property. This is the only item of property
you placed in service last year. The property cost $20,000 and you
elected a $10,000 section 179 deduction. Your unadjusted basis for the
property is $10,000. Because you placed your property in service in
the last 3 months of your tax year, you must use the mid-quarter
convention. You figured your deduction using the percentages in Table
A-5 for 7-year property. Last year, your depreciation was $357
($10,000 x 3.57%).
In July of this year, your property was vandalized. You had a
deductible casualty loss of $3,000. You spent $3,500 to put the
property back in operational order. Your adjusted basis at the end of
this year is $10,143. You figured this by subtracting the first year's
depreciation ($357) and the casualty loss ($3,000) from the unadjusted
basis of $10,000. To this amount, you added the $3,500 repair cost.
You cannot use the table percentages to figure your depreciation
for this property for this year because of the adjustments to basis.
You must figure the deduction yourself. You determine the declining
balance rate by dividing 2.00 (200%) by 7 years. The result is .2857
or 28.57%. You multiply the adjusted basis of your property ($10,143)
by the declining balance rate of .2857 to get your depreciation
deduction of $2,898 for this year.
MACRS Deduction in Short Tax Year
You cannot use the MACRS percentage tables to determine
depreciation for a short tax year. A short tax year is any tax year
with less than 12 full months. This section discusses the rules for
determining the depreciation deduction for tangible property you place
in service in a short tax year. It also discusses the rules for
determining depreciation when you have a short tax year during the
recovery period other than the year the property is placed in service.
Determining Placed-in-Service
Date in Short Tax Year
The half-year, mid-quarter, and mid-month conventions establish the
date property is treated as placed in service and the disposition
date. Depreciation is allowable only for that part of the tax year the
property is treated as in service. The recovery period begins on the
placed-in-service date. The recovery period at the beginning of the
next tax year is the full recovery period less that part of the first
tax year for which depreciation is allowable.
Mid-month convention.
Under the mid-month convention, you always treat your property as
placed in service on the midpoint of the month you place it in
service. You apply this rule without regard to your tax year.
Half-year convention.
Under the half-year convention, you treat property as placed in
service on the midpoint of the tax year.
First or last day of month.
For a short tax year beginning on the first day of a month or
ending on the last day of a month, the tax year consists of the number
of months in the tax year. If the short tax year includes part of a
month, you generally include the full month in the number of months in
the tax year. You determine the midpoint of the tax year by dividing
the number of months in the tax year by 2. For the half-year
convention, you treat property as placed in service on either the
first day or the midpoint of a month. For example, a short tax year
that begins on June 20 and ends on December 31 consists of 7 months.
Because you use only full months for this determination, you treat the
tax year as beginning on June 1 instead of June 20. The midpoint of
the tax year is the middle of September (3 1/2 months from
the beginning of the tax year).
Example.
Tara Corporation, a calendar year taxpayer, was incorporated on
March 15. For purposes of the half-year convention, it has a short tax
year of 10 months, ending on December 31, 2000. During the short tax
year, Tara placed property in service for which it uses the half-year
convention. Tara treats this property as placed in service on the
first day of the sixth month of the short tax year, or August 1, 2000.
Not on first or last day of month.
For a short tax year not beginning on the first day of the month
and not ending on the last day of a month, the tax year consists of
the number of days in the tax year. You determine the midpoint of the
tax year by dividing the number of days in the tax year by 2. For the
half-year convention, you treat property as placed in service on
either the first day or the midpoint of a month. If the result of
dividing the number of days in the tax year by 2 is not the first day
or the midpoint of a month, you treat the property as placed in
service on the nearest preceding first day or midpoint of a month.
Mid-quarter convention.
To determine if you must use the mid-quarter convention, compare
the basis of property you place in service in the last 3 months of
your tax year to that of property you place in service during the full
tax year. The length of your tax year does not matter. If you have a
short tax year of 3 months or less, use the mid-quarter convention for
all applicable property you place in service during that tax year.
You treat property under the mid-quarter convention as placed in
service on the midpoint of the quarter of the tax year. Divide a short
tax year into 4 quarters and determine the midpoint of each quarter.
For a short tax year of 4 or 8 full calendar months, determine
quarters on the basis of whole months. The midpoint of each quarter is
either the first or the midpoint of a month.
To determine the midpoint of a quarter for a short tax year of
other than 4 or 8 full calendar months, complete the following steps.
- Determine the number of days in your short tax year.
- Determine the number of days in each quarter. This means you
divide the number of days in your short tax year by 4.
- Determine the midpoint of each quarter. This means you
divide the number of days in each quarter by 2.
If the result of (3) gives you a midpoint of a quarter that is on a
day other than the first or midpoint of a month, treat the property as
placed in service on the nearest preceding first or midpoint of that
month.
Example -- mid-quarter convention.
Tara Corporation, a calendar year taxpayer, was incorporated and
began business on March 15. It has a short tax year of 9 1/2 months, ending on December 31. During December it placed
property in service for which it must use the mid-quarter convention.
Because this is a short tax year of other than 4 or 8 full calendar
months, it must determine the midpoint of each quarter.
- First, it determines that its short tax year beginning March
15 and ending December 31 consists of 292 days.
- Next, it divides 292 by 4 to determine the length of each
quarter, 73 days.
- Finally, it divides 73 by 2 to determine the midpoint of
each quarter, the 37th day.
The following table shows the quarters of Tara Corporation's short
tax year, the midpoint of each quarter, and the date in each quarter
that Tara must treat its property as placed in service.
Quarter |
Midpoint |
Placed in Service |
3/15 - 5/26 |
4/20 |
4/15 |
5/27 - 8/7 |
7/2 |
7/1 |
8/8 - 10/19 |
9/13 |
9/1 |
10/20 - 12/31 |
11/25 |
11/15 |
The last quarter of the short tax year begins on October 20, which
is 73 days from December 31, the end of the tax year. The 37th day of
the last quarter is November 25. Because the midpoint of the quarter
is not the first or the midpoint of November, Tara Corporation must
treat the property as placed in service in the middle of November.
Figuring Depreciation in a Short Tax Year
If you place property in service in a short tax year, you must
first determine the depreciation for a full tax year. You do this by
multiplying your basis in the property by the applicable depreciation
rate. Then determine the depreciation for the short tax year. Do this
by multiplying the depreciation for a full tax year by a fraction. The
numerator of the fraction is the number of months (including parts of
a month) the property is treated as in service during the tax year
(applying the applicable convention). The denominator is 12. See
Depreciation in Recovery Years After Short Tax Year, later,
for how to figure depreciation in later years.
Example 1 -- half-year convention.
Tara Corporation, with a short tax year beginning March 15 and
ending December 31, placed in service on March 16 an item of 5-year
property with a basis of $1,000. This is the only property the
corporation placed in service during the short tax year. The
depreciation method for this property is the 200% declining balance
method. The depreciation rate is 40% and Tara applies the half-year
convention.
Tara treats the property as placed in service on August 1. The law
allows Tara 5 months of depreciation for the short tax year that
consists of 10 months. The corporation first multiplies the basis
($1,000) by 40% (the declining balance rate) to get the depreciation
for a full tax year of $400. The corporation then multiplies $400 by 5/12 to get the short tax year depreciation of $167.
Example 2 -- mid-quarter convention.
Tara Corporation, with a short tax year beginning March 15 and
ending on December 31, placed in service on October 16 an item of
5-year property with a basis of $1,000. The depreciation method for
this property is the 200% declining balance method. The depreciation
rate is 40%. The corporation must apply the mid-quarter convention
because the property was the only item placed in service that year and
it was placed in service in the last 3 months of the tax year.
Tara treats the property as placed in service on September 1. Under
MACRS, Tara is allowed 4 months of depreciation for the short tax year
that consists of 10 months. The corporation first multiplies the basis
($1,000) by 40% to get the depreciation for a full tax year of $400.
The corporation then multiplies $400 by 4/12 to get the
short tax year depreciation of $133.
Depreciation in Recovery Years After
Short Tax Year
You can use either of the following to figure the depreciation for
later years in the recovery period.
- Simplified method
- Allocation method
You must use the method you choose consistently until the year
of change to the straight line method.
Simplified method.
Under the simplified method, you figure the depreciation for
subsequent years in the recovery period by multiplying the unrecovered
basis of your property at the beginning of the year by the applicable
depreciation rate.
Example -- half-year convention.
Tara Corporation has a short tax year of 10 months, ending on
December 31. It placed in service an item of 5-year property with a
basis of $1,000. It claimed depreciation of $167 using a depreciation
rate of 40% and the half-year convention. The unrecovered basis on
January 1 of the next year is $833 ($1,000 - $167). Tara's
depreciation for that next year will be 40% of $833, or $333.
Short tax year after property in service.
If a subsequent tax year in the recovery period is a short tax
year, you figure depreciation for that year by multiplying the
unrecovered basis of the property at the beginning of the tax year by
the applicable depreciation rate, and then by a fraction. The
fraction's numerator is the number of months (including parts of a
month) in the tax year. Its denominator is 12.
Allocation method.
Under the allocation method, you figure the depreciation for each
subsequent tax year by allocating to the tax year the depreciation
attributable to each recovery year, or part of a recovery year, that
falls within the tax year. Whether your tax year is a 12-month or
short tax year, you figure the depreciation by determining which
recovery years are included in the tax year. For each recovery year
included, multiply the depreciation attributable to each recovery year
by a fraction. The fraction's numerator is the number of months
(including parts of a month) in both the tax year and the recovery
year. Its denominator is 12. The allowable depreciation for the tax
year is the sum of the depreciation figured for each recovery year.
Example -- half-year convention.
Assume the same facts as in Example 1 under Figuring
Depreciation in a Short Tax Year. The Tara Corporation's second
tax year is a full year of 12 months, beginning January 1 and ending
December 31. A recovery year for the 5-year property placed in service
during the short tax year extends from August 1 to July 31. Tara
deducted 5 months of first recovery year on its short-year tax return.
Seven months of the first recovery year and 5 months of the second
recovery year fall within the second tax year. The depreciation for
the second tax year will be $333, which is the sum of the following.
- $233 -- The depreciation for the short year
($400 x 7/12).
- $100 -- The depreciation for the second tax year
[$600 ($1,000 - $400) x 40%] or ($240 x 5/12).
More information.
For more information on figuring depreciation in a short tax year,
see Revenue Procedure 89-15 in Cumulative Bulletin 1989-1.
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