[kanba]

My question is about the half-year convention. There are two questions.

1. A purchased depreciable equipment in 2011 for 523,000 and claimed the maximum sec179 deduction for that year of 500,000. The equipment qualified as 5-year property. A sold all of this equipment on June 30, 2012. The depreciation rates for 5-year property for the first 2 years, assuming 200%-declining-balance switching to straight-line, are 20% and 32%, respectively. What is the amount of A’s MACRS deduction for 2012?

The answer is (523000-500000)*32%*1/2=3680.

2. A taxpayer purchased and placed in service during the year a $100,00 piece of equipment. The equipment is 7-year property. The first-year depreciation for 7-year property is 14.29%. Assume that there is an allowable sec179 limit in the current year of 25000. What amount is the maximum allowable depreciation?

The answer is (100000-25000)*14.29%=10718.

My question is why the second question does not multiply 1/2 since the rule of half-year convention allows one-half year depreciation in the year of acquisition and one-half year depreciation in the year of disposition.

[Morganf]

Explaining where the half year convention appears in the 1st problem:

The 1/2 year convention was used in the top question, you just aren't seeing it; the 32% shortcut number incorporates first year's depreciation, which used the half year convention. To explain:

for 5-year 200% MACRS:

YEAR 1:100% starting basis – 20% first year depreciation (100% * 2 * 1/5 * 1/2) = 89% adjusted basis

YEAR 2: 80% adjusted basis – 32% 2nd year depreciation ( 80% * 2 * 1/5) -= 48% adjusted basis

Note that the 32% comes from the adjusted basis, which incorporated first year depreciation, which used the half year convention.

Explaining what the “1/2” is in the first problem:

When you see the calculation “Depreciable basis * 32% * 1/2,” the “1/2” is really a factored “6/12” referring to when the property was sold. The half year convention is only used when assets are bought and placed into service, not when assets are sold. Selling you must pro-rate the asset over how much it was used. Note minor materiality differences might arrise based on if you pro-rate (months used / 12) or (days used / 365).

Regarding question – “Why is the half year convention not used in Question 2?”:

This is similar to how the half year convention is used in the schedule/calculations arriving at the 32% number. 7 year 200% MACRS first year depreciation = 2 * 1/7 * 1/2 = 14.3% <—- calculated as 2 (200% not 150% macrs), 1/7 (straight line depreciation), 1/2 (half year convention).

BEC - 88
AUD - 69, 74, 93
FAR - 78
REG - 79

[Author]

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