[unDeR]

I’m not quite sure what is going on here:

Rockford Corp., a calendar-year taxpayer, purchased used furniture and fixtures for use in its business and placed the property in service on December 1, 2010. The furniture and fixtures cost $112,000 and represented Rockford’s only acquisition of depreciable property during the year. Rockford did not make any special elections with regard to depreciation and did not elect to expense any part of the cost of the property under Sec. 179. What is the amount of Rockford Corp.’s depreciation deduction for the furniture and fixtures under the Modified Accelerated Cost Recovery System (MACRS) for 2010?

Answer: The requirement is to determine the MACRS deduction for the furniture and fixtures placed in service during 2010. The furniture and fixtures qualify as 7-year property and under MACRS will be depreciated using the 200% declining balance method. Regular MACRS depreciation would be computed under which a half-year convention normally applies to the year of acquisition. However, the midquarter convention must be used if more than 40% of all personal property is placed in service during the last quarter of the taxpayer’s taxable year. Since this was Rockford’s only acquisition of personal property and the property was placed in service during the last quarter of Rockford’s calendar year, the midquarter convention must be used. Under this convention, property is treated as placed in service during the middle of the quarter in which placed in service. Since the furniture and fixtures were placed in service in December the amount of allowable MACRS depreciation is limited to ($112,000) x 2/7 x 1/8 = $4,000.

I’m not following the components of the calculation. Any help would be greatly appreciated.

Texas-licensed CPA

[Minimorty]

@unDeR – There are basically three components to the calculation above: (i) the purchase price, (ii) the rate of depreciation, ie. how fast you are able to depreciate, and (iii) how many months of the year are you able to depreciate the machine in the first year of the purchase.

(i) The first component in the equation above is the purchase price. This was $112,000, so this will be our base in year 1 for depreciating. I'm assuming you understood this component, so I'll move to the next two.

(ii) The second component of the equation is (2/7). This is where all that hard work and long hours of studying pay off. If it is not given, you'll be expected to know that furniture and fixtures qualify as 7-year property and that it will be depreciated under the double-declining balance method. So for book purposes using straight-line, you would generally calculate the purchase price and multiply it by 1/7 (year 1 divided by the number of years you are allowed to depreciate the furniture and fixtures). However, since we are using MACRS, we'll need to depreciate using the double declining. So instead of multiplying by 1/7, we'll need to multiple by 2/7 (twice the amount under straight line). This is where the 2/7 comes from in the equation above.

(ii) The third part of the equation is 1/8 and represents how many months during the year you can depreciate the furniture and fixtures in year one. Generally, we use the half-year convention under MACRS. But, you'll be expected to know that if more than 40% of your purchases are placed into service in the 4th quarter of your year, then you'll only be allowed to use the mid-quarter convention (fewer months to depreciate so less depreciation expense so higher taxable income). So the 1/8 in the equation above comes from taking the four quarters of the year (1/4) and splitting them into two halves (1/4)*(1/2)=1/8. So the 1/8 represents half of the last quarter of the year, the period of time that you are allowed to depreciate the equipment in year 1.

Let me know if you need further clarification. Good luck!

[SoCalCPA]

wow great explanation!

B - (4/2012)
A - (5/2012)
R - (1/2012) Done!
F - (10/2011) Done!

[unDeR]

Thanks Minimorty! Much appreciated. By the way, would you happen to know what Sec. 179 is as mentioned in the question and how that concept may be tested?

Texas-licensed CPA

[Minimorty]

@unDeR – Sec. 179 refers to bonus depreciation allowed under certain scenarios for certain years. Instead of depreciating the asset over its useful (or allowable) life, you are able to expense the cost of the property in the year of purchase. This basically encourages businesses and entrepreneurs to make purchases and pour money into the economy.

As for how it could be tested, they will ask you to calculate the allowable depreciation expense for the company in year 20xx and then they will list out a couple different pieces of property or equipment purchased during the year. If the question DOES NOT exclude the use of Sec. 179 depreciation (like the question in our original post does), you will be expected to know the rules for Sec. 179 depreciation and how much you can expense in the year of purchase.

This has all the information you'll need on Sec. 179:

https://www.section179.org/

[Author]

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