Example: Short Year Depreciation

Example 1

Assume a 7-year property purchased by a calendar year taxpayer on April 15 at a cost of $10,000 depreciated under the general MACRS 200% DB method over a seven year recovery period using the half-year convention. The applicable depreciation rate from IRS tables is 14.29%, giving a depreciation amount of $1,429.

Example 2

Assume the same asset as in Example 1 except that the taxpayer is filing a short-year return of 11 months. Enter 11 in "Number of Months in Short Tax Year" to print the applicable depreciation rate from the IRS tables and prorate the amount of depreciation by 11/12 giving a depreciation amount of $1,310 ($10,000 x 14.29% x 11/12).

Example 3

Assume the same asset as in Example 2 except the taxpayer would like to use the Simplified Method for determining the applicable depreciation rate. An entry of 5.5 in "No. of Deemed Mos." (half-year convention applied to 11 months) would calculate a rate of 13.10% (100% x 2/7 x 5.5/12) and a depreciation amount of $1,310.

Example 4

Assume the same facts as in Example 3 except that the taxpayer has determined that the mid-quarter convention should be applied to the asset. The first quarter is from February 1 to April 23 with a mid-point of March 1. Therefore, the number of months the property is deemed to be in service during the tax year is 10 months. Enter 10 in "No. of Deemed Mos" to give a depreciation rate of 23.81% (100% x 2/7 x 10/12) and depreciation of $2,381. Enter 2 in "1 If Half-year, 2 If Mid-quarter" to indicate to the program to print mid-quarter convention where applicable.

Example 5

Assume the same facts as Example 4 except that the taxpayer does not want to use the Simplified Method. An entry of 2 in "1 If Half- year, 2 If Mid-quarter" would use the table rate of 17.85% (the program would assume the asset to be in the second quarter) and an entry of 11 in "Number of Months in Short Tax Year" would prorate the depreciation by 11/12. This would give a depreciation amount of $1,636. In this case, the use of this field by itself would not be as accurate as using the Simplified Method as in Example 4.