Words you may need to know (see Glossary):
- Adjusted basis
- Amortization
- Basis
- Business/investment use
- Clean-fuel vehicle
- Clean-fuel vehicle refueling property
- Convention
- Declining balance method
- Disposition
- Exchange
- Nonresidential real property
- Placed in service
- Property class
- Recovery period
- Straight line method
To figure your depreciation deduction under MACRS, you first determine the depreciation system, property class, placed-in-service date, basis
amount, recovery period, convention, and depreciation method that applies to your property. Then you are ready to figure your depreciation deduction.
You can figure it using a percentage table provided by the IRS, or you can figure it yourself without using the table.
Using the MACRS Percentage Tables
To help you figure your deduction under MACRS, the IRS has established percentage tables that incorporate the applicable convention and
depreciation method. These percentage tables are in Appendix A near the end of this publication.
Which table to use.
Appendix A contains the MACRS Percentage Table Guide, which is designed to help you locate the correct percentage table to use for
depreciating your property. The percentage tables immediately follow the guide.
Rules Covering the Use of the Tables
The following rules cover the use of the percentage tables.
- You must apply the rates in the percentage tables to your property's unadjusted basis.
- You cannot use the percentage tables for a short tax year. See Figuring the Deduction for a Short Tax Year, later, for
information on figuring the deduction.
- Once you start using the percentage tables, you generally must continue to use them for the entire recovery period of the
property.
- You must stop using the tables if you adjust the basis of the property for any reason other than--
- Depreciation allowed or allowable, or
- An addition or improvement to that property that is depreciated as a separate item of property.
Basis adjustment due to recapture of clean-fuel vehicle deduction or credit.
If you increase the basis of your property because of the recapture of part or all of a deduction for clean-fuel vehicles or the credit for
clean-fuel vehicle refueling property, you cannot continue to use the percentage tables. For the year of the adjustment and the remaining recovery
period, you must figure the depreciation deduction yourself using the property's adjusted basis at the end of the year. See Figuring the
Deduction Without Using the Tables, later.
Basis adjustment due to casualty loss.
If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. For the year of the adjustment
and the remaining recovery period, you must figure the depreciation yourself using the property's adjusted basis at the end of the year. See
Figuring the Deduction Without Using the Tables, later.
Example.
On October 26, 2000, Sandra Elm, a calendar year taxpayer, bought and placed in service in her business an item of 7-year property. It cost $29,000
and she elected a section 179 deduction of $19,000. Her unadjusted basis after the section 179 deduction was $10,000 ($29,000 - $19,000). She
figured her deduction using the percentage tables. For 2000, her depreciation was $357.
In July 2001, the property was vandalized and Sandra had a deductible casualty loss of $3,000. Because she must adjust the property's basis for the
casualty loss, she can no longer use the percentage tables. Her adjusted basis at the end of 2001, before figuring her 2001 depreciation, is $6,643.
She figures that amount by subtracting the 2000 depreciation of $357 and the casualty loss of $3,000 from the unadjusted basis of $10,000. She must
now figure her depreciation for 2001 without using the percentage tables.
Figuring the Unadjusted Basis of
Your Property
You must apply the table rates to your property's unadjusted basis each year of the recovery period. Unadjusted basis is the same basis
amount you would use to figure gain on a sale, but you figure it without reducing your original basis by any depreciation taken in earlier years.
However, you do reduce your original basis by the following amounts.
- Any amortization taken on the property.
- Any section 179 deduction claimed.
- Any deduction claimed for a clean-fuel vehicle or clean-fuel vehicle refueling property.
- Any electric vehicle credit. (This is the lesser of $4,000 or 10% of the cost of the vehicle, even if the credit is less than that
amount.)
The clean-fuel vehicle and clean-fuel vehicle refueling property deductions and the electric vehicle credit are discussed in chapter 12 of
Publication 535.
For business property you purchase during the year, the unadjusted basis is its cost minus these adjustments. If you trade property, your
unadjusted basis in the property received is the cash paid plus the adjusted basis of the property traded minus these adjustments.
MACRS Worksheet
You can use this worksheet to help you figure your depreciation deduction using the percentage tables. (Use a separate worksheet for each item of
property.) Then use the information from this worksheet to prepare Form 4562.
Do not use this worksheet for automobiles. Use the Depreciation Worksheet for Passenger Automobiles in chapter 4.
MACRS Worksheet
| Part
I |
| 1. |
Description
of property |
|
| 2. |
Date placed
in service |
|
| 3. |
MACRS system
(GDS or ADS) |
|
| 4. |
Recovery period |
|
| 5. |
Method and
convention |
|
| 6. |
Depreciation
rate (from tables) |
|
| Part
II |
| 7. |
Cost or other basis* |
$ |
|
| 8. |
Business/investment use |
% |
|
| 9. |
Multiply line 7 by line
8 |
$ |
| 10. |
Total claimed for section
179 deduction and other items, including deduction for clean-fuel
vehicle refueling property |
$ |
| 11. |
Subtract line 10 from line
9. This is your unadjusted basis |
$ |
| 12. |
Depreciation rate (from
line 6) |
|
| 13. |
Multiply line 11 by line 12. This is
your depreciation deduction |
$ |
| *If real estate, do not
include cost (basis) of land. |
The following example shows how to figure your MACRS depreciation deduction using the percentage tables and the MACRS worksheet.
Example.
You bought office furniture (7-year property) for $10,000 and placed it in service on August 11, 2001. You use the furniture only for business.
This is the only property you placed in service this year. You did not elect a section 179 deduction. You use GDS and the half-year convention to
figure your depreciation. You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-1. Because you
did not elect a section 179 deduction, your property's unadjusted basis is its cost, $10,000. Multiply your property's unadjusted basis each year by
the percentage for 7-year property given in Table A-1. You figure your depreciation deduction using the MACRS worksheet as follows.
MACRS Worksheet
| Part
I |
| 1. |
Description
of property |
Office furniture |
| 2. |
Date placed
in service |
8/11/01 |
| 3. |
MACRS system
(GDS or ADS) |
GDS |
| 4. |
Recovery period |
7-Year |
| 5. |
Method and
convention |
200%DB/Half-Year |
| 6. |
Depreciation
rate (from tables) |
.1429 |
| Part
II |
| 7. |
Cost or other
basis* |
$10,000 |
|
| 8. |
Business/investment
use |
100% |
|
| 9. |
Multiply line 7 by line
8 |
$10,000 |
| 10. |
Total claimed for section
179 deduction and other items, including deduction for clean-fuel
vehicle refueling property |
-0- |
| 11. |
Subtract line 10 from line
9. This is your unadjusted basis |
$10,000 |
| 12. |
Depreciation rate (from
line 6) |
.1429 |
| 13. |
Multiply line 11 by line 12. This is
your depreciation deduction |
$1,429 |
| *If real estate, do not
include cost (basis) of land. |
If there are no adjustments to the basis of the property other than depreciation, your depreciation deduction for each subsequent year of the
recovery period will be as follows.
|
Year |
|
Basis |
Percentage |
Deduction |
| 2002 |
$ |
10,000 |
24.49% |
|
$2,449 |
|
| 2003 |
|
10,000 |
17.49 |
|
1,749 |
|
| 2004 |
|
10,000 |
12.49 |
|
1,249 |
|
| 2005 |
|
10,000 |
8.93 |
|
893 |
|
| 2006 |
|
10,000 |
8.92 |
|
892 |
|
| 2007 |
|
10,000 |
8.93 |
|
893 |
|
| 2008 |
|
10,000 |
4.46 |
|
446 |
|
Examples
The following examples are provided to show you how to use the percentage tables. In both examples, assume the following.
- You use the property only for business.
- You use the calendar year as your tax year.
- You use GDS for all the properties.
Example 1.
You bought a building and land for $120,000 and placed it in service on March 8. The sales contract showed the building cost $100,000 and the land
cost $20,000. It is nonresidential real property. The building's unadjusted basis is its original cost, $100,000.
You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-7a. Because March is the third month of
your tax year, multiply the building's unadjusted basis, $100,000, by the percentages for the third month in Table A-7a. Your depreciation deduction
for each of the first 3 years is as follows:
|
Year |
|
Basis |
Percentage |
Deduction |
| 1st |
$ |
100,000 |
2.033% |
|
$2,033 |
|
| 2nd |
|
100,000 |
2.564 |
|
2,564 |
|
| 3rd |
|
100,000 |
2.564 |
|
2,564 |
|
Example 2.
During the year, you bought a machine (7-year property) for $4,000, office furniture (7-year property) for $1,000, and a computer (5-year property)
for $5,000. You placed the machine in service in January, the furniture in September, and the computer in October. You do not elect a section 179
deduction for any of these items.
Because you placed property in service during the last three months of the year, you must first determine if you have to use the mid-quarter
convention. The total bases of all property you placed in service during the year is $10,000. The $5,000 basis of the computer, which you placed in
service during the last 3 months (the fourth quarter) of your tax year, is more than 40% of the total bases of all property ($10,000) you placed in
service during the year. Therefore, you must use the mid-quarter convention for all three items unless, under the exception for property placed in
service in 2001, you elect to apply the half-year convention.
You refer to the MACRS Percentage Table Guide in Appendix A to determine which table you should use under the mid-quarter convention.
Because you do not elect to apply the half-year convention and the machine is 7-year property placed in service in the first quarter, you use Table
A-2. Because the furniture is 7-year property placed in service in the third quarter, you use Table A-4. Finally, because the computer is 5-year
property placed in service in the fourth quarter, you use Table A-5. Knowing what table to use for each property, you figure the depreciation for the
first 2 years as follows.
| Year |
Property |
Basis |
Percentage |
Deduction |
| 1st |
Machine |
$4,000 |
25.00 |
$1,000 |
|
| 2nd |
Machine |
4,000 |
21.43 |
857 |
|
| 1st |
Furniture |
1,000 |
10.71 |
107 |
|
| 2nd |
Furniture |
1,000 |
25.51 |
255 |
|
| 1st |
Computer |
5,000 |
5.00 |
250 |
|
| 2nd |
Computer |
5,000 |
38.00 |
1,900 |
|
Sale or Other Disposition Before the Recovery Period Ends
If you sell or otherwise dispose of your property before the end of its recovery period, your depreciation deduction for the year of the
disposition will be only part of the depreciation amount for the full year. You have disposed of your property if you have permanently withdrawn it
from use in your business or income-producing activity because of its sale, exchange, retirement, abandonment, involuntary conversion, or destruction.
After you figure the full-year depreciation amount, figure the deductible part using the convention that applies to the property.
Half-year convention used.
For property for which you used a half-year convention, the depreciation deduction for the year of the disposition is half the depreciation
determined for the full year.
Mid-quarter convention used.
For property for which you used the mid-quarter convention, figure your depreciation deduction for the year of the disposition by multiplying a
full year of depreciation by the percentage listed below for the quarter in which you disposed of the property.
|
Quarter |
Percentage |
| First |
12.5% |
| Second |
37.5 |
| Third |
62.5 |
| Fourth |
87.5 |
Example.
On December 2, 1999, you placed an item of 5-year property in service in your business. The property cost $10,000 and you did not claim a section
179 deduction. Your unadjusted basis for the property was $10,000. You used the mid-quarter convention because this was the only item of business
property you placed in service in 1999 and it was placed in service during the last 3 months of your tax year. Because your property is in the 5-year
property class, you used Table A-5 to figure your depreciation deduction. Your deductions for 1999 and 2000 were $500 (5% of $10,000) and $3,800 (38%
of $10,000). You disposed of the property on April 6, 2001. To determine your depreciation deduction for 2001, first figure the deduction for the full
year. This is $2,280 (22.8% of $10,000). Because April is in the second quarter of the year, you multiply $2,280 by 37.5% to get your depreciation
deduction of $855 for 2001.
Mid-month convention used.
If you dispose of residential rental or nonresidential real property, figure your depreciation deduction for the year of the disposition by
multiplying a full year of depreciation by a fraction. The numerator of the fraction is the number of months (including partial months) in the year
that the property is considered in service. The denominator is 12.
Example.
On July 2, 1999, you purchased and placed in service residential rental property. The property cost $100,000, not including the cost of land. You
used Table A-6 to figure your MACRS depreciation for this property. You sold the property on March 2, 2001. You file your tax return based on the
calendar year.
A full year of depreciation for 2001 is $3,636. This is $100,000 multiplied by .03636 (the percentage for the seventh month of the third recovery
year) from Table A-6. You then apply the mid-month convention for the 2 1/2 months of use in 2001. Multiply $3,636 by 2.5 and divide by 12
to get your 2001 depreciation deduction of $757.50.
Figuring the Deduction Without Using the Tables
Instead of using the rates in the percentage tables to figure your depreciation deduction, you can figure it yourself. Before making the
computation each year, you must reduce your adjusted basis in the property by the depreciation claimed the previous year.
Figuring MACRS deductions without using the tables will generally result in a slightly different amount than using the tables.
Declining Balance Method
When using a declining balance method, you apply the same depreciation rate each year to the adjusted basis of your property. You must use the
applicable 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
straight line method is explained later.
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.
- Apply the applicable 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 Using the Applicable Convention, later, for information on how to
figure depreciation for the year you dispose of it.
Figuring depreciation under the declining balance method and switching to the straight line method is illustrated in Example 1, later,
under Examples.
Declining balance rate.
You figure your declining balance rate by dividing the specified declining balance percentage (150% or 200% changed to a decimal) by the number of
years in the property's recovery period. For example, for 3-year property depreciated using the 200% declining balance method, divide 2.00 (200%) by 3
to get 0.6667, or 66.67% declining balance rate. For 15-year property depreciated using the 150% declining balance method, divide 1.50 (150%) by 15 to
get 0.10, or 10% declining balance rate.
The following table shows the declining balance rate for each property class and the first year for which the straight line method gives an equal
or greater deduction.
| Property Class |
Method |
Declining Balance Rate |
Year |
| 3-year |
200% DB |
66.667% |
3rd |
| 5-year |
200% DB |
40.0 |
4th |
| 7-year |
200% DB |
28.571 |
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 apply a different depreciation rate each year to the adjusted basis of your property. You must use the
applicable convention in the year you place the property in service and the year you dispose of the property.
You figure depreciation for the year you place property in service as follows.
- Multiply your adjusted basis in the property by the straight line rate.
- Apply the applicable 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.
- 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 Using the Applicable Convention, next, for information on how to
figure depreciation for the year you dispose of it.
Straight line rate.
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 that 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%).
Using the Applicable Convention
The applicable convention (discussed earlier under Which Convention Applies?) affects how you figure your depreciation deduction for the
year you place your property in service and for the year you dispose of it. And, because it determines how much of the recovery period remains at the
beginning of each year, it also affects the depreciation rate for property you depreciate under the straight line method. See Straight line
rate in the previous discussion. Use the applicable convention as explained in the following discussions.
Half-year convention.
If this convention applies (or you elect to apply it for property placed in service in your 2001 tax year), you deduct a half-year of depreciation
for the first year and the last year that you depreciate the property. You deduct a full year of depreciation for any other year during the recovery
period.
Figure your depreciation deduction for the year you place the property in service by dividing the depreciation for a full year by 2. If you dispose
of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. If you hold
the property for the entire recovery period, your depreciation deduction for the year that includes the final 6 months of the recovery period is the
amount of your unrecovered basis in the property.
Mid-quarter convention.
If this convention applies (and you do not elect to apply the half-year convention for property placed in service in your 2001 tax year), the
depreciation you can deduct for the first year you depreciate the property depends on the quarter in which you place the property in service.
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 |
Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by the percentage
listed below for the quarter you place the property in service.
|
Quarter |
Percentage |
| First |
87.5% |
| Second |
62.5 |
| Third |
37.5 |
| Fourth |
12.5 |
If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition by
multiplying a full year of depreciation by the percentage listed below for the quarter you dispose of the property.
|
Quarter |
Percentage |
| First |
12.5% |
| Second |
37.5 |
| Third |
62.5 |
| Fourth |
87.5 |
If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final quarter of the recovery
period is the amount of your unrecovered basis in the property.
Mid-month convention.
If this convention applies, the depreciation you can deduct for the first year that you depreciate the property depends on the month in which you
place the property in service. Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a
full year 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.
If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same
way. If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final month of the recovery
period is the amount of your unrecovered basis in the property.
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). You multiply the depreciation for a full year by 4.5/12, or 0.375.
Examples
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--200% DB method and half-year convention.
In February, you placed in service depreciable property with a 5-year recovery period and a basis of $1,000. You do not elect to take the section
179 deduction. You use GDS and the 200% declining balance (DB) method to figure your depreciation. When the straight line (SL) method results in an
equal or larger deduction, you switch to the SL method. Because you did not place any property in service in the last three months of the year, you
must use the half-year convention.
First year. You figure 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%. You multiply the adjusted basis of the property ($1,000) by the 40% DB rate. You apply the half-year convention by
dividing the result ($400) by 2. Depreciation for the first year under the 200% DB method is $200.
You figure the depreciation rate under the straight line (SL) method by dividing 1 by 5, the number of years in the recovery period. The result is
20%.You multiply the adjusted basis of the property ($1,000) by the 20% SL rate. You apply 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, you deduct the $200 figured under the 200% DB method.
Second year. You reduce the adjusted basis ($1,000) by the depreciation claimed in the first year ($200). You multiply the result ($800)
by the DB rate (40%). Depreciation for the second year under the 200% DB method is $320.
You figure the SL depreciation rate by dividing 1 by 4.5, the number of years remaining in the recovery period. (Because of the half-year
convention, you used only half a year of the recovery period in the first year.) You multiply 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, you deduct the $320 figured under the 200% DB method.
Third year. You reduce the adjusted basis ($800) by the depreciation claimed in the second year ($320). You multiply the result ($480)
by the DB rate (40%). Depreciation for the third year under the 200% DB method is $192.
You figure the SL depreciation rate by dividing 1 by 3.5. You multiply 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, you deduct the $192 figured under the 200% DB method.
Fourth year. You reduce the adjusted basis ($480) by the depreciation claimed in the third year ($192). You multiply the result ($288)
by the DB rate (40%). Depreciation for the fourth year under the 200% DB method is $115.
You figure the SL depreciation rate by dividing 1 by 2.5. You multiply the reduced adjusted basis ($288) by the result (40%). Depreciation under
the SL method for the fourth year is $115.
Because the SL method provides an equal deduction, you switch to the SL method and deduct the $115.
Fifth year. You reduce the adjusted basis ($288) by the depreciation claimed in the fourth year ($115) to get the reduced adjusted basis
of $173. You figure the SL depreciation rate by dividing 1 by 1.5. You multiply the reduced adjusted basis ($173) by the result (66.67%). Depreciation
under the SL method for the fifth year is $115.
Sixth year. You reduce the adjusted basis ($173) by the depreciation claimed in the fifth year ($115) to get the reduced adjusted basis
of $58. Because there is less than one year remaining in the recovery period, the SL depreciation rate for the sixth year is 100%. You multiply the
reduced adjusted basis ($58) by 100% to arrive at the depreciation deduction for the sixth year ($58).
Example 2--SL method and 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 use GDS, the straight line (SL) method, and the mid-month convention to figure your depreciation.
First year. You figure the SL depreciation rate for the building by dividing 1 by 39 years. The result is .02564. The depreciation for a
full year is $2,564 ($100,000 × .02564). Under the mid-month convention, you treat the property as placed in service in the middle of January.
You 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 × .958).
Second year. You subtract $2,456 from $100,000 to get your adjusted basis of $97,544 for the second year. The SL rate is .02629. This is
1 divided by the remaining recovery period of 38.042 years (39 years reduced by 11.5 months or .958 year). Your depreciation for the building for the
second year is $2,564 ($97,544 × .02629).
Third year. The adjusted basis is $94,980 ($97,544 - $2,564). The SL rate is .027 (1 divided by 37.042 remaining years). Your
depreciation for the third year is $2,564 ($94,980 × .027).
Example 3--200% DB method and 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 and the 200% declining balance (DB) method 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 placed in service during the year ($10,000) and you do not elect to apply the half-year convention, you must use the mid-quarter convention.
This convention applies to all three items of property. The safe and office furniture are 7-year property and the computer is 5-year property.
The 200% DB rate for 7-year property is .28571. You determine this by dividing 2.00 (200%) by 7 years. The depreciation for the safe for a full
year is $1,143 ($4,000 × .28571). Because you placed the safe in service in the first quarter of your tax year, you multiply $1,143 by 87.5%
(the mid-quarter percentage for the first quarter). The result, $1,000, is your deduction for depreciation on the safe for the first year.
For the second year, the adjusted basis of the safe is $3,000. You figure 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 × .28571).
Because the furniture is also 7-year property, you use the same 200% DB rate of .28571. You multiply the basis of the furniture ($1,000) by .28571
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% (the mid-quarter percentage for the third quarter). The result, $107, is your deduction for depreciation on the furniture for the first
year.
For the second year, the adjusted basis of the furniture is $893. You figure this by subtracting the first year's depreciation ($107) from the
basis of the furniture ($1,000). Your depreciation for the second year is $255 ($893 × .28571).
The 200% DB rate for 5-year property is .40. You determine this by dividing 2.00 (200%) by 5 years. The depreciation for the computer for a full
year is $2,000 ($5,000 × .40). Because you placed the computer in service in the fourth quarter of your tax year, you multiply the $2,000 by
12.5% (the mid-quarter percentage for the fourth quarter). The result, $250, is your deduction for depreciation on the computer for the first year.
For the second year, the adjusted basis of the computer is $4,750. You figure this by subtracting the first year's depreciation ($250) from the
basis of the computer ($5,000). Your depreciation deduction for the second year is $1,900 ($4,750 × .40).
Example 4--200% DB method and mid-quarter convention.
Last year, in October, you bought and placed in service in your business an item of 7-year property. This was 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 used 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 × 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 DB rate by dividing 2.00 (200%) by 7 years. The result is .28571 or 28.571%. You multiply the
adjusted basis of your property ($10,143) by the declining balance rate of .28571 to get your depreciation deduction of $2,898 for this year.
Figuring the Deduction for Carried-Over-Basis Property
If your property has a carried-over basis because you acquired it in an exchange or involuntary conversion of other property or in a nontaxable
transfer, you may have to figure depreciation for the property as if the exchange, conversion, or transfer had not occurred.
Property Acquired in an Exchange or Involuntary Conversion
You generally must depreciate MACRS property that you acquired in a like-kind exchange or an involuntary conversion of other MACRS property over
the remaining recovery period of the exchanged or involuntarily converted property. You also generally continue to use the same depreciation method
and convention. You can depreciate the part of the acquired property's basis that exceeds its carried-over basis (the adjusted basis of the exchanged
or converted property) as newly purchased MACRS property.
If you placed the acquired MACRS property in service before January 3, 2000, you continue to use your original method of depreciating that
property.
Property Acquired in a Nontaxable Transfer
You must depreciate MACRS property acquired by a corporation or partnership in certain nontaxable transfers over the property's remaining recovery
period in the transferor's hands, as if the transfer had not occurred. You must continue to use the same depreciation method and convention as the
transferor. You can depreciate the part of the property's basis that exceeds its carried-over basis (the transferor's adjusted basis in the property)
as newly purchased MACRS property.
The nontaxable transfers covered by this rule include the following.
- A distribution in complete liquidation of a subsidiary.
- A transfer to a corporation controlled by the transferor.
- An exchange of property solely for corporate stock or securities in a reorganization.
- A contribution of property to a partnership in exchange for a partnership interest.
- A partnership distribution of property to a partner.
Figuring the Deduction for a 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 property you place in service or dispose of 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 or disposed of).
For more information on figuring depreciation for a short tax year, see Revenue Procedure 89-15 in Cumulative Bulletin 1989-1.
Using the Applicable Convention in a Short Tax Year
The applicable convention establishes the date property is treated as placed in service and disposed of. 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 determined by applying the
convention. The remaining recovery period at the beginning of the next tax year is the full recovery period less the part for which depreciation was
allowable in the first tax year.
The following discussions explain how to use the applicable convention in a short tax year.
Mid-month convention.
Under the mid-month convention, you always treat your property as placed in service or disposed of on the midpoint of the month it is placed in
service or disposed of. 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 or disposed of 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 or disposed of 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, 2001. 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, 2001.
Not on first or last day of month.
For a short tax year not beginning on the first day of a 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 or disposed of 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 or disposed of 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. However, see
Exception, next.
You treat property under the mid-quarter convention as placed in service or disposed of on the midpoint of the quarter of the tax year in which it
is placed in service or disposed of. 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 day 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 by dividing the number of days in your short tax year by 4.
- Determine the midpoint of each quarter by dividing 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 day or midpoint of a month, treat the property as
placed in service or disposed of on the nearest preceding first day or midpoint of that month.
Exception.
If the third or fourth quarter of your short tax year includes September 11, 2001, you can elect to apply the half-year convention, discussed
earlier, to all property (other than nonresidential real property and residential rental property) placed in service during that tax year. (The dates
included in the third or fourth quarter can be determined by dividing the number of days in the short tax year by 4.) To make this election, write
"Election Pursuant to Notice 2001-70" across the top of your Form 4562 for the tax year.
Example.
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 does not elect to apply the half-year convention and, therefore,
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 - 8/07 |
7/02 |
7/01 |
| 8/08 - 10/19 |
9/13 |
9/01 |
| 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 day or the midpoint of November, Tara Corporation must treat the property
as placed in service in the middle of November.
Property Placed in Service 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 After a 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. Tara is allowed 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, it was placed in service in the last 3
months of the tax year, and the corporation does not elect to apply the half-year convention.
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.
Property Placed in Service Before a Short Tax Year
If you have a short tax year after the tax year in which you began depreciating property, you must change the way you figure depreciation for that
property. If you were using the percentage tables, you can no longer use them. You must figure depreciation for the short tax year and each later tax
year as explained next.
Depreciation After a Short Tax Year
You can use either of the following methods to figure the depreciation for years after a short tax year.
- The simplified method.
- The allocation method.
You must use the method you choose consistently.
Using the simplified method for a 12-month year.
Under the simplified method, you figure the depreciation for a later 12-month year in the recovery period by multiplying the adjusted basis of your
property at the beginning of the year by the applicable depreciation rate.
Example.
Tara Corporation had a short tax year of 10 months, ending on December 31. During that year, 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 adjusted basis on January 1 of the
next year is $833 ($1,000 - $167). Tara's depreciation for that next year is 40% of $833, or $333.
Using the simplified method for a short year.
If a later tax year in the recovery period is a short tax year, you figure depreciation for that year by multiplying the adjusted 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.
Using the simplified method for an early disposition.
If you dispose of property in a later tax year before the end of the recovery period, determine the depreciation for the year of disposition by
multiplying the adjusted basis of the property at the beginning of the tax year by the applicable depreciation rate and then multiplying the result by
a fraction. The fraction's numerator 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). Its denominator is 12.
Using the allocation method for a 12-month or short tax year.
Under the allocation method, you figure the depreciation for each later tax year by allocating to that year the depreciation attributable to the
parts of the recovery years that fall within that 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 that year. For each recovery year included, multiply the depreciation attributable to that recovery
year by a fraction. The fraction's numerator is the number of months (including parts of a month) that are included 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.
Assume the same facts as in Example 1 under Property Placed in Service in a Short Tax Year. The Tara Corporation's first tax year after
the short tax year is a full year of 12 months, beginning January 1 and ending December 31. The first 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 the 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 next tax year. The depreciation for the next tax year
is $333, which is the sum of the following.
- $233--The depreciation for the first recovery year
($400 × 7/12).
- $100--The depreciation for the second recovery year. This is figured by multiplying the adjusted basis of $600 ($1,000 - $400) by
40%, then multiplying the $240 result by 5/12.
Using the allocation method for an early disposition.
If you dispose of property before the end of the recovery period in a later tax year, determine the depreciation for the year of disposition by
multiplying the depreciation figured for each recovery year or part of a recovery year included in the tax year by a fraction. The numerator of the
fraction is the number of months (including parts of months) the property is treated as in service in the tax year (applying the applicable
convention). The denominator is 12. If there is more than one recovery year in the tax year, you add together the depreciation for each recovery year.
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