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TheTaxBook™ Depreciation Edition — 2016 Tax Year MACRS Depreciation 3-7 Quarter Months First ................ January, February, March Second ................ April, May, June Third ................ July, August, September Fourth ................ October, November, December Did You Know? For purposes of determining whether the mid- quarter convention applies, the depreciable basis of property placed in service during the tax year reflects the reduction for amounts ex- pensed under Section 179, but does not reflect the reduction in basis for any special depreciation allowance claimed. Half-year convention. The half-year convention is used if neither the mid-quarter or mid-month convention applies. Under the half-year convention, all property placed in service or disposed of during a tax year is treated as placed in service or disposed of at the midpoint of the year. This means that one-half year (six months) of depreciation is allowed for the year the property is placed in service or disposed of. If the half-year convention applies, a taxpayer deducts a half-year of depreciation for the first year and the last year that the property is depreciated. The taxpayer deducts a full year of depreciation for any other year during the recovery period. Convention and depreciation deduction amount. The timing of when an asset is placed in service matters when planning on how much a taxpayer wishes to deduct for depreciation purposes. An item of property placed in service using the half-year convention may yield a higher depreciation deduction than property placed in service during the last quarter of the year and which must use the mid-quarter convention. Example: LEM Inc., purchases one depreciable asset during 2016, a $5,000 used machine that is five-year property under MACRS. No Sec- tion 179 election is made. If LEM places the asset in service during the first three quarters of its tax year, the first year depreciation allow- ance is $1,000 (200%DB using the half-year convention: $5,000 × 20%). However, if LEM places the asset in service during its 4th quarter, the depreciation deduction is reduced to $250 (200% DB using the mid- quarter convention: $5,000 × 5%) because the $5,000 machine basis is more than 40% of the total basis for the year. MACRS Depreciation Methods MACRS provides three depreciation methods under GDS and one depreciation method under ADS. The three MACRS de- preciation methods under GDS recovery periods include the 200% declining balance method (200DB), the 150% declining balance method (150DB), and the straight-line method (SL). The MACRS depreciation method under an ADS recovery period is the straight-line method (SL). Declining balance methods. The 200DB and 150DB methods ac- celerate depreciation at the beginning of the recovery period and switch to straight-line in the year SL produces a larger deduction. Straight-line method (SL). The SL method applies the same depreciation rate each year of the recovery period, with prorating adjustments for the year the asset is placed in service and the year the asset is disposed of or depreciation is complete. This method allows a taxpayer to deduct the same amount of depreciation each year over the useful life of the property. To figure the deduction, the adjusted basis, salvage value, if any, and estimated useful life of the property are determined. The salvage value is subtracted from the adjusted basis. The balance is the total depreciation to be taken over the useful life of the property. This amount is divided by the number of years in the useful life to determine the yearly depreciation deduction. Example: In April 2016, Frankie bought a patent for $5,100. He depreci- ates the patent under the straight line method, using a 17-year useful life. He divides the $5,100 basis by 17 years to get his $300 yearly de- preciation deduction. He only used the patent for nine months during 2016, so he multiplies $300 by 9/12 to get his deduction of $225 for 2016. In 2017, Frankie can deduct $300 for the full year. Comparison of MACRS Depreciation Methods Method Type of Property Benefit GDS using 200DB • Nonfarm 3-, 5-, 7-, and 10-year property. • Method not allowed for AMT purposes. • Provides greater deduction during earlier recovery years. • Changes to SL when SL provides an equal or greater deduction. GDS using 150DB • All farm property (except real property). • All 15- and 20-year property (except qualified leasehold improvement, qualified retail improvement, and qualified restaurant property). • May be elected for any property eligible for 200DB. • Must be used for AMT purposes unless SL is elected. • Provides greater deduction during earlier recovery years. • Changes to SL when SL provides an equal or greater deduction. GDS using SL • Nonresidential real property. • Residential rental property. • Qualified leasehold improvement, qualified retail improvement, and qualified restaurant property placed in service after 2008 and before 2015 . • Trees or vines bearing fruit or nuts. • Water utility property. • May be elected for any property eligible for 200DB or 150DB. • Provides equal yearly deductions (except for prorated first and last years). • Shorter recovery periods than ADS SL. ADS using SL • Listed property used 50% or less for business. • Imported property or property used predominantly outside the U.S. • Property used by tax-exempt organizations or financed by tax-exempt bonds. • Farm property when electing not to use UNICAP rules. • May be elected for any property. • Provides equal yearly deductions (except for prorated first and last years). • Longer recovery periods than GDS SL. Figuring Depreciation Cross References • IRS Pub. 946, How to Depreciate Property • IRC §167, Depreciation Related Topics • Repairs and Improvements, page 1-6 • MACRS Depreciation Tables, Tab 4 To figure the depreciation deduction under MACRS, a taxpayer must determine the depreciation system, the property class, the placed in service date, the basis amount, the recovery period, the applicable convention, and the depreciation method that applies to the property.

Figuring Depreciation - TheTaxBook · Figuring Depreciation Cross References • IRS Pub. 946, How to Depreciate Property ... month from the non-residential real property MACRS percentage

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Page 1: Figuring Depreciation - TheTaxBook · Figuring Depreciation Cross References • IRS Pub. 946, How to Depreciate Property ... month from the non-residential real property MACRS percentage

TheTaxBook™ Depreciation Edition — 2016 Tax Year MACRS Depreciation 3-7

Quarter Months First . . . . . . . . . . . . . . . . January, February, March Second . . . . . . . . . . . . . . . . April, May, June Third . . . . . . . . . . . . . . . . July, August, September Fourth . . . . . . . . . . . . . . . . October, November, December

Did You Know? For purposes of determining whether the mid-quarter convention applies, the depreciable basis of property placed in service during the tax year reflects the reduction for amounts ex-pensed under Section 179, but does not reflect the reduction in basis for any special depreciation allowance claimed.

Half-year convention. The half-year convention is used if neither the mid-quarter or mid-month convention applies. Under the half-year convention, all property placed in service or disposed of during a tax year is treated as placed in service or disposed of at the midpoint of the year. This means that one-half year (six months) of depreciation is allowed for the year the property is placed in service or disposed of.

If the half-year convention applies, a taxpayer deducts a half-year of depreciation for the first year and the last year that the property is depreciated. The taxpayer deducts a full year of depreciation for any other year during the recovery period.

Convention and depreciation deduction amount. The timing of when an asset is placed in service matters when planning on how much a taxpayer wishes to deduct for depreciation purposes. An item of property placed in service using the half-year convention may yield a higher depreciation deduction than property placed in service during the last quarter of the year and which must use the mid-quarter convention.

Example: LEM Inc., purchases one depreciable asset during 2016, a $5,000 used machine that is five-year property under MACRS. No Sec-tion 179 election is made. If LEM places the asset in service during the first three quarters of its tax year, the first year depreciation allow-ance is $1,000 (200%DB using the half-year convention: $5,000 × 20%). However, if LEM places the asset in service during its 4th quarter, the depreciation deduction is reduced to $250 (200% DB using the mid-quarter convention: $5,000 × 5%) because the $5,000 machine basis is more than 40% of the total basis for the year.

MACRS Depreciation MethodsMACRS provides three depreciation methods under GDS and one depreciation method under ADS. The three MACRS de-preciation methods under GDS recovery periods include the 200% declining balance method (200DB), the 150% declining balance method (150DB), and the straight-line method (SL). The MACRS depreciation method under an ADS recovery period is the straight-line method (SL).

Declining balance methods. The 200DB and 150DB methods ac-celerate depreciation at the beginning of the recovery period and switch to straight-line in the year SL produces a larger deduction.

Straight-line method (SL). The SL method applies the same depreciation rate each year of the recovery period, with prorating adjustments for the year the asset is placed in service and the year the asset is disposed of or depreciation is complete. This method allows a taxpayer to deduct the same amount of depreciation each year over the useful life of the property. To figure the deduction, the adjusted basis, salvage value, if any, and estimated useful life of the property are determined. The salvage value is subtracted from the adjusted basis. The balance is the total depreciation to be taken over the useful life of the property. This amount is divided by the number of years in the useful life to determine the yearly depreciation deduction.

Example: In April 2016, Frankie bought a patent for $5,100. He depreci-ates the patent under the straight line method, using a 17-year useful life. He divides the $5,100 basis by 17 years to get his $300 yearly de-preciation deduction. He only used the patent for nine months during 2016, so he multiplies $300 by 9/12 to get his deduction of $225 for 2016. In 2017, Frankie can deduct $300 for the full year.

Comparison of MACRS Depreciation MethodsMethod Type of Property Benefit

GDS using 200DB

• Nonfarm 3-, 5-, 7-, and 10-year property.• Method not allowed for AMT purposes.

• Provides greater deduction during earlier recovery years.

• Changes to SL when SL provides an equal or greater deduction.

GDS using 150DB

• All farm property (except real property).• All 15- and 20-year property (except

qualified leasehold improvement, qualified retail improvement, and qualified restaurant property).

• May be elected for any property eligible for 200DB.

• Must be used for AMT purposes unless SL is elected.

• Provides greater deduction during earlier recovery years.

• Changes to SL when SL provides an equal or greater deduction.

GDS using SL

• Nonresidential real property.• Residential rental property.• Qualified leasehold improvement,

qualified retail improvement, and qualified restaurant property placed in service after 2008 and before 2015.

• Trees or vines bearing fruit or nuts.• Water utility property.• May be elected for any property eligible

for 200DB or 150DB.

• Provides equal yearly deductions (except for prorated first and last years).

• Shorter recovery periods than ADS SL.

ADS using SL

• Listed property used 50% or less for business.

• Imported property or property used predominantly outside the U.S.

• Property used by tax-exempt organizations or financed by tax-exempt bonds.

• Farm property when electing not to use UNICAP rules.

• May be elected for any property.

• Provides equal yearly deductions (except for prorated first and last years).

• Longer recovery periods than GDS SL.

Figuring DepreciationCross References• IRS Pub. 946, How to Depreciate Property• IRC §167, Depreciation

Related Topics• Repairs and Improvements, page 1-6• MACRS Depreciation Tables, Tab 4

To figure the depreciation deduction under MACRS, a taxpayer must determine the depreciation system, the property class, the placed in service date, the basis amount, the recovery period, the applicable convention, and the depreciation method that applies to the property.

Page 2: Figuring Depreciation - TheTaxBook · Figuring Depreciation Cross References • IRS Pub. 946, How to Depreciate Property ... month from the non-residential real property MACRS percentage

3-8 MACRS Depreciation TheTaxBook™ Depreciation Edition — 2016 Tax Year

MACRS Percentage TablesTo help figure the deduction under MACRS, the IRS has estab-lished percentage tables that incorporate the applicable conven-tion and depreciation method. The rates in the percentage tables are applied to the property’s unadjusted basis.

Unadjusted basis. Unadjusted basis is the original basis, not reduced by any MACRS depreciation taken in earlier years. How-ever, the original basis is reduced by any Section 179 deduction or special depreciation allowance claimed on the property. For busi-ness property purchased during the year, the unadjusted basis is its cost minus any Section 179 or special depreciation allowance claimed. If the property is traded, the unadjusted basis in the property is the cash paid plus the adjusted basis of the property traded minus any Section 179 deduction claimed.

See Tab 4 for MACRS Percentage Tables.

Did You Know? Once a taxpayer begins using the percentage ta-bles for any item of property, he or she must continue to use the tables for the entire recovery period of the property.

Computing depreciation. The three MACRS depreciation meth-ods are the 200% declining-balance method (200DB), the 150% declining-balance method (150DB), and the straight-line method (SL) are summarized below.• The 200DB and 150DB methods accelerate depreciation at the

beginning of the recovery period and switch to straight-line in the year SL produces a larger deduction.

• MACRS 200DB and 150DB full-year percentage charts may not be used for a short tax year.

• The SL method applies the same depreciation rate each year of the recovery period, with prorating adjustments for the year the asset is placed in service and the year the asset is disposed of or depreciation is complete.

2016 MACRS WorksheetDo not use this worksheet for automobiles. Instead, see Vehicle Depreciation Limitations (Section 280F), page 5-1.

Part I1) MACRS system (GDS or ADS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1) 2) Property class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2) 3) Date placed in service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3) 4) Recovery period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4) 5) Method and convention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5) 6) Depreciation rate (from tables) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6)

Part II7) Cost or other basis (do not include land) . . . . . . . . . . . . . . . . . . . . . . . 7) $8) Business/investment use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8) %9) Multiply line 7 by line 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9) $

10) Total claimed for Section 179 deduction and other items . . 10) $11) Subtract line 10 from line 9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11) $12) Multiply line 11 by 0.50 if the 50% special depreciation

allowance applies. Enter -0- if this is not the year the property was placed in service, is not qualified property, or if the election was made not to claim a special depreciation allowance*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12) $

13) Subtract line 12 from line 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13) 14) Depreciation rate (from line 6). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14) 15) Multiply line 13 by line 14. This is the MACRS

depreciation deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15) $

* See Special Depreciation, page 2-9.

Example: Terry bought office furniture (7-year property) for $10,000 and placed it in service on August 11, 2016. She uses the furniture only for business and it was the only property placed in service that year. She did not elect a Section 179 deduction so her property’s unadjusted basis is its cost, $10,000. She uses GDS and the half-year convention to figure her depreciation. Her property’s unadjusted basis each year is multiplied by the percentage for 7-year property given in the ap-plicable table. The depreciation deduction is figured using the MACRS worksheet as follows.

Part I 1) MACRS system (GDS or ADS). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GDS 2) Property class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-year 3) Date placed in service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8/11/16 4) Recovery period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-Year 5) Method and convention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200%DB/Half-Year 6) Depreciation rate

(see Table C. 7-Year MACRS Property, page 4-4) . . . . . . . . . . . . . . 0.1429

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 . . . . . . . -0- 11) Subtract line 10 from line 9. This is the tentative basis for

depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,000 12) Multiply line 11 by .50 if the 50% special depreciation

allowance applies. Enter -0- if this is not the year the property was placed in service, the property is not qualified property, or the taxpayer elected not to claim a special depreciation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0-

13) Subtract line 12 from line 11. This is the basis for depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,000

14) Depreciation rate (from line 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1429 15 Multiply line 13 by line 14. This is the MACRS

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, the depreciation deduction for each subsequent year of the recovery period will be as follows.

Year Basis Percentage Deduction

2017 $10,000 24.49% $2,4492018 $10,000 17.49% $1,7492019 $10,000 12.49% $1,2492020 $10,000 8.93% $8932021 $10,000 8.92% $8922022 $10,000 8.93% $8932023 $10,000 4.46% $446

Example: Lori bought a building and land for $120,000 and placed it in service on March 8. The sales contract showed that the building cost $100,000 and the land cost $20,000. The building is nonresidential real property, and the building’s unadjusted basis is its original cost, $100,000. March is the third month of her tax year, so the building’s un-adjusted basis, $100,000, is multiplied by the percentages for the third month from the non-residential real property MACRS percentage table (page 4-7). The depreciation deduction is as follows: Year Basis Percentage Deduction 1 $ 100,000 2.033% $ 2,033 2 – 39 $ 100,000 2.564% $ 2,564 40 $ 100,000 0.535% $535