42.7 Last Quarter Placements—Mid-Quarter Convention

A mid-quarter convention generally applies if the total cost basis of business equipment placed in service during the last three months of the tax year exceeds 40% of the total basis of all the property placed in service during the year. In applying the 40% rule, you do not count residential rental property, nonresidential realty, and assets that were placed in service and disposed of during the same year.

Under the mid-quarter convention, the first-year depreciation allowance for all property (other than nonresidential real property and residential rental property) placed in service during the year is based on the number of quarters that the asset was in service. Property placed in service at any time during a quarter is treated as having been placed in service in the middle of the quarter. The mid-quarter convention also applies to sales and disposals of property. The disposal is treated as occurring in the midpoint of the quarter.

EXAMPLE
During August 2012, you place in service office furniture costing $1,000, and in October, a computer costing $5,000. You are on the calendar year. The total basis of all property placed in service in 2012 is $6,000. As the $5,000 basis of the computer placed in service in the last quarter exceeds 40% of the total basis of all property placed in service during 2012, you must use the mid-quarter convention for the furniture and the computer. The office furniture, which is seven-year property, and the computer, which is five-year property, are depreciated using MACRS and a mid-quarter convention.
You first multiply the $1,000 basis of the furniture by 10.71%—the seven-year property mid-quarter convention rate for the third quarter (see Table 42-1). The depreciation deduction is $107. You then multiply the $5,000 basis of the computer by 5%—the five-year property mid-quarter convention rate for the fourth quarter (see Table 42-1). The deduction is $250. Total depreciation is $357.

If you dispose of property before the end of its recovery period (42.5), your deduction for the year is figured by multiplying a full year of depreciation by the percentage listed in the following chart 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 November 1, 2009, you placed in service a machine costing $10,000 with a five-year recovery period. You used the mid-quarter convention because it was the only item placed in service during the year. In May 2012, you sell the machine.
To determine depreciation for 2012, first figure the deduction for the full year (see Table 42-1). This is $1,368 (13.68% (rate for fourth year, fourth quarter) of $10,000). Since May, the month of disposition, is in the second quarter of the year, you multiply $1,368 by 37.5% to figure your depreciation deduction for 2012 of $513.
..................Content has been hidden....................

You can't read the all page of ebook, please click here login for view all page.
Reset
13.59.187.201