Midquarter depreciation convention.

Earlier this year, the Internal Revenue Service issued proposed regulations regarding the modified accelerated cost recovery system (MACRS).

Normally, MACRS treats all current additions (other than realty) as if acquired midyear, allowing half-year depreciation. However, if the aggregate basis of property placed in service during the last three months of the tax year exceeds 40% of the basis placed in service during the entire year, the less-favorable midquarter convention applies.

The proposed regulations gave long-awaited guidance on calculating the 40% threshold. The regulations say the computation takes place after any deduction for the section 170 $S10,000 bonus depreciation and after any reduction for the nonbusiness portion of personal use assets [proposed regulations 1.168(d)-1(b)(4)].

Observation: Smaller businesses with infrequent asset additions may be able to eliminate a detrimental midquarter convention by electing the section 179 deduction against fourth-quarter additions, so as to decrease depreciable basis below 40%.

For example, a business adding $55,000 of assets in the second quarter and $45,000 in the fourth quarter (all seven-year MACRS equipment) can, by electing its section 179 deduction entirely against fourth-quarter assets rather than second-quarter additions, increase its depreciation deduction by over $3,000 by avoiding the midquarter convention.