Midquarter depreciation convention.
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.
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|Publication:||Journal of Accountancy|
|Date:||Nov 1, 1991|
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