topic How is current year depreciation calculated for disposed business property? in Business & farm

How is current year depreciation calculated for disposed business property?

ericbroder — Wed, 30 Dec 2020 16:37:53 GMT

I sold a few capital assets in 2020. All are 5-year property, using MACRS, 200%DB method. Two of the assets had been depreciated using the "HY" (Half-Year) convention, and two (purchased in a different year) were depreciated using the "MQ" convention (purchased in the 3rd quarter of that year).

The current year depreciation calculated by TurboTax for the two HY assets is equal to 50% of what the full-year depreciation would have been if the asset had not been sold. I don't understand TT's logic, given that they were sold in the 4th quarter, but I can see some sense to that.

However, I cannot figure out what TT has done with the other two assets. They were purchased in the 3rd quarter of 2019. I would expect full-year depreciation to be 34% of the purchase price. Given that it was sold in June, 2020, I would expect 2020 depreciation to be either:

25% of full-year depreciation (taking 1st quarter only)

50% of full-year depreciation (taking 1st two quarters - not sure I'd agree with that philosophically)

5/12 of full-year depreciation (since it was sold in June)

The TT calculation doesn't agree to any of these assumptions, so obviously I don't understand it. Instead, TT calculated an amount that is equal to 12.75% of the original purchase price, or 37.5% of full-year depreciation, equal to 4.5/12 of full-year depreciation.

Can anyone explain the logic of the current year depreciation and/or point me toward a publication that defines it (can't find any mention in Pub 946)?

Re: How is current year depreciation calculated for disposed business property?

AmeliesUncle — Wed, 30 Dec 2020 18:49:28 GMT

@ericbroder wrote:
Two of the assets had been depreciated using the "HY" (Half-Year) convention, and two (purchased in a different year) were depreciated using the "MQ" convention (purchased in the 3rd quarter of that year).

Half-Year convention means the law depreciates it for a half year in the year it is bought and the year it is disposed, regardless of the actual "placed in service" date.

Mid-Quarter convention means the law depreciates it for the mid-quarter that it is bought and the mid-quarter it was disposed. So your items are depreciated until the middle of the second quarter, or 4.5/12ths of the year.

Re: How is current year depreciation calculated for disposed business property?

ericbroder — Wed, 30 Dec 2020 19:14:24 GMT

Duh!! That makes perfect sense. Thank you.