1041 Schedule E Depreciation Form 4562: 200BD/HY rather than 200DB/MQ

[TLLau]

I'm taking over from a CPA and using turbotax Business to fill 2024 1041 return

When I depreciate a water heater for a residential rental property, I'm surprised that TurboTax uses 200DB/HY even though I specified that the "Date in Service" is 11/15/19.

Here are the parameters:

Description: Water Heater

Date in service: 11/15/2019

This asset was used 100% for business

Description of asset: Tools, Machinery, Equipment, Furniture -> Rental property furnishing

Amount paid: $1099.

No special depreciation deduction in prior years.

When I take a look at Form 4562, TurboTax uses 200DB/HY when it should be 200DB/MQ since the asset was put in service the last 3 months of the year.

What am I doing wrong?

[M-MTax]

The mid-quarter convention.

Use this convention if the mid-month convention does not apply and the total depreciable bases of MACRS property you placed in service during the last 3 months of the tax year......are more than 40% of the total depreciable bases of all MACRS property you placed in service during the entire year.

Did you place other assets in service during the 2019 tax year?

[TLLau]

No other asset was placed in service in 2019.

[RobertB4444]

Then the system used the HY convention correctly.

@TLLau 

[Mike9241]

it is possible that in the first year more than 60% of assets were placed into service in the first 3 quarters but in later years some were removed from the assets. 

so if 1/2 year applied total depreciation through 12/31/2023 should have been94.24%

 whereas for midquarter (4th) total depreciation should through 12/31/2023 should have been 90.42%. see IRS pub 946

since 2024 is the final year for a 5- year asset placed into service in 2019, i would only make sure that the current depreciation + all prior depreciation was equal to the cost. 

[M-MTax]

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@Mike9241 wrote:

since 2024 is the final year for a 5- year asset placed into service in 2019, i would only make sure that the current depreciation + all prior depreciation was equal to the cost. 

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Yeah, I agree. The first few years are water under the bridge at this point (2024 is the last). Thus, @Mike9241 has a good approach; just make sure the asset is fully depreciated as of last year (i.e., total depreciation equal to the cost of the asset).

[TLLau]

Thanks for all the responses. I agree with @Mike9241 that it doesn't matter much in my case as this is the last year.

But I was just wondering how TurboTax uses the convention, and I think that there's a problem. I was playing around with TurboTax using different scenarios.

If I placed the same asset in service in 11/15/2019 or 11/15/2020 or 11/15/2021 or 11/15/2022 or 11/15/2023, TurboTax consistently defaults to 200DB/HY

However, if I place the same asset in service in 11/15/2024, TurboTax uses 200DB/MQ.

Why is this the case?

[M-MTax]

I suppose it's always possible that they had the logic wrong programmatically and fixed it in last year's product.

[Mike9241]

i'm not completely familiar with the business version of the software. entering it in 2024, Turbotax knows that 40% or more was added in the 4th quarter. it cannot be sure of prior years if they weren't done use the app because it has no way of knowing if there were other assets that were added and then taken out of service that would negate the mid-quarter convention so by default it selects HY

in the desktop 1040 version you can go into forms mode and switch from HY to MQ (line 48)

don't know if forms mode is available in the business app but since it is a desktop app I would think so.

i did test using the 1040 app and entered 90.42% as depreciation through year 5 (2023) as per IRS tables (MQ 4TH quarter) but left the HY convention. Turbotax correctly computed year 6 (2024) depreciation as 9.58% though the depreciation report, that is not submitted to the IRS, showed 200DB/HY

switching line 48 to MQ only changed the depreciation report to show 200DB/MQ