DEPRECIATION METHODS, RECOVERY PERIOD, DEPRECIATION CONVENTIONS

WHILE PREPARING FORM 4562, WE OFFEN GET CONFUSED🤔🤔

WHICH DEPRECIATION METHOD TO SELECT?😑

WHAT SHOULD BE  RECOVERY PERIOD ?😕

AND WHICH CONVENTION TO BE USED?😒

Ø  What are different Depreciation methods?

As per IRS, if we are depreciating property placed in service before 1987, we must use the Accelerated Cost Recovery System (ACRS) or the same method you used in the past.

For property placed in service after 1986, we generally must use the Modified Accelerated Cost Recovery System (MACRS). Under MACRS Property is divided into 2 main categories Real Property and Personal Property

 

Ø  What are different Depreciation Method under macrs?

Depreciable Property under MACRS consists of 2 depreciation system

1.    General Depreciation System (GDS):

GDS uses 200% or 150% declining balance methods of depreciation, this allows greater depreciation percentages in early years. Upon sale or other disposition, certain non-residential real estate may be subject to recapture of excess depreciation (un-recaptured Section 1250 gain) if a method other than straight-line depreciation was used.

 

2.    Alternative Depreciation System (ADS):

ADS uses the Straight-line method of depreciation, deduct equal amounts throughout recovery period.

 

Example:  Mr.A purchases $2000 computer for business that has useful life of 5 years. He uses this exclusively for business. He can claim ( $2000/5= $400 as annual depreciation), if he uses Half Year Convention then he would claim $200 in 1^st Year.

 

Ø  What are different recovery periods under macrs (gds)?

·       5 Year Property:

Computer and Peripheral Equipment, Office Machinery, Passenger Automobiles, Appliances, Carpenting, Furniture etc used in Rental Residential Property, Machinery & Equipment

·       7 Year Property:

Office Furniture & Fixtures, Agricultural Machinery & Equipment used in Farming

·       15 Year Property:

Roads, Fences, Qualified Improvement Property and Municipal Waste Water Treatment Plants.

·       20 Year Property:

Farm Buildings 

·       27.5 Year Property:

Residential Real Property

·       39 Year Property:

Non-Residential Real Property

 

Ø  What are different COVENTION METHODS?

·       Mid-Month Convention:

For all residential rental property and non residential rental property

·       Mid-Quarter Convention:

Use Mid Quarter Convention if the mid-month convention does not apply and the total depreciable basis of MACRS Property placed in service in last 3 months of a tax year is more than 40% of the total basis of all such property placed in service during that year.

·       Half- Year Convention:

Use Half Year Convention if neither Mid Month or Mid Quarter convention applies. Under this convention, treat all property placed into service or disposed of  during a tax year as being placed into service or disposed of at the midpoint of that tax year.

 

TIP: The half year convention applies to most transactions, under this all property transactions are considered to occur at midpoint of the year.

 

 

Compiled by:

Ca. harsimran kaur