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Business Property Depreciation Questions

I assume these are probably simple questions for someone who knows how but reading the instructions for depreciating business property in Publication 4562 is giving me a headache.

QUESTION ONE: CALCULATING DEPRECIATION

I have a small business for which I have a small amount of depreciable property (computer, cell phone, furniture, etc.). I am using the S/L depreciation method and the mid-quarter (MQ) convention. I am having trouble figuring out the calculations for depreciation. As a simple example:

If I had an item with $100 basis placed in service the last quarter of the first year of use and depreciable over 5 years, I assume the calculations look somewhat like this:

Year 1 rate = 0.125, Depreciation = $12.50 Year 2 rate = 1/(5-0.125), Depreciation = rate*(100-12.50) = $17.95 Year 3 rate = 1/(5-1-0.125), Depreciation = rate*(100-12.50-17.95) $17.95 Year 4 rate = 1/(5-2-0.125), Depreciation rate*(100-12.50-17.95-17.95) = $17.95 Year 5 rate = 1/(5-3-0.125), Depreciation rate*(100-12.50-17.95-17.95-17.95) = $17.95 Year 6 rate = ???

I assume there is some fractional calculation for year 6 so that you can depreciate the full total value of the basis but for the life of me I can't figure out what the calculation is. If I follow the pattern and use rate=(1/5-4-0.125) and multiply that by the remaining basis I get $17.95 depreciation which would result in total depreciation of $102, which is more than the basis! I know by simple addition that the answer should probably be $15.70 but I have no idea how mathematically you get there other than to add up the accumulated depreciation and subtract it from the original basis.

QUESTION TWO: DISPOSING OF DEPRECIABLE PROPERTY

Now, assume the $100 item referenced above breaks in the second quarter of year 3 and has no saleable value. What happens to the depreciation calculations? Do you write off all the rest of the item's value in the year it breaks?

Example: Year 1 Depreciation = $12.50 Year 2 Depreciation = $17.95 Year 3 Depreciation = $69.55

OR

Do you depreciate only to the point where the item had usable value and then lose any remaining depreciation?

Example: Year 1 Depreciation = $12.50 Year 2 Depreciation = $17.95 Year 3 Depreciation = 0.375*$17.95 = $6.73 (remaining depreciation value of $62.82 is "lost")

Thank you for any help on this complex question!

Reply to
Anona
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You're trying to think too hard.

Your $100 wicket (S-L, MQ, 5 year depreciation life) will contain six actual years or part years. The middle 4 years will carry depeciation expense of 1/5 x 100 = $20 each fo a total of 80.

The remaining 12 months will be split 1.5/12 x 20 for the first year and 10.5/12 x 12 for the last year.

I often shudder when I hear a perectly good accounting term like "write off" enter a conversationabout income tax calculations, where things often mean something else entirely.

If you're on the cash method of accounting you get to throw out the term "write off" from your voculabulary.

If your widget is no longer serviceable, you remove it from service on the date it is no longer in use. Stop calculating any depreciation.

If you otherwise sell it to someone, the sale is also reported on one of the nastiest forms to get iht, Form 4797, a deceptively simple looking form.

If you scrap it out for no cash in return, well, that's that. It's like, gone. A sale for $0.

If you trade it in for another "like kind" of widget you continue to depreciate it and begin depreciating the replacment widget using the new widget's cost less the trade in value of the old widget.

Ask around about boot.

There's other possibilities, but these are common treatments.

Reply to
Arthur Kamlet

Thanks a million, Art! Below I have implemented the calculations that you indicated. Could you confirm I have it right?

Year 1, Rate = 0.125 (per Pub. 4562) (1.5/12)*"normal S/L depreciation" of $20, Depreciation = $2.50 Year 2, Rate = 0.2 (1/5)*basis ($100), Depreciation = $20 Year 3, Rate = 0.2 (1/5)* basis ($100), Depreciation = $20 Year 4, Rate = 0.2 (1/5)*basis ($100), Depreciation = $20 Year 5, Rate = 0.2 (1/5)*basis ($100), Depreciation = $20 Year 6, Rate = 0.875 (10.5/12)*"normal S/L depreciation" of $20, Depreciation = $17.50

Total depreciation = $100

QUESTION TWO: DISPOSING OF DEPRECIABLE PROPERTY

Year 1, Rate = 0.125 (per Pub. 4562) (1.5/12)*"normal S/L depreciation" of $20, Depreciation = $2.50 Year 2, Rate = 0.2 (1/5)*basis ($100), Depreciation = $20 Year 3, Rate = 0.375 (4.5/12)*"normal S/L depreciation" of $20, Depreciation = $7.50

Buy replacement item in second quarter of Year 3 with new basis of $100 also S/L depreciation over 5 years.

Year 3, Rate = 0.625(7.5/12)*"normal S/L depreciation" of $20 = $12.50 Year 4, Rate = 0.2 (1/5) *basis ($100), Depreciation = $20 Year 5, Rate = 0.2 (1/5)*basis ($100), Depreciation = $20 Year 6 etc. continue as per prior example.

So in year 3, the year the item breaks and is replaced, total depreciation = $19.50.

Sorry to have used such inappropriate language. :) Thanks again!

Reply to
Anona

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