Regarding depreciation of asset(s) bought and sold during the same year .... the CODE seems to allow it, as there are no restrictions against it. The only thing that seems to be required, in order to be entitled the expense, is that an asset be "placed in service" during the tax year. (This is an entitlement statute) The CODE, however, does contain many, many other restrictions and gives the Com'r specific authority to issue certain regulations .... for example, it gives the Com'r the power to issue regulations regarding recapture and related party purchases intended to abuse the statute. (see IRC Sec's 167,
168, 179).The only specific reference in the CODE to the issue of assets bought and sold within the same tax year is IRC Sec
168(d)(3) (A) -- "For purposes of this section" ... equip placed in service and disposed of within the same tax year is not counted when computing the "40% rule" on last quarter purchases (you'll recall, the 40% Rule requires the "mid-month" rather than the normal, "half year" convention if more than 40% of the total assets are purchased in the last quarter of the tax year). The Com'r, in-fact, is given specific regulatory authority "for purposes of this section"-- referencing the 40% Rule. Curiously, the REGULATIONS are much broader, as they specifically prohibit the entire depreciation deduction if an asset is placed in service and sold within the same tax year, not just for the purposes of applying the 40% rule. This regulatory restriction seems to be without statutory authority, as Regulations can not create new provisions and they may not restrict an entitlement statute unless the underlying statute empowers the Com'r to limit the deduction (rare- usually for anti-churning) ... but the statute must specifically give the Com'r that specific restriction authority-otherwise the Regulation must fall. A REGULATION without statutory authority is unenforceable. However, in Reg 1.168(d)-1, Example 1, it states that an asset bought and sold in the same year is not allowed to be depreciated-- it then references IRC Sec 168(d), the 40% rule (mid-qtr vs. half-yr convention), not the depreciation deduction itself. Temporary Reg 1.168(d)-1T(b)(3)(ii) also states no depreciation is allowed for assets bought and sold in the same tax year - again without any reference to statutory authority - although every other statement in that sentence is referenced. There may be other Regs under Sec 167, 168 or
179, but I didn't find anything else that jumped out at me ... just those non-supported, off-hand remarks in the regs, and nonsensical references to other facets of the deduction (such as the "40% rule"). I haven't checked the all the cases yet, just the recent Fed Tax Cases, Tax Court Memorandums and Tax Court Reported. I've checked the recent Conference Committee Reports for the "Legislative Intent" aspect and found nothing-I haven't check any prior to 1996. IN CONCLUSION, I'm thinking that a taxpayer may in-fact take the MACRS depreciation deduction, Bonus Depreciation (30% or 50%) and the Sec 179 expense deduction even if the asset is bought and sold in the same tax year. The consequences can be huge, as a sole proprietor may be able to write off $100+ in Sec 179 plus regular and bonus depr. expense, lowering his self employment social security taxable income and then recapture the expense in the same year as ordinary income, not subject to self employment social security tax-thus avoiding SESS tax on thousands of dollars of, what otherwise would be, self- employment income. My tax software (ProSeries) does not support depreciation of assets bought and sold in the same tax year.