Depreciation after short tax year

[oceanlovin'ea]

I have a partnership which began last year in June, so had a short tax year. I did the depreciation as stated in TTB page 9-14.
Now I need to figure what their depreciation expense will be for next year for their monthly bookkeeping.
As I said, I have read page 9-14 in TTB on how to figure for the next year and am still not sure I am doing this right. Can someone help me?

Example, $32019 of equipment put in service 06/01/05 depreciated MACRS 7 year property. Depreciation taken in 2005 was 1212. So adjusted basis is 30807. I divided that by 7 which is 4401 aand multiplied by 200% which is 8802. So their depreciation for 2006 will be $8802. Is that correct?

I think my brain has too much running around in there. Thanks for the help.

Linda F

[Brian EA]

I have a partnership which began last year in June, so had a short tax year. I did the depreciation as stated in TTB page 9-14.
Now I need to figure what their depreciation expense will be for next year for their monthly bookkeeping.
As I said, I have read page 9-14 in TTB on how to figure for the next year and am still not sure I am doing this right. Can someone help me?

Example, $32019 of equipment put in service 06/01/05 depreciated MACRS 7 year property. Depreciation taken in 2005 was 1212. So adjusted basis is 30807. I divided that by 7 which is 4401 aand multiplied by 200% which is 8802. So their depreciation for 2006 will be $8802. Is that correct?

I think my brain has too much running around in there. Thanks for the help.

Linda F

Hey Linda, doesn't you software do that for you?. All you do is plug in the numbers and based on the date it figures the depreciation - even if it is a short year. You can then do the depreciation for the following year. It works like a charm.

[oceanlovin'ea]

Apparently not

I put in the correct information and it did not come up with the same answers I did. So then I tried putting in mid quarter convention but still didn't get the same answer.

Maybe I did it wrong when I did it manually. I don't know. I followed the example in TTB.

Linda F

[RLymanC]

Depreciation

Linda,

$32,019 over 7 years???? How can six months of depreciation be only $`1212.

My software came up using MARCS 7 yrs. HY convention with
First year........$4576.00
Second year....$7841.00

[oceanlovin'ea]

TTB pg 9-13

under Short Tax Year Depreciation is where I read what to do. Short tax year conventions explains how to figure when the asset would be placed in service. By following the example of Patches Company, I figured that the assets would be considered placed in service on 9/01/05.
Several places it says you can't use MACRS depreciation in a short tax year. You must use straight line.

If I did this wrong, someone please tell me how I should have done it. This is the first time in 20 years of taxes that I have ever had to figure depreciation with a short tax year. So I really appreciate your help.

Linda F

[JG EA]

Straight line?

I don't know about this rule, but I've depreciated in a short tax year as you outlined. Pick the correct date to start with. Then it should just continue on with that date. If it was in the mid quarter convention (mid quarter of the short tax year that is) but you had to put a short tax year date, then there should be a place on your program to mark MQ and the number of the quarter.

[oceanlovin'ea]

TTB says

"The MACRS percentage tables cannot be used with a short tax year." on pg 9-13 the second paragraph under Short Tax Year Depreciation.
Then on pg 9-14 first column under Computing Depreciation in a short tax year, the second paragraph says "Short year depreciation cannot be computed using the MACRS percentage tables.

My program will allow me to change to MQ but places it in the 2nd quarter since date placed in service is 6/01/05. I don't have the option to change the quarter.

I recomputed the depreciation and got a different answer using 200%DB. But another paragraph says you can use SL.

So I am not sure which I should use.

Linda F

[JG EA]

Tables

It just means you cannot use the tables because they are set up for a full year. If you set the right date then you are not really using the tables because say your short tax year started in June. Then you have 7 months in your year. If you bought something in September you bought it in the third out of the seventh month - half year convention. If you bought it in October it is the 4th out of the 7 months and so still half year convention. You don't get into the last quarter until the second half of November.

See page 46 of pub 946.

[oceanlovin'ea]

HY Convention

But what about the example of the Patches company in the TTB pg 9-13? That example shows the depreciation starting at the midpoint of the short tax year or in September even though the business started in March.

So I figured the midpoint of my short tax year would be September 1.

Did I figure that part right?

If I adjusted my date placed in service to a later month than June 1 and used MQ convention maybe my program would give me the correct depreciation for the first year.

Still on pg 9-14, it shows how to calculate the following years depreciation and since the basis changes each year the tables would never work.

Linda F

[Bees Knees]

Linda,

TTB is correct. If you depreciate something in a short year, you have to throw out the MACRS tables for ALL years. You have to calculate the depreciation per the example given in TTB.

A simple way to do this is to use the short-year depreciation tables found on page 9-7 in TTB. Those tables not only calculate the depreciation for the short year, but also for all subsequent years, and will produce the same results as manually doing the calculations.

[oceanlovin'ea]

Thanks

Bee Knees. I didn't see that table. That will certainly make it much easier.

AND thanks to TTB for making all these charts and tables for us.

Linda F

[oceanlovin'ea]

Amortization

Would amortization of goodwill be affected by the short tax year? I figured the amortization based on the 7 months the business was open.

Linda F

[Bees Knees]

Amortization is straight line over the number of months in the year the goodwill was in service. So if the goodwill was purchased at the opening of the business, and the first year was 7 months, you take total goodwill divided by 180 months times 7 months for the first year amortization amount.

[jainen]

not completely true

>>You don't get into the last quarter until the second half of November<<

This is not completely true. First you have to determine whether property is subject to the mid-quarter convention, by comparing basis placed in service the last three months to the basis in the whole year. Even for a short year--so October counts as one of the last three months. Then you can determine which property went in which quarter.

[Bees Knees]

Amortization is not subject to mid quarter convention. Amortization is a per month deduction, similar to the mid month convention that applies to real property. The mid month convention is not subject to short year rules.