Determining the MACRS Convention to be used

[dtlee]

This started out one day because I was going to write to one of the software companies to tell them I believed they were determining the convention to use incorrectly on a tax return I had where both the taxpayer and the spouse had multiple activities with depreciable assets. However, as I looked into it and asked peers, I received varying interpretations of what they felt was the proper interpretation of the code. I contacted two research sites and got two different answers. I have been researching this question now for a couple of years and believe I have sufficient basis (no pun intended) to handle depreciation the way I do. However, I wanted to find out what a larger group believes is correct. Thanks for your input.

Under MACRS, personal property must use the Half-Year convention unless more than 40% of that year's property is placed in service within the final quarter of the year, in which case the Mid-Quarter convention must be used. In the situation where a joint tax return is filed and both the taxpayer and spouse have activities with depreciable assets, how do you determine the convention to be used?

[okie1tax]

See Sec 168(d)?

[tpert]

As I read Reg. § 1.168(d)-1(b)(3)(ii), it says that the applicable convention, as determined under this section, applies to all depreciable property (except nonresidential real property, residential rental property, and any railroad grading or tunnel bore) placed in service by the taxpayer during the taxable year. If it applies to the taxpayer, wouldn't that mean that the aggregation of the properties must also be done at the taxpayer level? If so, on a joint return, all of the taxpayer's assets placed in service during the year would be combined for application of the convention and separately all of the spouse's assets would be similarly combined.

[erchess]

Ok

Assuming you guys are reading correctly, I am used to thinking of an MFJ Return as having a Taxpayer and a Spouse and I wonder if in such cases the intent is to say that all the properties on the return are aggregated.

[okie1tax]

I guess the way I read it is that it is aggregated per tax return.

[dtlee]

This came up when I was doing a joint return and I decided to split the return to see if it was better. The result did not make sense until I checked deeper. Separately, the software had decided that the wife's new business property (and her half of the stove they added that year to the rental property) was subject to the Mid-Quarter convention. Jointly, they were using the Half Year convention and the husband was still depreciating his business property (and his half of the stove) using the Half Year convention.

The software was aggregating the assets and choosing the convention based on the entire return. I wondered what kind of notes I would have to make to remember this when the return is filed jointly in the future. Worse yet, what would happen if I for some reason decided to amend that return in the future to claim MFJ. Would I then have to change the method back to half-year? If not, is this a way around the rules that year (i.e., file separately if it gives you the method you want to use for some asset and then amend later without having to change it back). I decided it should not work this way. Luckily, the difference in the two returns was less than my fee would have been and they filed jointly that year, but it troubled me that I could not find this answer in all of the documents I had available to me.

I played with it in the off season and the only way that I could ensure that the depreciation convention was chosen identically regardless of filing status was to treat each activity separately (i.e., per 4562) since the jointly deployed rental property would have been placed in service at the same time for each spouse. My software doesn't do that and the IRS source documents do not support that (as far as I can discern).

Another preparer insists that the software was wrong and the taxpayer/spouse must choose the same convention (based on joint assets and when they jointly place them in service). In other words, I must manually compute what the two spouses place in service and override the returns to make sure that the correct convention is used by each on their separate return. Obviously, the chance of getting that kind of information from an estranged spouse would be slim-to-none, so I disregarded that too.

Doing it on a per-taxpayer basis makes sense, since the assets placed in service by each would be treated the same separately or jointly. However, the nagging question of that stove continued to haunt me. If they jointly owned and paid for it and each placed half of it in service and each had to determine their separate convention to be used, it would not make sense either. In the return I prepared, they would have had to have two different conventions used for the two halves of that stove even on a joint return. I have never seen nor heard anyone suggest that you have to split up joint assets to determine the convention to use.

So I started trying to find any information I could about the subject...since the IRS seems to rarely go after depreciation, there is virtually nothing about this subject. I went to the research services and they don't agree.

The one point that was raised about the regulations seems to say "taxpayer" is the right point to aggregate, but I continue to dislike that answer.

I am really glad that this rarely occurs.

If any of you have any points to add to this, I am all ears.