A client, Ms. Chen, purchased a new machine for her manufacturing business on October 1, 2023, for $80,000. The machine is 7-year MACRS property. What is the allowable depreciation deduction for 2023? (Use the IRS provided MACRS depreciation tables. For 7-year property, the half-year convention percentages are: Year 1: 14.29%, Year 2: 24.49%, Year 3: 17.49%, Year 4: 12.49%, Year 5: 8.93%, Year 6: 8.92%, Year 7: 8.93%, Year 8: 4.46%.) Assume no Section 179 or bonus depreciation.
- A$2,858
- B$1,429
- C$11,432
- D$2,000
Show answer & explanationAnswer & explanation
Correct answer: A. $2,858
To determine if the mid-quarter convention applies, calculate the percentage of total depreciable basis placed in service during the last quarter. If more than 40% is placed in service in the last quarter, the mid-quarter convention applies. In this case, 100% of the property was placed in service in the last quarter (October 1). For 7-year property placed in service in the 4th quarter, the MACRS percentage is 3.57%. Therefore, $80,000 * 0.0357 = $2,856. The closest answer is $2,858.
Why the other options are wrong
- B. This is an arbitrary value and does not reflect MACRS calculations.
- C. This would be the depreciation if the half-year convention applied ($80,000 * 0.1429 = $11,432), which it does not.
- D. This is an arbitrary value and does not reflect MACRS calculations.
MACRS Mid-Quarter Convention
A depreciation convention that must be used if more than 40% of the total depreciable basis of MACRS property (excluding real property) is placed in service during the last three months of the tax year.
- Applies to personal property, not real property.
- Triggered if >40% of assets are placed in service in Q4.
- Depreciation is calculated from the middle of the quarter the asset was placed in service.
Memory trick: Half-Year's the norm, unless 40% in Q4 is the storm.