Violation of the MACRS 40% Rule for Current Year Asset Acquisitions

The 40% Rule states that when 40% or more of the assets acquired in any given tax year are acquired in the 4th quarter of that tax year, all assets acquired in that year will use the Mid Quarter Convention. Personal Property under MACRS will normally use a Half Year Convention. When a piece of property is placed in service, you are required to use a particular convention to determine the depreciation deduction you will get for the first year. Let’s compare half year to mid quarter:

Half Year (HALFYR): Whether an asset is acquired on the first day of a calendar year or acquired on the last day of a fiscal or calendar year, six months of depreciation is allowed during the year of acquisition. This convention assumes that the asset is acquired in the middle of the year so for the 1st year and last year, only ½ of the allowable annual depreciation can be deducted.

Mid Quarter (MIDQ): Whether an asset is acquired on the first day of a quarter or on the last day of a quarter, one half of the quarters normal depreciation is allowed for the quarter of acquisition. So assets acquired in each quarter are allowed a given amount of cost recovery in the first year:

  • 1st quarter = 10.5 months
  •  2nd quarter = 7.5 months
  •  3rd quarter = 4.5 months
  •  4th quarter = 1.5 months

When an asset that was subject to the mid-quarter convention is disposed, then the cost recovery is determined from the middle of the quarter to the end of the year.

In Bassets eDepreciation there is a built-in utility to perform the MACRS 40% test:

Violation of the MACRS rule

As you can see on the above form, the system will test all of the current year acquisitions to ensure compliance. If the test finds a violation of the 40% rule then you can have the system make the switch on first year convention from half year to mid quarter. The 40% rule does not apply to the purchase of residential rental property, nonresidential realty, or assets that are placed in service but then disposed of before the end of the tax year.

Questions? Comments? Let us know in the comments section below.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.

First Year Averaging Conventions to Calculate a Depreciation Deduction

When a piece of property is placed in service, you are required to use a particular convention to determine the depreciation deduction you will get for the year of acquisition.  Below are the most commonly used convention types:

Half-Year (HALFYR): During the year an asset is acquired, only six months of depreciation is allowed regardless of when the asset is actually acquired during the year.

Mid-Month (MIDM):  For IRS Tax depreciation, one half of the normal monthly depreciation is allowed during the month of acquisition.  GAAP depreciation methods allow for full normal monthly depreciation when acquired between the 1st-15th of the month.  Assets acquired after the 15th are allowed no normal monthly depreciation during the month of acquisition with a full months depreciation allowance in the following months.

Mid-Quarter (MIDQ):  According to IRS Tax depreciation, when more than 40% of personal property assets acquired during the year are acquired during the last quarter of the year, a 40% Rule violation exists.  When the 40% Rule is violated, the tax payer can only deduct 1/2 of the normal depreciation calculated for the quarter during which the asset was acquired.  Remaining quarters following the quarter of acquisition are allowed full normal depreciation.

Full Month (FULLMO):  Allows for normal monthly deprecation regardless of the day of the month the asset is acquired.

When calculating depreciation expense, it is important to use the appropriate calculation for the first year conventions.  Otherwise, the amount will either be an overstatement or understatement.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.