Question

Please refer to IRS Publication 946

Table A-1. 3-, 5-, 7-, 10-, 15-, and 20-Year Property Half-Year Convention Depreciation rate for recovery period 3-year 5-year 7-year 10-year 15-year Year 20-year 33.33% 44.45 14.81 7.41 20.00% 32.00 19.20 11.52 11.52 14.29% 24.49 17.49 12.49 8.93 10.00% 18.00 14.40 11.52 9.22 5.00% 9.50 8.55 7.70 6.93 3.750% 7.219 6.677 6.177 5.713 ovo o AWN 5.76 8.92 8.93 4.46 7.37 6.55 6.55 6.56 6.55 6.23 5.90 5.90 5.91 5.90 5.285 4.888 4.522 4.462 4.461 3.28 5.91 5.90 5.91 5.90 5.91 4.462 4.461 4.462 4.461 4.462 2.95 4.461 oso a 4.462 4.461 4.462 4.461 2.231

2. In plain English, explain how depreciation was calculated for years 1-3.

3. In plain English, explain how depreciation was calculating for years 4-6 (Hint: See MACRS4 solution, end-of-year basis for year 3; divide by 5, but you must explain why you divided by 5).

4. Additional comments (optional):

Answer 1

For 3 year property, useful life in years =3

MACRS rate is based on double declining balance. This means in plain English, the depreciation rate will be double of Straight line depreciation rate and this rate will be multiplied by the book value of the asset at the beginning of year which will be declining from year to year.

For 3 year asset life , rate of depreciation as per Straight Line Method =1/3=33.3333%

For Double Declining method the depreciation rate will be =2*33.3333%=66.6666%=66.67%

Assume the cost of asset in the beginning of year1=$1

As per double declining balance method the depreciation in year 1 should be 66.66

But MACRS Table A-1 given above follows half year convention .

This means in year 1 the amount of depreciation will be (1/2)* Double Declining Balance depreciation.

The remaining depreciation will be taken in Year4 .

This is the reason the three year property has depreciation in year 4 also.

Year 1 depreciation =$1*(66.66/2)%=$1*33.33%=$0.3333

Value of asset at beginning of year 2=$1-$0.3333=$0.6667

Depreciation in Year 2=$0.6667*66.67%=$0.4445

Depreciation in year 2 =44.45% of $1

Value of Asset at the Beginning of Year 3=$0.6667-$0.4445=$0.2222

Depreciation in Year 3 =#0.2222*66.67%=$0.1481

Depreciation in Year 3 =14.81% of $1

Hence Depreciation Rate (On Cost of Asset )

Year1:33.33%

Year2: 44.45%

Year 3: 14.81%

3. 5 Year Recovery period

Double declining rate =2*(1/5)=40%

If the cost of asset is $1

Year 1 depreciation =(40/2)%*$1=$0.2

Year2 depreciation=32%*$1=$0.32

Year3 depreciation =$1*19.2%=0.192

Accumulated depreciation in Year3=$0.2+$0.32+$0.192=$0.712

Value of asset at the beginning of year 4 =$1-$0.712=$0.288

Depreciation in year 4 =0.288*40%=0.1152 (Note: 40% is same as (1/5))

Depreciation in year $1*11.52%

Depreciation in Year 5 =0.1152

Book Value at beginning of year 6=0.288-0.1152-0.1152=$0.0576

Depreciation in Year 6= Balance book Value =$0.0576

Depreciation in Year 6 =5.76% of $1

Hence Depreciation Rate (On Cost of Asset )

Year1:20.00%

Year2: 32.00%

Year 3: 19.20%

Year 4:11.52%

Year 5:11.52%

Year6:: 5.76%