Mid quarter vs half year

1. What are the two depreciation conventions that apply to tangible personal property under MACRS? Explain why Congress provides two methods.

After a business determines the depreciation method and recovery periods for the assets, it then has to decide a depreciation convention. For the personal property taxpayers, there are two depreciation conventions. A taxpayer can use the half-year convention or the mid-quarter convention. However, a taxpayer cannot choose between the two.

Half-year convention lets one-half of a full year’s depreciation in the year in which the asset was placed in service and also disposed. It did not matter when it was actually placed in service.

Mid-year convention must be used by businesses when 40% of their tangible personal property is placed in service during the year, is placed in service during the fourth quarter of the year.

Explain the two limitations placed on the Sec 179 deduction. How are they similar? How are they different?

The purpose of creating section 179 was to help small businesses purchase new or tangible personal properties. It is also known as immediate expensing. However, there are two limitations placed on the section 179 deduction. A business can elect to claim the maximum amount of one year is subjected to a phase-out limitation. Companies that lease, purchase, or finance business equipment for less than 2 million dollars are qualified for immediate expensing. In the profitable years, or years with no taxable income to be used for the deduction, businesses still have the option to use 50% “bonus depreciation”, and carry the left deductions to next year. All the assets from off the shelf software to vehicles used for business are eligible for deduction. Properties are also eligible if they meet the criteria of IRS requirements. Companies that have purchased equipment of more than 2 million dollars do not benefit much from this. Because the deduction is on the dollar to dollar scale in case if the expenses are over the amount of 2 million dollars, businesses are limited in deductions, and they cannot declare more than their net taxable income. It is calculated by removing the deductions except section 179, net operating loss, and employment tax.

2) The two depreciation conventions that apply to tangible personal property under MACRS are the half-year convention and the mid-quarter convention. The half-year convention is most common and allows for 50% of a full-year’s depreciation in both the first and last year the asset is in service (Spilker, et al., 2021). The mid-quarter convention applies when a business's tangible personal property assets placed into service in the fourth quarter exceed 40% of those for the year (Spilker, et al., 2021). Congress provides both methods to limit and prevent taxpayers from taking advantage of the half-year depreciation convention through early acquisition of assets in the end of the fourth quarter that would otherwise be acquired the following year (Spilker, et al., 2021). However, the mid-quarter test only applies after property is expensed to the degree eligible under §179 (Spilker, et al., 2021).

The two limitations placed on the section 179 deduction are the phase-out limitation and the taxable income limitation (Spilker, et al., 2021). The phase-out limitation places a maximum $2,590,000 yearly threshold for qualified property placed in service and reduces the maximum $1,040,000 deduction by one dollar for every dollar of qualified property exceeding the threshold (Spilker, et al., 2021). The taxable income limitation limits the taxpayer's §179 deduction for the year to the taxpayer's taxable income after all expenses have been deducted, besides the §179 expense, to prevent creating a net loss through deduction (Spilker, et al., 2021). Both limitations similarly create a maximum threshold for taking the deduction in a given year (Spilker, et al., 2021). However, for phase-out limitations, the portion phased-out cannot be carried over, while indefinite carry-over is allowed for §179 expenses not deducted due to the taxable income limitation, still subject to this limitation in future years (Spilker, et al., 2021).

Reference List:

Spilker, B. C., Ayers, B. C., Lewis, T. K., Weaver, C. D., Barrick, J. A., Robinson, J. R., Worsham, R.G. (2021). McGraw-Hill’s taxation of individuals and business entities. New York, NY: McGraw Hill LLC.