Small Business Taxes & ManagementTM--Copyright 2007, A/N Group, Inc.
Contents
Section 179 Expense Limit
MACRS Rates--Half-Year Convention
Residential Real Property--27.5 years
Nonresidential Real Property--39 years
MACRS Rates--Mid-Quarter Convention
For property placed in service in the:
Maximum Section 179 Expense Deduction
Tax Year Amount Phaseout Begins
2008 $250,000 $800,000
2007 125,000 500,000
2006 108,000 430,000
2005 105,000 420,000
2004 102,000 410,000
2003 100,000 400,000
2001 or 2002 24,000 200,000
2000 20,000 200,000
1999 19,000 200,000
1998 18,500 200,000
Table 1: MACRS Rates--Half-Year Convention
Year 3 years 5 years 7 years 10 years 15 years
1 33.33% 20.00% 14.29% 10.00% 5.00%
2 44.45% 32.00% 24.49% 18.00% 9.50%
3 14.81% 19.20% 17.49% 14.40% 8.55%
4 7.41% 11.52% 12.49% 11.52% 7.70%
5 11.52% 8.93% 9.22% 6.93%
6 5.76% 8.92% 7.37% 6.23%
7 8.93% 6.55% 5.90%
8 4.46% 6.55% 5.90%
9 6.56% 5.91%
10 6.55% 5.90%
11 3.28% 5.91%
12 5.90%
13 5.91%
14 5.90%
15 5.91%
16 2.95%
Caution--Please see notes and examples below.
Table 2: MACRS Rates--Mid-Quarter Convention--First Quarter
Year 3 years 5 years 7 years 10 years 15 years
1 58.33% 35.00% 25.00% 17.50% 8.75%
2 27.78% 26.00% 21.43% 16.50% 9.13%
3 12.35% 15.60% 15.31% 13.20% 8.21%
4 1.54% 11.01% 10.93% 10.56% 7.39%
5 11.01% 8.75% 8.45% 6.65%
6 1.38% 8.74% 6.76% 5.99%
7 8.75% 6.55% 5.90%
8 1.09% 6.55% 5.91%
9 6.56% 5.90%
10 6.55% 5.91%
11 0.82% 5.90%
12 5.91%
13 5.90%
14 5.91%
15 5.90%
16 0.74%
Table 3: MACRS Rates--Mid-Quarter Convention--Second Quarter
Year 3 years 5 years 7 years 10 years 15 years
1 41.67% 25.00% 17.85% 12.50% 6.25%
2 38.89% 30.00% 23.47% 17.50% 9.38%
3 14.14% 18.00% 16.76% 14.00% 8.44%
4 5.30% 11.37% 11.97% 11.20% 7.59%
5 11.37% 8.87% 8.96% 6.83%
6 4.26% 8.87% 7.17% 6.15%
7 8.87% 6.55% 5.91%
8 3.33% 6.55% 5.90%
9 6.56% 5.91%
10 6.55% 5.90%
11 2.46% 5.91%
12 5.90%
13 5.91%
14 5.90%
15 5.91%
16 2.21%
Table 4: MACRS Rates--Mid-Quarter Convention--Third Quarter
Year 3 years 5 years 7 years 10 years 15 years
1 25.00% 15.00% 10.71% 7.50% 3.75%
2 50.00% 34.00% 25.51% 18.50% 9.63%
3 16.67% 20.40% 18.22% 14.80% 8.66%
4 8.33% 12.24% 13.02% 11.84% 7.80%
5 11.30% 9.30% 9.47% 7.02%
6 7.06% 8.85% 7.58% 6.31%
7 8.86% 6.55% 5.90%
8 5.53% 6.55% 5.91%
9 6.56% 5.90%
10 6.55% 5.90%
11 4.10% 5.91%
12 5.90%
13 5.91%
14 5.90%
15 5.91%
16 3.69%
Table 5: MACRS Rates--Mid-Quarter Convention--Fourth Quarter
Year 3 years 5 years 7 years 10 years 15 years
1 8.33% 5.00% 3.57% 2.50% 1.25%
2 61.11% 38.00% 27.55% 19.50% 9.88%
3 20.37% 22.80% 19.68% 15.60% 8.89%
4 10.19% 13.68% 14.06% 12.48% 8.00%
5 10.94% 10.04% 9.98% 7.20%
6 9.58% 8.73% 7.99% 6.48%
7 8.73% 6.55% 5.90%
8 7.64% 6.55% 5.90%
9 6.56% 5.90%
10 6.55% 5.91%
11 5.74% 5.90%
12 5.91%
13 5.90%
14 5.91%
15 5.90%
16 5.17%
Table 6: Residential Real Property--27.5 Years
Month Placed Year
in Service 1 2-9 10 11 12 13-27 28 29
1 3.485% 3.636% 3.637% 3.636% 3.637% * 1.970% --
2 3.182% 3.636% 3.637% 3.636% 3.637% * 2.273% --
3 2.879% 3.636% 3.637% 3.636% 3.637% * 2.576% --
4 2.576% 3.636% 3.637% 3.636% 3.637% * 2.879% --
5 2.273% 3.636% 3.637% 3.636% 3.637% * 3.182% --
6 1.970% 3.636% 3.637% 3.636% 3.637% * 3.485% --
7 1.667% 3.636% 3.637% 3.636% 3.637% * 3.636% 0.152%
8 1.364% 3.636% 3.637% 3.636% 3.637% * 3.636% 0.455%
9 1.061% 3.636% 3.637% 3.636% 3.637% * 3.636% 0.758%
10 0.758% 3.636% 3.637% 3.636% 3.637% * 3.636% 1.061%
11 0.455% 3.636% 3.637% 3.636% 3.637% * 3.636% 1.364%
12 0.152% 3.636% 3.637% 3.636% 3.637% * 3.636% 1.667%
*In years 13-27, the rate alternates between 3.636% and 3.637%.Residential property is property rented out for nontransient living purposes.
Table 7: Nonresidential Real Property--39 Years
Month Placed Year
in Service 1 2-39 40
1 2.461% 2.564% 0.107%
2 2.247% 2.564% 0.321%
3 2.033% 2.564% 0.535%
4 1.819% 2.564% 0.749%
5 1.605% 2.564% 0.963%
6 1.391% 2.564% 1.177%
7 1.177% 2.564% 1.391%
8 0.963% 2.564% 1.605%
9 0.749% 2.564% 1.819%
10 0.535% 2.564% 2.033%
11 0.321% 2.564% 2.247%
12 0.107% 2.564% 2.461%
Nonresidential property includes all property not used for dwelling purposes. That includes offices, stores, warehouses, hotels and motels, etc. It also includes the portion of a home used for business.
Notes:
1. Special depreciation limits apply to autos and trucks. A summary of the limits can be found on our Auto and Vehicle Tables page.
2.The 50% bonus depreciation described below generally applies to assets placed in service after December 31, 2007 and before January 1, 2009. (30%/50% bonus depreciation under an earlier law generally expired January 1, 2005.)
The Economic Stimulus Act of 2008 provides for 50% extra depreciation in the first year qualifying property is placed in service. In order for property to qualify for the additional first-year depreciation deduction it must meet all of the following requirements. First, the property must be (1) property to which MACRS applies with an applicable recovery period of 20 years or less, (2) water utility property (as defined in Section 168(e)(5)), (3) computer software other than computer software covered by Section 197, or (4) qualified leasehold improvement property (as defined in Section 168(k)(3)). Second, the original use of the property must commence with the taxpayer after December 31, 2007. Third, the taxpayer must purchase the property within the applicable time period. Finally, the property must be placed in service after December 31, 2007, and before January 1, 2009. An extension of the placed in service date of one year (i.e., to January 1, 2010) is provided for certain property with a recovery period of 10 years or longer and certain transportation property. Transportation property is defined as tangible personal property used in the trade or business of transporting persons or property. Special rules, including an extension of the placed-in-service date of one year (i.e., to January 1, 2010), also apply to certain aircraft. Special rules apply to property for which there is where there was a binding contract in effect before January 1, 2008 and for property for which there was a binding contract after December 31, 2007 and before January 1, 2009.
Example --Madison Inc. acquires a special purpose computer for $100,000 on June 5, 2008. Madison claims a $15,000 Section 179 expense option (saving the remainder of the $250,000 expense option for other equipment). Thus, the basis for the bonus depreciation is $85,000. Madison computes the bonus depreciation as $42,500 (50% X $85,000). That leaves a basis for depreciation of $42,500 ($85,000 - $42,500). Since the computer is 5-year property, the first-year depreciation is $8,500 (20% X $42,500). Thus, the total regular and bonus depreciation and Section 179 expense deduction for the first year is $66,000 ($15,000 + $42,500 + 8,500). When using the table, the depreciation basis for future years is $42,500. Thus, for 2009 the depreciation is 32% X $42,500 or $13,600. For 2010 the depreciation deduction is $8,160.
Note 1--While there's a limit on the Section 179 expense deduction ($250,000 for 2008) there's no comparable limit on the bonus depreciation. In addition, unlike the Section 179 expense option there is no income limitation on bonus depreciation.
Note 2--There are other rules associated with the bonus depreciation.
Generally, any property placed in service during the course of a year receives a half-year's depreciation under the half-year convention (see table above). However, a special rule applies if you place in service more than 40% of the total basis of property for the year in the last quarter of your fiscal year. That's to avoid waiting until the end of the year to buy the property, yet secure a deduction for the whole year. When calculating the total basis of property placed in service, exclude any on which you took the Section 179 expense election. For real estate, a mid-month convention is used.
Assume in all the examples below that Madison is a calendar-year corporation and that it's been in business for more than a year. To simplify the examples we've ignored any bonus (additional) depreciation or Section 179 expense election.
Example 1--Madison Inc. purchases just two assets in 2007, a computer costing $10,000 on January 15th, and a $5,000 lathe on December 15th. The total dollar amount placed in service is $15,000, $5,000 of which was put in service in the last quarter. Since only 33% of the total was placed in service in the last quarter ($5,000/$15,000), the mid-quarter convention rule does not apply. The table to use is MACRS--Half-Year Convention. The computer has a 5-year life. The rate to use for the first year is 20%. Thus, the depreciation is $2,000 (20% of $10,000). Assume the lathe is 7-year property. The rate is 14.29% and the depreciation for the first year is $714.50 (14.29% of $5,000). For 2008, use the same table, but move down to year 2. The rate for the computer is 32% and the depreciation $3,200 (32% of $10,000). The rate for the lathe is 24.49% and the depreciation $1,224.50 (24.49% of $5,000). Use the same approach for later years.
Example 2--Assume the facts are the same as in the example above, but the lathe costs $7,500. Now the mid-quarter convention applies since the total placed in service during the year is $17,500 and the amount in the last quarter is 42.8% ($7,500/$17,500). You've got to apply the mid-quarter tables to each asset. Use the table corresponding to the quarter the asset was placed in service. The computer was bought in the first quarter. Using Table 2, Mid-Quarter Convention--First Quarter, the rate is 35%; the depreciation for 2007 is $3,500 (35% of $10,000). The lathe was purchased in the fourth quarter so use Table 5, Mid-Quarter Convention--Fourth Quarter (rate is 3.57%). The depreciation for 2007 is $267.75. Use the same tables for 2008, but move down the list to year 2. Thus, for the computer, use 26%. The depreciation for 2008 is $2,600 (26% of $10,000). For the lathe the rate is 27.55%; the depreciation is $2,066.25 (27.55% of $7,500).
Example 3--Assume the facts are the same as in example 2 above, but Madison decides to expense the lathe, using the section 179 expense election. The lathe is no longer counted as an asset placed in service during the year. Madison can now use the mid-year convention for the computer.
Example 4--In April, 2008 Fred buys a small apartment building that has four tenants. The property cost $125,000, $100,000 of which is allocated to the building. The property is residential real property, so Fred has to use Table 6. Since the property is placed in service in April (the 4th month), the depreciation rate for the first year is 2.576%. Thus, the first year's depreciation is $2,576. The rate for the second year is 3.636%, so depreciation for 2009 is $3,636.
Example 5--In July, 2008 Sue buys a small office building. Of the total purchase price, $400,000 is allocated to the building (a portion of the purchase price is allocated to the land). Since the property is placed in service in July, the depreciation rate for the first year is 1.177% (Table 7, nonresidential property). Thus, the first year's depreciation is $4,708 (1.177% of $400,000). The rate for the second year is 2.564%, so depreciation for 2009 is $10,256.
Copyright 1998-2008 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete
summary of all materials on the subject.--ISSN 1089-1536
Last update--02/25/08