Mid-Quarter Depreciation Convention

Course: Income Tax Planning

Student Question:

Hello, see the question below. I got this question right, but the explanation of why I got it right is weird. I thought mid-month depreciation was only used for real property, and this is saying it is used for equipment. Then, the explanation of the correct answer talks about mid-quarter.

Wurst Foods, Inc. distributes specialty German food. The company operates on a calendar year basis and purchases $800,000 in equipment in the current year as follows. Assume the property is depreciable but does not qualify for immediate expensing.

January 1st               $400,000

December 1st           $400,000

Which of the following, if any, accurately describes the calculation of current-year MACRS depreciation arising from these purchases? 

Instructor Response:

You are correct in that only depreciable real property is subject to the mid-month convention.  However, the assets purchased in this question are personal (not real) property (equipment) used in a trade or business.  The mid-quarter convention applies because Wurst purchased more than 40% of total asset (equipment) purchases in the final quarter of the year.  Hence, the January acquisition is entitled to one-half quarter’s depreciation in the acquisition quarter plus another three full quarters of depreciation for the period April through December.  The property acquired in December is entitled to only one-half quarter’s depreciation.