1. What is Harold’s 2007 cost-recovery deduction if he does not elect to expense any of the assets under Section 179?

Because more than 40% of the purchases of tangible personal property took place in the 4th quarter ($114,000  ¸  $149,000  =  77%), Harold must depreciate all personal property purchased in 2007 using the mid-quarter convention.  Tables A10-3 through A10-6 provide the depreciation schedules by quarter of acquisition.  Harold’s 2007 depreciation deduction is $11,950:

Depreciable Depreciation         Depreciation

Asset                                 Basis                  Percentage           Deduction    

Photocopy Equipment  $    5,000                       35%                       $ 1,750

(Table A10-3)

Dump Truck                    $  30,000                    15%                       $ 4,500

(Table A10-5)

Bus                                  $114,000                     5%                        $ 5,700

(Table A10-6)                           

2007 Cost-Recovery deduction using mid-quarter convention $11,950

NOTE:  Without the mid-quarter convention, the deduction would have been $29,800  ($149,000  x  20%) under the regular MACRS method.

1. What could Harold do to maximize his 2007 deduction?

Because the calculation of purchases for purposes of the 40% rule uses the depreciable basis placed in service each quarter, Harold can avoid the mid-quarter convention by electing to expense $112,000 of the bus.  This brings the depreciable basis of the bus down to $2,000 ($114,000  –  $112,000) and the total depreciable basis placed in service during the year to $37,000.  With the election to expense allocated to the bus, Harold will only have placed 5.4% ($2,000  ¸  $37,000) of the property in service during the 4th quarter and will be able to use the regular MACRS method.  Harold claims $7,400 ($37,000 x 20%) in regular MACRS cost-recovery. His total deduction is $119,400 of depreciation in 2007 ($112,000 election to expense  +  $7,400 of regular MACRS cost-recovery).