What is her MACRS depreciation deduction in the first year?

What is her MACRS depreciation deduction in the second year?

What if Mary sells the office equipment in the third year?

Again, we need to know two things to use the tables;

class life and convention.

Let's look at class life first.

To figure out class life,

we use Exhibit 1 and simply find the asset in the list.

Here, we're looking for office equipment.

What's the class life for office equipment?

Well, we can see that office equipment is seven year property.

Okay. The next thing is figuring out which convention we're using.

Here Mary placed the asset into service in March,

March is in the first quarter of the year.

To decide whether we use the half year or the mid quarter convention,

we have to ask ourselves,

was more than 40 percent of the value of the assets placed into service during the year,

placed into service in the fourth quarter?

In this case, no.

There were actually no assets placed into service in the fourth quarter of the year.

Therefore, we can use the half year convention.

If we use the half year convention,

we can look at table one.

Here it is. So, which column do we look at?

Well, remember that office equipment is seven year property.

So, we need to look at the seven year column.

For recovery year one,

we see that the applicable depreciation rate is 14.29 percent.

So, what do we do with this 14.29 percent?

Well, we'll multiply the original basis by this depreciation rate.

So, in the first question,

Mary's original basis was $200,000.

Therefore, her MACRS depreciation deduction in your 20x1 is $200,000

times 14.29 percent, or $28,580.

Next, what's our depreciation deduction in the second year, in year 20x2.

So, here we turn back to table one.

Now, we're in recovery year two.

The applicable depreciation rate here is 24.49 percent.

So, we take this 24.49 percent and multiply it by the original basis of $200,000.

Therefore, in answering the second question,

Mary's depreciation deduction in your 20x2 is $200,000 times 24.49 percent or $48,980.

Now, what if in year 20x3 Mary decides to sell the office equipment.

Well, if she had kept the equipment,

her depreciation rate in the third recovery year would have been 17.49 percent.

But the table doesn't know that Mary is disposing of the equipment in year three.

The table is assuming the disposal won't happen until

the last year in the table in recovery year eight.

Therefore, we need to adjust the 17.49 percent rate ourselves.

That is, multiply it by one half to adjust for the fact that

we're getting half a year's worth of depreciation in the last year of use.

Therefore, the depreciation that Mary is allowed to deduct

in the final year of using the office equipment is

$200,000 times 17.49 percent times one half or $17,490.

Okay. Now, let's assume the same facts as before,

but Mary placed into service that $200,000 office equipment in November of year 20x1.

What happens now?

Well, again,

we need to know two things;

class life and convention.

We're still talking about office equipment so the class life doesn't change,

it's still seven year property.

However, the asset was placed into service in the fourth quarter of the year,

this should ring some bells.

Recall that if more than 40 percent of the value of assets placed into

service during the year were placed into service in the fourth quarter,

then the taxpayer has to use

the mid quarter convention and cannot use the half year convention.

So, in this case,

Mary has to use the mid quarter convention.

So, we're going to look at table two to figure out her depreciation rates.

Again, office equipment is seven year property,

so we need to look at the seven year property panel, the bottom panel.

The equipment was placed into service in November which is the fourth quarter,

so we need to look in the fourth quarter column.

If its recovery year one,

then we find 3.57 percent.

So, we take this 3.57 percent and multiply it by the original basis or

$200,000 to figure out Mary's depreciation deduction in the first year.

Therefore, Mary's depreciation deduction in your 20x1 is the original basis of

$200,000 times 3.57 percent from table two to get $7,140.

Next, what is Mary's depreciation deduction in year 20x2?

Well, back to table two.

We're still talking about seven year property and it

was originally placed into service in the fourth quarter of the year,

in November of your 20x1.

So, all we do is stay in the fourth quarter column but

just dropped down one road to recovery year two.

This gets us a depreciation rate of 27.55 percent.

So, we take this 27.55 percent and multiply it by

the original basis to get the depreciation deduction in your 20x2.

Therefore, Mary's depreciation deduction in that second year is the original basis of

$200,000 times 27.55 percent from table two to get $55,100.

So remember, the two major facts that you need in order to use these tables are first,

the class life and second, the assets convention.

Once you know these two items,

you can identify the right depreciation rate for the particular recovery year,

then multiply that rate by the original basis

to obtain the depreciation deduction for that year.

I hope these examples help you navigate these important depreciation tables.