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taxmap/pubs/p946-026.htm#en_us_publink1000107554

How Is the Depreciation Deduction Figured?(p44)


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previous topic occurrence Depreciation next topic occurrence

Words you may need to know (see Glossary)

To figure your depreciation deduction under MACRS, you first determine the depreciation system, property class, placed in service date, basis amount, recovery period, convention, and depreciation method that applies to your property. Then, you are ready to figure your depreciation deduction. You can figure it using a percentage table provided by the IRS, or you can figure it yourself without using the table.
taxmap/pubs/p946-026.htm#en_us_publink1000107555

Using the MACRS Percentage Tables(p44)


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To help you figure your deduction under MACRS, the IRS has established percentage tables that incorporate the applicable convention and depreciation method. These percentage tables are in Appendix A near the end of this publication.
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Which table to use.(p44)


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Appendix A contains the MACRS Percentage Table Guide, which is designed to help you locate the correct percentage table to use for depreciating your property. The percentage tables immediately follow the guide.
taxmap/pubs/p946-026.htm#en_us_publink1000107557

Rules Covering the Use of the Tables(p44)


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The following rules cover the use of the percentage tables.
  1. You must apply the rates in the percentage tables to your property's unadjusted basis.
  2. You cannot use the percentage tables for a short tax year. See Figuring the Deduction for a Short Tax Year, later, for information on the short tax year rules.
  3. Once you start using the percentage tables for any item of property, you generally must continue to use them for the entire recovery period of the property.
  4. You must stop using the tables if you adjust the basis of the property for any reason other than—
    1. Depreciation allowed or allowable, or
    2. An addition or improvement to that property that is depreciated as a separate item of property.
Basis adjustments other than those made due to the items listed in (4) include an increase in basis for the recapture of a clean-fuel deduction or credit and a reduction in basis for a casualty loss.
taxmap/pubs/p946-026.htm#en_us_publink1000107558

Basis adjustment due to recapture of clean-fuel vehicle deduction or credit.(p44)


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If you increase the basis of your property because of the recapture of part or all of a deduction for clean-fuel vehicles or the credit for clean-fuel vehicle refueling property placed in service before January 1, 2006, you cannot continue to use the percentage tables. For the year of the adjustment and the remaining recovery period, you must figure the depreciation deduction yourself using the property's adjusted basis at the end of the year. See Figuring the Deduction Without Using the Tables, later.
taxmap/pubs/p946-026.htm#en_us_publink1000107559

Basis adjustment due to casualty loss.(p44)


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If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. For the year of the adjustment and the remaining recovery period, you must figure the depreciation yourself using the property's adjusted basis at the end of the year. See Figuring the Deduction Without Using the Tables, later.
taxmap/pubs/p946-026.htm#en_us_publink1000107560

Example.(p44)

On October 26, 2008, Sandra Elm, a calendar year taxpayer, bought and placed in service in her business in the GO Zone a new item of 7-year property. It cost $39,000 and she elected a section 179 deduction of $24,000. She also took a special depreciation allowance of $7,500 [50% of $15,000 ($39,000 − $24,000)]. Her unadjusted basis after the section 179 deduction and special depreciation allowance was $7,500 ($15,000 − $7,500). She figured her MACRS depreciation deduction using the percentage tables. For 2008, her MACRS depreciation deduction was $268.
In July 2009, the property was vandalized and Sandra had a deductible casualty loss of $3,000. She must adjust the property's basis for the casualty loss, so she can no longer use the percentage tables. Her adjusted basis at the end of 2009, before figuring her 2009 depreciation, is $4,232. She figures that amount by subtracting the 2008 MACRS depreciation of $268 and the casualty loss of $3,000 from the unadjusted basis of $7,500. She must now figure her depreciation for 2009 without using the percentage tables.
taxmap/pubs/p946-026.htm#en_us_publink1000107561

Figuring the Unadjusted Basis of  
Your Property(p45)


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Unadjusted Basis

You must apply the table rates to your property's unadjusted basis each year of the recovery period. Unadjusted basis is the same basis amount you would use to figure gain on a sale, but you figure it without reducing your original basis by any MACRS depreciation taken in earlier years. However, you do reduce your original basis by other amounts, including the following.
For business property you purchase during the year, the unadjusted basis is its cost minus these and other applicable adjustments. If you trade property, your unadjusted basis in the property received is the cash paid plus the adjusted basis of the property traded minus these adjustments.
taxmap/pubs/p946-026.htm#en_us_publink1000107562

MACRS Worksheet(p45)


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MACRS Worksheet

You can use this worksheet to help you figure your depreciation deduction using the percentage tables. Use a separate worksheet for each item of property. Then, use the information from this worksheet to prepare Form 4562.
EIC
Do not use this worksheet for automobiles. Use the Depreciation Worksheet for Passenger Automobiles in chapter 5.
taxmap/pubs/p946-026.htm#w13081f01
Pencil
MACRS Worksheet
Part I  
1.MACRS system (GDS or ADS)             
2.Property class             
3.Date placed in service             
4.Recovery period             
5.Method and convention             
6.Depreciation rate (from tables)             
Part II  
7.Cost or other basis* $   
8.Business/investment use              % 
9.Multiply line 7 by line 8  $
10.Total claimed for section 179 deduction and other items  $
11.Subtract line 10 from line 9. This is your tentative basis for depreciation  $
12.Multiply line 11 by .30 if the 30% special depreciation allowance applies. Multiply line 11 by .50 if the 50% special depreciation allowance applies. This is your special depreciation allowance. Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance  $
13.Subtract line 12 from line 11. This is your basis for depreciation              
14.Depreciation rate (from line 6)              
15.Multiply line 13 by line 14. This is your MACRS depreciation deduction  $
*If real estate, do not include cost (basis) of land.
The following example shows how to figure your MACRS depreciation deduction using the percentage tables and the MACRS worksheet.
taxmap/pubs/p946-026.htm#en_us_publink1000107564

Example.(p45)

You bought office furniture (7-year property) for $10,000 and placed it in service on August 11, 2009. You use the furniture only for business. This is the only property you placed in service this year. You did not elect a section 179 deduction and the property is not qualified property for purposes of claiming a special depreciation allowance so your property's unadjusted basis is its cost, $10,000. You use GDS and the half-year convention to figure your depreciation. You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-1. Multiply your property's unadjusted basis each year by the percentage for 7-year property given in Table A-1. You figure your depreciation deduction using the MACRS worksheet as follows. taxmap/pubs/p946-026.htm#en_us_publink100068774
Pencil
MACRS Worksheet
Part I
1.MACRS system (GDS or ADS) GDS
2.Property class 7-year
3.Date placed in service 8/11/09
4.Recovery period 7-Year
5.Method and convention 200%DB/Half-Year
6.Depreciation rate (from tables) .1429
Part II
7.Cost or other basis* $10,000   
8.Business/investment use 100 %  
9.Multiply line 7 by line 8  $10,000
10.Total claimed for section 179 deduction and other items  -0-
11.Subtract line 10 from line 9. This is your tentative basis for depreciation  $10,000
12.Multiply line 11 by .30 if the 30% special depreciation allowance applies. Multiply line 11 by .50 if the 50% special depreciation allowance applies. This is your special depreciation allowance. Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance  -0-
13.Subtract line 12 from line 11. This is your basis for depreciation  $10,000
14.Depreciation rate (from line 6)  .1429
15.Multiply line 13 by line 14. This is your MACRS depreciation deduction  $1,429
*If real estate, do not include cost (basis) of land.
If there are no adjustments to the basis of the property other than depreciation, your depreciation deduction for each subsequent year of the recovery period will be as follows.
Year   Basis Percentage Deduction
2010$10,000 24.49% $2,449 
2011  10,00017.49  1,749 
2012  10,00012.49  1,249 
2013  10,000 8.93  893 
2014  10,000 8.92  892 
2015  10,000 8.93  893 
2016  10,000 4.46  446 
taxmap/pubs/p946-026.htm#en_us_publink1000107565

Examples(p46)


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The following examples are provided to show you how to use the percentage tables. In both examples, assume the following.
taxmap/pubs/p946-026.htm#en_us_publink1000107566

Example 1.(p46)

You bought a building and land for $120,000 and placed it in service on March 8. The sales contract showed that the building cost $100,000 and the land cost $20,000. It is nonresidential real property. The building's unadjusted basis is its original cost, $100,000.
You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-7a. March is the third month of your tax year, so multiply the building's unadjusted basis, $100,000, by the percentages for the third month in Table A-7a. Your depreciation deduction for each of the first 3 years is as follows:
Year   Basis Percentage Deduction
1st$100,000 2.033% $2,033 
2nd  100,0002.564  2,564 
3rd  100,0002.564  2,564 
taxmap/pubs/p946-026.htm#en_us_publink1000107567

Example 2.(p46)

During the year, you bought a machine (7-year property) for $4,000, office furniture (7-year property) for $1,000, and a computer (5-year property) for $5,000. You placed the machine in service in January, the furniture in September, and the computer in October. You do not elect a section 179 deduction and none of these items is qualified property for purposes of claiming a special depreciation allowance.
You placed property in service during the last three months of the year, so you must first determine if you have to use the mid-quarter convention. The total bases of all property you placed in service during the year is $10,000. The $5,000 basis of the computer, which you placed in service during the last 3 months (the fourth quarter) of your tax year, is more than 40% of the total bases of all property ($10,000) you placed in service during the year. Therefore, you must use the mid-quarter convention for all three items.
You refer to the MACRS Percentage Table Guide in Appendix A to determine which table you should use under the mid-quarter convention. The machine is 7-year property placed in service in the first quarter, so you use Table A-2. The furniture is 7-year property placed in service in the third quarter, so you use Table A-4. Finally, because the computer is 5-year property placed in service in the fourth quarter, you use Table A-5. Knowing what table to use for each property, you figure the depreciation for the first 2 years as follows.
Year Property Basis Percentage Deduction
1stMachine$4,00025.00$1,000 
2ndMachine  4,00021.43 857 
1stFurniture  1,00010.71 107 
2ndFurniture  1,00025.51 255 
1stComputer  5,000 5.00 250 
2ndComputer  5,00038.00 1,900 
taxmap/pubs/p946-026.htm#en_us_publink1000107568

Sale or Other Disposition Before the Recovery Period Ends(p46)


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Sale or Other Disposition Before the Recovery Period Ends

If you sell or otherwise dispose of your property before the end of its recovery period, your depreciation deduction for the year of the disposition will be only part of the depreciation amount for the full year. You have disposed of your property if you have permanently withdrawn it from use in your business or income-producing activity because of its sale, exchange, retirement, abandonment, involuntary conversion, or destruction. After you figure the full-year depreciation amount, figure the deductible part using the convention that applies to the property.
taxmap/pubs/p946-026.htm#en_us_publink1000107569

Half-year convention used.(p46)


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For property for which you used a half-year convention, the depreciation deduction for the year of the disposition is half the depreciation determined for the full year.
taxmap/pubs/p946-026.htm#en_us_publink1000107570

Mid-quarter convention used.(p47)


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For property for which you used the mid-quarter convention, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter in which you disposed of the property.
Quarter Percentage
First12.5%
Second37.5
Third62.5
Fourth87.5
taxmap/pubs/p946-026.htm#en_us_publink1000107571

Example.(p47)

On December 2, 2006, you placed in service an item of 5-year property costing $10,000. You did not claim a section 179 deduction and the property does not qualify for a special depreciation allowance. Your unadjusted basis for the property was $10,000. You used the mid-quarter convention because this was the only item of business property you placed in service in 2006 and it was placed in service during the last 3 months of your tax year. Your property is in the 5-year property class, so you used Table A-5 to figure your depreciation deduction. Your deductions for 2006, 2007, and 2008 were $500 (5% of $10,000), $3,800 (38% of $10,000), and $2,280 (22.80% of $10,000). You disposed of the property on April 6, 2009. To determine your depreciation deduction for 2009, first figure the deduction for the full year. This is $1,368 (13.68% of $10,000). April is in the second quarter of the year, so you multiply $1,368 by 37.5% to get your depreciation deduction of $513 for 2009.
taxmap/pubs/p946-026.htm#en_us_publink1000107572

Mid-month convention used.(p47)


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If you dispose of residential rental or nonresidential real property, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by a fraction. The numerator of the fraction is the number of months (including partial months) in the year that the property is considered in service. The denominator is 12.
taxmap/pubs/p946-026.htm#en_us_publink1000107573

Example.(p47)

On July 2, 2007, you purchased and placed in service residential rental property. The property cost $100,000, not including the cost of land. You used Table A-6 to figure your MACRS depreciation for this property. You sold the property on March 2, 2009. You file your tax return based on the calendar year.
A full year of depreciation for 2009 is $3,636. This is $100,000 multiplied by .03636 (the percentage for the seventh month of the third recovery year) from Table A-6. You then apply the mid-month convention for the 21/2 months of use in 2009. Treat the month of disposition as one-half month of use. Multiply $3,636 by the fraction, 2.5 over 12, to get your 2009 depreciation deduction of $757.50.
taxmap/pubs/p946-026.htm#en_us_publink1000107574

Figuring the Deduction Without Using the Tables(p47)


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Instead of using the rates in the percentage tables to figure your depreciation deduction, you can figure it yourself. Before making the computation each year, you must reduce your adjusted basis in the property by the depreciation claimed the previous year.
EIC
Figuring MACRS deductions without using the tables generally will result in a slightly different amount than using the tables.
taxmap/pubs/p946-026.htm#en_us_publink1000107576

Declining Balance Method(p47)


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Declining Balance Method

When using a declining balance method, you apply the same depreciation rate each year to the adjusted basis of your property. You must use the applicable convention for the first tax year and you must switch to the straight line method beginning in the first year for which it will give an equal or greater deduction. The straight line method is explained later.
You figure depreciation for the year you place property in service as follows.
  1. Multiply your adjusted basis in the property by the declining balance rate.
  2. Apply the applicable convention.
You figure depreciation for all other years (before the year you switch to the straight line method) as follows.
  1. Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years.
  2. Multiply this new adjusted basis by the same declining balance rate used in earlier years.
If you dispose of property before the end of its recovery period, see Using the Applicable Convention, later, for information on how to figure depreciation for the year you dispose of it.
Figuring depreciation under the declining balance method and switching to the straight line method is illustrated in Example 1, later, under Examples.
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Declining balance rate.(p47)


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You figure your declining balance rate by dividing the specified declining balance percentage (150% or 200% changed to a decimal) by the number of years in the property's recovery period. For example, for 3-year property depreciated using the 200% declining balance method, divide 2.00 (200%) by 3 to get 0.6667, or a 66.67% declining balance rate. For 15-year property depreciated using the 150% declining balance method, divide 1.50 (150%) by 15 to get 0.10, or a 10% declining balance rate.
The following table shows the declining balance rate for each property class and the first year for which the straight line method gives an equal or greater deduction.
Property Class Method Declining Balance Rate Year
3-year200% DB 66.667%3rd
5-year200% DB40.04th
7-year200% DB 28.5715th
10-year200% DB20.07th
15-year150% DB10.07th
20-year150% DB 7.59th
taxmap/pubs/p946-026.htm#en_us_publink1000107578

Straight Line Method(p48)


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When using the straight line method, you apply a different depreciation rate each year to the adjusted basis of your property. You must use the applicable convention in the year you place the property in service and the year you dispose of the property.
You figure depreciation for the year you place property in service as follows.
  1. Multiply your adjusted basis in the property by the straight line rate.
  2. Apply the applicable convention.
You figure depreciation for all other years (including the year you switch from the declining balance method to the straight line method) as follows.
  1. Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years (under any method).
  2. Determine the depreciation rate for the year.
  3. Multiply the adjusted basis figured in (1) by the depreciation rate figured in (2).
If you dispose of property before the end of its recovery period, see Using the Applicable Convention, later, for information on how to figure depreciation for the year you dispose of it.
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Straight line rate.(p48)


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You determine the straight line depreciation rate for any tax year by dividing the number 1 by the years remaining in the recovery period at the beginning of that year. When figuring the number of years remaining, you must take into account the convention used in the year you placed the property in service. If the number of years remaining is less than 1, the depreciation rate for that tax year is 1.0 (100%).
taxmap/pubs/p946-026.htm#en_us_publink1000107580

Using the Applicable Convention(p48)


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Applicable Convention

The applicable convention (discussed earlier under Which Convention Applies) affects how you figure your depreciation deduction for the year you place your property in service and for the year you dispose of it. It determines how much of the recovery period remains at the beginning of each year, so it also affects the depreciation rate for property you depreciate under the straight line method. See Straight line rate in the previous discussion. Use the applicable convention as explained in the following discussions.
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Half-year convention.(p48)


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If this convention applies, you deduct a half-year of depreciation for the first year and the last year that you depreciate the property. You deduct a full year of depreciation for any other year during the recovery period.
Figure your depreciation deduction for the year you place the property in service by dividing the depreciation for a full year by 2. If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final 6 months of the recovery period is the amount of your unrecovered basis in the property.
taxmap/pubs/p946-026.htm#en_us_publink1000107582

Mid-quarter convention.(p48)


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If this convention applies, the depreciation you can deduct for the first year you depreciate the property depends on the quarter in which you place the property in service.
A quarter of a full 12-month tax year is a period of 3 months. The first quarter in a year begins on the first day of the tax year. The second quarter begins on the first day of the fourth month of the tax year. The third quarter begins on the first day of the seventh month of the tax year. The fourth quarter begins on the first day of the tenth month of the tax year. A calendar year is divided into the following quarters.
Quarter Months
FirstJanuary, February, March
SecondApril, May, June
ThirdJuly, August, September
FourthOctober, November, December
Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by the percentage listed below for the quarter you place the property in service.
Quarter Percentage
First 87.5%
Second62.5
Third37.5
Fourth12.5
If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter you dispose of the property.
Quarter Percentage
First12.5%
Second37.5
Third62.5
Fourth87.5
If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final quarter of the recovery period is the amount of your unrecovered basis in the property.
taxmap/pubs/p946-026.htm#en_us_publink1000107583

Mid-month convention.(p48)


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If this convention applies, the depreciation you can deduct for the first year that you depreciate the property depends on the month in which you place the property in service. Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by a fraction. The numerator of the fraction is the number of full months in the year that the property is in service plus 1/2 (or 0.5). The denominator is 12.
If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final month of the recovery period is the amount of your unrecovered basis in the property.
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Example.(p49)

You use the calendar year and place nonresidential real property in service in August. The property is in service 4 full months (September, October, November, and December). Your numerator is 4.5 (4 full months plus 0.5). You multiply the depreciation for a full year by 4.5/12, or 0.375.
taxmap/pubs/p946-026.htm#en_us_publink1000107585

Examples(p49)


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The following examples show how to figure depreciation under MACRS without using the percentage tables. Figures are rounded for purposes of the examples. Assume for all the examples that you use a calendar year as your tax year.
taxmap/pubs/p946-026.htm#en_us_publink1000107586

Example 1—200% DB method and half-year convention.(p49)

In February, you placed in service depreciable property with a 5-year recovery period and a basis of $1,000. You do not elect to take the section 179 deduction and the property does not qualify for a special depreciation allowance. You use GDS and the 200% declining balance (DB) method to figure your depreciation. When the straight line (SL) method results in an equal or larger deduction, you switch to the SL method. You did not place any property in service in the last 3 months of the year, so you must use the half-year convention.
First year. You figure the depreciation rate under the 200% DB method by dividing 2 (200%) by 5 (the number of years in the recovery period). The result is 40%. You multiply the adjusted basis of the property ($1,000) by the 40% DB rate. You apply the half-year convention by dividing the result ($400) by 2. Depreciation for the first year under the 200% DB method is $200.
You figure the depreciation rate under the straight line (SL) method by dividing 1 by 5, the number of years in the recovery period. The result is 20%.You multiply the adjusted basis of the property ($1,000) by the 20% SL rate. You apply the half-year convention by dividing the result ($200) by 2. Depreciation for the first year under the SL method is $100.
The DB method provides a larger deduction, so you deduct the $200 figured under the 200% DB method.
Second year. You reduce the adjusted basis ($1,000) by the depreciation claimed in the first year ($200). You multiply the result ($800) by the DB rate (40%). Depreciation for the second year under the 200% DB method is $320.
You figure the SL depreciation rate by dividing 1 by 4.5, the number of years remaining in the recovery period. (Based on the half-year convention, you used only half a year of the recovery period in the first year.) You multiply the reduced adjusted basis ($800) by the result (22.22%). Depreciation under the SL method for the second year is $178.
The DB method provides a larger deduction, so you deduct the $320 figured under the 200% DB method.
Third year. You reduce the adjusted basis ($800) by the depreciation claimed in the second year ($320). You multiply the result ($480) by the DB rate (40%). Depreciation for the third year under the 200% DB method is $192.
You figure the SL depreciation rate by dividing 1 by 3.5. You multiply the reduced adjusted basis ($480) by the result (28.57%). Depreciation under the SL method for the third year is $137.
The DB method provides a larger deduction, so you deduct the $192 figured under the 200% DB method.
Fourth year. You reduce the adjusted basis ($480) by the depreciation claimed in the third year ($192). You multiply the result ($288) by the DB rate (40%). Depreciation for the fourth year under the 200% DB method is $115.
You figure the SL depreciation rate by dividing 1 by 2.5. You multiply the reduced adjusted basis ($288) by the result (40%). Depreciation under the SL method for the fourth year is $115.
The SL method provides an equal deduction, so you switch to the SL method and deduct the $115.
Fifth year. You reduce the adjusted basis ($288) by the depreciation claimed in the fourth year ($115) to get the reduced adjusted basis of $173. You figure the SL depreciation rate by dividing 1 by 1.5. You multiply the reduced adjusted basis ($173) by the result (66.67%). Depreciation under the SL method for the fifth year is $115.
Sixth year. You reduce the adjusted basis ($173) by the depreciation claimed in the fifth year ($115) to get the reduced adjusted basis of $58. There is less than one year remaining in the recovery period, so the SL depreciation rate for the sixth year is 100%. You multiply the reduced adjusted basis ($58) by 100% to arrive at the depreciation deduction for the sixth year ($58).
taxmap/pubs/p946-026.htm#en_us_publink1000107587

Example 2—SL method and mid-month convention.(p49)

In January, you bought and placed in service a building for $100,000 that is nonresidential real property with a recovery period of 39 years. The adjusted basis of the building is its cost of $100,000. You use GDS, the straight line (SL) method, and the mid-month convention to figure your depreciation.
First year. You figure the SL depreciation rate for the building by dividing 1 by 39 years. The result is .02564. The depreciation for a full year is $2,564 ($100,000 × .02564). Under the mid-month convention, you treat the property as placed in service in the middle of January. You get 11.5 months of depreciation for the year. Expressed as a decimal, the fraction of 11.5 months divided by 12 months is .958. Your first-year depreciation for the building is $2,456 ($2,564 × .958).
Second year. You subtract $2,456 from $100,000 to get your adjusted basis of $97,544 for the second year. The SL rate is .02629. This is 1 divided by the remaining recovery period of 38.042 years (39 years reduced by 11.5 months or .958 year). Your depreciation for the building for the second year is $2,564 ($97,544 × .02629).
Third year. The adjusted basis is $94,980 ($97,544 − $2,564). The SL rate is .027 (1 divided by 37.042 remaining years). Your depreciation for the third year is $2,564 ($94,980 × .027).
taxmap/pubs/p946-026.htm#en_us_publink1000107588

Example 3—200% DB method and mid-quarter convention.(p50)

During the year, you bought and placed in service in your business the following items.
Item Month Placed
in Service
Cost
SafeJanuary$4,000
Office furnitureSeptember1,000
Computer (not listed property)October5,000
You do not elect a section 179 deduction and these items do not qualify for a special depreciation allowance. You use GDS and the 200% declining balance (DB) method to figure the depreciation. The total bases of all property you placed in service this year is $10,000. The basis of the computer ($5,000) is more than 40% of the total bases of all property placed in service during the year ($10,000), so you must use the mid-quarter convention. This convention applies to all three items of property. The safe and office furniture are 7-year property and the computer is 5-year property.
First and second year depreciation for safe. The 200% DB rate for 7-year property is .28571. You determine this by dividing 2.00 (200%) by 7 years. The depreciation for the safe for a full year is $1,143 ($4,000 × .28571). You placed the safe in service in the first quarter of your tax year, so you multiply $1,143 by 87.5% (the mid-quarter percentage for the first quarter). The result, $1,000, is your deduction for depreciation on the safe for the first year.
For the second year, the adjusted basis of the safe is $3,000. You figure this by subtracting the first year's depreciation ($1,000) from the basis of the safe ($4,000). Your depreciation deduction for the second year is $857 
($3,000 × .28571).
First and second year depreciation for furniture. The furniture is also 7-year property, so you use the same 200% DB rate of .28571. You multiply the basis of the furniture ($1,000) by .28571 to get the depreciation of $286 for the full year. You placed the furniture in service in the third quarter of your tax year, so you multiply $286 by 37.5% (the mid-quarter percentage for the third quarter). The result, $107, is your deduction for depreciation on the furniture for the first year.
For the second year, the adjusted basis of the furniture is $893. You figure this by subtracting the first year's depreciation ($107) from the basis of the furniture ($1,000). Your depreciation for the second year is $255 ($893 × .28571).
First and second year depreciation for computer. The 200% DB rate for 5-year property is .40. You determine this by dividing 2.00 (200%) by 5 years. The depreciation for the computer for a full year is $2,000 ($5,000 × .40). You placed the computer in service in the fourth quarter of your tax year, so you multiply the $2,000 by 12.5% (the mid-quarter percentage for the fourth quarter). The result, $250, is your deduction for depreciation on the computer for the first year.
For the second year, the adjusted basis of the computer is $4,750. You figure this by subtracting the first year's depreciation ($250) from the basis of the computer ($5,000). Your depreciation deduction for the second year is $1,900 ($4,750 × .40).
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Example 4—200% DB method and half-year convention.(p50)

Last year, in July, you bought and placed in service in your business a new item of 7-year property. This was the only item of property you placed in service last year. The property cost $39,000 and you elected a $24,000 section 179 deduction. You also took a special depreciation allowance of $7,500. Your unadjusted basis for the property is $7,500. Because you did not place any property in service in the last 3 months of your tax year, you used the half-year convention. You figured your deduction using the percentages in Table A-1 for 7-year property. Last year, your depreciation was $1,072 ($7,500 × 14.29%).
In July of this year, your property was vandalized. You had a deductible casualty loss of $3,000. You spent $3,500 to put the property back in operational order. Your adjusted basis at the end of this year is $6,928. You figured this by first subtracting the first year's depreciation ($1,072) and the casualty loss ($3,000) from the unadjusted basis of $7,500. To this amount ($3,428), you then added the $3,500 repair cost.
You cannot use the table percentages to figure your depreciation for this property for this year because of the adjustments to basis. You must figure the deduction yourself. You determine the DB rate by dividing 2.00 (200%) by 7 years. The result is .28571 or 28.571%. You multiply the adjusted basis of your property ($6,928) by the declining balance rate of .28571 to get your depreciation deduction of $1,979 for this year.
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Figuring the Deduction for Property Acquired in a Nontaxable Exchange(p50)


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If your property has a carryover basis because you acquired it in a nontaxable transfer such as a like-kind exchange or involuntary conversion, you must generally figure depreciation for the property as if the transfer had not occurred. However, see Like-kind exchanges and involuntary conversions, earlier, in chapter 3 under How Much Can You Deduct and Property Acquired in a Like-kind Exchange or Involuntary Conversion, next.
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Property Acquired in a Like-kind Exchange or Involuntary Conversion(p51)


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Property Acquired in a Like-kind Exchange or Involuntary Conversion

You generally must depreciate the carryover basis of property acquired in a like-kind exchange or involuntary conversion over the remaining recovery period of the property exchanged or involuntarily converted. You also generally continue to use the same depreciation method and convention used for the exchanged or involuntarily converted property. This applies only to acquired property with the same or a shorter recovery period and the same or more accelerated depreciation method than the property exchanged or involuntarily converted. The excess basis (the part of the acquired property's basis that exceeds its carryover basis), if any, of the acquired property is treated as newly placed in service property.
For acquired property that has a longer recovery period or less accelerated depreciation method than the exchanged or involuntarily converted property, you generally must depreciate the carryover basis of the acquired property as if it were placed in service in the same tax year as the exchanged or involuntarily converted property. You also generally continue to use the longer recovery period and less accelerated depreciation method of the acquired property.
If the MACRS property you acquired in the exchange or involuntary conversion is qualified property, discussed earlier in chapter 3 under What Is Qualified Property, you can claim a special depreciation allowance on the carryover basis.
Special rules apply to vehicles acquired in a trade-in. For information on how to figure depreciation for a vehicle acquired in a trade-in that is subject to the passenger automobile limits, see Deductions For Passenger Automobiles Acquired in a Trade-in under Do the Passenger Automobile Limits Apply in chapter 5.
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Election out.(p51)
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Instead of using the above rules, you can elect, for depreciation purposes, to treat the adjusted basis of the exchanged or involuntarily converted property as if disposed of at the time of the exchange or involuntary conversion. Treat the carryover basis and excess basis, if any, for the acquired property as if placed in service the later of the date you acquired it or the time of the disposition of the exchanged or involuntarily converted property. The depreciable basis of the new property is the adjusted basis of the exchanged or involuntarily converted property plus any additional amount you paid for it. The election, if made, applies to both the acquired property and the exchanged or involuntarily converted property. This election does not affect the amount of gain or loss recognized on the exchange or involuntary conversion.
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When to make the election.(p51)
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You must make the election on a timely filed return (including extensions) for the year of replacement. The election must be made separately by each person acquiring replacement property. In the case of a partnership, S corporation, or consolidated group, the election is made by the partnership, by the S corporation, or by the common parent of a consolidated group, respectively. Once made, the election may not be revoked without IRS consent.
For more information and special rules, see the Instructions for Form 4562.
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Property Acquired in a Nontaxable Transfer(p51)


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Property Acquired in a Nontaxable Transfer

You must depreciate MACRS property acquired by a corporation or partnership in certain nontaxable transfers over the property's remaining recovery period in the transferor's hands, as if the transfer had not occurred. You must continue to use the same depreciation method and convention as the transferor. You can depreciate the part of the property's basis that exceeds its carryover basis (the transferor's adjusted basis in the property) as newly purchased MACRS property.
The nontaxable transfers covered by this rule include the following.
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Figuring the Deduction for a Short Tax Year(p51)


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You cannot use the MACRS percentage tables to determine depreciation for a short tax year. A short tax year is any tax year with less than 12 full months. This section discusses the rules for determining the depreciation deduction for property you place in service or dispose of in a short tax year. It also discusses the rules for determining depreciation when you have a short tax year during the recovery period (other than the year the property is placed in service or disposed of).
For more information on figuring depreciation for a short tax year, see Revenue Procedure 89-15, 1989-1 C.B. 816.
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Using the Applicable Convention in a Short Tax Year(p51)


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Applicable Convention in a Short Tax Year

The applicable convention establishes the date property is treated as placed in service and disposed of. Depreciation is allowable only for that part of the tax year the property is treated as in service. The recovery period begins on the placed in service date determined by applying the convention. The remaining recovery period at the beginning of the next tax year is the full recovery period less the part for which depreciation was allowable in the first tax year.
The following discussions explain how to use the applicable convention in a short tax year.
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Mid-month convention.(p51)


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Under the mid-month convention, you always treat your property as placed in service or disposed of on the midpoint of the month it is placed in service or disposed of. You apply this rule without regard to your tax year.
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Half-year convention.(p52)


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Under the half-year convention, you treat property as placed in service or disposed of on the midpoint of the tax year it is placed in service or disposed of.
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First or last day of month.(p52)
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For a short tax year beginning on the first day of a month or ending on the last day of a month, the tax year consists of the number of months in the tax year. If the short tax year includes part of a month, you generally include the full month in the number of months in the tax year. You determine the midpoint of the tax year by dividing the number of months in the tax year by 2. For the half-year convention, you treat property as placed in service or disposed of on either the first day or the midpoint of a month.
For example, a short tax year that begins on June 20 and ends on December 31 consists of 7 months. You use only full months for this determination, so you treat the tax year as beginning on June 1 instead of June 20. The midpoint of the tax year is the middle of September (31/2 months from the beginning of the tax year). You treat property as placed in service or disposed of on this midpoint.
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Example.(p52)

Tara Corporation, a calendar year taxpayer, was incorporated on March 15. For purposes of the half-year convention, it has a short tax year of 10 months, ending on December 31, 2009. During the short tax year, Tara placed property in service for which it uses the half-year convention. Tara treats this property as placed in service on the first day of the sixth month of the short tax year, or August 1, 2009.
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Not on first or last day of month.(p52)
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For a short tax year not beginning on the first day of a month and not ending on the last day of a month, the tax year consists of the number of days in the tax year. You determine the midpoint of the tax year by dividing the number of days in the tax year by 2. For the half-year convention, you treat property as placed in service or disposed of on either the first day or the midpoint of a month. If the result of dividing the number of days in the tax year by 2 is not the first day or the midpoint of a month, you treat the property as placed in service or disposed of on the nearest preceding first day or midpoint of a month.
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Mid-quarter convention.(p52)


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To determine if you must use the mid-quarter convention, compare the basis of property you place in service in the last 3 months of your tax year to that of property you place in service during the full tax year. The length of your tax year does not matter. If you have a short tax year of 3 months or less, use the mid-quarter convention for all applicable property you place in service during that tax year.
You treat property under the mid-quarter convention as placed in service or disposed of on the midpoint of the quarter of the tax year in which it is placed in service or disposed of. Divide a short tax year into 4 quarters and determine the midpoint of each quarter.
For a short tax year of 4 or 8 full calendar months, determine quarters on the basis of whole months. The midpoint of each quarter is either the first day or the midpoint of a month. Treat property as placed in service or disposed of on this midpoint.
To determine the midpoint of a quarter for a short tax year of other than 4 or 8 full calendar months, complete the following steps.
  1. Determine the number of days in your short tax year.
  2. Determine the number of days in each quarter by dividing the number of days in your short tax year 
    by 4.
  3. Determine the midpoint of each quarter by dividing the number of days in each quarter by 2.
If the result of (3) gives you a midpoint of a quarter that is on a day other than the first day or midpoint of a month, treat the property as placed in service or disposed of on the nearest preceding first day or midpoint of that month.
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Example.(p52)

Tara Corporation, a calendar year taxpayer, was incorporated and began business on March 15. It has a short tax year of 91/2 months, ending on December 31. During December, it placed property in service for which it must use the mid-quarter convention. This is a short tax year of other than 4 or 8 full calendar months, so it must determine the midpoint of each quarter.
  1. First, it determines that its short tax year beginning March 15 and ending December 31 consists of 292 days.
  2. Next, it divides 292 by 4 to determine the length of each quarter, 73 days.
  3. Finally, it divides 73 by 2 to determine the midpoint of each quarter, the 37th day.
The following table shows the quarters of Tara Corporation's short tax year, the midpoint of each quarter, and the date in each quarter that Tara must treat its property as placed in service.
Quarter Midpoint Placed in Service
3/15 – 5/26 4/20 4/15
5/27 – 8/077/02 7/01
8/08 – 10/199/13 9/01
10/20 – 12/3111/25 11/15
The last quarter of the short tax year begins on October 20, which is 73 days from December 31, the end of the tax year. The 37th day of the last quarter is November 25, which is the midpoint of the quarter. November 25 is not the first day or the midpoint of November, so Tara Corporation must treat the property as placed in service in the middle of November (the nearest preceding first day or midpoint of that month).
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Property Placed in Service in a Short  
Tax Year(p53)


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Property Placed in Service in a Short Tax Year

To figure your MACRS depreciation deduction for the short tax year, you must first determine the depreciation for a full tax year. You do this by multiplying your basis in the property by the applicable depreciation rate. Then, determine the depreciation for the short tax year. Do this by multiplying the depreciation for a full tax year by a fraction. The numerator (top number) of the fraction is the number of months (including parts of a month) the property is treated as in service during the tax year (applying the applicable convention). The denominator (bottom number) is 12. See Depreciation After a Short Tax Year, later, for information on how to figure depreciation in later years.
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Example 1—half-year convention.(p53)

Tara Corporation, with a short tax year beginning March 15 and ending December 31, placed in service on March 16 an item of 5-year property with a basis of $1,000. This is the only property the corporation placed in service during the short tax year. Tara does not elect to claim a section 179 deduction and the property does not qualify for a special depreciation allowance. The depreciation method for this property is the 200% declining balance method. The depreciation rate is 40% and Tara applies the half-year convention.
Tara treats the property as placed in service on  
August 1. The determination of this August 1 date is explained in the example illustrating the half-year convention under Using the Applicable Convention in a Short Tax Year, earlier. Tara is allowed 5 months of depreciation for the short tax year that consists of 10 months. The corporation first multiplies the basis ($1,000) by 40% (the declining balance rate) to get the depreciation for a full tax year of $400. The corporation then multiplies $400 by 5/12 to get the short tax year depreciation of $167.
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Example 2—mid-quarter convention.(p53)

Tara Corporation, with a short tax year beginning March 15 and ending on December 31, placed in service on October 16 an item of 5-year property with a basis of $1,000. Tara does not elect to claim a section 179 deduction and the property does not qualify for a special depreciation allowance. The depreciation method for this property is the 200% declining balance method. The depreciation rate is 40%. The corporation must apply the mid-quarter convention because the property was the only item placed in service that year and it was placed in service in the last 3 months of the tax year.
Tara treats the property as placed in service on September 1. This date is shown in the table provided in the example illustrating the mid-quarter convention under Using the Applicable Convention in a Short Tax Year, earlier, for property that Tara Corporation placed in service during the quarter that begins on August 8 and ends on October 19. Under MACRS, Tara is allowed 4 months of depreciation for the short tax year that consists of 10 months. The corporation first multiplies the basis ($1,000) by 40% to get the depreciation for a full tax year of $400. The corporation then multiplies $400 by 4/12 to get the short tax year depreciation of $133.
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Property Placed in Service Before a Short Tax Year(p53)


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Property Placed in Service Before a Short Tax Year

If you have a short tax year after the tax year in which you began depreciating property, you must change the way you figure depreciation for that property. If you were using the percentage tables, you can no longer use them. You must figure depreciation for the short tax year and each later tax year as explained next.
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Depreciation After a Short Tax Year(p53)


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You can use either of the following methods to figure the depreciation for years after a short tax year. You must use the method you choose consistently.
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Using the simplified method for a 12-month year.(p53)


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Under the simplified method, you figure the depreciation for a later 12-month year in the recovery period by multiplying the adjusted basis of your property at the beginning of the year by the applicable depreciation rate.
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Example.(p53)

Assume the same facts as in Example 1 under Property Placed in Service in a Short Tax Year, earlier. The Tara Corporation claimed depreciation of $167 for its short tax year. The adjusted basis on January 1 of the next year is $833 ($1,000 − $167). Tara's depreciation for that next year is 40% of $833, or $333.
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Using the simplified method for a short year.(p53)


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If a later tax year in the recovery period is a short tax year, you figure depreciation for that year by multiplying the adjusted basis of the property at the beginning of the tax year by the applicable depreciation rate, and then by a fraction. The fraction's numerator is the number of months (including parts of a month) in the tax year. Its denominator is 12.
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Using the simplified method for an early disposition.(p53)


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If you dispose of property in a later tax year before the end of the recovery period, determine the depreciation for the year of disposition by multiplying the adjusted basis of the property at the beginning of the tax year by the applicable depreciation rate and then multiplying the result by a fraction. The fraction's numerator is the number of months (including parts of a month) the property is treated as in service during the tax year (applying the applicable convention). Its denominator is 12.
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Using the allocation method for a 12-month or short tax year.(p53)


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Under the allocation method, you figure the depreciation for each later tax year by allocating to that year the depreciation attributable to the parts of the recovery years that fall within that year. Whether your tax year is a 12-month or short tax year, you figure the depreciation by determining which recovery years are included in that year. For each recovery year included, multiply the depreciation attributable to that recovery year by a fraction. The fraction's numerator is the number of months (including parts of a month) that are included in both the tax year and the recovery year. Its denominator is 12. The allowable depreciation for the tax year is the sum of the depreciation figured for each recovery year.
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Example.(p54)

Assume the same facts as in Example 1 under Property Placed in Service in a Short Tax Year, earlier. The Tara Corporation's first tax year after the short tax year is a full year of 12 months, beginning January 1 and ending December 31. The first recovery year for the 5-year property placed in service during the short tax year extends from August 1 to July 31. Tara deducted 5 months of the first recovery year on its short-year tax return. Seven months of the first recovery year and 5 months of the second recovery year fall within the next tax year. The depreciation for the next tax year is $333, which is the sum of the following.
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Using the allocation method for an early disposition.(p54)


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If you dispose of property before the end of the recovery period in a later tax year, determine the depreciation for the year of disposition by multiplying the depreciation figured for each recovery year or part of a recovery year included in the tax year by a fraction. The numerator of the fraction is the number of months (including parts of months) the property is treated as in service in the tax year (applying the applicable convention). The denominator is 12. If there is more than one recovery year in the tax year, you add together the depreciation for each recovery year.