What is Poplock LLC's maximum depreciation for their first year after purchasing a warehouse and land for $350,000, with $275,000 allocated to the building and $75,000 to the land, placed in service on August 12 using the mid-month convention for MACRS?
The maximum depreciation for Poplock LLC's first year can be calculated using the Modified Accelerated Cost Recovery System (MACRS) with the mid-month convention. According to the data provided, the building was allocated $275,000 and the land $75,000. The property was placed in service on August 12, meaning that only a portion of the year is eligible for depreciation.
To calculate the depreciation, we first apply the MACRS depreciation rate of 0.963% for non-residential property with a 39-year recovery period. The depreciation amount for the building would be $275,000 × 0.963% = $2,648.
Using the mid-month convention, the depreciation for the first year is based on the number of months the property is in service. Since the property was placed in service on August 12, there are 4.5 months remaining in the year. Therefore, the total depreciation for the first year would be $2,648 × 4.5 = $11,916.
In conclusion, Poplock LLC's maximum depreciation for the first year after purchasing the warehouse and land under these circumstances would be $11,916.
Understanding MACRS and Mid-Month Convention
MACRS:
The Modified Accelerated Cost Recovery System (MACRS) is a method used in the United States to calculate the depreciation expense for tax purposes. Under MACRS, fixed assets are assigned to a specific depreciation class based on their useful life, which determines the depreciation method and recovery period. Non-residential real property, such as commercial buildings, typically has a recovery period of 39 years under MACRS.
Mid-Month Convention:
The mid-month convention is a rule used for calculating depreciation that assumes all fixed asset purchases occur in the middle of the month for depreciation purposes. This simplifies the calculation of depreciation for the initial and final months of ownership. When applying the mid-month convention, a half-month of depreciation is deducted in the first and last month of an asset's useful life to account for the partial month of service.
In the case of Poplock LLC's purchase of the warehouse and land, the mid-month convention is applied to determine the depreciation for the first year. By considering the property to be placed in service on August 15, the calculations are adjusted to reflect the partial months of August and December. This results in a total depreciation expense of $11,916 for the first year.
In summary, the combination of MACRS depreciation rates and the mid-month convention allows for a more accurate calculation of depreciation expenses for fixed assets, ensuring businesses can properly account for the wear and tear of these assets over time in their financial statements.