 Income tax 2022-2023, maker's depreciation. Which convention applies? Let's do some wealth preservation with some tax preparation. Support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical, reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. Most of this information comes from publication 946 how to depreciate property tax year 2022 you can find on the IRS website irs.gov irs.gov looking at the income tax formula focused online one income remember in the first half of the income tax formula is in essence an income statement but just an outline other forms and schedules flowing into these line items one being the schedule C having business income minus business expenses the net business income from the schedule C flowing into line one income of our income tax formula the form 1040 noting that we have the schedule C which would flow into the schedule one then flow into page one form 1040 line number eight the schedule C is the profit or loss from business income statement format income minus expenses were focused on the expenses more specifically on depreciation remembering even if on a cashed based system you're going to have to do the accrual concept thing if you have depreciable property putting it on the books and then depreciating the property over the useful life needing to coincide with the categorizations and periods of depreciation provided by the tax code which may differ from accounting concepts and accounting theory as well as regulations like generally accepted accounting principles our general objective is to try to depreciate as much as we can as early as we can because that will give us the best tax benefit that's a different objective than we normally have for normal accounting that said we're continuing on with our discussion of maker's depreciation so which convention applies so now we talked about the type of property the number of years we have to depreciate over now we're going to get into conventions now remember the first thing you want to think about is just a normal depreciation straight line depreciation because conceptually that makes sense it's easy to kind of graft on to conceptual framework of a straight line depreciation where we take the depreciable property we decide how long we're going to depreciate it over divide the cost by that number of years and then simply depreciate an even amount over that time frame however we can then differentiate from that we might then want double declining kind of balance meaning we're going to depreciate in some way more upfront than in latter years and that could be beneficial from tax standpoint and makes sense from a bookkeeping standpoint because we might have property that we actually have more benefit from in the early years and then into the later years and then we might have other things that don't really coincide to bookkeeping concepts but rather our tax concepts like a 179 deduction and special depreciation then we can also ask well what happens if I buy the property in the middle of the year because obviously I'm not going to buy it on January 1st what are there any kind of conventions that we might be able to use for example might we just assume that it was bought in the middle of the year that would make it easier for a calculation to be taken rather than taking like the number of days in a year and using some kind of ratio analysis to do this calculation all right so under make it makers average conventions establish when the recovery period begins and ends so the convention you use determines the number of months for which you can claim depreciation in the year you place property in service and in the year to dispose of the property so you've got the mid month convention which is sounds you know it is in essence what it sounds like so use this convention for non-residential real property residential rental property and any railroad grading or tunnel bore so what does that mean that means for these types of property you're going to not say that I bought it on you know January or let's say February 3rd you're going to say that you bought it in the middle of February right right in the middle of the month it's a mid month convention which makes it slightly easier to calculate than if you if you're trying to break out you know each day for the calculation okay and then we've got under this convention you treat all property placed in service or disposed of during a month as placed in service or disposed of at the midpoint of the month the middle of the month this purchased or disposed of when you get rid of it or sell it or whatever you do at dispose of it this means that a one half month of depreciation is allowed for the month the property is placed in service or disposed of notice these are for the the mid month is for the big items the real estate kind of items non-residential real property residential real property and any railroad grading because you're talking about big dollar amounts the amount of depreciation for a month can be fairly significant which is why you're not using like a mid quarter convention which would even be easier to calculate or a mid year convention but they're doing the mid month convention so so your use of the mid month convention is indicated by the mm that's the label for it so if you see that mm on depreciation schedules from tax software that's what it's indicating already showing under column e uh in part three of form four five six two so now we when we think about the methods being used if it was if it was bookkeeping you might have straight line method versus double declining straight lines the baseline double declining you depreciate more upfront makers method is now going to determine the amount of years we have the class of the property which is different from bookkeeping when you have more leeway to determine it and then it will talk more about the method which is usually more of a double declining oftentimes method versus a straight line method although that's a general rule and then we're going to be depreciating it using some kind of convention now which would be and that last one was mid month versus you know mid year mid quarter or something like that all right so the next one mid quarter convention use this convention if the mid month convention does not apply and the total depreciation basis of makers property you placed in service during the last three months of the tax year excluding non-residential real property residential real property any railroad grading or tunnel bore property placed in service and disposed of in the same year and property that is being depreciated under the method other than maker makers are more than 40 percent of the total depreciable basis of all makers to a property you placed in service during the entire year okay so this gets a little bit funny because you might basically most of the other property oftentimes you might have like a mid year convention which would be the easiest kind of thing whenever you bought it during the year you're going to get half the year of depreciation now if you were going to try to manipulate this rule from the taxpayer standpoint you would say hey i'm not going to buy any equipment at the beginning of the year i'm going to buy it all at the end of the year why because if i buy if i buy all the equipment like in december then they're still going to give me six months of depreciation at that point in time even though even though i really only had one month because of a mid-year convention and that's why they might say well no we're not going to let you do that we're going to force you to use a mid-quarter convention uh in some cases so you can see how that kind of pans out under this convention you treat all property placed in service or disposed of during any quarter of the tax year as placed in service or disposed of at the midpoint of that quarter now obviously tax software is useful to to to make some of these determinations we need to know them in concept so that when people try to make those kind of more complex tax strategies we we can say okay wait you're going to run into a problem if you try to depreciate or buy everything at the end of the year thinking you're going to get a half year of depreciation for it so this means that for 12 months tax year 11 over two months of depreciation is allowed for the quarter the property is placed in service or disposed of so if you use this convention enter mq that's going to be the sign you might see change in your tax software to give you the method so it would you would see an indication usually of a maker's method double declining possibly two d's and then a mq instead of an mm which would be mid month under column e uh in part three a form 4562 caution for purposes of determining whether the mid quarter convention applies the depreciable basis of the property yet placed in service during the tax year reflects the reduction in basis for amounts expensed under section 179 and the part of the basis of property attributable to personal use so 179 can kind of confuse the you know you might think that that might confuse your calculation in terms of when you know when you're going to get the deduction because you get the 179 in period one so however it does not reflect any reduction in basis for any special depreciation allowance all right then we've got the half year convention so use this convention if neither the mid quarter convention nor the mid month mention convention applies so in actuality this is often like the default type of convention right because a lot of the equipment you put on the books if it's not real estate which means you would have the mid quarter type i mean mid month convention if it was big real estate that doesn't happen all the time if you're then you're buying other stuff machine or any equipment and stuff you would think you would have the half year convention the reason they did the half quarter convention first is because is because that would be the exception right you had the half year convention but the way to think about it would normally be okay i'm going to put this machinery or whatever on the books whenever i buy it i'm going to imagine it's going to be depreciated in the middle of the year maker's depreciation method according to the number of years they give me according to the classification of what i'm buying and then usually double declining balance oftentimes we will talk about that more later and then i'm going to assume that it was bought in the middle of the year which would be the half year convention mid year convention half year convention unless i bought a bunch of stuff at the end of the year in which case the irs would be assuming that i'm trying to take advantage of the half year or mid year convention half year convention by taking six months of depreciation when i bought it all at the end of december in which case i i'm going to have to be kicked out possibly to using like a mid a mid quarter convention or something like that possibly okay so under this convention you treat all property placed in service or disposed of during a tax year as placed in service or disposed of at the midpoint of the year so this means that for a 12 month tax year one half year of depreciation is allowed for the year the property is placed in service or disposed of if you use this convention enter h y so that might be a little confusion you might think it i mean i keep saying mid year because everything else is mid and then here they went to half year so h y but half year so you're gonna see makers usually a double d double declining balance h y half year so that's where you'd have an under column e in part three of form four five six two so see figuring the deduction for a short tax year later for information on the short tax year rules