Question

Convers Corporation (calendar-year-end) acquired and placed in service the following assets during the current tax year: Machinery: original basis = $84,000; placed in service on October 25 Computer equipment: original basis = $24,000; placed in service on February 3 Used delivery truck*: original basis = $37,000; placed in service on March 17 Furniture: original basis = $164,000; placed in service on December 22 *The delivery truck is not a luxury automobile. What is the applicable depreciation convention for the assets Convers placed in service this year assuming Convers elects out of bonus depreciation and does not take §179 expense?

• 200% declining balance

• Mid-quarter convention

• Mid-month convention

• Full-month convention

• Half-year convention

Answer 1

In order to determine the applicable Depreciation convention for the assets placed in service this year, calculate the percentage of assets placed in service during the last quarter of the year by Convers Corporation to that of the total assets placed during the year.

Assets placed in service during the last quarter of the year:-

Asset	Date placed in service	Original cost
Machinery	October 25	84,000
Furniture	December 22	164,000
	Total	248,000

Assets placed in service during the entire year:-

Asset	Date placed in service	Original cost
Machinery	October 25	84,000
Computer equipment	February 3	24,000
Used Truck	March 17	37,000
Furniture	December 22	164,000
	Total	309,000

The percentage of assets placed during the last quarter of the year as a percentage of total assets placed during the year is :-

$248,000/$309,000 = 80.26%

Per IRS, the Mid-quarter convention should be used to depreciate the assets if the company places more than 40% of the assets during the last quarter of the year. As can be seen above, since the company has placed more than 40% of assets during the last quarter of the year and also since Convers elects out of bonus depreciation and does not take Section 179 depreciation, the applicable convention is "Mid-Quarter Convention".

Hence, the correct answer is Option B - Mid Quarter convention.

Option A is incorrect as 200% declining balance method is not applicable in this scenario.

Option C is incorrect as mid month convention is generally used for non residential real property, residential rental property and railroad grading or tunnel bore.

Option D is incorrect as full month convention is not a valid convention method.

Option E is incorrect as the mid quarter convention is applicable in the above scenario as against the half year convention since the company has placed more than 40% of assets during the last quarter of the year.