Durna Inc., a calendar year taxpayer, made two asset purchases this year. The first purchase was a machine costing $874,000, and the second purchase was equipment costing $660,000. Both assets are 7-year recovery property. Durna placed the machine in service on March 27 and the equipment in service on December 14. How many months of MACRS depreciation is Durna allowed for each asset this year?
A) Durna is allowed six months depreciation for the machine and 1.5 months of depreciation for the equipment.
B) Durna is allowed 10.5 months depreciation for the machine and 1.5 months of depreciation for the equipment.
C) Durna is allowed 1.5 months of depreciation for both the machine and the equipment.
D) Durna is allowed six months of depreciation for both the machine and the equipment.

Question

Quizplus · Accepted Answer

To calculate the number of months of MACRS depreciation, we need to use the half-year convention. Under the half-year convention, regardless of when the asset is placed in service during the year, depreciation starts from the midpoint of the year. For 7-year recovery property, the percentage used for the first year is 14.29%.

1) Machine: Since the machine was placed in service on March 27, it was in service for 9 months in the first year (April to December). However, we can only count 6 months of depreciation due to the half-year convention. Therefore, depreciation for the machine is:

$874,000 x 14.29% x 6/12 = $62,357

2) Equipment: Since the equipment was placed in service on December 14, it was in service for 1.5 months in the first year. Therefore, depreciation for the equipment is:

$660,000 x 14.29% x 1.5/12 = $8,536

Therefore, the answer is B: Durna is allowed 10.5 months depreciation for the machine and 1.5 months of depreciation for the equipment.

Durna Inc, a Calendar Year Taxpayer, Made Two Asset Purchases This