Tax Update Blog: Permalink

« Previous · Tax Update Blog Home · Next »

The Mid-Quarter trap

December 08, 2009

While year-end asset purchases can be a great way to reduce taxes, sometimes they can backfire.

The tax law normally computes depreciation for fixed assets (other than buildings) as if they were placed in service at the mid-point of the tax year. But if more than 40% of fixed assets are placed in service in the last three months of the tax year, the assets are all treated as placed in service in the middle of the quarter in which they were purchased.

Say Joe, Inc., a calendar-year taxpayer, bought $2.4 million of new computers in July 2009 and 1,599,000 in October 2009. His depreciation for these assets for the year would be $2,399,400: $1,999,500 in "bonus" depreciation and $399,900 in regular depreciation.

But now Joe buys and installs another $2,000 computer in December. Suddenly his purchases in the last 3 months of the year are 40.0149% of fixed asset purchases for the year, and the mid-quarter convention applies. Joe's depreciation is now $2,230,525 for his 2009 additions:

- $2,000,500 in bonus depreciation
- $180,000 non-bonus depreciation for property placed in service in the third quarter, and
- $ 50,025 non-bonus depreciation for property placed in service in the fourth quarter.

The $2,000 December addition reduced depreciation expense by $168,875 for the year.

The moral: be careful in your year-end fixed asset purchases. Sometimes a little more assets can mean a lot less deductions.