Question 7.4: MACRS Depreciation with GDS A firm purchased and placed in s...

From Table 7-2, it may be seen that the semiconductor (electronic) manufacturing equipment has a class life of six years and a GDS recovery period of five years. The recovery rates that apply are given in Table 7-3.

TABLE 7-2

MACRS Class Lives and Recovery Periods^{a}

^{a}Partial listing abstracted from How to Depreciate Property, IRS Publication 946, Tables B-1 and B-2, 2006.

^{b}Also the GDS property class.

TABLE 7-3

GDS Recovery Rates (r_{k}) for the Six Personal Property Classes

Source: IRS Publication 946. Depreciation. Washington, D.C.: U.S. Government Printing Office, for 2006 tax returns.

^aThese rates are determined by applying the 200% DB method (with switchover to the SL method) to the recovery period with the half-year convention applied to the first and last years. Rates for each period must sum to 1.0000.

^bThese rates are determined with the 150% DB method instead of the 200% DB method (with switchover to the SL method) and are rounded off to four decimal places.

(a) The depreciation deduction, or cost-recovery allowance, that is allowable in year four (d_{4}) is 0.1152 ($100,000) = $11,520.

(b) The BV at the end of year four (BV_{4}) is the cost basis less depreciation charges in years one through four:
BV_{4} = $100,000 − $100,000(0.20 + 0.32 + 0.192 + 0.1152)
= $17,280.

(c) Accumulated depreciation through year three, d^{*}_{3}, is the sum of depreciation amounts in years one through three:
d^{*}_{3}= d_{1}+d_{2}+d_{3}
= $100,000(0.20 + 0.32 + 0.192)
= $71,200.
(d) The depreciation deduction in year five can only be (0.5)(0.1152)($100,000) = $5,760 when the equipment is disposed of prior to year six. Thus, the BV at the end of year five is BV_{4} − $5,760 = $11,520.