MACRS Depreciation with GDS A firm purchased and placed in service a new piece of semiconductor manufacturing equipment. The cost basis for the equipment is $100,000. Determine (a) the depreciation charge permissible in the fourth year, (b) the BV at the end of the fourth year, (c) the cumulative

Question

MACRS Depreciation with GDS
A firm purchased and placed in service a new piece of semiconductor manufacturing equipment. The cost basis for the equipment is $100,000. Determine
(a) the depreciation charge permissible in the fourth year,
(b) the BV at the end of the fourth year,
(c) the cumulative depreciation through the third year,
(d) the BV at the end of the fifth year if the equipment is disposed of at that time.

Accepted Answer

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[latex]^{a}[/latex]

			Recovery Period
Asset Class	Description of Assets	Class Life	GDS^b	ADS
00.11	Office furniture and equipment	10	7	10
00.12	Information systems, including computers	6	5	5
00.22	Automobiles, taxis	3	5	5
00.23	Buses	9	5	9
00.241	Light general purpose trucks	4	5	5
00.242	Heavy general purpose trucks	6	5	6
00.26	Tractor units for use over the road	4	3	4
01.1	Agriculture	10	7	10
10.0	Mining	10	7	10
13.2	Production of petroleum and natural gas	14	7	14
13.3	Petroleum refining	16	10	16
15.0	Construction	6	5	6
22.3	Manufacture of carpets	9	5	9
24.4	Manufacture of wood products and furniture	10	7	10
28.0	Manufacture of chemicals and allied products	9.5	5	9.5
30.1	Manufacture of rubber products	14	7	14
32.2	Manufacture of cement	20	15	20
34.0	Manufacture of fabricated metal products	12	7	12
36.0	Manufacture of electronic components, products, and systems	6	5	6
37.11	Manufacture of motor vehicles	12	7	12
37.2	Manufacture of aerospace products	10	7	10
48.12	Telephone central office equipment	18	10	18
49.13	Electric utility steam production plant	28	20	28
49.21	Gas utility distribution facilities	35	20	35
79.0	Recreation	10	7	10

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

[latex]^{b}[/latex]Also the GDS property class.

TABLE 7-3

GDS Recovery Rates ([latex]r_{k}[/latex]) for the Six Personal Property Classes

Depreciation Rate for Recovery Period
Year	3-year^a	5-year^a	7-year^a	10-year^a	15-year^b	20-year^b
1	0.3333	0.2000	0.1429	0.1000	0.0500	0.0375
2	0.4445	0.3200	0.2449	0.1800	0.0950	0.0722
3	0.1481	0.1920	0.1749	0.1440	0.0855	0.0668
4	0.0741	0.1152	0.1249	0.1152	0.0770	0.0618
5		0.1152	0.0893	0.0922	0.0693	0.0571
6		0.0576	0.0892	0.0737	0.0623	0.0528
7			0.0893	0.0655	0.0590	0.0489
8			0.0446	0.0655	0.0590	0.0452
9				0.0656	0.0591	0.0447
10				0.0655	0.0590	0.0447
11				0.0328	0.0591	0.0446
12					0.0590	0.0446
13					0.0591	0.0446
14					0.0590	0.0446
15					0.0591	0.0446
16					0.0295	0.0446
17						0.0446
18						0.0446
19						0.0446
20						0.0446
21						0.0223

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 ([latex]d_{4}[/latex]) is 0.1152 ($100,000) = $11,520.

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

(c) Accumulated depreciation through year three, [latex]d^{*}_{3}[/latex], is the sum of depreciation amounts in years one through three:
[latex]d^{*}_{3}= d_{1}+d_{2}+d_{3}[/latex]
= $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 [latex]BV_{4}[/latex] − $5,760 = $11,520.

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

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