MACRS Depreciation: Half-Year (HY) Calculation - YouTube

Hi team! We are back today - we are looking  at how to calculate the half year convention  

MACRS depreciation numbers. We just have a quick  example here - so a company placed in service the  

following assets in 2022, so in quarter 1 which  was January 20th, they had a $34,000 asset with  

a 5 year life and quarter 3 August 23rd they had  a $57,000 asset, again with a 5 year life and then  

quarter 4 October 3rd, $1,000, 7 year life.  There's a separate video explaining half year  

versus mid-quarter - if you already watched that  video, you can maybe easily tell that only $1,000  

in quarter 4 out of this whole total would be less  than 40% and that's what pushed us into half year.  

So they want us to calculate depreciation for  2022 which is the year it was placed in service  

and then they also want us to calculate  depreciation for 2025 - a couple of years out.  

So I want to pull up the MACRS depreciation tables  and these come from an IRS publication, so you  

will need to be careful - if you pull them from  the publication - you can see right here they come  

from pub 946. They do release a new publication  every year but it's always the same - it's always  

the same. It's been the same since the major tax  rewrite in 1986, so I guess that's not always,  

but it's been a long long time, so I just usually  will do a google search and see: did anything  

change in the tax code? And then sometimes I'll  reuse my old tables. So when you're looking at the  

tables you'll see this one right up here says half  year convention, so I'll just put a little border  

around it. You do want to be careful that you're  not accidentally getting into a different one,  

so if you look down here you can see this  is the mid-quarter first quarter convention,  

and then if you scroll down you can see the rest  of the tables are there. So we're going to focus  

here on the half year convention. We have the  years down here on the left, so these years are  

when the asset itself - which year of depreciation  we're in of the asset and then these tables up  

here - so these years - this year indicates what  the useful life of the asset is. So for example  

for our first one we have a 5-year asset and so  that is the tape - the column that we're going  

to use rather, so if we jump back over here we  have this - I'm going to just copy this I think  

and scooch it right down here and then I'm just  going to add to it. So what we're going to do  

is take the next column. We really want to take  is the table the MACRS table percentage and then  

we're just going to multiply the percentage out  to get our current year depreciation, so I'm just  

going to add those couple of cells and then we'll  do a total when we're done here, so for the first  

one we have this 5-year asset - we're calculating  depreciation in the 1st year - 2022 - that's the  

1st year so I'm going to jump back over here  and see what is depreciation in the 1st year  

of a 5 year asset so we'll be right here in  a 5 year and the 1st year is 20%, so 20%,  

so over here we're going to put 0.2 - that's 20  percent and I'm going to fix my excel so that you  

can see that it is indeed 20% and then we're going  to take the cost total cost and multiply by the  

20% and that gives us current year depreciation.  The table is automatically adjusting for it to be  

half of a year of depreciation so you don't have  to do anything fancy - the table does all the hard  

lifting for us which is amazing. So then for this  second asset, it's really the same thing, so it's  

a 5-year asset, it's the first year of the asset  so 5 year, year 1 - that's still going to be 20%,  

so this is going to be 0.2 and we're going  to just carry this down, so this is going to  

be $57,000 times the 20% and then for the last  one we have a 7 year asset in the first year,  

so we're just going to scooch this little box  over - maybe, if i can grab it, nope - we're  

going to delete it and draw a new one! So we're  going to take a 7 year asset in the first year so  

we're just going to slide over a column and that's  going to be 14.29%, so this is going to be 0.1429  

and that means we're going to take this and we're  going to multiply it by the total cost and that's  

going to give us depreciation for that asset,  so when you're done you're going to just add all  

of those together and this will give you total  depreciation for the whole year of $18,342.90.  

We could format all of these so they look the  same. Okay, so that's year one depreciation but  

assets we know we have to calculate them for many  years unless we only own them for the first year,  

so we want to look at depreciation a few years out  - 2025 - and see what that would look like so I'm  

just going to steal this whole entire table and  move it down here and then I'm going to take out  

these percentages and plug in new ones. So for  2025 we placed these assets in service in 2022,  

so let's focus on this 5-year asset first. So  we're going to jump back over to the table,  

so this - let me get rid of this little box.  Okay so this first year was 2022, this is 2023,  

2024, 2025 is year 4 so I like to actually  physically count down my years because you  

might think -25, 22- that's 3 years but that's  a lie, so 2022 is year one, right? Let me just  

jump back to our example really quick so we  started in 2022 and then we we're going up to  

calculate depreciation for 2025 so I just start  in year one - this is 2022, this is 2023, 2024,  

2025. So I literally will point to the years and  just count down my years to figure out where I  

am in the table. So this is going to be 11.52% so  this is 0.1152 and same thing for the next asset,  

right? Because they're both 5-year assets  so they're treated exactly the same  

and then same thing for the 7 year asset, so it's  2022 up to 2025 so we're going to delete this box,  

maybe, oh here - it'll let me slide it now  - but I'll just show you so 2022, 23, 24, 25  

and then we slide over to the seven year column  this time so this one's going to be 0.1249  

so 0.1249 and we have that set to calculate  automatically for us which is great, but again  

just to show you the calculation you're just going  to take the cost times that MACRS table to get  

your current year depreciation, so this would be  our total depreciation reported on the tax return  

in 2025, this would be the total depreciation  reported on the tax return back in 2022.  

The last thing I wanted to mention before we  part ways here is that once an asset is a half  

year asset you'll see it's always a half year  asset, so we're not changing, right? We're not  

jumping into mid quarter and then back to half  year and then jumping all around. Once something  

is identified as a half year asset it is always  a half year asset so it was a half year asset  

back here in year 1 that $3,000 asset - it's  also half year asset in year 2, in year 3, year  

4all the way until it's done being depreciated.  You'll see that it goes into 8 years and that's  

because we do half of a year in the first  year and then half of a year in the last year,  

so it's really seven years but split half and  half, which will lead to 8 years. Same thing  

for 5 - goes over 6 years so because it's half  year right? So it's really splitting that 1 year  

into 2 parts. All right team I think that's it  for half year depreciation and then if you're  

interested in how to use the mid quarter  tables go ahead and check out that video.