Homework Tiffany Watt November 30, 2011 AC 402 – 01 Half-year Convention The half-year convention is a cost recovery convention that assumes all property is placed in service at mid-year and thus provides for a half-year’s cost recovery for that year. For example, the statutory recovery period for three-year property begins in the middle of the year an asset is placed in service and ends three years later. In practical terms, this means that taxpayers must wait an extra year to recover the cost of depreciable assets. That is, the actual write-off periods are 4, 6, 8, 11, 16, and 21 years. MACRS also allows for a half-year of cost recovery in the year of disposition or retirement. Example: Dan purchased a computer on January 2, 2011 for $2,400. The computer is considered to be a five-year class asset. The depreciation rate is 20%. Dan’s cost recovery deduction for 2011 would be computed as follows: MACRS cost recovery ($2,400 x .20) = $480 If Dan were to dispose of the computer in the fifth year cost recovery would be $138.24 ($2,400 x ½ x .
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