Depreciation when business use changes each year?

[Rich Carreiro]

While I (believe) I know how to depreciate something
that is used 100% for business or whose less-than-100%
use is the same each year, I'm wondering how you're
supposed to do it when the business use percentage
changes every year.

Say I had 5-year property places in service in Q1. I paid $10000 for it
and it was used 100% for business. I could go to page 71 of the 2014
Pub 946 and read off the percentages: 35%, 26%, 15.60%, 11.01%, 11.01%,
and 1.38%. So in the initial and subsequent years I'd take depreciation
of $3500, $2600, $1560, $1101, $1101, and $138 for a total of $10000 and
zero remaining basis.

If used at a constant 80%, then it is my understanding I'd apply the
same percentages to $8000 (80% of $10000) and so end up with $2800,
$2080, $1248, $881, $881, and $110 for a total of $8000 and $2000
remaining basis.

(While typing that a new question came to mind -- what happens to that
$2000 basis if the use subsequently shifts to 100% (or anything more
than 80%)? Is it "trapped" because you hit the end of the property
depreciable lifetime without depreciating away all the basis? Can the
remaining basis be somehow considered to be "put into service" when the
business use increases (like when any other previously personal asset is
put into service for business use)?)

But say you had the same item but instead of the business use being
80% the whole time it changed from year to year. Say it goes 90%, 70%,
85%, 75%, 65%, 80%.

Now what happens?

Do you compute what the depreciation would have been if it was all 100%
use and then multiply each of those years by the business use percentage
that year? For example, would you do:
$3500 * 90% = $3150
$2600 * 70% = $1820
$1560 * 85% = $1326
$1101 * 75% = $ 826
$1101 * 65% = $ 716
$ 138 * 80% = $ 110

for a total of $7948 of depreciation and $2052 of remaining basis?
Or do you do something else?

For example, on page 41 of the 2014 Pub 946 I found the algorithmic
description of 200% DB MACRS, and that says for the initial year:
1. Muliply your adjusted basis in the property by
declining balance rate.
2. Apply the applicable convention

and then for subsequent years:
1. Reduce your adjusted basis in the property
by the deprection allowed or allowable in
earlier years.
2. Multiply this new adjusted balance by the same
declining balance rate used in earlier years.

with the overriding instruction to switch to straight line
when it gives the bigger deduction.

But how does that work with a time-varying business use
percentage? What initial adjusted basis do you use? How
do you account for each year's actual business percentage?
And what basis do you use at each step?

--
Rich Carreiro rlc-...@rlcarr.com

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[MTW]

On Monday, April 13, 2015 at 8:55:04 PM UTC-7, Rich Carreiro wrote:
> While I (believe) I know how to depreciate something
> that is used 100% for business or whose less-than-100%
> use is the same each year, I'm wondering how you're
> supposed to do it when the business use percentage
> changes every year.

I have nothing to cite, but I'll tell you how I (used to) do it:

In your first example, using the table factors, I would compute depreciation as you did, then take the business use percentage (if less than 100%) of each year's calculated amount as your deduction. As to the amount of remaining basis that is therefore "trapped," I have always taken the view that this is basis allocated to PERSONAL use, and therefore isn't further useable for a business deduction. But I've seen commentaries that suggest differently, so who knows.

In your second example where you are computing declining balance depreciation by formula (rather than table factor), I would follow a similar approach: Calculate the annual depreciation amount based on 100% use, and then take the business use percentage of that as your deduction. But again, no "cites" on that.

If you post this question in the Taxprofessionals group on Yahoo, there is a guy who pretty much specializes in depreciation issues, and I'm sure he could expand on this...and maybe completely disagree with everything I just said. ;-)

MTW