This article explains depreciation tables. These tables are available in Appendix A of IRS Publication 946, How to Depreciate Property.
Tax preparation software incorporates tax tables, or formulas used to calculate the allowable depreciation amounts for the farmer or rancher relative to their respective tax year in question. Likewise, stand-alone depreciation schedules created by capital management software also use these tables of formulas in deriving the correct amount of annual depreciation expense.
Example 1: Table A-1, from Appendix A, IRS Publication 946, page 70.
Armand purchased a tractor in May of 2018 for $200,000. The tractor was new, meaning Armand was the first farmer to use the tractor in a farming business. Therefore, the class life was 5 years because the tractor was new. Armand would use Table A-1 (above) to calculate his allowable depreciation because of half-year convention as the tractor was purchased in May. To calculate his 2020 depreciation, Armand goes to the row for the third year and over to the column for 5-year recovery and finds that he’s allowed 19.20 percent of the original cost or $38,400 [$200,000 x 0.1920]. Armand reports his annual depreciation value for this tractor on line 17 of IRS Form 4562, Depreciation and Amortization, as illustrated below.
Tax software will make this calculation automatically as the tax return is prepared.Table A-1, above, provides percentages to calculate the annual depreciation over a property’s class life to recover the cost of 3-, 5-, 7-, 10-, 15-, and 20-year property using 200 percent declining balance.
Example 2. Table A-2, from Appendix A, IRS Publication 946, page 71.
Eloise purchased a multi-purpose structure for her goat ranch in 2011 at a total cost of $56,000. The building was completed and placed into service in August of that year. Because she also purchased other equipment in November of that year totaling more than 40% of her entire personal property purchases, mid-quarter convention was triggered.
To calculate the allowable depreciation for the multi-purpose building, Eloise goes to the row for year 10, which aligns with tax year 2020 and moves to the right to the column for 20-year assets since the multi-purpose building has a 20-year recovery period as an agricultural building. At that intersection, Eloise sees that she’s allowed 4.46 percent of the original cost or $2,497.60 [$56,000 x 0.0446]. This number is included in the total being reported on Line 17 of IRS Form 4562.
Table A-4, below, provides percentages to calculate the annual depreciation over a property’s class life to recover the cost of 3-, 5-, 7-, 10-, 15-, and 20-year property using 150 percent declining balance placed into service in the third quarter of the taxpayer’s tax year. When comparing the two tables, readers will note the difference in percentage amounts for the respective class life recovery period and the specific year in question.
Conclusion
Appendix A of IRS Publication 946 has 27 pages of various tables from which depreciation can be calculated. This article used two of those tables as examples to illustrate the calculation. Most, if not all professional tax practitioners use software to complete client tax returns. The software will have these tables or depreciation formulas incorporated into the software when depreciation calculations are required for the accurate and complete preparation of the client’s federal income tax return.
Resources
IRS Publication 946, How to Depreciate Property, See Appendix A which begins on page 69 for various depreciation tables.
https://www.irs.gov/pub/irs-pdf/p946.pdf