Year-end deals may qualify for more generous tax depreciation

Year-end deals may qualify for more generous tax depreciation | Norton Rose Fulbright

December 01, 2001 | By Keith Martin in Washington, DC

YEAR-END DEALS may qualify for more generous tax depreciation.

The IRS said in November that it will give most taxpayers the option of claiming a half year worth of depreciation for assets placed in service during the remainder of this year. The government hopes this will boost investment.

Ordinarily, assets placed in service at any time during the year qualify for only a half year of tax depreciation. In the past, there was always a rush in late December to close transactions in order to enable companies to claim a half year of depreciation for assets that they owned for only a few days. Congress took steps to discourage this in 1986 by adopting a “mid-quarter convention” that reduced the depreciation that could be claimed on late-year asset purchases. Since 1986, companies that place more than 40% of their total assets for the year in service in the last quarter have been limited to only a month and a half worth of depreciation on assets they put into service in the last quarter.

In November, the IRS said in two notices that it is waiving this mid-quarter convention for the rest of 2001. Companies sometimes use odd tax years. The waiver applies to any company for whom September 11 falls in its third or fourth quarter.

Any company wanting to take advantage of the waiver must write “Election Pursuant to Notice 2001-70” across the top of the Form 4562 it files with its 2001 tax return. This is the form on which depreciation and amortization are reported.