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Depreciation: Negative depreciation calculating in a monthly client
In a monthly client where a MACRS asset is disposed of after the 6th month of the period, negative current depreciation could potentially be calculated. This is because in the year of disposition, a MACRS asset takes 6 months of depreciation.
If more than 6 months worth of depreciation has already been taken on the asset when the disposition is entered, a negative amount of current depreciation equal to the depreciation over 6 months worth will be calculated. This negative figure ensures that the current depreciation and YTD depreciation total to the correct figure for the 6 months of depreciation that is allowed.
For example, consider a MACRS asset that is disposed of in August in a calendar year client. If the client is being processed monthly, then 8 months of depreciation (January through August) will have been calculated. After the disposition is entered the asset is only entitled to 6 months of depreciation. The 2 extra months of depreciation already taken on the asset in prior months must be added back onto the asset’s basis by the application calculating negative depreciation.
More specifically, consider a MACRS asset that is generating $200 a month of depreciation in a calendar year client. By August $16,000 ($200 x 8) dollars worth of depreciation will have been taken on the asset. If the asset is then disposed of in the month of August it will then, according to MACRS regulations, be entitled to only 6 months or $1,200 of depreciation. $1,600 of depreciation has already been calculated for the asset and $400 must be added back to the basis. The application will do this by replacing the $200 that was in the
Current Depreciation
field with -$200. This effectively removes the $200 of current depreciation calculated for August and adds back the $200 calculated for July, leaving the total depreciation for the year at $1,200.