Question

Regarding the computation of cost recovery in the year of sale of an asset using the mid-quarter convention, indicate whether the following statements are "True" or "False".

A) If the mid-quarter convention applies, the property is treated as though it were disposed of at the midpoint of the quarter.
B) If the mid-quarter convention applies, no cost recovery deduction is allowed in the year of sale.
C) If the mid-quarter convention applies, one-quarter of the annual cost recovery deduction is allowed in the year of sale.

Answer 1

A) True

B) False

C) False

The mid-quarter convention allocates depreciation as if the asset were placed in service or disposed of at the midpoint of the quarter, allowing for varying deduction percentages.

Step-by-step explanation:

The mid-quarter convention, applied for assets placed in service during the tax year, treats the property as though it were disposed of at the midpoint of the quarter.

Hence, statement A is true.

However, statement B is false. Cost recovery deductions are allowed in the year of sale when the mid-quarter convention applies, but the amount is determined based on the depreciation percentage for the specific quarter.

Statement C is also false, as the mid-quarter convention does not specify a fixed one-quarter deduction; instead, it depends on the quarter in which the asset is placed in service or disposed of.

Understanding these principles is crucial for accurate tax calculations and reporting, ensuring compliance with the IRS guidelines.