Thanks for the reply Delray and Lovisa.

I get your point that sage is calculating depreciation month on month basis but when I looked at the Publication 946 again I could see that the rule says "property placed in service and disposed of in the same YEAR (not month)" cannot be depreciated. Then why this is different for Sage? Am I missing something?

This is what I could see for Mid- month convention explained in Publication 946

"Under this convention, you treat all property placed in service or disposed of during a month as placed in service or disposed of at the midpoint of the month. This means that a one-half month of depreciation is allowed for the month the property is placed in service or disposed of."

As per this explanation, it seems an asset calculates half month depreciation irrespective of the day on which it is placed into service on a give month.

Correct me if I am wrong.

Again, thank you so much for your time:)

Property placed in service and disposed of in the same year will not calculate depreciation if the convention on the asset is Half year. In this case, the life is to long for half year and with the straight line mid-month method, the determination is made based on month the asset is PIS or Disposed not the whole year. See Straight Line mid-month calculation for more details of SLMM.

On a side note, I am assuming you are talking about the Tax book where assets which a life of 27.5 years I generally see entered as MF100 not SL, which would change your calculation a bit, since MF100 takes a half month in the month on being placed into service and on disposal. Then you would get 5 months instead of 6 months worth of depreciation on this asset and it would appear correctly on the 4562 on Line 19.

Hello rajeshknair,

With the depreciation method SLMM the result you are seeing is correct. This depreciation method is not a half year depreciation method but a method that determines if the asset will get depreciation for the month of service or not based on the middle of the month. If asset is placed into service between 1-15th of the month you get depreciation for that month. If you place it in service after the 15th you get depreciation first in the following month. If the asset in question was not placed into service and disposed of in the same month then it is normal that the asset will have depreciation for the months it was depreciated. If you would have used property type R and depreciation method of MF100 with the 27.5 yrs of estimated life it would have given you a half month of depreciation in the month of service and another half month for the month of disposal and full months in between. Only time again you would not have received any depreciation is when you placed asset in service and disposed of it in the same month.

Respectfully, Lovisa

Correct, that is exactly what MF100 does. MF100 is MACRS Straight line. The SLMM you quoted in your first is not a Tax method of depreciation and does not follow all the Tax rules.

MF100 with a life greater than 15 years, takes the mid-month convention as you quoted. Now if this asset had a life of 15 years, instead of 27.5, it would have a Half years convention and no depreciation would have been taken.

Longer lived assets no not get a half year convention, without the half years convention some depreciation will always be taken on an asset.

Thanks again Delray, this is helpful. 

The client wants to follow the rule "property placed in service and disposed of in the same YEAR doesn't calculate a depreciation" and not  expecting depreciation to be calculated in this instance.

Is there any exception to this rule (as per IRS) which says depreciation would be calculated in this instance. I just  wanted to give an explanation to the client. 

The rules of the asset as given, Property Type R, MF100, 27.5 years - will take depreciation if PIS date disposed in the same year. There is no answer that I can give to change it which would be in compliance to normal IRS rules. Can it be change to be half year? Yes, just changing the life to 15 years, or the method to SH would make this a half year asset, but if this asset is actually in the 27.5 life Tax class, then it need to take the depreciation.

Here is an extract from the textbook we use when teaching the Principles of Fixed Asset Accounting class offered through Sage U:

"If a business acquired and disposed of personal property in the same tax year, no depreciation is allowed for that asset (per final IRS Reg. 1.168(d)-1, effective for tax years ending after 1/30/91). For all other MACRS property, you are allowed to depreciate the property in the year of the disposition."