Current depreciation by Turbo Tax

Technical topics regarding tax preparation.
#1
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The following is transcribed from Turbo Tax PDF file received from a client:

Depreciation and Amortization Report
Tax Year 2018
Date in service: 08/01/2013
Cost: 165,000
Land: 0
Business use %: 100%
Section 179: 0
Special depreciation allowance: 0
Depreciation basis: 165,000
Life: 27.5
Method/Convention: SL/MM
Prior depreciation: 24,465
Current depreciation: 6077


For the life of me, I cannot determine how Turbo Tax computed the current depreciation. My number is simple 16500/27.5 = 6000. Even the 77 difference is small, I feel there is something in it but I could not figure it out.
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#2
AlexCPA  
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Using the mid-month convention and the numbers that you provided, the accumulated depreciation as of 12/31/2018 should have been 32,250 (2,250 for tax year 2013 and 6,000 for every tax year thereafter including tax year 2018). Accordingly, since the prior depreciation amount that you're showing is lower than that, then the rental activity may have been suspended at some point which should have also paused the deduction of depreciation. If all of this was not handled correctly, then the 27.5 year depreciable life may be incorrect which may be causing the issue.

Think of it this way: if you have a $100,000 asset to be depreciated over 10 years, and after 2 years the accumulated depreciation is only $11,000 for whatever reason, then the depreciation calculated over the remaining 8 years would be overstated for each remaining year.
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#3
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AlexCPA wrote:... If all of this was not handled correctly, then the 27.5 year depreciable life may be incorrect which may be causing the issue.

Think of it this way: if you have a $100,000 asset to be depreciated over 10 years, and after 2 years the accumulated depreciation is only $11,000 for whatever reason, then the depreciation calculated over the remaining 8 years would be overstated for each remaining year.


AlexCPA: thank you so much for the reply. I do believe the vacation home treatment and rental activity suspension are the causes of the discrepancy. I have two follow up questions:

[1] Besides the depreciation cost basis, life, method and convention, what other factors affects the current year depreciation? Where would be the additional information specified in the depreciation input? Turbo Tax must have used the parameters not shown in the depreciation report that I transcribed in the original post.

[2] When the rental activity have been suspended at some point in the past, what is the "best" way to continue? Shorten the life or reduce the cost basis?

[3] The vacation home treatment will or will not affect the current year depreciation? Often when people starts to rent in the first year, Turbo Tax mistreated it as vacation rental if the taxpayer just naively enter the dates.

Thanks a lot.
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#4
Doug M  
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pura-is this a vacation home?
 

#5
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Doug M wrote:pura-is this a vacation home?


Not for year 2018. In 1st and 2nd year yes, there were vacation home depreciation carryover, but would this affect the current year depreciation? Thanks.
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#6
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Depreciation and Amortization Report
Tax Year 2018
Date in service: 08/01/2013
Cost: 165,000
Land: 0
Business use %: 100%
Section 179: 0
Special depreciation allowance: 0
Depreciation basis: 165,000
Life: 27.5
Method/Convention: SL/MM
Prior depreciation: 24,465
Current depreciation: 6077


AlexCPA said in #2 is correct, the "extra" depreciation computed by Turbox Tax comes from the "lack" of the prior depreciation that the Turbo Tax tries to catch up. Here is the detailed computation to prove it:

The years from 08/01/2013 to 12/31/2017 using MM convention:
4.5 / 12 + 4 = 4.375

The prior year depreciation should be:
165000 / 27.5 * 4.375 = 26250

The lack of prior year depreciation is:
26250 - 24465 = 1785

Remaining years left:
27.5 - 4.375 = 23.125

The catch up amount per year:
1785 / 23.125 = 77 !

That is where the $77 comes from. Here is the answer that Turbo Tax provided to the question how to continue depreciation when there is rental activity suspension. This also shows the vacation home is not a factor per Turbo Tax as the not allowed vacation home depreciation will be carried over to the following years. Vacation home depreciation is allowed to up to the rental gain.

The extra "catch up" depreciation is a preference item for the purpose of AMT per Turbo Tax. I am not sure if every software can handle the "lack of prior year depreciation" by creating a catch up and treat it as a preference item, so I would like to do a survey:

- Can your software can do it?
- What would you do if a client with this depreciation history comes to you?

Thank you.
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