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Short Years Example

Short Tax Years

A short tax year occurs when there is an accounting period of less than 12 calendar months. A short tax year can be:

  • The first tax reporting period,
  • The final tax reporting period, or
  • The result of a change in an annual accounting period.

A short tax year requires special calculations for depreciation. In general, a short year requires that you allocate depreciation calculations based on the number of months in the short year. The way you accomplish this differs depending on the depreciation method selected.

When annual depreciation allowances for personal property are determined using IRS tables (methods AT and ST), an amount of unrecovered short-year depreciation is created, carried forward, and recovered in the period following the normal depreciable life. You cannot use the MACRS table method (method MT) if a short year occurs during an asset's life.

For ACRS personal property, the full year's depreciation is multiplied by the short-year fraction to determine the annual short-year amount. The short-year fraction is:

Months in a short year

            12 

 

For example, if a company changes its fiscal year-end month from September to December, the short-year fraction is 3/12. The remaining unrecovered deduction (9/12 of the full year's deduction) is taken in the first year of the post-recovery period.

Depreciation methods that use a half-year convention (methods SH, DH, and YH) need to use the half-rate rule, which requires that one-half of the depreciation calculated for the full short-year period be used. Depreciation methods that use the modified half-year convention (methods SD, DD, and YD) apply special rules to the short-year calculation. When you place an asset in service in the first half of a short year, then the full amount of the short-year depreciation is allowed. In such cases, the regular full-year recovery is multiplied by the short-year fraction.

The short-year fraction is:

Months in a short year

            12 

 

For example, if an organization changes its fiscal year-end month from September to December, the short-year fraction is 3/12.