Calculating the 168 Allowance

This topic explains how the 168 Allowance provided by the Job Creation and Worker Assistance Act of 2002 is calculated.

The 168 Allowance is calculated by multiplying the asset's depreciable basis by the percent in the 168 Allowance % field, which is based on the placed-in-service date and other qualifying factors. The 168 Allowance amount is then subtracted from the depreciable basis.

Then the remaining depreciation for the asset’s life is calculated, using the new depreciable basis.

Here is an example:

A company purchases office equipment for $10,000 on October 1, 2001 and places it in service on that date. Before the passage of the Job Creation and Worker Assistance Act, the depreciation method for tax purposes would have been MF200. The equipment has a recovery period of 7 years. The company takes the 168 Allowance, so it selects depreciation method MA200. The MA200 depreciation method uses the half-year averaging convention.

Year 1:

The first-year depreciation deductions are calculated as follows:

First, the 168 Allowance is calculated: $10,000 X .30 = $3,000.

Then, the 168 Allowance is subtracted from $10,000 to calculate the new depreciable basis:

$10,000 - $3,000 = $7,000.

Recall that the formula for calculating depreciation for personal property with the MF200 depreciation method is:

Adjusted Basis

Estimated Life

1 *

Annual Depr.

* In the placed-in-service year, MACRS personal property uses the half-year averaging convention, which allows a half-year's depreciation in the year of acquisition (provided that the midquarter convention does not apply).

The new depreciable basis is used to calculate the "regular" depreciation for 2001:

$7,000

$1,000

When you calculate depreciation for December 2001, $1,000 is entered in the Current Year-to-Date and Current Accumulated Depreciation fields. The additional allowance of $3,000 is not added to the amounts in the Current Year-to-Date and Current Accumulated Depreciation fields. The additional allowance is treated as a reduction in the asset’s depreciable basis, not as an increase in the accumulated depreciation. The Net Value of the asset is $6,000: $10,000 acquired value less $3,000 additional allowance, less $1,000 regular depreciation.

The 168 Allowance appears in the 168 Allowance Amount field in Asset Detail. The additional allowance also appears by asset on the Asset Basis report and in total for the tax year on the Form 4562 - Depreciation and Amortization report.

Year 2 and later (until the switch to straight-line):

Recall the formula for MF200 depreciation in the second year is:

Adjusted Basis - Accumulated Depr.

Estimated Life

Annual Depr.

The second year of depreciation is calculated as follows:

$7,000 - $1,000

$1714.29