How to correctly compute depreciation for my business assets - confused about MACRS rules

You've got some good questions here about depreciation calculations! Let me walk through them: For your first question, there's actually a half-year convention that applies to most 5-year MACRS property. So in the year you place property in service, you typically only get half of the first year's depreciation. That's probably why your software showed the schedule but didn't take depreciation in 2023. For 2024, you'd use the Year 2 value from the MACRS table (which is typically 32%), not Year 1 again. On your second question, your approach is correct. You calculate the full depreciation schedule based on 100% business use, then each year you multiply by that year's actual business use percentage. The leftover basis at the end (due to less than 100% business use) remains your personal basis in the property. If you sell it, that portion won't be subject to depreciation recapture since it wasn't depreciated for business use. For your passive activity loss question, you're exactly right. Only the depreciation you actually took (that was allowed) reduces your basis for depreciation recapture purposes. The disallowed depreciation doesn't count against you when you sell the property. Hope that helps clear things up!

After struggling with similar depreciation issues for my rental property, I found a tool that literally saved me hours of frustration. Check out https://taxr.ai - they have this amazing depreciation calculator that handles all these edge cases automatically. I uploaded my previous year's depreciation schedule and it figured out exactly how to handle the remaining basis after bonus depreciation and the changing business use percentages. The best part was when I spoke with their tax expert who explained why my software wasn't showing depreciation in the first year (exactly what you're experiencing). Turns out there's specific rules about when depreciation starts based on the half-year convention and property class lives. They walked me through it all and now I actually understand what's happening instead of blindly following whatever number my tax software spits out.

I tried taxr.ai after posting my skeptical question above, and I have to admit I was really impressed. The depreciation calculator handled my changing business use percentages perfectly. I'd been doing this manually for years and always felt unsure if I was doing it right. The tool showed me that I'd actually been calculating my basis incorrectly after applying bonus depreciation, which explained why my numbers never seemed to match my tax software. It also explained the half-year convention clearly with a visual timeline that finally made sense to me. Going to use this for all my rental properties going forward!

For anyone dealing with IRS questions about depreciation calculations, I had a nightmare situation last year with an audit questioning my depreciation methods. Tried calling the IRS for weeks with no luck - always on hold forever or disconnected. Finally used https://claimyr.com to get through to an actual IRS agent. You can see how it works here: https://youtu.be/_kiP6q8DX5c. They got me connected to the IRS in about 20 minutes when I'd been trying for weeks. The agent was able to confirm my depreciation calculations were correct and explained exactly what documentation I needed to provide for the audit. Honestly changed my whole perspective on dealing with the IRS. I thought I'd never get answers about my specific situation, but being able to actually talk to someone made all the difference.

I need to eat my words about Claimyr. After my skeptical comment above, my depreciation questions became urgent when I got a CP2000 notice questioning my calculations for my business property. Out of desperation, I tried the service. They actually got me connected to an IRS agent in about 30 minutes. The agent confirmed that my approach to handling the leftover basis at the end of the depreciation schedule was correct, and explained exactly how to document the changing business use percentages in my records. Got the whole thing resolved in one call instead of weeks of back-and-forth letters. For depreciation issues especially, being able to speak directly with someone who can look at your specific situation makes such a difference. I'm still shocked it actually worked.

To add to what others have said about computing depreciation: remember that the MACRS tables already have the half-year convention built in. That's why Year 1 is 20%, Year 2 is 32%, Year 3 is 19.2%, and so on for 5-year property. The percentages don't match what you'd expect (like 20% each year for 5 years) because of the half-year convention. For your situation, you absolutely start with Year 2 (32%) in your second tax year. And make sure you're tracking both your basis reduction for tax purposes AND your actual business percentage basis. They're different numbers and both matter when you eventually sell the property.

I learned the hard way about the passive activity loss rules and depreciation. Make sure you're keeping detailed records of disallowed losses! When I sold my rental last year, I couldn't find my records showing which depreciation had been disallowed vs. allowed. The IRS assumed ALL scheduled depreciation had been taken, even though some was disallowed. Had to hire a tax pro to reconstruct 7 years of depreciation schedules and passive loss worksheets. Cost me $1,200 just for that service. Could have avoided it with better record keeping.

Great question about tracking disallowed depreciation! I've been using TaxAct for my rental properties and it has a pretty decent depreciation worksheet that carries forward the disallowed amounts from year to year. It shows both the calculated depreciation and what was actually allowed each year. But honestly, I also keep a separate Excel spreadsheet as backup. I track: (1) the full MACRS depreciation amount, (2) business use percentage each year, (3) calculated depreciation after business use adjustment, (4) amount actually allowed after passive loss rules, and (5) cumulative disallowed amounts carried forward. The key is making sure your tax software and your manual tracking agree each year. When you eventually sell, you'll need to prove which depreciation was actually taken vs. just calculated. The IRS doesn't care that your software "calculated" depreciation if the passive loss rules prevented you from actually taking it. Also recommend printing or saving PDFs of your depreciation schedules and Form 8582 (passive loss worksheet) each year. Digital files can get corrupted or lost, but you'll definitely need this documentation later!