How to Set Up Modified Accelerated Cost Recovery System (MACRS) Depreciation in Microsoft Dynamics NAV Fixed Assets

Note This document does not address all the issues that relate to income tax depreciation or to the requirements that are covered in Internal Revenue Service (IRS) Publication 946. Additionally, addressing gain/loss issues on the sale of fixed assets for IRS requirements goes beyond the scope of this document. This document is a guide for setting up depreciation to comply with some of the common depreciation requirements. The customer should always seek assistance from a certified public accountant regarding income tax requirements.

MACRS Depreciation in Fixed Assets

Microsoft Dynamics NAV does not contain IRS tax tables in the Fixed Assets granule. However, IRS tax tables include depreciation percentages that are computed based on various IRS conventions and rules. See IRS Publication 946 for a detailed explanation of depreciation requirements and for a listing of IRS depreciation tables.

For more information about IRS publications, visit the following IRS Web site: http://www.irs.gov/publications/ 

Microsoft Dynamics NAV contains the following depreciation methods:

• Straight-Line (SL)
  Microsoft Dynamics NAV calculates depreciation by using a 360-day year, with 30 days allocated to each month. This method of calculation causes a consistent straight-line calculation from month to month, even though the actual number of days varies among the months.
  
  For example, February typically contains 28 days, and January always contains 31 days. However, each month has 30 days of depreciation, regardless of whether the month actually has that number of days.
  

Note The Accounting Periods table must be set up for the year that is being calculated.

• Declining-Balance 1 (DB1)
  The Microsoft Dynamics NAV Declining-Balance 1 (DB1) method allocates the largest part of the cost of an asset to the early years of the asset's useful lifetime. To use this method, you must specify a fixed yearly percentage. To do this, use the following formula:
  Depreciation Amount = (Declining-Balance % * Number of Depreciation Days * Depreciation Basis) / (100 * 360)
• Declining-Balance 2 (DB2)
  The Microsoft Dynamics NAV Declining-Balance 2 (DB2) method and the DB1 method calculate the same total depreciation amount for each year. However, if you run the Calculate Depreciation batch job more than one time each year, the DB1 method causes equal depreciation amounts for each depreciation period, whereas the DB2 method causes depreciation amounts that decline during each period within the year.
• Declining-Balance 1/Straight-Line (DB1/SL)
  The Microsoft Dynamics NAV Declining-Balance 1/Straight-Line (DB1/SL) method uses the DB1 method of depreciation until the SL method causes a larger depreciation calculation. The DB1/SL method disperses equal amounts of depreciation per month within the year. Note that the DB1/SL method depends on the Accounting Periods table. For this depreciation method, the setup of the Accounting Periods table for future years is especially important if you run the Fixed Asset-Projected Value report. The DB1/SL method mirrors the tax depreciation requirements that are stated by the IRS under MACRS rules. This method of depreciation is reviewed closely in the examples that follow.
• Declining-Balance 2/Straight-Line (DB2/SL)
  The Microsoft Dynamics NAV Declining-Balance 2/Straight-Line (DB2/SL) method uses the same total depreciation amount each year as does the DB1/SL method. However, if you run the Calculate Depreciation batch job more than one time each year, the DB2/SL method creates amounts that decline during each period within the year. Therefore, this method cannot be used for MACRS requirements.

Examples that use the DB1/SL depreciation method

To use the DB1/SL depreciation method, you must specify the number of depreciation years and the Declining-Balance percentage for each asset. (The number of depreciation years is known as "Useful Life' in Fixed Assets terminology.) The Useful Life value is used to calculate the Straight-Line depreciation amount, and the Declining-Balance percentage is used to calculate the Declining-Balance depreciation amount. The depreciation method that results in the larger depreciation amount on an annual basis is the method that will be used for the specific year under the DB1/SL method.

The 887642IRSDepreciation.xls file shows how these amounts are calculated. The amounts in bold are the amounts of depreciation that are taken each year, assuming that the Declining-Balance 1 depreciation method is used until the amount of depreciation that is specified by the Straight-Line method is larger.

Note To view the 887642IRSDepreciation.xls file, visit the following Microsoft Web site:
https://mbs.microsoft.com/downloads/customer/887642IRSDepreciation.xls
Note Depreciation that is taken in years one, two, and three follows the rules of the DB1 method. Depreciation that is taken in years four and five follows the rules of the SL method.

Example 1. Two hundred percent declining balance
To set up a new fixed asset card that uses a 200% declining balance, follow these steps:

1. From the Navigation Pane, click Financial Management, Fixed Assets, click Setup, and then click Depreciation Books.
2. In the Depreciation Book Card dialog box, press F3, and then enter the following information:
   • Code: TAX
   • Description : Tax Book
3. Click the Integration tab, and then click to select all the options if the book values are to be posted to G/L.
4. In the Fixed Assets pane, click Fixed Assets.
5. In the Fixed Asset Card dialog box, enter the following information:
   • No.: Leave as default
   • Depreciation: Example with DB1/SL 200%
   • FA Class Code: TANGIBLE
   • FA Subclass Code: CAR
   • FA Location Code: ADM
   • Depreciation Book Code: TAX
   • FA Posting Group: CAR
   • Depreciation Method: DB1/SL
   • Depreciation Starting Date: 01/01/2005
   • Depreciation Ending Date: 12/31/2009
   • No. of Depreciation Years: 5
   • Declining-Balance %: 40

Example 2. One hundred fifty percent declining balance
To set up a new fixed asset card that uses a 150% declining balance, follow these steps:

• From the Navigation Pane, click Financial Management, Fixed Assets, and then click Fixed Assets.
• In the Fixed Asset Card dialog box, press F3, and then enter the following information:
  • No.: Leave as default
  • Description: Example with DB1/SL 150%
  • FA Class Code: TANGIBLE
  • FA Subclass Code: CAR
  • FA Location Code: ADM
  • Depreciation Book Code: TAX
  • FA Posting Group: CAR
  • Depreciation Method: DB1/SL
  • Depreciation Starting Date: 01/01/2005
  • Depreciation Ending Date: 12/31/2009
  • No. of Depreciation Years: 5
  • Declining-Balance %: 30

Note To calculate the declining balance percentage for the Fixed Asset depreciation book, you must determine the correct declining percentage and then divide that percentage by the number of years. For more information, view the examples in the 887642IRSDepreciation.xls file. To download this file, visit the following Microsoft Web site:
https://mbs.microsoft.com/downloads/customer/887642IRSDepreciation.xls

Convention Information
The IRS has two conventions that can be used in calculating depreciation:

• Half-Year Convention
  By default, the half-year convention applies unless the qualifications for the mid-quarter convention are met. Under the half-year convention, all assets are assumed to be put in service as of the middle of the year. For example, all assets are assumed to be put in service as of July 1 for calendar-year taxpayers.
• Mid-Quarter Convention
  The mid-quarter convention is used only if 40% or more of the total value of goods that are purchased during the year are purchased in the fourth quarter. The mid-quarter convention assumes that the assets are put in service at the midpoint of the quarter in which they are purchased. For more information, see the table at the end of this section.
  
  Because the mid-quarter convention is based on a percentage of the value of assets that are purchased in the fourth quarter of the year, you cannot determine the appropriate tax convention until the end of the year. At that time, the total value of acquired fixed assets is known, and the percentage of fixed assets that were acquired in the final quarter can be determined.

Table 1. Mid-Quarter Convention for a calendar year company

Determining Depreciation Information

You will find the Use Half-Year Convention field, that is used in the "Examples that use the DB1/SL depreciation method" section, on the fixed asset card. The Use Half-Year Convention field is determined for any particular depreciation book code. When the box in the Use Half-Year Convention field is selected, Microsoft Dynamics NAV depreciation calculation automatically takes a half-year depreciation amount in the first year.

Note Besides clicking to select the box in the Use Half-Year Convention field, you must change the date in the Depreciation Ending Date field in the Fixed Asset Card dialog box to the midyear date of the last year of depreciation. In this manner, Microsoft Dynamics NAV takes only the half-year depreciation in the final year. For example, in a calendar year, you would use 6/30 of the last year of depreciation as the ending date.

Real Estate Property
MACRS rules use straight-line depreciation when a 27.5-year, 31.5-year, 39-year, or 40-year useful life is used. At the same time, MACRS rules use the mid-month convention. The mid-month convention is similar to the mid-quarter convention. However, when you use the mid-month convention, the property is assumed to be put in service during the middle of the month in which the asset was put in service. For example, a building that was purchased in January is assumed to have been added in the middle of the current month and will have a depreciation starting date of 1/16.

Specialized Issues
Automobiles fall under IRS Listed Property rules and are subject to an annual depreciation limitation. You must either manually override the amount or set up a depreciation table and use a user-defined depreciation method. There are no percentage calculations that can handle the special automobile depreciation rules.

The Section 179 Deduction
The Section 179 deduction is handled as a fixed asset ledger entry that has a corresponding write-down entry in the FA Posting Type field in the Fixed Asset Journal dialog box. The Section 179 amount for the asset must be set as a negative number. When this amount is a negative number, the Section 179 depreciation is separated from the typical depreciation for easier reporting.

Before you post the negative entries for Section 179, you must set the posting option for the tax depreciation book. To set the posting option, follow these steps:

1. Follow step 5 in the "Example 1. Two hundred percent declining balance" section to return to the depreciation book.
2. In the Depreciation Book Card dialog box, click Depr. Book, and then click FA Posting Type Setup.

Note Negative entries are also known as write-down entries.

Note The options that are selected in the FA Posting Type Setup dialog box for the Write-Down line in the FA Posting Type field depend on whether you select the DB1/SL method or set up a depreciation table.

When you use DB1/SL
When you use DB1/SL, Microsoft Dynamics NAV automatically calculates the depreciation. Therefore, the following boxes must be selected in the FA Posting Type dialog box:

• Part of Book Value
• Part of Depreciable Basis
• Include in Depr. Calculation
• Include in Gain/Loss Calc.
• Depreciation Type

When you use Depreciation Tables

To use depreciation tables, click Fixed Assets in the Main Menu dialog box, click Setup, and then click Depreciation Tables.

For an example of a depreciation table, see the 30BonusDepreciation.xls file. To download this file, visit the following Microsoft Web sites:
https://mbs.microsoft.com/downloads/customer/88764230BONUSDEPRECIATION.xls
When you select depreciation tables, the following boxes must be selected in the FA Posting Type Setup dialog box:

• Part of Book Value
• Part of Depreciable Basis
• Include in Gain/Loss Calc.
• Depreciation Type

Thirty Percent Bonus Tax Depreciation
In July 2002, the IRS established the 30% bonus tax depreciation. Further legislation was introduced in the Economic Stimulus Act of 2008 to provide for a 50% bonus depreciation amount. The bonus tax depreciation percentage is in addition to the typical MACRS depreciation and is similar to the Section 179 deduction. The bonus tax depreciation percentage is added to the allowed depreciation for the first year that an asset is put in service. We recommend that you set up a depreciation table to handle the depreciation through the ending period of the asset's life. We recommend this action because the 30% and 50% bonus tax depreciation goes beyond any depreciation calculations that can be made by using regular depreciation methods. The alternative would be to use the Write-down functionality on the date of acquisition and post the bonus amount as a writedown value.

For more information about how the 30% and 50% bonus depreciation functions, see the 30BonusDepreciation.xls file. To download this file, visit the following Microsoft Web site:
https://mbs.microsoft.com/downloads/customer/88764230BONUSDEPRECIATION.xls