If a property is depreciated using the mid-quarter convention, how is the MACRS deduction for the year of disposition computed?

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When a property is disposed of during the year and is subject to the mid-quarter convention for depreciation under the Modified Accelerated Cost Recovery System (MACRS), the MACRS deduction for the year of disposition is determined based on the percentage of the quarter in which the property is disposed of.

Under the mid-quarter convention, assets placed in service or disposed of during the last half of the quarter are depreciated differently compared to those placed in service at the beginning of the quarter. The convention assumes the asset is in use for half of the quarter for the purpose of calculating depreciation. Therefore, when calculating the MACRS deduction for the year of disposition, you would apply the percentage that corresponds to how much of the quarter the asset was in service prior to its disposal.

This variable approach allows taxpayers to more accurately reflect the asset's use and reflects the economic reality of the ownership period for tax purposes. Hence, the correct answer emphasizes the need to adjust the deduction based on the timing of the disposal within the quarter.

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