94613081FHow To
Depreciate
Property• Section 179 Deduction
• Special Depreciation
Allowance
• MACRS
• Listed PropertyWhat's New2Important Reminders2Introduction21. Overview of Depreciation3What Property Can Be Depreciated?3What Property Cannot Be Depreciated?5When Does Depreciation Begin and End?7Can You Use MACRS To Depreciate Your Property?7What Is the Basis of Your Depreciable Property?11How Do You Treat Improvements?12Do You Have To File Form 4562?12How Do You Correct Depreciation Deductions?132. Electing the Section 179 Deduction15What Property Qualifies?15What Property Does Not Qualify?16How Much Can You Deduct?17How Do You Elect the Deduction?22When Must You Recapture the Deduction?223. Claiming the Special Depreciation Allowance23What Is Qualified Property?23How Much Can You Deduct?28How Can You Elect Not To Claim an Allowance?29When Must You Recapture an Allowance?294. Figuring Depreciation Under MACRS30Which Depreciation System (GDS or ADS) Applies?30Which Property Class Applies Under GDS?31What Is the Placed-in-Service Date?33What Is the Basis for Depreciation?34Which Recovery Period Applies?34Which Convention Applies?36Which Depreciation Method Applies?37How Is the Depreciation Deduction Figured?38How Do You Use General Asset Accounts?48When Do You Recapture MACRS Depreciation?525. Additional Rules for Listed Property53What Is Listed Property?53Can Employees Claim a Deduction?55What Is the Business-Use Requirement?56Do the Passenger Automobile Limits Apply?60What Records Must Be Kept?63How Is Listed Property Information Reported?656. How To Get Tax Help66Appendix A — MACRS Percentage Table Guide68Appendix B — Table of Class Lives and Recovery Periods94Glossary105Index107What's NewIncreased section 179 deduction dollar limit.
The maximum amount you can elect to deduct for most section 179 property you placed in service in 2005 is $105,000 ($140,000 for qualified
enterprise zone, renewal community, and New York Liberty Zone (Liberty Zone) property). This limit is reduced by the amount by which the cost of the
property placed in service during the tax year exceeds $420,000. See Dollar Limits under How Much Can You Deduct in chapter 2.
Increased section 179 limits for Gulf Opportunity Zone property.
If you placed in service section 179 property that is qualified Gulf Opportunity Zone (GO Zone) property acquired after August 27, 2005, the
$105,000 section 179 deduction dollar limit and the $420,000 threshold used to figure any reduction in the amount for which you can make the section
179 election are increased. See Increased dollar limits under Gulf Opportunity Zone (GO Zone) Property in chapter 2.
Limited applicability of special depreciation allowance.
The additional special depreciation allowance (including the increased limits for passenger automobiles) only applies to certain property placed in
service in 2005. You can claim a special allowance for certain aircraft, certain property with a long production period, and qualified Liberty Zone
property you placed in service in 2005. You can also claim a special allowance for qualified GO Zone property you acquired after August 27, 2005. See
chapter 3, Claiming the Special Depreciation Allowance, later.
Recovery periods for certain natural gas gathering and transmission lines and electric transmission property.
Certain natural gas gathering lines placed in service after April 11, 2005, are treated as 7-year property under MACRS. In addition, certain
electric transmission property and natural gas distribution lines placed in service after April 11, 2005, are treated as 15-year property under MACRS.
See Which Property Class Applies Under GDS and Which Recovery Period Applies in chapter 4.
Depreciation limits on business vehicles.
The total section 179 deduction and depreciation you can deduct for a passenger automobile (that is not an electric vehicle or a truck or van) you
use in your business and first placed in service in 2005 is $2,960. The maximum deduction for an electric vehicle is $8,880. The maximum deduction you
can take for a truck or van you use in your business and first placed in service in 2005 is $3,260. See Maximum Depreciation Deduction in
chapter 5.
Important RemindersPhotographs of missing children.
The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children
selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the
photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.
Property classification for qualified leasehold improvement and restaurant property.
Qualified leasehold improvement property and qualified restaurant property placed in service after December 31, 2005, will not be treated as
15-year property under MACRS. See Which Property Class Applies Under GDS in chapter 4.
Recovery periods for Indian Reservation property.
The shorter recovery periods for qualified property placed in service on an Indian reservation will not apply to property placed in service after
December 31, 2005. See Indian Reservation Property under Which Recovery Period Applies in chapter 4.
This publication explains how you can recover the cost of business or income-producing property through deductions for depreciation (for example,
the special depreciation allowance and deductions under the Modified Accelerated Cost Recovery System (MACRS)). It also explains how you can elect to
take a section 179 deduction, instead of depreciation deductions, for certain property and the additional rules for listed property.
The depreciation methods discussed in this publication generally do not apply to property placed in service before 1987. If you want information
about depreciating such property, see Publication 534.
Definitions.
Many of the terms used in this publication are defined in the Glossary near the end of the publication. Glossary terms used in each
discussion under the major headings are listed before the beginning of each discussion throughout the publication.
Do you need a different publication?
The following table shows where you can get more detailed information when depreciating certain types of property.
For information
on depreciating:See Publication:A car463, Travel, Entertainment, Gift, and Car ExpensesResidential rental property527, Residential Rental PropertyOffice space in your home587, Business Use of Your Home (Including Use by Daycare Providers)Farm property225, Farmer's Tax Guide
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address shown under How To Get Tax Help in chapter 6.
Overview of Depreciation
Depreciation is an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the
property. It is an allowance for the wear and tear, deterioration, or obsolescence of the property.
This chapter discusses the general rules for depreciating property. It explains the following.
What property can be depreciated.
What property cannot be depreciated.
When depreciation begins and ends.
Whether MACRS can be used to figure depreciation.
What the basis of property is.
How to treat improvements.
When to file Form 4562.
How to correct depreciation claimed incorrectly in a previous year.
Publication534 Depreciating Property Placed in Service Before 1987535 Business Expenses 538 Accounting Periods and Methods 551 Basis of Assets Form (and Instructions)Profit or Loss From BusinessNet Profit From BusinessEmployee Business Expenses Unreimbursed Employee Business Expenses Application for Change in Accounting MethodDepreciation and Amortization
See chapter 6 for information about getting publications and forms.
What Property Can Be Depreciated?Property:Depreciable
Adjusted basis
Basis
Commuting
Disposition
Fair market value
Intangible property
Listed property
Placed in service
Tangible property
Term interest
Useful life
You can depreciate most types of tangible property (except land), such as buildings, machinery, vehicles, furniture, and equipment. You also can
depreciate certain intangible property, such as patents, copyrights, and computer software.
To be depreciable, the property must meet all the following requirements.
It must be property you own.
It must be used in your business or income-producing activity.
It must have a determinable useful life.
It must be expected to last more than one year.
The following discussions provide information about these requirements.
Property You OwnDepreciation:Property owned
To claim depreciation, you usually must be the owner of the property. You are considered as owning property even if it is subject to a debt.
Example 1.
You made a down payment to purchase rental property and assumed the previous owner's mortgage. You own the property and you can depreciate it.
Example 2.
You bought a new van that you will use only for your courier business. You will be making payments on the van over the next 5 years. You own the
van and you can depreciate it.
Leased property.Property:Leased
You can depreciate leased property only if you retain the incidents of ownership in the property (explained below). This means you bear the burden
of exhaustion of the capital investment in the property. Therefore, if you lease property from someone to use in your trade or business or for the
production of income, you generally cannot depreciate its cost because you do not retain the incidents of ownership. You can, however, depreciate any
capital improvements you make to the property. See How Do You Treat Improvements later in this chapter and Additions and
Improvements under Which Recovery Period Applies in chapter 4.
If you lease property to someone, you generally can depreciate its cost even if the lessee (the person leasing from you) has agreed to preserve,
replace, renew, and maintain the property. However, if the lease provides that the lessee is to maintain the property and return to you the same
property or its equivalent in value at the expiration of the lease in as good condition and value as when leased, you cannot depreciate the cost of
the property.
Incidents of ownership.Ownership, incidents of
Incidents of ownership in property include the following.
The legal title to the property.
The legal obligation to pay for the property.
The responsibility to pay maintenance and operating expenses.
The duty to pay any taxes on the property.
The risk of loss if the property is destroyed, condemned, or diminished in value through obsolescence or exhaustion.
Life tenant.Life tenantTerm interests
Generally, if you hold business or investment property as a life tenant, you can depreciate it as if you were the absolute owner of the property.
However, see Certain term interests in property under Excepted Property, later.
If you are a tenant-stockholder in a cooperative housing corporation and use your cooperative apartment in your business or for the production of
income, you can depreciate your stock in the corporation, even though the corporation owns the apartment.
Figure your depreciation deduction as follows.
Figure the depreciation for all the depreciable real property owned by the corporation in which you have a proprietary lease or right of
tenancy. If you bought your cooperative stock after its first offering, figure the depreciable basis of this property as follows.
Multiply your cost per share by the total number of outstanding shares, including any shares held by the corporation.
Add to the amount figured in (a) any mortgage debt on the property on the date you bought the stock.
Subtract from the amount figured in (b) any mortgage debt that is not for the depreciable real property, such as the part for the land.
Subtract from the amount figured in (1) any depreciation for space owned by the corporation that can be rented but cannot be lived in by
tenant-stockholders.
Divide the number of your shares of stock by the total number of outstanding shares, including any shares held by the
corporation.
Multiply the result of (2) by the percentage you figured in (3). This is your depreciation on the stock.
Your depreciation deduction for the year cannot be more than the part of your adjusted basis in the stock of the corporation that is allocable to
your business or income-producing property. You must also reduce your depreciation deduction if only a portion of the property is used in a business
or for the production of income.
Example.
You figure your share of the cooperative housing corporation's depreciation to be $30,000. Your adjusted basis in the stock of the corporation is
$50,000. You use one half of your apartment solely for business purposes. Your depreciation deduction for the stock for the year cannot be more than
$25,000 ( of $50,000).
Change to business use.
If you change your cooperative apartment to business use, figure your allowable depreciation as explained earlier. The basis of all the depreciable
real property owned by the cooperative housing corporation is the smaller of the following amounts.
The fair market value of the property on the date you change your apartment to business use. This is considered to be the same as the
corporation's adjusted basis minus straight line depreciation, unless this value is unrealistic.
The corporation's adjusted basis in the property on that date. Do not subtract depreciation when figuring the corporation's adjusted
basis.
If you bought the stock after its first offering, the corporation's adjusted basis in the property is the amount figured in (1), above. The fair
market value of the property is considered to be the same as the corporation's adjusted basis figured in this way minus straight line depreciation,
unless the value is unrealistic.
For a discussion of fair market value and adjusted basis, see Publication 551.
Property Used in Your Business or Income-Producing ActivityDepreciation:Property used in business
To claim depreciation on property, you must use it in your business or income-producing activity. If you use property to produce income (investment
use), the income must be taxable. You cannot depreciate property that you use solely for personal activities.
Partial business or investment use.Business use of property, partialInvestment use of property, partial
If you use property for business or investment purposes and for personal purposes, you can deduct depreciation based only on the business or
investment use. For example, you cannot deduct depreciation on a car used only for commuting, personal shopping trips, family vacations, driving
children to and from school, or similar activities.
You must keep records showing the business, investment, and personal use of your property. For more information on the records you must keep for
listed property, such as a car, see What Records Must Be Kept in chapter 5.
Although you can combine business and investment use of property when figuring depreciation deductions, do not treat investment use as qualified
business use when determining whether the business-use requirement for listed property is met. For information about qualified business use of listed
property, see What Is the Business-Use Requirement in chapter 5.
Office in the home.Office in the home
If you use part of your home as an office, you may be able to deduct depreciation on that part based on its business use. For information about
depreciating your home office, see Publication 587.
Inventory.Inventory
You cannot depreciate inventory because it is not held for use in your business. Inventory is any property you hold primarily for sale to customers
in the ordinary course of your business.
If you are a rent-to-own dealer, you may be able to treat certain property held in your business as depreciable property rather than as inventory.
See Rent-to-own dealer under Which Property Class Applies Under GDS in chapter 4.
In some cases, it is not clear whether property is held for sale (inventory) or for use in your business. If it is unclear, examine carefully all
the facts in the operation of the particular business. The following example shows how a careful examination of the facts in two similar situations
results in different conclusions.
Example.
Maple Corporation is in the business of leasing cars. At the end of their useful lives, when the cars are no longer profitable to lease, Maple
sells them. Maple does not have a showroom, used car lot, or individuals to sell the cars. Instead, it sells them through wholesalers or by similar
arrangements in which a dealer's profit is not intended or considered. Maple can depreciate the leased cars because the cars are not held primarily
for sale to customers in the ordinary course of business, but are leased.
If Maple buys cars at wholesale prices, leases them for a short time, and then sells them at retail prices or in sales in which a dealer's profit
is intended, the cars are treated as inventory and are not depreciable property. In this situation, the cars are held primarily for sale to customers
in the ordinary course of business.
Containers.Containers
Generally, containers for the products you sell are part of inventory and you cannot depreciate them. However, you can depreciate containers used
to ship your products if they have a life longer than one year and meet the following requirements.
They qualify as property used in your business.
Title to the containers does not pass to the buyer.
To determine if these requirements are met, consider the following questions.
Does your sales contract, sales invoice, or other type of order acknowledgment indicate whether you have retained title?
Does your invoice treat the containers as separate items?
Do any of your records state your basis in the containers?
Property Having a Determinable Useful LifeDepreciation:Determinable useful lifeDeterminable useful lifeUseful life
To be depreciable, your property must have a determinable useful life. This means that it must be something that wears out, decays, gets used up,
becomes obsolete, or loses its value from natural causes.
Property Lasting More Than One YearDepreciation:Property lasting more than one year
To be depreciable, property must have a useful life that extends substantially beyond the year you place it in service.
Example.
You maintain a library for use in your profession. You can depreciate it. However, if you buy technical books, journals, or information services
for use in your business that have a useful life of one year or less, you cannot depreciate them. Instead, you deduct their cost as a business
expense.
What Property Cannot Be Depreciated?
Amortization
Basis
Goodwill
Intangible property
Remainder interest
Term interest
Certain property cannot be depreciated. This includes the following.
LandLand:Not depreciable
You cannot depreciate the cost of land because land does not wear out, become obsolete, or get used up. The cost of land generally includes the
cost of clearing, grading, planting, and landscaping.
Land preparation costs.Land:Preparation costs
Although you cannot depreciate land, you can depreciate certain costs (such as landscaping costs) incurred in preparing land for business use.
These costs must be so closely associated with other depreciable property that you can determine a life for them along with the life of the associated
property.
Example.
You constructed a new building for use in your business and paid for grading, clearing, seeding, and planting bushes and trees. Some of the bushes
and trees were planted right next to the building, while others were planted around the outer border of the lot. If you replace the building, you
would have to destroy the bushes and trees right next to it. These bushes and trees are closely associated with the building, so they have a
determinable useful life. Therefore, you can depreciate them. Add your other land preparation costs to the basis of your land because they have no
determinable life and you cannot depreciate them.
Excepted PropertyDepreciation:Excepted property
Even if the requirements explained in the preceding discussions are met, you cannot depreciate the following property.
Property placed in service and disposed of in the same year. (Determining when property is placed in service is explained
later.)
Equipment used to build capital improvements. You must add otherwise allowable depreciation on the equipment during the period of
construction to the basis of your improvements. (See Uniform Capitalization Rules in Publication 551.)
You cannot depreciate section 197 intangibles. Instead, you must amortize their cost. For information, see chapter 9 in Publication 535.
Section 197 intangibles include the following types of property.
Franchises.
FranchiseSection 197 intangibles
Certain agreements not to compete.Agreement not to competeSection 197 intangibles
Goodwill.
Trademarks or trade names.
The following property, unless you created it other than in connection with acquiring assets constituting a business or a substantial part
of a business.
Patents and copyrights.
Customer or subscription lists, location contracts, and insurance expirations.
Computer software is a section 197 intangible only if you acquired it in connection with the acquisition of assets constituting a business or a
substantial part of a business.
However, computer software is not a section 197 intangible and can be depreciated, even if acquired in connection with the acquisition of a
business, if it meets all of the following tests.
It is readily available for purchase by the general public.
It is subject to a nonexclusive license.
It has not been substantially modified.
If the software meets the tests above, it may also qualify for the section 179 deduction and the special depreciation allowance, discussed later.
Certain term interests in property.Term interestProperty:Term interest
You cannot depreciate a term interest in property created or acquired after July 27, 1989, for any period during which the remainder interest is
held, directly or indirectly, by a person related to you. A term interest in property means a life interest in property, an interest in property for a
term of years, or an income interest in a trust.
Related persons.Related persons
For a description of related persons, see Related persons in the discussion on property owned or used in 1986 under Can You Use
MACRS To Depreciate Your Property later in this chapter. For this purpose, however, treat as related persons only the relationships listed in
items (1) through (10) of that discussion and substitute 50% for 10% each place it appears.
Basis adjustments.Basis:Term interest
If you would be allowed a depreciation deduction for a term interest in property except that the holder of the remainder interest is related to
you, you generally must reduce your basis in the term interest by any depreciation or amortization not allowed.
If you hold the remainder interest, you generally must increase your basis in that interest by the depreciation not allowed to the term interest
holder. However, do not increase your basis for depreciation not allowed for periods during which either of the following situations applies.
The term interest is held by an organization exempt from tax.
The term interest is held by a nonresident alien individual or foreign corporation, and the income from the term interest is not effectively
connected with the conduct of a trade or business in the United States.
Exceptions.
The above rules do not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. They also do not apply to the
holder of dividend rights that were separated from any stripped preferred stock if the rights were purchased after April 30, 1993, or to a person
whose basis in the stock is determined by reference to the basis in the hands of the purchaser.
When Does Depreciation
Begin and End?
Basis
Exchange
Placed in service
You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income. You stop
depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first.
Placed in ServicePlaced in service:Rule
You place property in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a
tax-exempt activity, or a personal activity. Even if you are not using the property, it is in service when it is ready and available for its specific
use.
Example 1.
Donald Steep bought a machine for his business. The machine was delivered last year. However, it was not installed and operational until this year.
It is considered placed in service this year. If the machine had been ready and available for use when it was delivered, it would be considered placed
in service last year even if it was not actually used until this year.
Example 2.
On April 6, Sue Thorn bought a house to use as residential rental property. She made several repairs and had it ready for rent on July 5. At that
time, she began to advertise it for rent in the local newspaper. The house is considered placed in service in July when it was ready and available for
rent. She can begin to depreciate it in July.
Example 3.
James Elm is a building contractor who specializes in constructing office buildings. He bought a truck last year that had to be modified to lift
materials to second-story levels. The installation of the lifting equipment was completed and James accepted delivery of the modified truck on January
10 of this year. The truck was placed in service on January 10, the date it was ready and available to perform the function for which it was bought.
Conversion to business use.
If you place property in service in a personal activity, you cannot claim depreciation. However, if you change the property's use to use in a
business or income-producing activity, then you can begin to depreciate it at the time of the change. You place the property in service on the date of
the change.
Example.
You bought a home and used it as your personal home several years before you converted it to rental property. Although its specific use was
personal and no depreciation was allowable, you placed the home in service when you began using it as your home. You can begin to claim depreciation
in the year you converted it to rental property because its use changed to an income-producing use at that time.
Idle PropertyIdle propertyProperty:Idle
Continue to claim a deduction for depreciation on property used in your business or for the production of income even if it is temporarily idle
(not in use). For example, if you stop using a machine because there is a temporary lack of a market for a product made with that machine, continue to
deduct depreciation on the machine.
Cost or Other Basis Fully Recovered
You stop depreciating property when you have fully recovered your cost or other basis. You recover your basis when your section 179 and allowed or
allowable depreciation deductions equal your cost or investment in the property. See What Is the Basis of Your Depreciable Property, later.
Retired From ServiceProperty:Retired from service
You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. You retire property
from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following
events.
You sell or exchange the property.
You convert the property to personal use.
You abandon the property.
You transfer the property to a supplies or scrap account.
The property is destroyed.
Can You Use MACRS To Depreciate Your Property?
Adjusted basis
Basis
Convention
Exchange
Fiduciary
Grantor
Intangible property
Nonresidential real property
Placed in service
Related persons
Residential rental property
Salvage value
Section 1245 property
Section 1250 property
Standard mileage rate
Straight line method
Unit-of-production method
Useful life
You must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most property. MACRS is discussed in chapter 4.
You cannot use MACRS to depreciate the following property.
Property you placed in service before 1987.
Certain property owned or used in 1986.
Intangible property.
Films, video tapes, and recordings.
Certain corporate or partnership property acquired in a nontaxable transfer.
Property you elected to exclude from MACRS.
The following discussions describe the property listed above and explain what depreciation method should be used.
Property You Placed in Service
Before 1987Placed in service:Before 1987
You cannot use MACRS for property you placed in service before 1987 (except property you placed in service after July 31, 1986, if MACRS was
elected). Property placed in service before 1987 must be depreciated under the methods discussed in Publication 534.
For a discussion of when property is placed in service, see When Does Depreciation Begin and End, earlier.
Use of real property changed.
You generally must use MACRS to depreciate real property that you acquired for personal use before 1987 and changed to business or income-producing
use after 1986.
Improvements made after 1986.
You must treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. Therefore, you can
depreciate that improvement as separate property under MACRS if it is the type of property that otherwise qualifies for MACRS depreciation. For more
information about improvements, see How Do You Treat Improvements, later in this chapter, and Additions and Improvements under
Which Recovery Period Applies in chapter 4.
Property Owned or Used in 1986
You may not be able to use MACRS for property you acquired and placed in service after 1986 if any of the situations described below apply. If you
cannot use MACRS, the property must be depreciated under the methods discussed in Publication 534.
For the following discussions, do not treat property as owned before you placed it in service. If you owned property in 1986 but did not place it
in service until 1987, you do not treat it as owned in 1986.
Personal property.Property:PersonalPersonal property
You cannot use MACRS for personal property (section 1245 property) in any of the following situations.
You or someone related to you owned or used the property in 1986.
You acquired the property from a person who owned it in 1986 and as part of the transaction the user of the property did not
change.
You lease the property to a person (or someone related to this person) who owned or used the property in 1986.
You acquired the property in a transaction in which:
The user of the property did not change, and
The property was not MACRS property in the hands of the person from whom you acquired it because of (2) or (3) above.
Real property.Property:RealReal property
You generally cannot use MACRS for real property (section 1250 property) in any of the following situations.
You or someone related to you owned the property in 1986.
You lease the property to a person who owned the property in 1986 (or someone related to that person).
You acquired the property in a like-kind exchange, involuntary conversion, or repossession of property you or someone related to you owned
in 1986. MACRS applies only to that part of your basis in the acquired property that represents cash paid or unlike property given up. It does not
apply to the carried-over part of the basis.
Exceptions.
The rules above do not apply to the following.
Residential rental property or nonresidential real property.
Any property if, in the first tax year it is placed in service, the deduction under the Accelerated Cost Recovery System (ACRS) is more than
the deduction under MACRS using the half-year convention. (For information on how to figure depreciation under ACRS, see Publication 534.)
Property that was MACRS property in the hands of the person from whom you acquired it because of (2) above.
Related persons.Related persons
For this purpose, the following are related persons.
An individual and a member of his or her family, including only a spouse, child, parent, brother, sister, half-brother, half-sister,
ancestor, and lineal descendant.
A corporation and an individual who directly or indirectly owns more than 10% of the value of the outstanding stock of that corporation.
Two corporations that are members of the same controlled group.
A trust fiduciary and a corporation if more than 10% of the value of the outstanding stock is directly or indirectly owned by or for the
trust or grantor of the trust.
The grantor and fiduciary, and the fiduciary and beneficiary, of any trust.
The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of
both trusts.
A tax-exempt educational or charitable organization and any person (or, if that person is an individual, a member of that person's family)
who directly or indirectly controls the organization.
Two S corporations, and an S corporation and a regular corporation, if the same persons own more than 10% of the value of the outstanding
stock of each corporation.
A corporation and a partnership if the same persons own both of the following.
More than 10% of the value of the outstanding stock of the corporation.
More than 10% of the capital or profits interest in the partnership.
The executor and beneficiary of any estate.
A partnership and a person who directly or indirectly owns more than 10% of the capital or profits interest in the partnership.
Two partnerships, if the same persons directly or indirectly own more than 10% of the capital or profits interest in each.
The related person and a person who is engaged in trades or businesses under common control. (See section 52(a) and 52(b) of the Internal
Revenue Code.)
When to determine relationship.
You must determine whether you are related to another person at the time you acquire the property.
A partnership acquiring property from a terminating partnership must determine whether it is related to the terminating partnership immediately
before the event causing the termination. For this rule, a terminating partnership is one that sells or exchanges, within 12 months, 50% or more of
its total interest in partnership capital or profits.
Constructive ownership of stock or partnership interest.Stock, constructive ownership of
To determine whether a person directly or indirectly owns any of the outstanding stock of a corporation or an interest in a partnership, apply the
following rules.
Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned
proportionately by or for its shareholders, partners, or beneficiaries. However, for a partnership interest owned by or for a C corporation, this
applies only to shareholders who directly or indirectly own 5% or more of the value of the stock of the corporation.
An individual is considered to own the stock or partnership interest directly or indirectly owned by or for the individual's
family.
An individual who owns, except by applying rule (2), any stock in a corporation is considered to own the stock directly or indirectly owned
by or for the individual's partner.
For purposes of rules (1), (2), or (3), stock or a partnership interest considered to be owned by a person under rule (1) is treated as
actually owned by that person. However, stock or a partnership interest considered to be owned by an individual under rule (2) or (3) is not treated
as owned by that individual for reapplying either rule (2) or (3) to make another person considered to be the owner of the same stock or partnership
interest.
Intangible PropertyIntangible property:Depreciation methodStraight line methodStraight line method
Generally, if you can depreciate intangible property, you usually use the straight line method of depreciation. However, you can choose to
depreciate certain intangible property under the income forecast method (discussed later).
You cannot depreciate intangible property that is a section 197 intangible or that otherwise does not meet all the requirements discussed earlier
under What Property Can Be Depreciated.
Straight Line Method
This method lets you deduct the same amount of depreciation each year over the useful life of the property. To figure your deduction, first
determine the adjusted basis, salvage value, and estimated useful life of your property. Subtract the salvage value, if any, from the adjusted basis.
The balance is the total depreciation you can take over the useful life of the property.
Divide the balance by the number of years in the useful life. This gives you your yearly depreciation deduction. Unless there is a big change in
adjusted basis or useful life, this amount will stay the same throughout the time you depreciate the property. If, in the first year, you use the
property for less than a full year, you must prorate your depreciation deduction for the number of months in use.
Example.
In April, Frank bought a patent for $5,100 that is not a section 197 intangible. He depreciates the patent under the straight line method, using a
17-year useful life and no salvage value. He divides the $5,100 basis by 17 years to get his $300 yearly depreciation deduction. He only used the
patent for 9 months during the first year, so he multiplies $300 by to get his deduction of $225 for the first year. Next year,
Frank can deduct $300 for the full year.
Patents and copyrights.PatentSection 197 intangiblesCopyrightSection 197 intangibles
If you can depreciate the cost of a patent or copyright, use the straight line method over the useful life. The useful life of a patent or
copyright is the lesser of the life granted to it by the government or the remaining life when you acquire it. However, if the patent or copyright
becomes valueless before the end of its useful life, you can deduct in that year any of its remaining cost or other basis.
If you can depreciate the cost of computer software, use the straight line method over a useful life of 36 months.
Tax-exempt use property subject to a lease.
The useful life of computer software leased under a lease agreement entered into after March 12, 2004, to a tax-exempt organization, governmental
unit, or foreign person or entity (other than a partnership), cannot be less than 125 percent of the lease term.
Certain created intangibles.Straight line method:Created intangibles
You can amortize certain intangibles created after December 30, 2003, over a 15-year period using the straight line method and no salvage value,
even though they have a limited useful life that cannot be estimated with reasonable accuracy. For example, amounts paid to acquire memberships or
privileges of indefinite duration, such as a trade association membership, are eligible costs.
The following are not eligible.
Any intangible asset acquired from another person.
Created financial interests.
Any intangible asset that has a useful life that can be estimated with reasonable accuracy.
Any intangible asset that has an amortization period or useful life that is specifically prescribed or prohibited by the Code, regulations,
or other published IRS guidance.
Any amount paid to facilitate an acquisition of a trade or business, a change in the capital structure of a business entity, and certain
other transactions.
You must also increase the 15-year safe harbor amortization period to a 25-year period for certain intangibles related to benefits arising from the
provision, production, or improvement of real property. For this purpose, real property includes property that will remain attached to the real
property for an indefinite period of time (such as roads, bridges, tunnels, pavements, pollution control facilities, etc.).
Income Forecast MethodIntangible property:Depreciation methodIncome forecast methodIncome forecast method
You can choose to use the income forecast method instead of the straight line method to depreciate the following depreciable intangibles.
Motion picture films or video tapes.
Sound recordings.
Copyrights.
Books.
Patents.
Under the income forecast method, each year's depreciation deduction is equal to the cost, less salvage value, of the property, multiplied by a
fraction. The numerator of the fraction is the current year's net income from the property, and the denominator is the total income anticipated from
the property through the end of the 10th taxable year following the taxable year the property is placed in service. For more information, see section
167(g) of the Internal Revenue Code.
Films, video tapes, and recordings.FilmsVideo tapeSound recording
You cannot use MACRS for motion picture films, video tapes, and sound recordings. For this purpose, sound recordings are discs, tapes, or other
phonorecordings resulting from the fixation of a series of sounds. You can depreciate this property using either the straight line method or the
income forecast method.
Participations and residuals.
You can include participations and residuals in the adjusted basis of the property for purposes of computing your depreciation deduction under the
income forecast method. The participations and residuals must relate to income to be derived from the property before the end of the 10th taxable year
after the property is placed in service. For this purpose, participations and residuals are defined as costs which by contract vary with the amount of
income earned in connection with the property.
Instead of including these amounts in the adjusted basis of the property, you can deduct the costs in the taxable year that they are paid.
Videocassettes.
If you are in the business of renting videocassettes, you can depreciate only those videocassettes bought for rental. If the videocassette has a
useful life of one year or less, you can currently deduct the cost as a business expense.
Corporate or Partnership Property Acquired in a Nontaxable Transfer
MACRS does not apply to property used before 1987 and transferred after 1986 to a corporation or partnership (except property the transferor placed
in service after July 31, 1986, if MACRS was elected) to the extent its basis is carried over from the property's adjusted basis in the transferor's
hands. You must continue to use the same depreciation method as the transferor and figure depreciation as if the transfer had not occurred. However,
if MACRS would otherwise apply, you can use it to depreciate the part of the property's basis that exceeds the carried-over basis.
The nontaxable transfers covered by this rule include the following.
A distribution in complete liquidation of a subsidiary.
A transfer to a corporation controlled by the transferor.
An exchange of property solely for corporate stock or securities in a reorganization.
A contribution of property to a partnership in exchange for a partnership interest.
A partnership distribution of property to a partner.
Election To Exclude Property
From MACRSElection:Exclusion from MACRS
If you can properly depreciate any property under a method not based on a term of years, such as the unit-of-production method, you can elect to
exclude that property from MACRS. You make the election by reporting your depreciation for the property on line 15 in Part II of Form 4562 and
attaching a statement as described in the instructions for Form 4562. You must make this election by the return due date (including extensions) for
the tax year you place your property in service. However, if you timely filed your return for the year without making the election, you can still make
the election by filing an amended return within six months of the due date of the return (excluding extensions). Attach the election to the amended
return and write Filed pursuant to section 301.9100-2 on the election statement. File the amended return at the same address you filed the
original return.
Use of standard mileage rate.
If you use the standard mileage rate to figure your tax deduction for your business automobile, you are treated as having made an election to
exclude the automobile from MACRS. See Publication 463 for a discussion of the standard mileage rate.
What Is the Basis of Your Depreciable Property?
Abstract fees
Adjusted basis
Basis
Exchange
Fair market value
To figure your depreciation deduction, you must determine the basis of your property. To determine basis, you need to know the cost or other basis
of your property.
Cost as BasisCost basisBasis:Cost
The basis of property you buy is its cost plus amounts you paid for items such as sales tax (see Exception, below), freight charges, and
installation and testing fees. The cost includes the amount you pay in cash, debt obligations, other property, or services.
Exception.
You can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form
1040). If you make that choice, you cannot include those sales taxes as part of your cost basis.
Assumed debt.
If you buy property and assume (or buy subject to) an existing mortgage or other debt on the property, your basis includes the amount you pay for
the property plus the amount of the assumed debt.
Example.
You make a $20,000 down payment on property and assume the seller's mortgage of $120,000. Your total cost is $140,000, the cash you paid plus the
mortgage you assumed.
Settlement costs.Settlement fees
The basis of real property also includes certain fees and charges you pay in addition to the purchase price. These generally are shown on your
settlement statement and include the following.
Legal and recording fees.
Abstract fees.
Survey charges.
Owner's title insurance.
Amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or
repairs, and sales commissions.
For fees and charges you cannot include in the basis of property, see Real Property in Publication 551.
Property you construct or build.
If you construct, build, or otherwise produce property for use in your business, you may have to use the uniform capitalization rules to determine
the basis of your property. For information about the uniform capitalization rules, see Publication 551 and the regulations under section 263A of the
Internal Revenue Code.
Other BasisBasis:Other than cost
Other basis usually refers to basis that is determined by the way you received the property. For example, your basis is other than cost if you
acquired the property in exchange for other property, as payment for services you performed, as a gift, or as an inheritance. If you acquired property
in this or some other way, see Publication 551 to determine your basis.
Property changed from personal use.Basis:Change in use
If you held property for personal use and later use it in your business or income-producing activity, your depreciable basis is the lesser of the
following.
The fair market value (FMV) of the property on the date of the change in use.
Your original cost or other basis adjusted as follows.
Increased by the cost of any permanent improvements or additions and other costs that must be added to basis.
Decreased by any deductions you claimed for casualty and theft losses and other items that reduced your basis.
Example.
Several years ago, Nia paid $160,000 to have her home built on a lot that cost her $25,000. Before changing the property to rental use last year,
she paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house. Land is not
depreciable, so she includes only the cost of the house when figuring the basis for depreciation.
Nia's adjusted basis in the house when she changed its use was $178,000 ($160,000 + $20,000 − $2,000). On the same date, her property had an
FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. The basis for depreciation on the house is the FMV on the date of
change ($165,000), because it is less than her adjusted basis ($178,000).
Property acquired in a nontaxable transaction.
Generally, if you receive property in a nontaxable exchange, the basis of the property you receive is the same as the adjusted basis of the
property you gave up. Special rules apply in determining the basis and figuring the MACRS depreciation deduction and special depreciation allowance
for property acquired in a like-kind exchange or involuntary conversion. See Like-kind exchanges and involuntary conversions under How
Much Can You Deduct in chapter 3 and Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring
Depreciation Under MACRS in chapter 4.
There are also special rules for determining the basis of MACRS property involved in a like-kind exchange or involuntary conversion when the
property is contained in a general asset account. See How Do You Use General Aset Accounts in chapter 4.
Adjusted BasisAdjusted basis
To find your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for
events occurring between the time you acquired the property and the time you placed it in service. These events could include the following.
Installing utility lines.
Paying legal fees for perfecting the title.
Settling zoning issues.
Receiving rebates.
Incurring a casualty or theft loss.
For a discussion of adjustments to the basis of your property, see Adjusted Basis in Publication 551.
If you depreciate your property under MACRS, you also may have to reduce your basis by certain deductions and credits with respect to the property.
For more information, see What Is the Basis For Depreciation in chapter 4.
Basis adjustment for depreciation allowed or allowable.Basis:AdjustmentsDepreciation allowedDepreciation allowable
You must reduce the basis of property by the depreciation allowed or allowable, whichever is greater. Depreciation allowed is depreciation you
actually deducted (from which you received a tax benefit). Depreciation allowable is depreciation you are entitled to deduct.
If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the full amount of depreciation
allowable.
If you deduct more depreciation than you should, you must reduce your basis by any amount deducted from which you received a tax benefit (the
depreciation allowed).
How Do You Treat Improvements?ImprovementsProperty:Improvements
Improvement
If you improve depreciable property, you must treat the improvement as separate depreciable property. For more information, see Additions and
Improvements under Which Recovery Period Applies in chapter 4.
Repairs.Repairs
You generally deduct the cost of repairing business property in the same way as any other business expense. However, if a repair or replacement
increases the value of your property, makes it more useful, or lengthens its life, you must treat it as an improvement and depreciate it.
Example.
You repair a small section on one corner of the roof of a rental house. You deduct the cost of the repair as a rental expense. However, if you
completely replace the roof, the new roof is an improvement because it increases the value and lengthens the life of the property. You depreciate the
cost of the new roof.
Improvements to rented property.Rented property, improvements
You can depreciate permanent improvements you make to business property you rent from someone else.
Do You Have To File
Form 4562?
Amortization
Listed property
Placed in service
Standard mileage rate
You must complete and attach Form 4562 to your tax return for the current tax year if you are claiming any of the following items.
A section 179 deduction for the current year or a section 179 carryover from a prior year. See chapter 2 for information on the section 179
deduction.
Depreciation for property placed in service during the current year.
Depreciation on any vehicle or other listed property, regardless of when it was placed in service. Listed property is discussed in chapter
5.
A deduction for any vehicle if the deduction is reported on a form other than Schedule C (Form 1040) or Schedule C-EZ (Form
1040).
Amortization of costs if the current year is the first year of the amortization period.
Depreciation or amortization on any asset on a corporate income tax return (other than Form 1120S, U.S. Income Tax Return for an S
Corporation) regardless of when it was placed in service.
You must submit a separate Form 4562 for each business or activity on your return for which a Form 4562 is required.
Table 1-1 presents an overview of the purpose of the various parts of Form 4562.
Employee.Employee:How to claim depreciation
Do not use Form 4562 if you are an employee and you deduct job-related vehicle expenses using either actual expenses (including depreciation) or
the standard mileage rate. Instead, use either Form 2106 or Form 2106-EZ. Use Form 2106-EZ if you are claiming the standard mileage rate and you are
not reimbursed by your employer for any expenses.
If you deducted an incorrect amount of depreciation in any year, you may be able to make a correction by filing an amended return for that year.
See Filing an Amended Return, next. If you are not allowed to make the correction on an amended return, you may be able to change your
accounting method to claim the correct amount of depreciation. See Changing Your Accounting Method, later.
Filing an Amended ReturnAmended return
You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations.
You claimed the incorrect amount because of a mathematical error made in any year.
You claimed the incorrect amount because of a posting error made in any year.
You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003.
You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003.
Adoption of accounting method defined.
Generally, you adopt a method of accounting for depreciation by using a permissible method of determining depreciation when you file your first tax
return, or by using the same impermissible method of determining depreciation in two or more consecutively filed tax returns. For an exception to this
2-year rule, see Revenue Procedure 2002-9 on page 327 of Internal Revenue Bulletin 2002-3, available at
www.irs.gov/pub/irs-irbs/irb02-03.pdf,
as modified by Revenue Procedure 2004-11 on page 311 of Internal Revenue Bulletin 2004-3, available at
www.irs.gov/pub/irs-irbs/irb04-03.pdf.
When to file.
If an amended return is allowed, you must file it by the later of the following.
3 years from the date you filed your original return for the year in which you did not deduct the correct amount. A return filed before an
unextended due date is considered filed on that due date.
2 years from the time you paid your tax for that year.
Changing Your Accounting MethodChanging accounting method
Generally, you must get IRS approval to change your method of accounting. You generally must file Form 3115, Application for Change in Accounting
Method, to request a change in your method of accounting for depreciation.
The following are examples of a change in method of accounting for depreciation.
A change in the treatment of an asset from nondepreciable to depreciable or vice versa.
A change in the depreciation method, period of recovery, or convention of a depreciable asset.
A change from not claiming to claiming the special depreciation allowance if you did not make the election to not claim any special
allowance.
A change from claiming a 50% special depreciation allowance to claiming a 30% special depreciation allowance for qualified property
(including property that is included in a class of property for which you elected a 30% special allowance instead of a 50% special
allowance).
Changes in depreciation that are not a change in method of accounting (and may only be made on an amended return) include the following.
An adjustment in the useful life of a depreciable asset for which depreciation is determined under section 167.
A change in use of an asset in the hands of the same taxpayer.
Making a late depreciation election or revoking a timely valid depreciation election (including the election not to deduct the special
depreciation allowance). If you elected not to claim any special allowance, a change from not claiming to claiming the special allowance is a
revocation of the election and is not an accounting method change. Also, if the property is qualified property, a change from not claiming to claiming
any special allowance is a late election and is not an accounting method change.
Any change in the placed-in-service date of a depreciable asset.
See section 1.446-1T(e)(2)(ii)(d) of the regulations for more information and examples.
IRS approval.
In some instances, you may be able to get approval from the IRS to change your method of accounting for depreciation under the automatic change
request procedures generally covered in Revenue Procedure 2002-9. If you do not qualify to use the automatic procedures to get approval, you must use
the advance consent request procedures generally covered in Revenue Procedure 97-27, 1997-1 C.B. 680. Also see the Instructions for Form 3115 for more
information on getting approval, including lists of scope limitations and automatic accounting method changes.
Additional guidance.
For additional guidance and special procedures for changing your accounting method, automatic change procedures, amending your return, and filing
Form 3115, see Revenue Procedure 2004-11, Revenue Procedure 2005-43 on page 107 of Internal Revenue Bulletin 2005-29, available at
www.irs.gov/pub/irs-irbs/irb05-29.pdf,
and Revenue Procedure 2006-12 on page 310 of Internal Revenue Bulletin 2006-3, available at
www.irs.gov/pub/irs-irbs/irb06-03.pdf.
<ROM>Table 1-1.</ROM>
<IMARK>Purpose of Form 4562This table describes the purpose of the various parts of Form 4562. For more information, see Form 4562 and its
instructions.PartPurposeI• Electing the section 179 deduction
• Figuring the maximum section 179 deduction for the current year
• Figuring any section 179 deduction carryover to the next yearII• Reporting the special depreciation allowance for property (other than listed property)
placed in service during the tax year
• Reporting depreciation deductions on property being depreciated under any method other than Modified Accelerated Cost Recovery System
(MACRS)III• Reporting MACRS depreciation deductions for property placed in service before this year
• Reporting MACRS depreciation deductions for property (other than listed property) placed in service during the current yearIV• Summarizing other partsV• Reporting the special depreciation allowance for automobiles and other listed property
• Reporting MACRS depreciation on automobiles and other listed property
• Reporting the section 179 cost elected for automobiles and other listed property
• Reporting information on the use of automobiles and other transportation vehiclesVI• Reporting amortization deductions
Section 481(a) adjustment.
If you file Form 3115 and change from an impermissible method to a permissible method of accounting for depreciation, you can make a section 481(a)
adjustment for any unclaimed or excess amount of allowable depreciation. The adjustment is the difference between the total depreciation actually
deducted for the property and the total amount allowable prior to the year of change. If no depreciation was deducted, the adjustment is the total
depreciation allowable prior to the year of change. A negative section 481(a) adjustment results in a decrease in taxable income. It is taken into
account in the year of change and is reported on your business tax returns as other expenses. A positive section 481(a) adjustment results in
an increase in taxable income. It is generally taken into account over 4 tax years and is reported on your business tax returns as other
income. However, you can elect to use a one-year adjustment period and report the adjustment in the year of change if the total adjustment is less
than $25,000. Make the election by completing the appropriate line on Form 3115.
If you file a Form 3115 and change from one permissible method to another permissible method, the section 481(a) adjustment is zero.
Electing the Section 179 Deduction
You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property
in service. This is the section 179 deduction. You can elect the section 179 deduction instead of recovering the cost by taking depreciation
deductions.
Estates and trusts cannot elect the section 179 deduction.
This chapter explains what property does and does not qualify for the section 179 deduction, what limits apply to the deduction (including special
rules for partnerships and corporations), and how to elect it. It also explains when and how to recapture the deduction.
Publication537 Installment Sales 544 Sales and Other Dispositions of Assets 954Tax Incentives for Distressed CommunitiesForm (and Instructions)Depreciation and Amortization Sales of Business Property
See chapter 6 for information about getting publications and forms.
What Property Qualifies?
Adjusted basis
Basis
Class life
Structural components
Tangible property
To qualify for the section 179 deduction, your property must meet all the following requirements.
It must be eligible property.
It must be acquired for business use.
It must have been acquired by purchase.
It must not be property described later under What Property Does Not Qualify.
The following discussions provide information about these requirements and exceptions.
To qualify for the section 179 deduction, your property must be one of the following types of depreciable property.
Tangible personal property.
Other tangible property (except buildings and their structural components) used as:
An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or
sewage disposal services,
A research facility used in connection with any of the activities in (a) above, or
A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities.
Single purpose agricultural (livestock) or horticultural structures. (See chapter 7 of Publication 225 for definitions and information
regarding the use requirements that apply to these structures.)
Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product
of petroleum.
Off-the-shelf computer software.
Tangible personal property.Property:Tangible personalTangible personal property
Tangible personal property is any tangible property that is not real property. It includes the following property.
Machinery and equipment.
Property contained in or attached to a building (other than structural components), such as refrigerators, grocery store counters, office
equipment, printing presses, testing equipment, and signs.
Gasoline storage tanks and pumps at retail service stations.
Livestock, including horses, cattle, hogs, sheep, goats, and mink and other furbearing animals.
The treatment of property as tangible personal property for the section 179 deduction is not controlled by its treatment under local law. For
example, property may not be tangible personal property for the deduction even if treated so under local law, and some property (such as fixtures) may
be tangible personal property for the deduction even if treated as real property under local law.
Off-the-shelf computer software placed in service during the tax year is qualifying property for purposes of the section 179 deduction. This is
computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially
modified. It includes any program designed to cause a computer to perform a desired function. However, a database or similar item is not considered
computer software unless it is in the public domain and is incidental to the operation of otherwise qualifying software.
Property Acquired for Business Use
To qualify for the section 179 deduction, your property must have been acquired for use in your trade or business. Property you acquire only for
the production of income, such as investment property, rental property (if renting property is not your trade or business), and property that produces
royalties, does not qualify.
Partial business use.Section 179 deduction:Business use requiredPartial business useSection 179 deduction:Limits:Partial business use
When you use property for both business and nonbusiness purposes, you can elect the section 179 deduction only if you use the property more than
50% for business in the year you place it in service. If you use the property more than 50% for business, multiply the cost of the property by the
percentage of business use. Use the resulting business cost to figure your section 179 deduction.
Example.
May Oak bought and placed in service an item of section 179 property costing $11,000. She used the property 80% for her business and 20% for
personal purposes. The business part of the cost of the property is $8,800 (80% × $11,000).
Property Acquired by PurchaseSection 179 deduction:Purchase requiredInheritanceBasis, other than costGiftBasis, other than cost
To qualify for the section 179 deduction, your property must have been acquired by purchase. For example, property acquired by gift or inheritance
does not qualify.
Property is not considered acquired by purchase in the following situations.
It is acquired by one member of a controlled group from another member of the same group.
Its basis is determined either—
In whole or in part by its adjusted basis in the hands of the person from whom it was acquired, or
Under the stepped-up basis rules for property acquired from a decedent.
It is acquired from a related person.
Related persons.Related persons
Related persons are described under Related persons in chapter 1 in the discussion on property owned or used in 1986 under Can You
Use MACRS To Depreciate Your Property. However, to determine whether property qualifies for the section 179 deduction, treat as an individual's
family only his or her spouse, ancestors, and lineal descendants and substitute "50%" for "10%" each place it appears.
Example.
Ken Larch is a tailor. He bought two industrial sewing machines from his father. He placed both machines in service in the same year he bought
them. They do not qualify as section 179 property because Ken and his father are related persons. He cannot claim a section 179 deduction for the cost
of these machines.
What Property Does Not Qualify?
Basis
Class life
Certain property does not qualify for the section 179 deduction. This includes the following.
Land and Improvements
Land and land improvements, such as buildings and other permanent structures and their components, are real property, not personal property and do
not qualify as section 179 property. Land improvements include swimming pools, paved parking areas, wharves, docks, bridges, and fences.
Even if the requirements explained earlier under What Property Qualifies are met, you cannot elect the section 179 deduction for the
following property.
Certain property you lease to others (if you are a noncorporate lessor).
Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging.
Air conditioning or heating units.
Property used predominantly outside the United States (except property described in section 168(g)(4) of the Internal Revenue
Code).
Property used by certain tax-exempt organizations (except property used in connection with the production of income subject to the tax on
unrelated trade or business income).
Property used by governmental units or foreign persons or entities (except property used under a lease with a term of less than 6
months).
Leased property.Leased propertyProperty:Leased
Generally, you cannot claim a section 179 deduction based on the cost of property you lease to someone else. (This rule does not apply to
corporations.) However, you can claim a section 179 deduction for the cost of the following property.
Property you manufacture or produce and lease to others.
Property you purchase and lease to others if both the following tests are met.
The term of the lease (including options to renew) is less than 50% of the property's class life.
For the first 12 months after the property is transferred to the lessee, the total business deductions you are allowed on the property
(other than rents and reimbursed amounts) are more than 15% of the rental income from the property.
Property used for lodging.Lodging
Generally, you cannot claim a section 179 deduction for property used predominantly to furnish lodging or in connection with the furnishing of
lodging. However, this does not apply to the following types of property.
Nonlodging commercial facilities that are available to those not using the lodging facilities on the same basis as they are available to
those using the lodging facilities.
Property used by a hotel or motel in connection with the trade or business of furnishing lodging where the predominant portion of the
accommodations is used by transients.
Any certified historic structure to the extent its basis is due to qualified rehabilitation expenditures.
Any energy property.
Energy property.Energy property
Energy property is property that meets the following requirements.
It is one of the following types of property.
Equipment that uses solar energy to generate electricity, to heat or cool a structure, to provide hot water for use in a structure, or to
provide solar process heat.
Equipment acquired after December 31, 2005, that uses solar energy to illuminate the inside of a structure using fiberoptic distributed
sunlight.
Equipment used to produce, distribute, or use energy derived from a geothermal deposit. For electricity generated by geothermal power, this
includes equipment up to (but not including) the electrical transmission stage.
Qualified fuel cell property or qualified microturbine property acquired after December 31, 2005.
The construction, reconstruction, or erection of the property must be completed by you.
For property you acquire, the original use of the property must begin with you.
The property must meet the performance and quality standards, if any, prescribed by Income Tax Regulations in effect at the time you get the
property.
Energy property does not include any property that is public utility property as defined by section 46(f)(5) of the Internal Revenue Code (as in
effect on November 4, 1990).
How Much Can You Deduct?Deduction limit:Section 179Limit on deduction:Section 179
Adjusted basis
Basis
Placed in service
Your section 179 deduction is generally the cost of the qualifying property. However, the total amount you can elect to deduct under section 179 is
subject to a dollar limit and a business income limit. These limits apply to each taxpayer, not to each business. However, see Married
Individuals under Dollar Limits, later. Also, see the special rules for applying the limits for partnerships and S corporations later
under Partnerships and Partners and under S Corporations. For a passenger automobile placed in service in 2005, the total
section 179 and depreciation deduction is limited. See Do the Passenger Automobile Limits Apply in chapter 5.
If you deduct only part of the cost of qualifying property as a section 179 deduction, you can generally depreciate the cost you do not deduct. See
Claiming the Special Depreciation Allowance and Figuring Depreciation Under MACRS, later.
Trade-in of other property.Trade-in of property
If you buy qualifying property with cash and a trade-in, its cost for purposes of the section 179 deduction includes only the cash you paid.
Example.
Silver Leaf, a retail bakery, traded two ovens having a total adjusted basis of $680 for a new oven costing $1,320. They received an $800 trade-in
allowance for the old ovens and paid $520 in cash for the new oven. The bakery also traded a used van with an adjusted basis of $4,500 for a new van
costing $9,000. They received a $4,800 trade-in allowance on the used van and paid $4,200 in cash for the new van.
Only the portion of the new property's basis paid by cash qualifies for the section 179 deduction. Therefore, Silver Leaf's qualifying costs for
the section 179 deduction are $4,720 ($520 + $4,200).
Dollar LimitsSection 179 deduction:Limits:Dollar
The total amount you can elect to deduct under section 179 for most property placed in service in 2005 generally cannot be more than $105,000
($108,000 in 2006). If you acquire and place in service more than one item of qualifying property during the year, you can allocate the section 179
deduction among the items in any way, as long as the total deduction is not more than $105,000. You do not have to claim the full $105,000.
The amount you can elect to deduct is not affected if you place qualifying property in service in a short tax year or if you place qualifying
property in service for only a part of a 12-month tax year.
After you apply the dollar limit to determine a tentative deduction, you must apply the business income limit (described later) to determine your
actual section 179 deduction.
Example.
In 2005, you bought and placed in service a $108,000 tractor and a $2,000 circular saw for your business. You elect to deduct $103,000 for the
tractor and the entire $2,000 for the saw, a total of $105,000. This is the maximum amount you can deduct. Your $2,000 deduction for the saw
completely recovered its cost. Your basis for depreciation is zero. The basis for depreciation of your tractor is $5,000. You figure this by
subtracting your $103,000 section 179 deduction for the tractor from the $108,000 cost of the tractor.
Reduced dollar limit for cost exceeding $420,000.
If the cost of your qualifying section 179 property placed in service in a year is more than $420,000 ($430,000 in 2006), you generally must reduce
the dollar limit (but not below zero) by the amount of cost over $420,000. If the cost of your section 179 property placed in service during 2005 is
$525,000 ($535,000 in 2006) or more, you cannot take a section 179 deduction.
Example.
In 2005, Jane Ash placed in service machinery costing $495,000. This cost is $75,000 more than $420,000, so she must reduce her dollar limit to
$30,000 ($105,000 − $75,000).
Situations affecting dollar limit.
Under certain circumstances, the general dollar limits on the section 179 deduction may be reduced or increased or there may be an additional
dollar limit. The general dollar limit is affected by any of the following situations.
You placed qualified property in service in the New York Liberty Zone.
Your business is an enterprise zone business or a renewal community business.
You placed qualified property in service in the Gulf Opportunity Zone.
You placed in service a sport utility vehicle.
Liberty Zone PropertySection 179 deduction:Limits:Liberty Zone property
An increased section 179 deduction is available for qualified Liberty Zone property (defined next) you place in service in the New York Liberty
Zone (Liberty Zone). The Liberty Zone is the area located on or south of Canal Street, East Broadway (east of its intersection with Canal Street), or
Grand Street (east of its intersection with East Broadway) in the Borough of Manhattan in the City of New York, New York.
Qualified Liberty Zone property.
To qualify for this increased section 179 deduction, you must acquire section 179 property that is either:
Qualified Liberty Zone property, or
Property that would be qualified Liberty Zone property except for the fact that it is eligible for the special depreciation
allowance.
See Qualified Liberty Zone Property in chapter 3 for an explanation of qualified Liberty Zone property. See What Is Qualified
Property in chapter 3 for an explanation of property eligible for the special depreciation allowance.
You take into account only 50% (instead of 100%) of the cost of qualified Liberty Zone property placed in service in a year when figuring the
reduced dollar limit for costs exceeding $420,000 (explained earlier).
Increased dollar limit.
The dollar limit on the section 179 deduction is increased by the smaller of:
$35,000, or
The cost of section 179 property that is qualified Liberty Zone property placed in service during the year (including such property placed
in service by your spouse, even if you are filing a separate return).
Enterprise Zone and Renewal Community BusinessesSection 179 deduction:Limits:Enterprise zone business
An increased section 179 deduction is available to enterprise zone businesses and renewal community businesses for qualified zone property or
qualified renewal property placed in service in an empowerment zone or renewal community. For definitions of enterprise zone business,renewal community business,qualified zone property, and qualified renewal property, see Publication 954, Tax Incentives for
Distressed Communities.
Increased dollar limit.
The dollar limit on the section 179 deduction is increased if your business qualifies as an enterprise zone business or a renewal community
business. The increase is the smaller of:
$35,000, or
The cost of section 179 property that is also qualified zone property or qualified renewal property (including such property placed in
service by your spouse, even if you are filing a separate return).
Reduced dollar limit.
You take into account only 50% (instead of 100%) of the cost of qualified zone property placed in service in a year when figuring the reduced
dollar limit for costs exceeding $420,000 (explained earlier).
For purposes of this increased section 179 deduction, do not treat qualified section 179 Gulf Opportunity Zone property (defined next under
Gulf Opportunity (GO) Zone Property) as qualified zone property (or qualified renewal property) unless you elect not to treat the property
as section 179 GO Zone property.
Gulf Opportunity Zone (GO Zone) PropertySection 179 deduction:Limits:Gulf Opportunity Zone property
An increased section 179 deduction is available for qualified section 179 GO Zone property (defined next) you place in service in the GO Zone. The
GO Zone is that portion of the Hurricane Katrina disaster area that is determined by the Federal Emergency Management Agency (FEMA) to warrant
individual only or both individual and public assistance from the federal government. See Publication 4492, Information for Taxpayers Affected by
Hurricanes Katrina, Rita, and Wilma, for a list of the areas affected.
Qualified section 179 GO Zone property.
Qualified section 179 GO Zone property is section 179 property (described earlier) acquired after August 27, 2005, that is also qualified GO Zone
property. See Qualified Gulf Opportunity Zone Property in chapter 3 for a description of qualified GO Zone property.
Increased dollar limits.
The limit on the section 179 deduction is increased by the smaller of:
$100,000, or
The cost of qualified section 179 GO Zone property placed in service during the year (including such property placed in service by your
spouse, even if you are filing a separate return).
The amount for which you can make the election is reduced if the cost of all section 179 property placed in service during the year exceeds
$420,000 increased by the smaller of:
$600,000, or
The cost of qualified section 179 GO Zone property placed in service during the year.
.
Sport Utility and Certain Other Vehicles
You cannot elect to expense more than $25,000 of the cost of any heavy sport utility vehicle (SUV) and certain other vehicles placed in service in
2005. This rule applies to any 4-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, or highways, that is rated
at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight. However, the $25,000 limit does not apply to any
vehicle:
Designed to seat more than nine passengers behind the driver's seat,
Equipped with a cargo area (either open or enclosed by a cap) of at least six feet in interior length that is not readily accessible from
the passenger compartment, or
That has an integral enclosure fully enclosing the driver compartment and load carrying device, does not have seating rearward of the
driver's seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.
Married IndividualsSection 179 deduction:Married filing separate returns
If you are married, how you figure your section 179 deduction depends on whether you file jointly or separately. If you file a joint return, you
and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or
placed it in service. If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit, including the reduction for
costs over $420,000. You must allocate the dollar limit (after any reduction) between you equally, unless you both elect a different allocation. If
the percentages elected by each of you do not total 100%, 50% will be allocated to each of you.
Example.
Jack Elm is married. He and his wife file separate returns. Jack bought and placed in service $420,000 of qualified farm machinery in 2005. His
wife has her own business, and she bought and placed in service $10,000 of qualified business equipment. Their combined dollar limit is $95,000. This
is because they must figure the limit as if they were one taxpayer. They reduce the $105,000 dollar limit by the $10,000 excess of their costs over
$420,000.
They elect to allocate the $95,000 dollar limit as follows.
$90,250 ($95,000 x 95%) to Mr. Elm's machinery.
$4,750 ($95,000 x 5%) to Mrs. Elm's equipment.
If they did not make an election to allocate their costs in this way, they would have to allocate $47,500 ($95,000 × 50%) to each of
them.
Joint return after filing separate returns.
If you and your spouse elect to amend your separate returns by filing a joint return after the due date for filing your return, the dollar limit on
the joint return is the lesser of the following amounts.
The dollar limit (after reduction for any cost of section 179 property over $420,000).
The total cost of section 179 property you and your spouse elected to expense on your separate returns.
Example.
The facts are the same as in the previous example except that Jack elected to deduct $30,000 of the cost of section 179 property on his separate
return and his wife elected to deduct $2,000. After the due date of their returns, they file a joint return. Their dollar limit for the section 179
deduction is $32,000. This is the lesser of the following amounts.
$95,000—The dollar limit less the cost of section 179 property over $420,000.
$32,000—The total they elected to expense on their separate returns.
Business Income LimitSection 179 deduction:Limits:Business (taxable) income
The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or
business during the year. Generally, you are considered to actively conduct a trade or business if you meaningfully participate in the management or
operations of the trade or business.
Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. See Carryover of disallowed
deduction, later.
Taxable income.
In general, figure taxable income for this purpose by totaling the net income and losses from all trades and businesses you actively conducted
during the year. Net income or loss from a trade or business includes the following items.
Section 1231 gains (or losses).
Interest from working capital of your trade or business.
Wages, salaries, tips, or other pay earned as an employee.
For information about section 1231 gains and losses, see chapter 3 in Publication 544.
In addition, figure taxable income without regard to any of the following.
The section 179 deduction.
The self-employment tax deduction.
Any net operating loss carryback or carryforward.
Any unreimbursed employee business expenses.
Two different taxable income limits.
In addition to the business income limit for your section 179 deduction, you may have a taxable income limit for some other deduction. You may have
to figure the limit for this other deduction taking into account the section 179 deduction. If so, complete the following steps.
StepAction1Figure taxable income without the section 179 deduction or the other deduction.2Figure a hypothetical section 179 deduction using the taxable income figured in Step 1.3Subtract the hypothetical section 179 deduction figured in Step 2 from the taxable income figured in Step 1.4Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income.5Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in Step 1.6Figure your actual section 179 deduction using the taxable income figured in Step 5.7Subtract your actual section 179 deduction figured in Step 6 from the taxable income figured in Step 1.8Figure your actual other deduction using the taxable income figured in Step 7.
Example.
On February 1, 2005, the XYZ corporation purchased and placed in service qualifying section 179 property that cost $105,000. It elects to expense
the entire $105,000 cost under section 179. In June, the corporation gave a charitable contribution of $10,000. A corporation's limit on charitable
contributions is figured after subtracting any section 179 deduction. The business income limit for the section 179 deduction is figured after
subtracting any allowable charitable contributions. XYZ's taxable income figured without the section 179 deduction or the deduction for charitable
contributions is $125,000. XYZ figures its section 179 deduction and its deduction for charitable contributions as follows.
Step 1– Taxable income figured without either deduction is $125,000.
Step 2– Using $125,000 as taxable income, XYZ's hypothetical section 179 deduction is $105,000.
Step 3– $20,000 ($125,000 − $105,000).
Step 4– Using $20,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of
taxable income) is $2,000.
Step 5– $123,000 ($125,000 − $2,000).
Step 6– Using $123,000 (from Step 5) as taxable income, XYZ figures the actual section 179 deduction. Because the taxable
income is at least $105,000, XYZ can take a $105,000 section 179 deduction.
Step 7– $20,000 ($125,000 − $105,000).
Step 8– Using $20,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable
income) is $2,000.
Carryover of disallowed deduction.Section 179 deduction:CarryoverCarryover of section 179 deduction
You can carry over for an unlimited number of years the cost of any section 179 property you elected to expense but were unable to because of the
business income limit. This disallowed deduction amount is shown on line 13 of Form 4562. You use the amount you carry over to determine your section
179 deduction in the next year. Enter that amount on line 10 of your Form 4562 for the next year.
If you place more than one property in service in a year, you can select the properties for which all or a part of the costs will be carried
forward. Your selections must be shown in your books and records. For this purpose, treat section 179 costs allocated from a partnership or an S
corporation as one item of section 179 property. If you do not make a selection, the total carryover will be allocated equally among the properties
you elected to expense for the year.
If costs from more than one year are carried forward to a subsequent year in which only part of the total carryover can be deducted, you must
deduct the costs being carried forward from the earliest year first.
If there is a sale or other disposition of your property (including a transfer at death) before you can use the full amount of any outstanding
carryover of your disallowed section 179 deduction, neither you nor the new owner can deduct any of the unused amount. Instead, you must add it back
to the property's basis.
Partnerships and PartnersSection 179 deduction:Partnership rules
The section 179 deduction limits apply both to the partnership and to each partner. The partnership determines its section 179 deduction subject to
the limits. It then allocates the deduction among its partners.
Each partner adds the amount allocated from partnerships (shown on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc.)
to his or her nonpartnership section 179 costs and then applies the dollar limit to this total. To determine any reduction in the dollar limit for
costs over $420,000, the partner does not include any of the cost of section 179 property placed in service by the partnership. After the dollar limit
(reduced for any nonpartnership section 179 costs over $420,000) is applied, any remaining cost of the partnership and nonpartnership section 179
property is subject to the business income limit.
Partnership's taxable income.
For purposes of the business income limit, figure the partnership's taxable income by adding together the net income and losses from all trades or
businesses actively conducted by the partnership during the year. See Publication 541, Partnerships, for information on how to figure partnership net
income (or loss). However, figure taxable income without regard to credits, tax-exempt income, the section 179 deduction, and guaranteed payments
under section 707(c) of the Internal Revenue Code.
Partner's share of partnership's taxable income.
For purposes of the business income limit, the taxable income of a partner engaged in the active conduct of one or more of a partnership's trades
or businesses includes his or her allocable share of taxable income derived from the partnership's active conduct of any trade or business.
Example.
In 2005, Beech Partnership placed in service section 179 property with a total cost of $445,000. The partnership must reduce its dollar limit by
$25,000 ($445,000 − $420,000). Its maximum section 179 deduction is $80,000 ($105,000 − $25,000), and it elects to expense that amount.
The partnership's taxable income from the active conduct of all its trades or businesses for the year was $100,000, so it can deduct the full $80,000.
It allocates $40,000 of its section 179 deduction and $50,000 of its taxable income to Dean, one of its partners.
In addition to being a partner in Beech Partnership, Dean is also a partner in the Cedar Partnership, which allocated to him a $30,000 section 179
deduction and $35,000 of its taxable income from the active conduct of its business. He also conducts a business as a sole proprietor and, in 2005,
placed in service in that business qualifying section 179 property costing $55,000. He had a net loss of $5,000 from that business for the year.
Dean does not have to include section 179 partnership costs to figure any reduction in his dollar limit, so his total section 179 costs for the
year are not more than $420,000 and his dollar limit is not reduced. His maximum section 179 deduction is $105,000. He elects to expense all of the
$70,000 in section 179 deductions allocated from the partnerships ($40,000 from Beech Partnership plus $30,000 from Cedar Partnership), plus $35,000
of his sole proprietorship's section 179 costs, and notes that information in his books and records. However, his deduction is limited to his business
taxable income of $80,000 ($50,000 from Beech Partnership, plus $35,000 from Cedar Partnership minus $5,000 loss from his sole proprietorship). He
carries over $25,000 ($105,000 − $80,000) of the elected section 179 costs to 2006. He allocates the carryover amount to the cost of section 179
property placed in service in his sole proprietorship, and notes that allocation in his books and records.
Different tax years.
For purposes of the business income limit, if the partner's tax year and that of the partnership differ, the partner's share of the partnership's
taxable income for a tax year is generally the partner's distributive share for the partnership tax year that ends with or within the partner's tax
year.
Example.
John and James Oak are equal partners in Oak Company. Oak Company uses a tax year ending January 31. John and James both use a tax year ending
December 31. For its tax year ending January 31, 2005, Oak Company's taxable income from the active conduct of its business is $80,000, of which
$70,000 was earned during 2004. John and James each include $40,000 (each partner's entire share) of partnership taxable income in computing their
business income limit for the 2005 tax year.
Adjustment of partner's basis in partnership.Basis:Adjustments
A partner must reduce the basis of his or her partnership interest by the total amount of section 179 expenses allocated from the partnership even
if the partner cannot currently deduct the total amount. If the partner disposes of his or her partnership interest, the partner's basis for
determining gain or loss is increased by any outstanding carryover of disallowed section 179 expenses allocated from the partnership.
Adjustment of partnership's basis in section 179 property.
The basis of a partnership's section 179 property must be reduced by the section 179 deduction elected by the partnership. This reduction of basis
must be made even if a partner cannot deduct all or part of the section 179 deduction allocated to that partner by the partnership because of the
limits.
S CorporationsSection 179 deduction:S corporation rules
Generally, the rules that apply to a partnership and its partners also apply to an S corporation and its shareholders. The deduction limits apply
to an S corporation and to each shareholder. The S corporation allocates its deduction to the shareholders who then take their section 179 deduction
subject to the limits.
Figuring taxable income for an S corporation.
To figure taxable income (or loss) from the active conduct by an S corporation of any trade or business, you total the net income and losses from
all trades or businesses actively conducted by the S corporation during the year.
To figure the net income (or loss) from a trade or business actively conducted by an S corporation, you take into account the items from that trade
or business that are passed through to the shareholders and used in determining each shareholder's tax liability. However, you do not take into
account any credits, tax-exempt income, the section 179 deduction, and deductions for compensation paid to shareholder-employees. For purposes of
determining the total amount of S corporation items, treat deductions and losses as negative income. In figuring the taxable income of an S
corporation, disregard any limits on the amount of an S corporation item that must be taken into account when figuring a shareholder's taxable income.
Other Corporations
A corporation's taxable income from its active conduct of any trade or business is its taxable income figured with the following changes.
It is figured before deducting the section 179 deduction, any net operating loss deduction, and special deductions (as reported on the
corporation's income tax return).
It is adjusted for items of income or deduction included in the amount figured in 1, above, not derived from a trade or business actively
conducted by the corporation during the tax year.
How Do You Elect the Deduction?Section 179 deduction:ElectingElection:Section 179 deduction
Listed property
Placed in service
You elect to take the section 179 deduction by completing Part I of Form 4562.
If you elect the deduction for listed property (described in chapter 5), complete Part V of Form 4562 before completing Part I.
For property placed in service in 2005, file Form 4562 with either of the following.
Your original 2005 tax return (whether or not you file it timely).
An amended return for 2005 filed within the time prescribed by law. An election made on an amended return must specify the item of section
179 property to which the election applies and the part of the cost of each such item to be taken into account. The amended return must also include
any resulting adjustments to taxable income.
Recordkeeping:Section 179Section 179 deduction:RecordkeepingYou must keep records that show the specific identification of each piece of qualifying section 179 property.
These records must show how you acquired the property, the person you acquired it from, and when you placed it in service.
Revoking an election.Revoking:Section 179 election
An election (or any specification made in the election) to take a section 179 deduction for 2005, can be revoked without IRS approval by filing an
amended return. The amended return must be filed within the time prescribed by law. The amended return must also include any resulting adjustments to
taxable income. Once made, the revocation is irrevocable.
When Must You Recapture the Deduction?Section 179 deduction:RecaptureRecapture:Section 179 deductionBusiness-use limit, recapture of Section 179 deductionSection 179 deduction:Limits:Business-use, recapture
Disposition
Exchange
Recapture
Recovery period
Section 1245 property
You may have to recapture the section 179 deduction if, in any year during the property's recovery period, the percentage of business use drops to
50% or less. In the year the business use drops to 50% or less, you include the recapture amount as ordinary income in Part IV of Form 4797. You also
increase the basis of the property by the recapture amount. Recovery periods for property are discussed under Which Recovery Period Applies
in chapter 4.
Section 179 deduction:DispositionsDisposition:Section 179 deductionIf you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under
the rules explained in this discussion. Instead, use the rules for recapturing depreciation explained in chapter 3 of Publication 544 under
Section 1245 Property.
If the property is listed property (described in chapter 5), do not figure the recapture amount under the rules explained in this discussion when
the percentage of business use drops to 50% or less. Instead, use the rules for recapturing excess depreciation in chapter 5 under What Is the
Business-Use Requirement.
Figuring the recapture amount.
To figure the amount to recapture, take the following steps.
Figure the depreciation that would have been allowable on the section 179 deduction you claimed. Begin with the year you placed the property
in service and include the year of recapture.
Subtract the depreciation figured in (1) from the section 179 deduction you claimed. The result is the amount you must
recapture.
Example.
In January 2003, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. The property is not listed
property. He elected a $5,000 section 179 deduction for the property and also elected not to claim a special depreciation allowance. He used the
property only for business in 2003 and 2004. In 2005, he used the property 40% for business and 60% for personal use. He figures his recapture amount
as follows.
Qualified zone property and qualified renewal property.
If any qualified zone property or qualified renewal property placed in service during the year ceases to be used in an empowerment zone or renewal
community by an enterprise zone business or a renewal community business in a later year, the benefit of the increased section 179 deduction must be
reported as other income on your return.
Qualified Liberty Zone property.
If any qualified Liberty Zone property placed in service during the year ceases to be used in the Liberty Zone in a later year, the benefit of the
increased section 179 deduction must be reported as other income on your return.
Qualified section 179 GO Zone property.
If any qualified section 179 GO Zone property ceases to be qualified section 179 GO Zone property in a later year, the benefit of the increased
section 179 deduction must be reported as other income on your return.
Claiming the Special Depreciation Allowance
You can take a special depreciation allowance to recover part of the cost of qualified property (defined next), placed in service during the tax
year. The allowance applies only for the first year you place the property in service. For qualified property placed in service in 2005, you can take
an additional 50% (or 30%, if applicable) special allowance. The allowance is an additional deduction you can take after any section 179 deduction and
before you figure regular depreciation under MACRS for the year you place the property in service.
This chapter explains what is qualified property. It also includes rules regarding how to figure an allowance, how to elect not to claim an
allowance, and when you must recapture an allowance.
Form (and Instructions)Depreciation and Amortization
See chapter 6 for information about getting publications and forms.
What Is Qualified Property?Special depreciation allowance:Qualified propertyQualified property, special depreciation allowance
Business/investment use
Improvement
Nonresidential real property
Placed in service
Residential rental property
Structural components
Your property is qualified property if it is one of the following.
Certain property with a long production period.
Certain noncommercial aircraft.
Qualified Liberty Zone property.
Qualified Gulf Opportunity Zone (GO Zone) property.
.
The following discussions provide information about the types of qualified property listed above for which you can take the special depreciation
allowance.
Long Production Period PropertyLong production period property, requirements for the special allowance
To be qualified property, long production period property must meet the following requirements.
It is new property of one of the following types.
Tangible property depreciated under the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less.
Generally, every type of property except real property has a recovery period of 20 years or less.
Water utility property (25-year property described under Which Property Class Applies under GDS in chapter 4).
Computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been
substantially modified. (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS.)
The property has a recovery period of at least 10 years or is transportation property. Transportation property is tangible personal property
used in the trade or business of transporting persons or property.
The property is subject to section 263A.
The property has an estimated production period exceeding 2 years or has an estimated production period exceeding 1 year and an estimated
production cost exceeding $1,000,000.
The property meets all of the tests discussed under Other Tests To Be Met, later.
The property is not excepted property, discussed on page 25 under Excepted Property.
Generally, this is any improvement to an interior part of a building that is nonresidential real property, if all the following requirements are
met.
The improvement is made under or according to a lease by the lessee (or any sublessee) or the lessor of that part of the
building.
That part of the building is to be occupied exclusively by the lessee (or any sublessee) of that part.
The improvement is placed in service more than 3 years after the date the building was first placed in service by any person.
The improvement is section 1250 property. See chapter 3 in Publication 544, Sales and Other Dispositions of Assets, for the definition of
section 1250 property.
However, a qualified leasehold improvement does not include any improvement for which the expenditure is attributable to any of the following.
The enlargement of the building.
Any elevator or escalator.
Any structural component benefiting a common area.
The internal structural framework of the building.
Generally, a binding commitment to enter into a lease is treated as a lease and the parties to the commitment are treated as the lessor and lessee.
However, a lease between related persons is not treated as a lease.
Related persons.Related persons
For this purpose, the following are related persons.
Members of an affiliated group.
An individual and a member of his or her family, including only a spouse, child, parent, brother, sister, half-brother, half-sister,
ancestor, and lineal descendant.
A corporation and an individual who directly or indirectly owns 80% or more of the value of the outstanding stock of that corporation.
Two corporations that are members of the same controlled group.
A trust fiduciary and a corporation if 80% or more of the value of the outstanding stock is directly or indirectly owned by or for the trust
or grantor of the trust.
The grantor and fiduciary, and the fiduciary and beneficiary, of any trust.
The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of
both trusts.
A tax-exempt educational or charitable organization and any person (or, if that person is an individual, a member of that person's family)
who directly or indirectly controls the organization.
Two S corporations, and an S corporation and a regular corporation, if the same persons own 80% or more of the value of the outstanding
stock of each corporation.
A corporation and a partnership if the same persons own both of the following.
80% or more of the value of the outstanding stock of the corporation.
80% or more of the capital or profits interest in the partnership.
The executor and beneficiary of any estate.
Noncommercial AircraftNoncommercial aircraft, requirements for the special allowance
To be qualified property, noncommercial aircraft must meet the following requirements.
The aircraft must not be tangible personal property used in the trade or business of transporting persons or property (except for
agricultural or firefighting purposes).
The aircraft must be purchased (as discussed under Property Acquired by Purchase in chapter 2) by a purchaser who at the time of
the contract for purchase, makes a nonrefundable deposit of the lesser of 10% of the cost or $100,000.
The aircraft must have an estimated production period exceeding four months and a cost exceeding $200,000.
The aircraft must meet all of the tests discussed next under Other Tests To Be Met.
The aircraft must not be excepted property, discussed on page 25 under Excepted Property.
Other Tests To Be Met
Qualified long production period property and noncommercial aircraft must also meet all of the following tests.
Acquisition date test.Long production period property:Acquisition date testNoncommercial aircraft:Acquisition date test
To qualify for the 50% special allowance, you must have acquired the property after May 5, 2003, and before January 1, 2005. If a written binding
contract to acquire the property existed before May 6, 2003, the property does not qualify.
To qualify for the 30% special allowance, you must have acquired the property after September 10, 2001, and before January 1, 2005. If a written
binding contract to acquire the property existed before September 11, 2001, the property does not qualify.
You can elect to claim the 30% special allowance instead of the 50% allowance for property that qualifies for the 50% allowance. This election
applies to all property in the same property class placed in service during the tax year. See How Can You Elect Not To Claim an Allowance,
later.
Property you manufacture, construct, or produce for your own use meets this test if you began the manufacture, construction, or production of the
property after May 5, 2003 (after September 10, 2001, for the 30% special allowance, if applicable), and before January 1, 2005. Property that is
manufactured, constructed, or produced for your use by another person under a written binding contract entered into before the manufacture,
construction, or production of the property, is considered to be manufactured, constructed, or produced by you.
Placed in service date test.Long production period property:Placed in service date testNoncommercial aircraft:Placed in service date test
Qualified long production period property and noncommercial aircraft must be placed in service before January 1, 2006.
Extension of placed-in-service date.
The IRS may extend the December 31, 2005, deadline for meeting the placed in service date test (but not by more than one year) on a case-by-case
basis for qualified long production period property and noncommercial aircraft placed in service or manufactured in the GO Zone, the Rita GO Zone, or
the Wilma GO Zone. This authority applies only to taxpayers that were unable to meet the deadline as a result of Hurricane Katrina, Rita, and/or
Wilma. For information about the GO Zone, Rita GO Zone, and Wilma GO Zone, see Publication 4492, Information for Taxpayers Affected by Hurricanes
Katrina, Rita, and Wilma.
Sale-leaseback.
If you sold qualified long production period property or noncommercial aircraft you placed in service after May 5, 2003 (after September 10, 2001,
for the 30% special allowance, if applicable), and leased it back within 3 months after you originally placed it in service, the property is treated
as originally placed in service no earlier than the date it is used by you under the leaseback.
The property will not qualify for the special allowance if the lessee or a related person to the lessee or lessor had a written binding contract in
effect for the acquisition of the property before May 6, 2003 (before September 11, 2001, if applicable).
Syndicated leasing transactions.
If qualified long production period property or noncommercial aircraft is originally placed in service by a lessor after May 5, 2003 (after
September 10, 2001, for the 30% special allowance, if applicable), the property is sold within 3 months of the date it was placed in service, and the
user of the property does not change, then the property is treated as originally placed in service by the purchaser no earlier than the date of the
last sale.
Multiple units of property subject to the same lease will be treated as originally placed in service no earlier than the date of the last sale if
the property is sold within 3 months after the final unit is placed in service and the period between the times the first and last units are placed in
service does not exceed 12 months.
For special rules explaining when property involved in certain other transactions is treated as originally placed in service, see section
1.168(k)-1T(b)(5) of the Regulations.
Original use test.Long production period property:Original use testNoncommercial aircraft:Original use test
The original use of the property must have begun with you after May 5, 2003, for the 50% special allowance (after September 10, 2001, for the 30%
special allowance, if applicable). Original use means the first use to which the property is put, whether or not by you. Therefore, property used by
any person before May 6, 2003 (before September 11, 2001, if applicable), does not meet the original use test.
Additional capital expenditures you incurred to recondition or rebuild your property meet the original use test. However, the cost of reconditioned
or rebuilt property you acquired does not meet this test. Property containing used parts will not be treated as reconditioned or rebuilt if the cost
of the used parts is not more than 20 percent of the total cost of the property.
If you sold new property you placed in service after May 5, 2003 (after September 10, 2001, if applicable), and you leased it back within 3 months
after you originally placed the property in service, the lessor is considered to be the original user of the property.
For special rules identifying the original user of property involved in certain other transactions and the original user of fractional interests in
property, see section 1.168(k)-1T(b)(3) of the Regulations.
If you acquire new property for personal use and then use the property in your trade or business or for the production of income, you are
considered to be the original user.
Excepted PropertyLong production period property:Excepted propertyNoncommercial aircraft:Excepted property
Qualified long production period property and noncommercial aircraft do not include any of the following.
Property placed in service and disposed of in the same tax year.
Property converted from business use to personal use in the same tax year it is acquired. (Property converted from personal use to business
use in the same or later tax year may be qualified property.)
Property required to be depreciated using the Alternative Depreciation System (ADS). This includes listed property used 50% or less in a
qualified business use. For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation
System (GDS or ADS) Applies, in Chapter 4.
Qualified New York Liberty Zone (Liberty Zone) leasehold improvement property (defined next).
Property for which you elected not to claim any special depreciation allowance (discussed later).
Qualified Liberty Zone leasehold improvement property.Liberty Zone leasehold improvement property, defined
This is any qualified leasehold improvement property (as defined earlier) if all the following requirements are met.
The improvement is made to a building located in the Liberty Zone (defined under Liberty Zone Property in chapter 2).
The improvement is placed in service after September 10, 2001, and before January 1, 2007.
No written binding contract for the improvement was in effect before September 11, 2001.
Qualified Liberty Zone PropertySpecial depreciation allowance:Qualified Liberty Zone propertyQualified Liberty Zone property, requirements for the special allowance
You can take a special depreciation allowance for qualified Liberty Zone property. Your property is qualified Liberty Zone property if it meets the
following requirements.
It is one of the following types of property.
Property depreciated under the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less other than new
long production period property and new noncommercial aircraft described earlier under What Is Qualified Property. See Can You Use
MACRS To Depreciate Your Property in chapter 1.
Water utility property (other than new long production period property), which is either of the following.
Property that is an integral part of the gathering, treatment, or commercial distribution of water, and that, without regard to this
provision, would be 20-year property.
Any municipal sewer.
Computer software (other than new long production period property) that is readily available for purchase by the general public, is subject
to a nonexclusive license, and has not been substantially modified. (The cost of some computer software is treated as part of the cost of hardware and
is depreciated under MACRS.)
Certain nonresidential real property and residential rental property (defined next).
It is property that meets certain tests (explained later under Other Tests To Be Met).
It is not excepted property (explained on page 27 under Excepted Property.
Nonresidential real property and residential rental property.
This property is qualified Liberty Zone property only to the extent it rehabilitates real property damaged, or replaces real property destroyed or
condemned, as a result of the terrorist attacks of September 11, 2001. Property is treated as replacing destroyed or condemned property if, as part of
an integrated plan, such property replaces real property included in a continuous area that includes real property destroyed or condemned.
For these purposes, real property is considered destroyed (or condemned) only if an entire building or structure was destroyed (or condemned) as a
result of the terrorist attacks. Otherwise, the property is considered damaged real property. For example, if certain structural components of a
building (such as walls, floors, and plumbing fixtures) are damaged or destroyed as a result of the terrorist attacks, but the building is not
destroyed (or condemned), then only costs related to replacing the damaged or destroyed structural components qualify for the special Liberty Zone
depreciation allowance.
Other Tests To Be Met
To be qualified Liberty Zone property, the property must also meet all of the following tests.
Acquisition date test.Qualified Liberty Zone property:Acquisition date test
You must have acquired the property by purchase (as discussed under Property Acquired by Purchase in chapter 2) after September 10,
2001, and there must not have been a binding written contract for the acquisition in effect before September 11, 2001.
Property you manufacture, construct, or produce for your own use meets this test if you began the manufacture, construction, or production of the
property after September 10, 2001. Property that is manufactured, constructed, or produced for your use by another person under a written binding
contract entered into before the manufacture, construction, or production of the property, is considered to be manufactured, constructed, or produced
by you.
Placed in service date test.Qualified Liberty Zone property:Placed in service date test
The property must be placed in service for use in your trade or business or for the production of income before January 1, 2007 (January 1, 2010,
in the case of qualifying nonresidential real property and residential rental property).
Sale-leaseback.
If you sold qualified Liberty Zone property you placed in service after September 10, 2001, and leased it back within 3 months after you originally
placed it in service, the property is treated as originally placed in service no earlier than the date it is used by you under the leaseback.
The property will not qualify for the special allowance if the lessee or a related person to the lessee or lessor had a written binding contract in
effect for the acquisition of the property before September 11, 2001.
Syndicated leasing transactions.
If qualified Liberty Zone property is originally placed in service by a lessor after September 10, 2001, the property is sold within 3 months of
the date it was placed in service, and the user of the property does not change, then the property is treated as originally placed in service by the
taxpayer no earlier than the date of the last sale.
Multiple units of property subject to the same lease will be treated as originally placed in service no earlier than the date of sale if the
property is sold within 3 months after the final unit is placed in service and the period between the times the first and last units are placed in
service does not exceed 12 months.
For special rules explaining when property involved in certain other transactions is treated as originally placed in service, see section
1.168(k)-1T(b)(5) of the Regulations.
Substantial use test.Qualified Liberty Zone property:Substantial use test
Substantially all (80 percent or more) of the use of the property must be in the Liberty Zone and in the active conduct of your trade or business
in the Liberty Zone.
Original use test.Qualified Liberty Zone property:Original use test
The original use of the property in the Liberty Zone must have begun with you after September 10, 2001.
Used property can be qualified Liberty Zone property if it has not previously been used within the Liberty Zone. Also, additional capital
expenditures you incurred after September 10, 2001, to recondition or rebuild your property meet the original use test if the original use of the
property in the Liberty Zone began with you. However, the cost of reconditioned or rebuilt property you acquired does not meet this test. Property
containing used parts will not be treated as reconditioned or rebuilt if the cost of the used parts is not more than 20 percent of the total cost of
the property.
If you sold property you placed in service after September 10, 2001, and you leased it back within 3 months after you originally placed the
property in service, the lessor is considered to be the original user of the property.
For special rules identifying the original user of property involved in certain other transactions and the original user of fractional interests in
property, see section 1.168(k)-1T(b)(3) of the regulations.
Excepted PropertyQualified Liberty Zone property:Excepted property
Qualified Liberty Zone property does not include any of the following.
Property placed in service and disposed of in the same tax year.
Property converted from business use to personal use in the same tax year it is acquired. (Property converted from personal use to business
use in the same or later tax year may be qualified Liberty Zone property.)
Property that also qualifies for the special depreciation allowance.
Property required to be depreciated using the Alternative Depreciation System (ADS). This includes listed property used 50% or less in a
qualified business use. For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation
System (GDS or ADS) Applies, in Chapter 4.
Qualified New York Liberty Zone leasehold improvement property (see Qualified Liberty Zone leasehold improvement property,
earlier, in the discussion on excepted property under What Is Qualified Property).
Property for which you elected not to claim any special depreciation allowance (discussed later).
Qualified Gulf Opportunity Zone PropertySpecial depreciation allowance:Qualified Gulf Opportunity Zone propertyQualified Gulf Opportunity Zone property, requirements for the special allowance
You can take a special depreciation allowance for qualified Gulf Opportunity Zone (GO Zone) property. Your property is qualified GO Zone property
if it meets the following requirements.
It is one of the following types of property.
Property depreciated under the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less. See Can
You Use MACRS To Depreciate Your Property in
chapter 1.
Water utility property, which is either of the following.
Property that is an integral part of the gathering, treatment, or commercial distribution of water, and that, without regard to this
provision, would be 20-year property.
Any municipal sewer.
Computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been
substantially modified. (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS.)
Qualified leasehold improvement property (defined earlier in the discussion of qualified leasehold improvement property under Long
Production Period Property).
Certain nonresidential real property and residential rental property.
It is property that meets certain tests (explained next under Other Tests To Be Met).
It is not excepted property (explained on page 28 under Excepted Property.
Other Tests To Be Met
To be qualified GO Zone property, the property must also meet all of the following tests.
Acquisition date test.Qualified Gulf Opportunity Zone property:Acquisition date test
You must have acquired the property by purchase (as discussed under Property Acquired by Purchase in chapter 2) after August 27, 2005,
with no binding written contract for the acquisition in effect before August 28, 2005.
Property you manufacture, construct, or produce for your own use meets this test if you began the manufacture, construction, or production of the
property after August 27, 2005, and before January 1, 2008. Property that is manufactured, constructed, or produced for your use by another person
under a written binding contract entered into before the manufacture, construction, or production of the property, is considered to be manufactured,
constructed, or produced by you.
Placed in service date test.Qualified Gulf Opportunity Zone property:Placed in service date test
The property must be placed in service for use in your trade or business or for the production of income before January 1, 2008 (January 1, 2009,
in the case of qualifying nonresidential real property and residential rental property).
Sale-leaseback.
If you sold qualified GO Zone property you placed in service after August 27, 2005, and leased it back within 3 months after you originally placed
it in service, the property is treated as originally placed in service no earlier than the date it is used by you under the leaseback.
The property will not qualify for the special allowance if the lessee or a related person to the lessee or lessor had a written binding contract in
effect for the acquisition of the property before August 28, 2005.
Syndicated leasing transactions.
If qualified GO Zone property is originally placed in service by a lessor after August 27, 2005, the property is sold within 3 months of the date
it was placed in service, and the user of the property does not change, then the property is treated as originally placed in service by the taxpayer
no earlier than the date of the last sale.
Multiple units of property subject to the same lease will be treated as originally placed in service no earlier than the date of sale if the
property is sold within 3 months after the final unit is placed in service and the period between the times the first and last units are placed in
service does not exceed 12 months.
Substantial use test.Qualified Gulf Opportunity Zone property:Substantial use test
Substantially all (80 percent or more) of the use of the property must be in the GO Zone and in the active conduct of your trade or business in the
GO Zone.
Original use test.Qualified Gulf Opportunity Zone property:Original use test
The original use of the property in the GO Zone must have begun with you after August 27, 2005.
Used property can be qualified GO Zone property if it has not previously been used within the GO Zone. Also, additional capital expenditures you
incurred after August 27, 2005, to recondition or rebuild your property meet the original use test if the original use of the property in the GO Zone
began with you.
If you sold property you placed in service after August 27, 2005, and you leased it back within 3 months after you originally placed the property
in service, the lessor is considered to be the original user of the property.
Excepted PropertyQualified Gulf Opportunity Zone property:Excepted property
Qualified GO Zone property does not include any of the following.
Property required to be depreciated using the Alternative Depreciation System (ADS). This includes listed property used 50% or less in a
qualified business use. For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation
System (GDS or ADS) Applies, in Chapter 4.
Property any portion of which is financed with the proceeds of a tax-exempt obligation under section 103 of the Internal Revenue
Code.
Any qualified revitalization building (described next) for which you have elected to claim a commercial revitalization deduction for
qualified revitalization expenditures.
Any property used in connection with any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility,
or any store, the principal business of which is the sale of alcoholic beverages for consumption off premises.
Any gambling or animal racing property (defined later).
Property for which you elected not to claim any special depreciation allowance (discussed later).
Qualified revitalization building.
This is a commercial building and its structural components that you placed in service in a renewal community. If the building is new, the original
use of the building must begin with you. If the building is not new, you must substantially rehabilitate the building and then place it in service.
For more information, including definitions of substantially rehabilitated building and qualified revitalization expenditure, see Publication 954, Tax
Incentives for Distressed Communities.
Gambling or animal racing property.
Gambling or animal racing property includes the following personal and real property.
Any equipment, furniture, software, or other property used directly in connection with gambling, the racing of animals, or the on-site
viewing of such racing.
Any real property determined by square footage (other than any portion that is less than 100 square feet) that is dedicated to gambling, the
racing of animals, or the on-site viewing of such racing.
How Much Can You Deduct?
Adjusted basis
Basis
Placed in service
Figure the special depreciation allowance by multiplying the depreciable basis of the qualified property by 50% (or 30% if applicable). For
qualified Liberty Zone property, multiply the depreciable basis by 30%. For qualified GO Zone property, multiply the depreciable basis by 50%.
For qualified property other than listed property, enter the special allowance on line 14 in Part II of Form 4562. For qualified property that is
listed property, enter the special allowance on line 25 in Part V of Form 4562.
If you place qualified property in service in a short tax year, you can take the full amount of a special depreciation allowance.
Depreciable basis.Basis:Depreciable basis
This is the property's cost or other basis multiplied by the percentage of business/investment use, reduced by the total amount of any credits and
deductions allocable to the property.
The following are examples of some credits and deductions that reduce depreciable basis.
Any section 179 deduction.
Any deduction for removal of barriers to the disabled and the elderly.
Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services.
Basis adjustment to investment credit property under section 50(c) of the Internal Revenue Code.
For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code.
For long production period property, only the part of the depreciable basis attributable to manufacture, construction, or production before January
1, 2005, is eligible for the special depreciation allowance.
For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property in
chapter 1. For a discussion of business/investment use, see Partial business or investment use under Property Used in Your Business or
Income-Producing Activity in chapter 1.
Depreciating the remaining cost.
After you figure your special depreciation allowance for your qualified property, you can use the remaining cost to figure your regular MACRS
depreciation deduction (discussed in chapter 4). Therefore, you must reduce the depreciable basis of the property by the allowance before figuring
your regular MACRS depreciation deduction.
Example 1.
On November 1, 2005, Tom Brown bought and placed in service in his business qualified property (for example, a noncommercial aircraft) that cost
$205,000. He did not elect to claim a section 179 deduction. He deducts 50% of the cost ($102,500) as a special depreciation allowance for 2005. He
uses the remaining $102,500 of cost to figure his regular MACRS depreciation deduction for 2005 and later years.
Example 2.
The facts are the same as in Example 1, except that Tom chooses to deduct $105,000 of the property's cost as a section 179 deduction. He uses the
remaining $100,000 of cost to figure his special depreciation allowance of $50,000 ($100,000 × 50%). He uses the remaining $50,000 of cost to
figure his regular MACRS depreciation deduction for 2005 and later years.
Like-kind exchanges and involuntary conversions.
If you acquire qualified property in a like-kind exchange or involuntary conversion, the carryover basis of the acquired property is eligible for a
special depreciation allowance. After you figure your special allowance, you can use the remaining carryover basis to figure your regular MACRS
depreciation deduction. In the year you claim the allowance (the year you place in service the property received in the exchange or dispose of
involuntarily converted property), you must reduce the carryover basis of the property by the allowance before figuring your regular MACRS
depreciation deduction. See Figuring the Deduction for Property Acquired in a Nontaxable Exchange, in chapter 4, under How Is the
Depreciation Deduction Figured. The excess basis (the part of the acquired property's basis that exceeds its carryover basis) is also eligible
for a special depreciation allowance.
How Can You Elect Not To Claim an Allowance?Special depreciation allowance:Election not to claimElection:Not to claim special depreciation allowance
Property class
You can elect, for any class of property, either:
To deduct the 30% special allowance, instead of the 50% allowance (unless the allowance is for qualified GO Zone property), for all property
in such class placed in service during the tax year, or
Not to deduct any special allowances for all property (including qualified GO Zone property) in such class placed in service during the tax
year.
For qualified long production period property and noncommercial aircraft acquired before May 6, 2003, and for qualified Liberty Zone property, you
can elect, for any class of property, not to deduct the 30% special allowance for all property in such class placed in service during the year. For
qualified GO Zone property, you can elect, for any class of property, not to deduct the 50% special allowance.
To make an election, attach a statement to your return indicating what election you are making and the class of property for which you are making
the election.
When to make election.
Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service.
However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return
within 6 months of the due date of the original return (not including extensions). Attach the election statement to the amended return. On the amended
return, write Filed pursuant to section 301.9100-2.
Revoking an election.
Once you elect not to deduct a special depreciation allowance for a class of property, you cannot revoke the election without IRS consent. A
request to revoke the election is a request for a letter ruling. See Changing Your Accounting Method in chapter 1.
If you elect not to have any special allowance apply, the property may be subject to an alternative minimum tax adjustment for depreciation.
When Must You Recapture the Allowance?Special depreciation allowance:RecaptureRecapture:Special depreciation allowance
Disposition
Recapture
When you dispose of property that you depreciated, any gain on the disposition is generally recaptured (included in income) as ordinary income up
to the amount of the depreciation previously allowed or allowable for the property. A special depreciation allowance deducted for qualified property
(including qualified Liberty Zone and GO Zone property) is considered to be depreciation for this purpose and is therefore subject to recapture. See
When Do You Recapture MACRS Depreciation in chapter 4 for more information.
Recapture of allowance deducted for qualified GO Zone property.
If, in any year after the year you claim the special depreciation allowance for qualified GO Zone property, the property ceases to be qualified GO
Zone property, you may have to recapture as ordinary income the excess benefit you received from claiming the special allowance.
Figuring Depreciation Under MACRS
The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after
1986. MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Generally,
these systems provide different methods and recovery periods to use in figuring depreciation deductions.
To be sure you can use MACRS to figure depreciation for your property, see Can You Use MACRS To Depreciate Your Property in
chapter 1.
This chapter explains how to determine which MACRS depreciation system applies to your property. It also discusses other information you need to
know before you can figure depreciation under MACRS. This information includes the property's recovery class, placed-in-service date, and basis, as
well as the applicable recovery period, convention, and depreciation method. It explains how to use this information to figure your depreciation
deduction and how to use a general asset account to depreciate a group of properties. Finally, it explains when and how to recapture MACRS
depreciation.
Publication225 Farmer's Tax Guide 463 Travel, Entertainment, Gift, and Car
Expenses544 Sales and Other Dispositions of Assets 551 Basis of Assets 587 Business Use of Your Home (Including Use by Daycare Providers) Form (and Instructions)Employee Business ExpensesUnreimbursed Employee Business ExpensesDepreciation and Amortization
See chapter 6 for information about getting publications and forms.
Which Depreciation System (GDS or ADS) Applies?Modified ACRS (MACRS):Alternative Depreciation System (ADS)Modified ACRS (MACRS):General Depreciation System (GDS)When to use ADS
Listed property
Nonresidential real property
Placed in service
Property class
Recovery period
Residential rental property
Tangible property
Tax exempt
Your use of either the General Depreciation System (GDS) or the Alternative Depreciation System (ADS) to depreciate property under MACRS determines
what depreciation method and recovery period you use. You generally must use GDS unless you are specifically required by law to use ADS or you elect
to use ADS.
If you placed your property in service in 2005, complete Part III of Form 4562 to report depreciation using MACRS. Complete section B of Part III
to report depreciation using GDS, and complete section C of Part III to report depreciation using ADS. If you placed your property in service before
2005 and are required to file Form 4562 (as explained in chapter 1 under Do You Have To File Form 4562), report depreciation using either
GDS or ADS on line 17 in Part III.
Required use of ADS.Alternative Depreciation System (ADS):Required use
You must use ADS for the following property.
Listed property used 50% or less in a qualified business use. (See chapter 5 for information on listed property.)
Any tangible property used predominantly outside the United States during the year.
Any tax-exempt use property.
Any tax-exempt bond-financed property.
All property used predominantly in a farming business and placed in service in any tax year during which an election not to apply the
uniform capitalization rules to certain farming costs is in effect.
Any property imported from a foreign country for which an Executive Order is in effect because the country maintains trade restrictions or
engages in other discriminatory acts.
If you are required to use ADS to depreciate your property, you cannot claim any special depreciation allowance (discussed in chapter 3) for the
property.
Electing ADS.Election:ADSRevoking:ADS election
Although your property may qualify for GDS, you can elect to use ADS. The election generally must cover all property in the same property class
that you placed in service during the year. However, the election for residential rental property and nonresidential real property can be made on a
property-by-property basis. Once you make this election, you can never revoke it.
You make the election by completing line 20 in Part III of Form 4562.
Which Property Class Applies Under GDS?Modified ACRS (MACRS):Property classesProperty:Classes
Class life
Nonresidential real property
Placed in service
Property class
Recovery period
Residential rental property
Section 1245 property
Section 1250 property
The following is a list of the nine property classifications under GDS and examples of the types of property included in each class. These property
classes are also listed under column (a) in section B, Part III, of Form 4562.
3-year property.
Tractor units for over-the-road use.
Any race horse over 2 years old when placed in service.
Any other horse (other than a race horse) over 12 years old when placed in service.
Qualified rent-to-own property (defined later).
5-year property.
Automobiles, taxis, buses, and trucks.
Computers and peripheral equipment.
Office machinery (such as typewriters, calculators, and copiers).
Any property used in research and experimentation.
Breeding cattle and dairy cattle.
Appliances, carpets, furniture, etc., used in a residential rental real estate activity.
Any qualified Liberty Zone leasehold improvement property. See Qualified Liberty Zone leasehold improvement property,
later.
Certain geothermal, solar, and wind energy property.
7-year property.
Office furniture and fixtures (such as desks, files, and safes).
Agricultural machinery and equipment.
Any property that does not have a class life and has not been designated by law as being in any other class.
Certain motorsports entertainment complex property (defined later).
Any natural gas gathering line placed in service after April 11, 2005. See Natural gas gathering line, natural gas distribution line,
and electric transmission property, later.
10-year property.
Vessels, barges, tugs, and similar water transportation equipment.
Any single purpose agricultural or horticultural structure.
Any tree or vine bearing fruits or nuts.
15-year property.
Certain improvements made directly to land or added to it (such as shrubbery, fences, roads, and bridges).
Any retail motor fuels outlet (defined later), such as a convenience store.
Any municipal wastewater treatment plant.
Any qualified leasehold improvement property (defined later) placed in service before January 1, 2006.
Any qualified restaurant property (defined later) placed in service before January 1, 2006.
Initial clearing and grading land improvements for gas utility property.
Electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity placed in
service after April 11, 2005. See Natural gas gathering line, natural gas distribution line, and electric transmission property,
later.
Any natural gas distribution line placed in service after April 11, 2005. See Natural gas gathering line, natural gas distribution
line, and electric transmission property, later.
20-year property.
Farm buildings (other than single purpose agricultural or horticultural structures).
Municipal sewers not classified as 25-year property.
Initial clearing and grading land improvements for electric utility transmission and distribution plants.
25-year property. This class is water utility property, which is either of the following.
Property that is an integral part of the gathering, treatment, or commercial distribution of water, and that, without regard to this
provision, would be 20-year property.
Municipal sewers other than property placed in service under a binding contract in effect at all times since June 9, 1996.
Residential rental property.Residential rental propertyRental homeResidential rental propertyMobile homeResidential rental propertyApartment:Rental This is any building or structure, such as a rental home (including a mobile home), if 80% or more of its gross
rental income for the tax year is from dwelling units. A dwelling unit is a house or apartment used to provide living accommodations in a building or
structure. It does not include a unit in a hotel, motel, or other establishment where more than half the units are used on a transient basis. If you
occupy any part of the building or structure for personal use, its gross rental income includes the fair rental value of the part you occupy.
Nonresidential real property.Nonresidential real property This is section 1250 property, such as an office building, store, or warehouse, that is neither
residential rental property nor property with a class life of less than 27.5 years.
If your property is not listed above, you can determine its property class from the Table of Class Lives and Recovery Periods in
Appendix B. The property class is generally the same as the GDS recovery period indicated in the table.
Qualified rent-to-own property.Rent-to-own property, defined
Qualified rent-to-own property is property held by a rent-to-own dealer for purposes of being subject to a rent-to-own contract. It is tangible
personal property generally used in the home for personal use. It includes computers and peripheral equipment, televisions, videocassette recorders,
stereos, camcorders, appliances, furniture, washing machines and dryers, refrigerators, and other similar consumer durable property. Consumer durable
property does not include real property, aircraft, boats, motor vehicles, or trailers.
If some of the property you rent to others under a rent-to-own agreement is of a type that may be used by the renters for either personal or
business purposes, you still can treat this property as qualified property as long as it does not represent a significant portion of your leasing
property. However, if this dual-use property does represent a significant portion of your leasing property, you must prove that this property is
qualified rent-to-own property.
Rent-to-own dealer.
You are a rent-to-own dealer if you meet all the following requirements.
You regularly enter into rent-to-own contracts in the ordinary course of your business for the use of consumer property.
A substantial portion of these contracts end with the customer returning the property before making all the payments required to transfer
ownership.
The property is tangible personal property of a type generally used within the home for personal use.
Rent-to-own contract.
This is any lease for the use of consumer property between a rent-to-own dealer and a customer who is an individual which—
Is titled Rent-to-Own Agreement,Lease Agreement with Ownership Option, or other similar language.
Provides a beginning date and a maximum period of time, not to exceed 156 weeks or 36 months from the beginning date, for which the contract
can be in effect (including renewals or options to extend).
Provides for regular periodic (weekly or monthly) payments that can be either level or decreasing. If the payments are decreasing, no
payment can be less than 40 percent of the largest payment.
Provides for total payments that generally exceed the normal retail price of the property plus interest.
Provides for total payments that do not exceed $10,000 for each item of property.
Provides that the customer has no legal obligation to make all payments outlined in the contract and that, at the end of each weekly or
monthly payment period, the customer can either continue to use the property by making the next payment or return the property in good working order
with no further obligations and no entitlement to a return of any prior payments.
Provides that legal title to the property remains with the rent-to-own dealer until the customer makes either all the required payments or
the early purchase payments required under the contract to acquire legal title.
Provides that the customer has no right to sell, sublease, mortgage, pawn, pledge, or otherwise dispose of the property until all contract
payments have been made.
Qualified Liberty Zone leasehold improvement property.
For a definition of qualified Liberty Zone leasehold improvement property, see Qualified Liberty Zone leasehold improvement property in
the discussion on excepted property under What Is Qualified Property in chapter 3.
Election out.
You can elect not to treat this property as 5-year property. If you make this election, the property will be depreciable under the rules for
qualified leasehold improvement property. To make the election, attach a statement to your return indicating that you are making this election under
section 1400L(c)(5) of the Internal Revenue Code. The election applies to all qualified Liberty Zone leasehold improvement property placed in service
during the year.
The election must be made separately by each person owning qualified property (for example, by the partnership, by the S corporation, or by the
common parent of a consolidated group).
If you timely filed your return without making an election, you can still make the election by filing an amended return within 6 months of the due
date of the return (excluding extensions). Write Filed pursuant to section 301.9100-2 on the amended return.
Once made, the election cannot be revoked without IRS consent.
Motorsports entertainment complex.
This is a racing track facility permanently situated on land that hosts one or more racing events for automobiles, trucks, or motorcycles during
the 36-month period after the first day of the month in which the facility is placed in service. The events must be open to the public for the price
of admission.
Retail motor fuels outlet.Retail motor fuels outlet
Real property is a retail motor fuels outlet if it is used to a substantial extent in the retail marketing of petroleum or petroleum products
(whether or not it is also used to sell food or other convenience items) and meets any one of the following three tests.
It is not larger than 1,400 square feet.
50% or more of the gross revenues generated from the property are derived from petroleum sales.
50% or more of the floor space in the property is devoted to petroleum marketing sales.
A retail motor fuels outlet does not include any facility related to petroleum and natural gas trunk pipelines.
Generally, this is any improvement to an interior part of a building that is nonresidential real property, provided all of the requirements
discussed in chapter 3 under Qualified leasehold improvement property are met.
In addition, an improvement made by the lessor does not qualify as qualified leasehold improvement property to any subsequent owner unless it is
acquired from the original lessor by reason of the lessor's death or in any of the following types of transactions.
A transaction to which section 381(a) applies,
A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified
leasehold improvement property and the taxpayer retains a substantial interest in the trade or business,
A like-kind exchange, involuntary conversion, or reacquisition of real property to the extent that the basis in the property represents the
carryover basis, or
Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor's or
distributor's basis in the property. Examples include the following.
A complete liquidation of a subsidiary.
A transfer to a corporation controlled by the transferor.
An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization.
Qualified restaurant property.
Qualified restaurant property is any section 1250 property that is an improvement to a building and meets the following requirements.
The improvement is placed in service more than 3 years after the date the building was first placed in service, and
More than 50% of the building's square footage is devoted to preparation of meals and seating for on-premise consumption of prepared
meals.
Natural gas gathering line, natural gas distribution line, and electric transmission property.
Any natural gas gathering line placed in service after April 11, 2005, is treated as 7-year property, and electric transmission property (that is
section 1245 property) used in the transmission at 69 or more kilovolts of electricity and any natural gas distribution line placed in service after
April 11, 2005, are treated as 15-year property, if the following requirements are met.
The original use of the property must have begun with you after April 11, 2005. Original use means the first use to which the property is
put, whether or not by you. Therefore, property used by any person before April 12, 2005, is not original use. Original use includes additional
capital expenditures you incurred to recondition or rebuild your property. However, original use does not include the cost of reconditioned or rebuilt
property you acquired. Property containing used parts will not be treated as reconditioned or rebuilt if the cost of the used parts is not more than
20 percent of the total cost of the property.
The property must not be placed in service under a binding contract in effect before April 12, 2005.
The property must not be self-constructed property (property you manufacture, construct, or produce for your own use), if you began the
manufacture, construction, or production of the property before April 12, 2005. Property that is manufactured, constructed, or produced for your use
by another person under a written binding contract entered into by you or a related party before the manufacture, construction, or production of the
property, is considered to be manufactured, constructed, or produced by you.
What Is the Placed-in-Service Date?Placed in service:Date
Placed in service
You begin to claim depreciation when your property is placed in service for either use in a trade or business or the production of income. The
placed-in-service date for your property is the date the property is ready and available for a specific use. It is therefore not necessarily the date
it is first used. If you converted property held for personal use to use in a trade or business or for the production of income, treat the property as
being placed in service on the conversion date. See Placed in Service under When Does Depreciation Begin and End in chapter 1
for examples illustrating when property is placed in service.
What Is the Basis for Depreciation?Basis:Basis for depreciation
Basis
The basis for depreciation of MACRS property is the property's cost or other basis multiplied by the percentage of business/investment use. (For a
discussion of business/investment use, see Partial business or investment use under Property Used in Your Business or Income-Producing
Activity in chapter 1.) Reduce that amount by any credits and deductions allocable to the property. The following are examples of some credits
and deductions that reduce basis.
Any deduction for section 179 property.
Any deduction under section 179B of the Internal Revenue Code for capital costs to comply with Environmental Protection Agency sulfur
regulations.
Any deduction under section 179C of the Internal Revenue Code for certain qualified refinery property placed in service after August 8,
2005.
Any deduction for removal of barriers to the disabled and the elderly.
Any deduction under section 179A of the Internal Revenue Code for qualified clean-fuel vehicles and qualified clean-fuel vehicle refueling
property placed in service before January 1, 2006.
Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services.
Any special depreciation allowance.
Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code.
For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code.
Enter the basis for depreciation under column (c) in Part III of Form 4562. For information about how to determine the cost or other basis of
property, see What Is the Basis of Your Depreciable Property in chapter 1.
Which Recovery Period Applies?Modified ACRS (MACRS):Recovery periods
Active conduct of a trade or business
Basis
Improvement
Listed property
Nonresidential real property
Placed in service
Property class
Recovery period
Residential rental property
Section 1245 property
The recovery period of property is the number of years over which you recover its cost or other basis. It is determined based on the depreciation
system (GDS or ADS) used.
Recovery Periods Under GDSGeneral Depreciation System (GDS), recovery periodsRecovery periods:GDS
Under GDS, property that is not qualified Indian reservation property is depreciated over one of the following recovery periods.
Property ClassRecovery Period3-year property 3 years15-year property 5 years7-year property 7 years10-year property10 years15-year property15 years220-year property20 years25-year property 25 years3Residential rental property 27.5 yearsNonresidential real property 39 years415 years for qualified rent-to-own property placed in service before August 6, 1997.239 years for property that is a retail motor fuels outlet placed in service before August 20, 1996 (31.5 years if placed in service before
May 13, 1993), unless you elected to depreciate it over 15 years.320 years for property placed in service before June 13, 1996, or under a binding contract in effect before June 10, 1996.431.5 years for property placed in service before May 13, 1993 (or before January 1, 1994, if the purchase or construction of the property
is under a binding contract in effect before May 13, 1993, or if construction began before May 13, 1993).
The GDS recovery periods for property not listed above can be found in Appendix B, Table of Class Lives and Recovery Periods.
Residential rental property and nonresidential real property are defined earlier under Which Property Class Applies Under GDS.
Enter the appropriate recovery period on Form 4562 under column (d) in section B of Part III, unless already shown (for 25-year property,
residential rental property, and nonresidential real property).
Office in the home.Office in the home
If your home is a personal-use single family residence and you begin to use part of your home as an office, depreciate that part of your home as
nonresidential real property over 39 years (31.5 years if you began using it for business before May 13, 1993). However, if your home is an apartment
in an apartment building that you own and the building is residential rental property as defined earlier under Which Property Class Applies Under
GDS, depreciate the part used as an office as residential rental property over 27.5 years. See Publication 587 for a discussion of the tests you
must meet to claim expenses, including depreciation, for the business use of your home.
Home changed to rental use.
If you begin to rent a home that was your personal home before 1987, you depreciate it as residential rental property over 27.5 years.
Indian Reservation PropertyIndian reservation:Recovery periods for qualified property
The recovery periods for qualified property you placed in service on an Indian reservation after 1993 and before 2006 are shorter than those listed
earlier. The following table shows these shorter recovery periods.
Property eligible for the shorter recovery periods are 3-, 5-, 7-, 10-, 15-, and 20-year property and nonresidential real property. You must use
this property predominantly in the active conduct of a trade or business within an Indian reservation. The rental of real property that is located on
an Indian reservation is treated as the active conduct of a trade or business within an Indian reservation.
The following property is not qualified property.
Property used or located outside an Indian reservation on a regular basis, other than qualified infrastructure property.
Property acquired directly or indirectly from a related person.
Property placed in service for purposes of conducting or housing class I, II, or III gaming activities. (These activities are defined in
section 4 of the Indian Regulatory Act (25 U.S.C. 2703).)
Any property you must depreciate under ADS. Determine whether property is qualified without regard to the election to use ADS and after
applying the special rules for listed property not used predominantly for qualified business use (discussed in chapter 5).
Item (1) above does not apply to qualified infrastructure property located outside the reservation that is used to connect with qualified
infrastructure property within the reservation. Qualified infrastructure property is property that meets all the following rules.
It is qualified property, as defined earlier, except that it is outside the reservation.
It benefits the tribal infrastructure.
It is available to the general public.
It is placed in service in connection with the active conduct of a trade or business within a reservation.
Infrastructure property includes, but is not limited to, roads, power lines, water systems, railroad spurs, and communications facilities.
Related person.Indian reservation:Related personRelated persons
For purposes of item (2) above, see Related persons in the discussion on property owned or used in 1986 under Can You Use MACRS To
Depreciate Your Property in chapter 1 for a description of related persons.
Indian reservation.Indian reservation:Defined
The term Indian reservation means a reservation as defined in section 3(d) of the Indian Financing Act of 1974 (25 U.S.C. 1452(d)) or section 4(10)
of the Indian Child Welfare Act of 1978 (25 U.S.C. 1903(10)). Section 3(d) of the Indian Financing Act of 1974 defines reservation to include former
Indian reservations in Oklahoma. For a definition of the term former Indian reservations in Oklahoma, see Notice 98-45 in Internal Revenue
Bulletin 1998-35.
Recovery Periods Under ADSAlternative Depreciation System (ADS):Recovery periodsRecovery periods:ADS
The recovery periods for most property generally are longer under ADS than they are under GDS. The following table shows some of the ADS recovery
periods.
PropertyRecoveryPeriodRent-to-own property 4 yearsAutomobiles and light duty trucks 5 yearsComputers and peripheral equipment 5 yearsHigh technology telephone station equipment installed on customer premises 5 yearsHigh technology medical equipment 5 yearsPersonal property with no class life12 yearsNatural gas gathering lines14 years
1Single purpose agricultural and horticultural
structures15 yearsAny tree or vine bearing fruit or nuts20 yearsInitial clearing and grading land
improvements for gas utility property20 years
2Initial clearing and grading land
improvements for electric utility
transmission and distribution plants25 years
2Electric transmission property used in the transmission at 69 or more kilovolts of electricity30 years
1Natural gas distribution lines35 years
1 Any qualified leasehold improvement property39 years
2Any qualified restaurant property39 years
2Nonresidential real property40 yearsResidential rental property40 yearsSection 1245 real property not listed in Appendix B40 yearsRailroad grading and tunnel bore50 years1Applicable to property placed in service after April 11, 2005, the original use of which began with you after that date, but not
applicable to property placed in service under a binding contract in effect before April 12, 2005, and self-constructed property for which
construction began before that date.2Applicable to property placed in service before January 1, 2006.
The ADS recovery periods for property not listed above can be found in the tables in Appendix B. Rent-to-own property, qualified leasehold
improvement property, qualified restaurant property, residential rental property, and nonresidential real property are defined earlier under
Which Property Class Applies Under GDS.
Tax-exempt use property subject to a lease.
The ADS recovery period for any property leased under a lease agreement to a tax-exempt organization, governmental unit, or foreign person or
entity (other than a partnership) cannot be less than 125 percent of the lease term.
Additions and ImprovementsModified ACRS (MACRS):Addition or improvementAddition to propertyImprovements
An addition or improvement you make to depreciable property is treated as separate depreciable property. (See How Do You Treat
Improvements in chapter 1.) Its property class and recovery period are the same as those that would apply to the original property if you had
placed it in service at the same time you placed the addition or improvement in service. The recovery period begins on the later of the following
dates.
The date you place the addition or improvement in service.
The date you place in service the property to which you made the addition or improvement.
If the improvement you make is qualified leasehold improvement property or qualified restaurant property (defined earlier under Which Property
Class Applies Under GDS), the GDS recovery period is 15 years (39 years under ADS).
Example.
You own a rental home that you have been renting out since 1981. If you put an addition on the home and place the addition in service this year,
you would use MACRS to figure your depreciation deduction for the addition. Under GDS, the property class for the addition is residential rental
property and its recovery period is 27.5 years because the home to which the addition is made would be residential rental property if you had placed
it in service this year.
Which Convention Applies?ConventionsModified ACRS (MACRS):Conventions
Basis
Convention
Disposition
Nonresidential real property
Placed in service
Recovery period
Residential rental property
Under MACRS, averaging conventions establish when the recovery period begins and ends. The convention you use determines the number of months for
which you can claim depreciation in the year you place property in service and in the year you dispose of the property.
The mid-month convention.
Use this convention for nonresidential real property, residential rental property, and any railroad grading or tunnel bore.
Under this convention, you treat all property placed in service or disposed of during a month as placed in service or disposed of at the midpoint
of the month. This means that a one-half month of depreciation is allowed for the month the property is placed in service or disposed of.
Your use of the mid-month convention is indicated by the MM already shown under column (e) in Part III of Form 4562.
The mid-quarter convention.
Use this convention if the mid-month convention does not apply and the total depreciable bases of MACRS property you placed in service during the
last 3 months of the tax year (excluding nonresidential real property, residential rental property, any railroad grading or tunnel bore, property
placed in service and disposed of in the same year, and property that is being depreciated under a method other than MACRS) are more than 40% of the
total depreciable bases of all MACRS property you placed in service during the entire year.
Under this convention, you treat all property placed in service or disposed of during any quarter of the tax year as placed in service or disposed
of at the midpoint of that quarter. This means that 1 months of depreciation is allowed for the quarter the property is placed in
service or disposed of.
If you use this convention, enter MQ under column (e) in Part III of Form 4562.
For purposes of determining whether the mid-quarter convention applies, the depreciable basis of property you placed in service during the tax year
reflects the reduction in basis for amounts expensed under section 179 and the part of the basis of property attributable to personal use. However, it
does not reflect any reduction in basis for any special depreciation allowance.
The half-year convention.
Use this convention if neither the mid-quarter convention nor the mid-month convention applies.
Under this convention, you treat all property placed in service or disposed of during a tax year as placed in service or disposed of at the
midpoint of the year. This means that a one-half year of depreciation is allowed for the year the property is placed in service or disposed of.
If you use this convention, enter HY under column (e) in Part III of Form 4562.
Which Depreciation Method Applies?Modified ACRS (MACRS):Depreciation methodsDepreciation:Methods
Declining balance method
Listed property
Nonresidential real property
Placed in service
Property class
Recovery period
Residential rental property
Straight line method
Tax exempt
MACRS provides three depreciation methods under GDS and one depreciation method under ADS.
The 200% declining balance method over a GDS recovery period.
The 150% declining balance method over a GDS recovery period.
The straight line method over a GDS recovery period.
The straight line method over an ADS recovery period.
For property placed in service before 1999, you could have elected the 150% declining balance method using the ADS recovery periods for certain
property classes. If you made this election, continue to use the same method and recovery period for that property.
Table 4-1 lists the types of property you can depreciate under each method. It also gives a brief explanation of the method, including
any benefits that may apply.
Depreciation Methods for Farm PropertyFarm:PropertyModified ACRS (MACRS):Farm property
If you place personal property in service in a farming business after 1988, you generally must depreciate it under GDS using the 150% declining
balance method unless you are a farmer who must depreciate the property under ADS using the straight line method or you elect to depreciate the
property under GDS or ADS using the straight line method. You can depreciate real property using the straight line method under either GDS or ADS. For
a definition of farming business, see Which Depreciation Method Applies in chapter 7 of Publication 225.
Fruit or nut trees and vines.
Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a recovery period of 10 years.
ADS required for some farmers.
If you elect not to apply the uniform capitalization rules to any plant produced in your farming business, you must use ADS. You must use ADS for
all property you place in service in any year the election is in effect. See the regulations under section 263A of the Internal Revenue Code for
information on the uniform capitalization rules that apply to farm property.
Electing a Different Method
As shown in Table 4-1, you can elect a different method for depreciation for certain types of property. You must make the election by
the due date of the return (including extensions) for the year you placed the property in service. However, if you timely filed your return for the
year without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding
extensions). Attach the election to the amended return and write Filed pursuant to section 301.9100-2 on the election statement. File the
amended return at the same address you filed the original return. Once you make the election, you cannot change it.
If you elect to use a different method for one item in a property class, you must apply the same method to all property in that class placed in
service during the year of the election. However, you can make the election on a property-by-property basis for nonresidential real and residential
rental property.
Instead of using the 200% declining balance method over the GDS recovery period for nonfarm property in the 3-, 5-, 7-, and 10-year property
classes, you can elect to use the 150% declining balance method. Make the election by entering 150 DB under column (f) in Part III of Form
4562.
Straight line election.Election:Straight line method
Instead of using either the 200% or 150% declining balance methods over the GDS recovery period, you can elect to use the straight line method over
the GDS recovery period. Make the election by entering
S/L under column (f) in Part III of Form 4562.
Election of ADS.Election:ADS
As explained earlier under Which Depreciation System (GDS or ADS) Applies, you can elect to use ADS even though your property may come
under GDS. ADS uses the straight line method of depreciation over fixed ADS recovery periods. Most ADS recovery periods are listed in Appendix B, or
see the table under Recovery Periods Under ADS, earlier.
Make the election by completing line 20 in Part III of Form 4562.
Farm property.
Instead of using the 150% declining balance method over a GDS recovery period for property you use in a farming business (other than real
property), you can elect to depreciate it using either of the following methods.
The straight line method over a GDS recovery period.
The straight line method over an ADS recovery period.
<ROM>Table 4-1.</ROM> Depreciation MethodsNote. The declining balance method is abbreviated as DB and the straight line method is abbreviated as
SL.MethodType of PropertyBenefitGDS using 200% DB• Nonfarm 3-, 5-, 7-, and 10-year property• Provides a greater deduction during the earlier recovery years
• Changes to SL when that method provides an equal or greater deduction GDS using 150% DB• All farm property (except real property)
• All 15- and 20-year property (except qualified leasehold improvement property and qualified restaurant property placed in service before
January 1, 2006)
• Nonfarm 3-, 5-, 7-, and 10-year property• Provides a greater deduction during the earlier recovery years
• Changes to SL when that method provides an equal or greater deduction
1GDS using SL• Nonresidential real property
• Qualified leasehold improvement property placed in service before January 1, 2006
• Qualified restaurant property placed in service before January 1, 2006
• Residential rental property
• Trees or vines bearing fruit or nuts
• Water utility property
• All 3-, 5-, 7-, 10-, 15-, and 20-year property
2• Provides for equal yearly deductions (except for the first and last
years)ADS using SL• Listed property used 50% or less for business
• Property used predominantly outside the U.S.
• Qualified leasehold improvement property placed in service before January 1, 2006
• Qualified restaurant property placed in service before January 1, 2006
• Tax-exempt property
• Tax-exempt bond-financed property
• Farm property used when an election not to apply the uniform capitalization rules is in effect
• Imported property
3• Any property for which you elect to use this method
2• Provides for equal yearly deductions1The MACRS percentage tables in Appendix A have the switch to the straight line method built into their rates2Elective method3See section 168(g)(6) of the Internal Revenue Code
How Is the Depreciation Deduction Figured?Figuring MACRS:Using percentage tables
Adjusted basis
Amortization
Basis
Business/investment use
Clean-fuel vehicle
Clean-fuel vehicle refueling property
Convention
Declining balance method
Disposition
Exchange
Nonresidential real property
Placed in service
Property class
Recovery period
Straight line method
To figure your depreciation deduction under MACRS, you first determine the depreciation system, property class, placed-in-service date, basis
amount, recovery period, convention, and depreciation method that applies to your property. Then, you are ready to figure your depreciation deduction.
You can figure it using a percentage table provided by the IRS, or you can figure it yourself without using the table.
Using the MACRS Percentage TablesModified ACRS (MACRS):Percentage tables
To help you figure your deduction under MACRS, the IRS has established percentage tables that incorporate the applicable convention and
depreciation method. These percentage tables are in Appendix A near the end of this publication.
Which table to use.
Appendix A contains the MACRS Percentage Table Guide, which is designed to help you locate the correct percentage table to use for
depreciating your property. The percentage tables immediately follow the guide.
Rules Covering the Use of the Tables
The following rules cover the use of the percentage tables.
You must apply the rates in the percentage tables to your property's unadjusted basis.
You cannot use the percentage tables for a short tax year. See Figuring the Deduction for a Short Tax Year, later, for
information on the short tax year rules.
Once you start using the percentage tables for any item of property, you generally must continue to use them for the entire recovery period
of the property.
You must stop using the tables if you adjust the basis of the property for any reason other than—
Depreciation allowed or allowable, or
An addition or improvement to that property that is depreciated as a separate item of property.
Basis adjustments other than those made due to the items listed in (4) include an increase in basis for the recapture of a clean-fuel deduction
or credit and a reduction in basis for a casualty loss.
Basis adjustment due to recapture of clean-fuel vehicle deduction or credit.Recapture:Clean-fuel vehicle deduction or creditBasis:Recapture of clean-fuel vehicle deduction or creditBasis:Adjustments
If you increase the basis of your property because of the recapture of part or all of a deduction for clean-fuel vehicles or the credit for
clean-fuel vehicle refueling property, you cannot continue to use the percentage tables. For the year of the adjustment and the remaining recovery
period, you must figure the depreciation deduction yourself using the property's adjusted basis at the end of the year. See Figuring the
Deduction Without Using the Tables, later.
Basis adjustment due to casualty loss.Casualty loss, effect ofBasis:Casualty lossBasis:Adjustments
If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. For the year of the adjustment
and the remaining recovery period, you must figure the depreciation yourself using the property's adjusted basis at the end of the year. See
Figuring the Deduction Without Using the Tables, later.
Example.
On October 26, 2004, Sandra Elm, a calendar year taxpayer, bought and placed in service in her business a new item of 7-year property. It cost
$39,000 and she elected a section 179 deduction of $24,000. She also took a special depreciation allowance of $7,500 [50% of $15,000 ($39,000 −
$24,000)]. Her unadjusted basis after the section 179 deduction and special depreciation allowance was $7,500 ($15,000 − $7,500). She figured
her MACRS depreciation deduction using the percentage tables. For 2004, her MACRS depreciation deduction was $268.
In July 2005, the property was vandalized and Sandra had a deductible casualty loss of $3,000. She must adjust the property's basis for the
casualty loss, so she can no longer use the percentage tables. Her adjusted basis at the end of 2005, before figuring her 2005 depreciation, is
$4,232. She figures that amount by subtracting the 2004 MACRS depreciation of $268 and the casualty loss of $3,000 from the unadjusted basis of
$7,500. She must now figure her depreciation for 2005 without using the percentage tables.
Figuring the Unadjusted Basis of
Your PropertyUnadjusted basisBasis:Unadjusted
You must apply the table rates to your property's unadjusted basis each year of the recovery period. Unadjusted basis is the same basis amount you
would use to figure gain on a sale, but you figure it without reducing your original basis by any MACRS depreciation taken in earlier years. However,
you do reduce your original basis by other amounts, including the following.
Any amortization taken on the property.
Any section 179 deduction claimed.
Any special depreciation allowance taken on the property.
Any deduction claimed for a clean-fuel vehicle or clean-fuel vehicle refueling property placed in service before January 1,
2006.
Any electric vehicle credit.
The clean-fuel vehicle and clean-fuel vehicle refueling property deductions and the electric vehicle credit are discussed in chapter 12 of
Publication 535.
For business property you purchase during the year, the unadjusted basis is its cost minus these and other applicable adjustments. If you trade
property, your unadjusted basis in the property received is the cash paid plus the adjusted basis of the property traded minus these adjustments.
MACRS WorksheetWorksheet:MACRS
You can use this worksheet to help you figure your depreciation deduction using the percentage tables. (Use a separate worksheet for each item of
property.) Then, use the information from this worksheet to prepare Form 4562.
Do not use this worksheet for automobiles. Use the Depreciation Worksheet for Passenger Automobiles in chapter 5.
<BLD>MACRS Worksheet </BLD>Part I 1.MACRS system (GDS or ADS)2.Property class3.Date placed in service4.Recovery period5.Method and convention6.Depreciation rate (from tables)Part II 7.Cost or other basis*$8.Business/investment use%9.Multiply line 7 by line 8$10.Total claimed for section 179 deduction and other items, including deduction for clean-fuel
vehicle refueling property$11.Subtract line 10 from line 9. This is your tentative basis for depreciation$12.Multiply line 11 by .30 if the 30% special depreciation allowance applies. Multiply line 11 by .50 if the
50% special depreciation allowance applies. This is your special depreciation allowance. Enter -0- if this is not the year you placed the property in
service, the property is not qualified property, or you elected not to claim a special allowance $13.Subtract line 12 from line 11. This is your basis for depreciation14.Depreciation rate (from line 6)15.Multiply line 13 by line 14. This is your MACRS depreciation deduction$*If real estate, do not include cost (basis) of land.
The following example shows how to figure your MACRS depreciation deduction using the percentage tables and the MACRS worksheet.
Example.
You bought office furniture (7-year property) for $10,000 and placed it in service on August 11, 2005. You use the furniture only for business.
This is the only property you placed in service this year. You did not elect a section 179 deduction and the property is not qualified property for
purposes of claiming a special depreciation allowance so your property's unadjusted basis is its cost, $10,000. You use GDS and the half-year
convention to figure your depreciation. You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-1.
Multiply your property's unadjusted basis each year by the percentage for 7-year property given in Table A-1. You figure your depreciation deduction
using the MACRS worksheet as follows.
<BLD>MACRS Worksheet </BLD>Part I 1.MACRS system (GDS or ADS)GDS2.Property class7-year3.Date placed in service8/11/054.Recovery period7-Year5.Method and convention200%DB/Half-Year6.Depreciation rate (from tables).1429Part II 7.Cost or other basis*$10,0008.Business/investment use100%9.Multiply line 7 by line 8$10,00010.Total claimed for section 179 deduction and other items, including deduction for clean-fuel
vehicle refueling property-0-11.Subtract line 10 from line 9. This is your tentative basis for depreciation$10,00012.Multiply line 11 by .30 if the 30% special depreciation allowance applies. Multiply line 11 by .50 if the
50% special depreciation allowance applies. This is your special depreciation allowance. Enter -0- if this is not the year you placed the property in
service, the property is not qualified property, or you elected not to claim a special allowance-0-13.Subtract line 12 from line 11. This is your basis for depreciation$10,00014.Depreciation rate (from line 6).142915.Multiply line 13 by line 14. This is your MACRS depreciation deduction$1,429*If real estate, do not include cost (basis) of
land.
If there are no adjustments to the basis of the property other than depreciation, your depreciation deduction for each subsequent year of the
recovery period will be as follows.
The following examples are provided to show you how to use the percentage tables. In both examples, assume the following.
You use the property only for business.
You use the calendar year as your tax year.
You use GDS for all the properties.
Example 1.
You bought a building and land for $120,000 and placed it in service on March 8. The sales contract showed that the building cost $100,000 and the
land cost $20,000. It is nonresidential real property. The building's unadjusted basis is its original cost, $100,000.
You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-7a. March is the third month of your
tax year, so multiply the building's unadjusted basis, $100,000, by the percentages for the third month in Table A-7a. Your depreciation deduction for
each of the first 3 years is as follows:
During the year, you bought a machine (7-year property) for $4,000, office furniture (7-year property) for $1,000, and a computer (5-year property)
for $5,000. You placed the machine in service in January, the furniture in September, and the computer in October. You do not elect a section 179
deduction and none of these items is qualified property for purposes of claiming a special depreciation allowance.
You placed property in service during the last three months of the year, so you must first determine if you have to use the mid-quarter convention.
The total bases of all property you placed in service during the year is $10,000. The $5,000 basis of the computer, which you placed in service during
the last 3 months (the fourth quarter) of your tax year, is more than 40% of the total bases of all property ($10,000) you placed in service during
the year. Therefore, you must use the mid-quarter convention for all three items.
You refer to the MACRS Percentage Table Guide in Appendix A to determine which table you should use under the mid-quarter convention.
The machine is 7-year property placed in service in the first quarter, so you use Table A-2. The furniture is 7-year property placed in service in the
third quarter, so you use Table A-4. Finally, because the computer is 5-year property placed in service in the fourth quarter, you use Table A-5.
Knowing what table to use for each property, you figure the depreciation for the first 2 years as follows.
Sale or Other Disposition Before the Recovery Period EndsSale of propertyDisposition:Before recovery period ends
If you sell or otherwise dispose of your property before the end of its recovery period, your depreciation deduction for the year of the
disposition will be only part of the depreciation amount for the full year. You have disposed of your property if you have permanently withdrawn it
from use in your business or income-producing activity because of its sale, exchange, retirement, abandonment, involuntary conversion, or destruction.
After you figure the full-year depreciation amount, figure the deductible part using the convention that applies to the property.
Half-year convention used.
For property for which you used a half-year convention, the depreciation deduction for the year of the disposition is half the depreciation
determined for the full year.
Mid-quarter convention used.
For property for which you used the mid-quarter convention, figure your depreciation deduction for the year of the disposition by multiplying a
full year of depreciation by the percentage listed below for the quarter in which you disposed of the property.
On December 2, 2002, you placed in service an item of 5-year property costing $10,000. You did not claim a section 179 deduction and the property
does not qualify for a special depreciation allowance. Your unadjusted basis for the property was $10,000. You used the mid-quarter convention because
this was the only item of business property you placed in service in 2002 and it was placed in service during the last 3 months of your tax year. Your
property is in the 5-year property class, so you used Table A-5 to figure your depreciation deduction. Your deductions for 2002, 2003, and 2004 were
$500 (5% of $10,000), $3,800 (38% of $10,000), and $2,280 (22.80% of $10,000). You disposed of the property on April 6, 2005. To determine your
depreciation deduction for 2005, first figure the deduction for the full year. This is $1,368 (13.68% of $10,000). April is in the second quarter of
the year, so you multiply $1,368 by 37.5% to get your depreciation deduction of $513 for 2005.
Mid-month convention used.
If you dispose of residential rental or nonresidential real property, figure your depreciation deduction for the year of the disposition by
multiplying a full year of depreciation by a fraction. The numerator of the fraction is the number of months (including partial months) in the year
that the property is considered in service. The denominator is 12.
Example.
On July 2, 2003, you purchased and placed in service residential rental property. The property cost $100,000, not including the cost of land. You
used Table A-6 to figure your MACRS depreciation for this property. You sold the property on March 2, 2005. You file your tax return based on the
calendar year.
A full year of depreciation for 2005 is $3,636. This is $100,000 multiplied by .03636 (the percentage for the seventh month of the third recovery
year) from Table A-6. You then apply the mid-month convention for the 2 months of use in 2005. (Treat the month of disposition as
one-half month of use.) Multiply $3,636 by the fraction, 2.5 over 12, to get your 2005 depreciation deduction of $757.50.
Figuring the Deduction Without Using the TablesFiguring MACRS:Without using percentage tables
Instead of using the rates in the percentage tables to figure your depreciation deduction, you can figure it yourself. Before making the
computation each year, you must reduce your adjusted basis in the property by the depreciation claimed the previous year.
Figuring MACRS deductions without using the tables generally will result in a slightly different amount than using the tables.
When using a declining balance method, you apply the same depreciation rate each year to the adjusted basis of your property. You must use the
applicable convention for the first tax year and you must switch to the straight line method beginning in the first year for which it will give an
equal or greater deduction. The straight line method is explained later.
You figure depreciation for the year you place property in service as follows.
Multiply your adjusted basis in the property by the declining balance rate.
Apply the applicable convention.
You figure depreciation for all other years (before the year you switch to the straight line method) as follows.
Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years.
Multiply this new adjusted basis by the same declining balance rate used in earlier years.
If you dispose of property before the end of its recovery period, see Using the Applicable Convention, later, for information on how to
figure depreciation for the year you dispose of it.
Figuring depreciation under the declining balance method and switching to the straight line method is illustrated in Example 1, later,
under Examples.
Declining balance rate.Declining balance:Rates
You figure your declining balance rate by dividing the specified declining balance percentage (150% or 200% changed to a decimal) by the number of
years in the property's recovery period. For example, for 3-year property depreciated using the 200% declining balance method, divide 2.00 (200%) by 3
to get 0.6667, or a 66.67% declining balance rate. For 15-year property depreciated using the 150% declining balance method, divide 1.50 (150%) by 15
to get 0.10, or a 10% declining balance rate.
The following table shows the declining balance rate for each property class and the first year for which the straight line method gives an equal
or greater deduction.
Property ClassMethodDeclining Balance RateYear3-year200% DB 66.667%3rd5-year200% DB40.04th7-year200% DB 28.5715th10-year200% DB20.07th15-year150% DB10.07th20-year150% DB 7.59th
Straight Line MethodModified ACRS (MACRS):Straight line methodStraight line method
When using the straight line method, you apply a different depreciation rate each year to the adjusted basis of your property. You must use the
applicable convention in the year you place the property in service and the year you dispose of the property.
You figure depreciation for the year you place property in service as follows.
Multiply your adjusted basis in the property by the straight line rate.
Apply the applicable convention.
You figure depreciation for all other years (including the year you switch from the declining balance method to the straight line method) as
follows.
Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years (under any method).
Determine the depreciation rate for the year.
Multiply the adjusted basis figured in (1) by the depreciation rate figured in (2).
If you dispose of property before the end of its recovery period, see Using the Applicable Convention, later, for information on how to
figure depreciation for the year you dispose of it.
Straight line rate.
You determine the straight line depreciation rate for any tax year by dividing the number 1 by the years remaining in the recovery period at the
beginning of that year. When figuring the number of years remaining, you must take into account the convention used in the year you placed the
property in service. If the number of years remaining is less than 1, the depreciation rate for that tax year is 1.0 (100%).
Using the Applicable Convention
The applicable convention (discussed earlier under Which Convention Applies) affects how you figure your depreciation deduction for the
year you place your property in service and for the year you dispose of it. It determines how much of the recovery period remains at the beginning of
each year, so it also affects the depreciation rate for property you depreciate under the straight line method. See Straight line rate in
the previous discussion. Use the applicable convention as explained in the following discussions.
Half-year convention.
If this convention applies, you deduct a half-year of depreciation for the first year and the last year that you depreciate the property. You
deduct a full year of depreciation for any other year during the recovery period.
Figure your depreciation deduction for the year you place the property in service by dividing the depreciation for a full year by 2. If you dispose
of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. If you hold
the property for the entire recovery period, your depreciation deduction for the year that includes the final 6 months of the recovery period is the
amount of your unrecovered basis in the property.
Mid-quarter convention.
If this convention applies, the depreciation you can deduct for the first year you depreciate the property depends on the quarter in which you
place the property in service.
A quarter of a full 12-month tax year is a period of 3 months. The first quarter in a year begins on the first day of the tax year. The second
quarter begins on the first day of the fourth month of the tax year. The third quarter begins on the first day of the seventh month of the tax year.
The fourth quarter begins on the first day of the tenth month of the tax year. A calendar year is divided into the following quarters.
QuarterMonthsFirstJanuary, February, MarchSecondApril, May, JuneThirdJuly, August, SeptemberFourthOctober, November, December
Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by the percentage
listed below for the quarter you place the property in service.
If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition by
multiplying a full year of depreciation by the percentage listed below for the quarter you dispose of the property.
If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final quarter of the recovery
period is the amount of your unrecovered basis in the property.
Mid-month convention.
If this convention applies, the depreciation you can deduct for the first year that you depreciate the property depends on the month in which you
place the property in service. Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a
full year by a fraction. The numerator of the fraction is the number of full months in the year that the property is in service plus
(or 0.5). The denominator is 12.
If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same
way. If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final month of the recovery
period is the amount of your unrecovered basis in the property.
Example.
You use the calendar year and place nonresidential real property in service in August. The property is in service 4 full months (September,
October, November, and December). Your numerator is 4.5 (4 full months plus 0.5). You multiply the depreciation for a full year by 4.5/12, or 0.375.
Examples
The following examples show how to figure depreciation under MACRS without using the percentage tables. Figures are rounded for purposes of the
examples. Assume for all the examples that you use a calendar year as your tax year.
Example 1—200% DB method and half-year convention.
In February, you placed in service depreciable property with a 5-year recovery period and a basis of $1,000. You do not elect to take the section
179 deduction and the property does not qualify for a special depreciation allowance. You use GDS and the 200% declining balance (DB) method to figure
your depreciation. When the straight line (SL) method results in an equal or larger deduction, you switch to the SL method. You did not place any
property in service in the last 3 months of the year, so you must use the half-year convention.
First year. You figure the depreciation rate under the 200% DB method by dividing 2 (200%) by 5 (the number of years in the recovery
period). The result is 40%. You multiply the adjusted basis of the property ($1,000) by the 40% DB rate. You apply the half-year convention by
dividing the result ($400) by 2. Depreciation for the first year under the 200% DB method is $200.
You figure the depreciation rate under the straight line (SL) method by dividing 1 by 5, the number of years in the recovery period. The result is
20%.You multiply the adjusted basis of the property ($1,000) by the 20% SL rate. You apply the half-year convention by dividing the result ($200) by
2. Depreciation for the first year under the SL method is $100.
The DB method provides a larger deduction, so you deduct the $200 figured under the 200% DB method.
Second year. You reduce the adjusted basis ($1,000) by the depreciation claimed in the first year ($200). You multiply the result ($800)
by the DB rate (40%). Depreciation for the second year under the 200% DB method is $320.
You figure the SL depreciation rate by dividing 1 by 4.5, the number of years remaining in the recovery period. (Based on the half-year convention,
you used only half a year of the recovery period in the first year.) You multiply the reduced adjusted basis ($800) by the result (22.22%).
Depreciation under the SL method for the second year is $178.
The DB method provides a larger deduction, so you deduct the $320 figured under the 200% DB method.
Third year. You reduce the adjusted basis ($800) by the depreciation claimed in the second year ($320). You multiply the result ($480)
by the DB rate (40%). Depreciation for the third year under the 200% DB method is $192.
You figure the SL depreciation rate by dividing 1 by 3.5. You multiply the reduced adjusted basis ($480) by the result (28.57%). Depreciation under
the SL method for the third year is $137.
The DB method provides a larger deduction, so you deduct the $192 figured under the 200% DB method.
Fourth year. You reduce the adjusted basis ($480) by the depreciation claimed in the third year ($192). You multiply the result ($288)
by the DB rate (40%). Depreciation for the fourth year under the 200% DB method is $115.
You figure the SL depreciation rate by dividing 1 by 2.5. You multiply the reduced adjusted basis ($288) by the result (40%). Depreciation under
the SL method for the fourth year is $115.
The SL method provides an equal deduction, so you switch to the SL method and deduct the $115.
Fifth year. You reduce the adjusted basis ($288) by the depreciation claimed in the fourth year ($115) to get the reduced adjusted basis
of $173. You figure the SL depreciation rate by dividing 1 by 1.5. You multiply the reduced adjusted basis ($173) by the result (66.67%). Depreciation
under the SL method for the fifth year is $115.
Sixth year. You reduce the adjusted basis ($173) by the depreciation claimed in the fifth year ($115) to get the reduced adjusted basis
of $58. There is less than one year remaining in the recovery period, so the SL depreciation rate for the sixth year is 100%. You multiply the reduced
adjusted basis ($58) by 100% to arrive at the depreciation deduction for the sixth year ($58).
Example 2—SL method and mid-month convention.
In January, you bought and placed in service a building for $100,000 that is nonresidential real property with a recovery period of 39 years. The
adjusted basis of the building is its cost of $100,000. You use GDS, the straight line (SL) method, and the mid-month convention to figure your
depreciation.
First year. You figure the SL depreciation rate for the building by dividing 1 by 39 years. The result is .02564. The depreciation for a
full year is $2,564 ($100,000 × .02564). Under the mid-month convention, you treat the property as placed in service in the middle of January.
You get 11.5 months of depreciation for the year. Expressed as a decimal, the fraction of 11.5 months divided by 12 months is .958. Your first-year
depreciation for the building is $2,456 ($2,564 × .958).
Second year. You subtract $2,456 from $100,000 to get your adjusted basis of $97,544 for the second year. The SL rate is .02629. This is
1 divided by the remaining recovery period of 38.042 years (39 years reduced by 11.5 months or .958 year). Your depreciation for the building for the
second year is $2,564 ($97,544 × .02629).
Third year. The adjusted basis is $94,980 ($97,544 − $2,564). The SL rate is .027 (1 divided by 37.042 remaining years). Your
depreciation for the third year is $2,564 ($94,980 × .027).
Example 3—200% DB method and mid-quarter convention.
During the year, you bought and placed in service in your business the following items.
ItemMonth Placed
in ServiceCostSafeJanuary$4,000Office furnitureSeptember1,000Computer (not listed property)October5,000
You do not elect a section 179 deduction and these items do not qualify for a special depreciation allowance. You use GDS and the 200%
declining balance (DB) method to figure the depreciation. The total bases of all property you placed in service this year is $10,000. The basis of the
computer ($5,000) is more than 40% of the total bases of all property placed in service during the year ($10,000), so you must use the mid-quarter
convention. This convention applies to all three items of property. The safe and office furniture are 7-year property and the computer is 5-year
property.
First and second year depreciation for safe. The 200% DB rate for 7-year property is .28571. You determine this by dividing 2.00 (200%)
by 7 years. The depreciation for the safe for a full year is $1,143 ($4,000 × .28571). You placed the safe in service in the first quarter of
your tax year, so you multiply $1,143 by 87.5% (the mid-quarter percentage for the first quarter). The result, $1,000, is your deduction for
depreciation on the safe for the first year.
For the second year, the adjusted basis of the safe is $3,000. You figure this by subtracting the first year's depreciation ($1,000) from the basis
of the safe ($4,000). Your depreciation deduction for the second year is $857 ($3,000 × .28571).
First and second year depreciation for furniture. The furniture is also 7-year property, so you use the same 200% DB rate of .28571. You
multiply the basis of the furniture ($1,000) by .28571 to get the depreciation of $286 for the full year. You placed the furniture in service in the
third quarter of your tax year, so you multiply $286 by 37.5% (the mid-quarter percentage for the third quarter). The result, $107, is your deduction
for depreciation on the furniture for the first year.
For the second year, the adjusted basis of the furniture is $893. You figure this by subtracting the first year's depreciation ($107) from the
basis of the furniture ($1,000). Your depreciation for the second year is $255 ($893 × .28571).
First and second year depreciation for computer. The 200% DB rate for 5-year property is .40. You determine this by dividing 2.00 (200%)
by 5 years. The depreciation for the computer for a full year is $2,000 ($5,000 × .40). You placed the computer in service in the fourth quarter
of your tax year, so you multiply the $2,000 by 12.5% (the mid-quarter percentage for the fourth quarter). The result, $250, is your deduction for
depreciation on the computer for the first year.
For the second year, the adjusted basis of the computer is $4,750. You figure this by subtracting the first year's depreciation ($250) from the
basis of the computer ($5,000). Your depreciation deduction for the second year is $1,900 ($4,750 × .40).
Example 4—200% DB method and half-year convention.
Last year, in July, you bought and placed in service in your business a new item of 7-year property. This was the only item of property you placed
in service last year. The property cost $39,000 and you elected a $24,000 section 179 deduction. You also took a special depreciation allowance of
$7,500. Your unadjusted basis for the property is $7,500. Because you did not place any property in service in the last 3 months of your tax year, you
used the half-year convention. You figured your deduction using the percentages in Table A-1 for 7-year property. Last year, your depreciation was
$1,072 ($7,500 × 14.29%).
In July of this year, your property was vandalized. You had a deductible casualty loss of $3,000. You spent $3,500 to put the property back in
operational order. Your adjusted basis at the end of this year is $6,928. You figured this by first subtracting the first year's depreciation ($1,072)
and the casualty loss ($3,000) from the unadjusted basis of $7,500. To this amount ($3,428), you then added the $3,500 repair cost.
You cannot use the table percentages to figure your depreciation for this property for this year because of the adjustments to basis. You must
figure the deduction yourself. You determine the DB rate by dividing 2.00 (200%) by 7 years. The result is .28571 or 28.571%. You multiply the
adjusted basis of your property ($6,928) by the declining balance rate of .28571 to get your depreciation deduction of $1,979 for this year.
Figuring the Deduction for Property Acquired in a Nontaxable Exchange
If your property has a carryover basis because you acquired it in a nontaxable transfer such as a like-kind exchange or involuntary conversion, you
must generally figure depreciation for the property as if the transfer had not occurred. However, see Like-kind exchanges and involuntary
conversions, earlier, in chapter 3 under How Much Can You Deduct and Property Acquired in a Like-kind Exchange or Involuntary
Conversion, next.
Property Acquired in a Like-kind Exchange or Involuntary ConversionExchange of MACRS propertyInvoluntary conversion of MACRS property
You generally must depreciate the carryover basis of property acquired in a like-kind exchange or involuntary conversion over the remaining
recovery period of the property exchanged or involuntarily converted. You also generally continue to use the same depreciation method and convention
used for the exchanged or involuntarily converted property. This applies only to acquired property with the same or a shorter recovery period and the
same or more accelerated depreciation method than the property exchanged or involuntarily converted. The excess basis (the part of the acquired
property's basis that exceeds its carryover basis), if any, of the acquired property is treated as newly placed in service property.
For acquired property that has a longer recovery period or less accelerated depreciation method than the exchanged or involuntarily converted
property, you generally must depreciate the carryover basis of the acquired property as if it were placed in service in the same tax year as the
exchanged or involuntarily converted property. You also generally continue to use the longer recovery period and less accelerated depreciation method
of the acquired property.
If the MACRS property you acquired in the exchange or involuntary conversion is qualified property, discussed earlier in chapter 3 under What
Is Qualified Property, you can claim a special depreciation allowance on the carryover basis.
Special rules apply to vehicles acquired in a trade-in. For information on how to figure depreciation for a vehicle acquired in a trade-in that is
subject to the passenger automobile limits, see Deductions For Passenger Automobiles Acquired in a Trade-in under Do the Passenger
Automobile Limits Apply in chapter 5.
Election out.
Instead of using the above rules, you can elect, for depreciation purposes, to treat the adjusted basis of the exchanged or involuntarily converted
property as if disposed of at the time of the exchange or involuntary conversion. Treat the carryover basis and excess basis, if any, for the acquired
property as if placed in service the later of the date you acquired it or the time of the disposition of the exchanged or involuntarily converted
property. The depreciable basis of the new property is the adjusted basis of the exchanged or involuntarily converted property plus any additional
amount you paid for it. The election, if made, applies to both the acquired property and the exchanged or involuntarily converted property. This
election does not affect the amount of gain or loss recognized on the exchange or involuntary conversion.
When to make the election.
You must make the election on a timely filed return (including extensions) for the year of replacement. The election must be made separately by
each person acquiring replacement property. In the case of a partnership, S corporation, or consolidated group, the election is made by the
partnership, by the S corporation, or by the common parent of a consolidated group, respectively. Once made, the election may not be revoked without
IRS consent.
For more information and special rules, see the Instructions for Form 4562.
Property Acquired in a Nontaxable TransferNontaxable transfer of MACRS property
You must depreciate MACRS property acquired by a corporation or partnership in certain nontaxable transfers over the property's remaining recovery
period in the transferor's hands, as if the transfer had not occurred. You must continue to use the same depreciation method and convention as the
transferor. You can depreciate the part of the property's basis that exceeds its carryover basis (the transferor's adjusted basis in the property) as
newly purchased MACRS property.
The nontaxable transfers covered by this rule include the following.
A distribution in complete liquidation of a subsidiary.
A transfer to a corporation controlled by the transferor.
An exchange of property solely for corporate stock or securities in a reorganization.
A contribution of property to a partnership in exchange for a partnership interest.
A partnership distribution of property to a partner.
Figuring the Deduction for a Short Tax YearModified ACRS (MACRS):Short tax year
You cannot use the MACRS percentage tables to determine depreciation for a short tax year. A short tax year is any tax year with less than 12 full
months. This section discusses the rules for determining the depreciation deduction for property you place in service or dispose of in a short tax
year. It also discusses the rules for determining depreciation when you have a short tax year during the recovery period (other than the year the
property is placed in service or disposed of).
For more information on figuring depreciation for a short tax year, see Revenue Procedure 89-15, 1989-1 C.B. 816.
Using the Applicable Convention in a Short Tax YearShort tax year:Figuring placed-in-service date
The applicable convention establishes the date property is treated as placed in service and disposed of. Depreciation is allowable only for that
part of the tax year the property is treated as in service. The recovery period begins on the placed-in-service date determined by applying the
convention. The remaining recovery period at the beginning of the next tax year is the full recovery period less the part for which depreciation was
allowable in the first tax year.
The following discussions explain how to use the applicable convention in a short tax year.
Mid-month convention.
Under the mid-month convention, you always treat your property as placed in service or disposed of on the midpoint of the month it is placed in
service or disposed of. You apply this rule without regard to your tax year.
Half-year convention.
Under the half-year convention, you treat property as placed in service or disposed of on the midpoint of the tax year it is placed in service or
disposed of.
First or last day of month.
For a short tax year beginning on the first day of a month or ending on the last day of a month, the tax year consists of the number of months in
the tax year. If the short tax year includes part of a month, you generally include the full month in the number of months in the tax year. You
determine the midpoint of the tax year by dividing the number of months in the tax year by 2. For the half-year convention, you treat property as
placed in service or disposed of on either the first day or the midpoint of a month.
For example, a short tax year that begins on June 20 and ends on December 31 consists of 7 months. You use only full months for this determination,
so you treat the tax year as beginning on June 1 instead of June 20. The midpoint of the tax year is the middle of September (3 months
from the beginning of the tax year). You treat property as placed in service or disposed of on this midpoint.
Example.
Tara Corporation, a calendar year taxpayer, was incorporated on March 15. For purposes of the half-year convention, it has a short tax year of 10
months, ending on December 31, 2005. During the short tax year, Tara placed property in service for which it uses the half-year convention. Tara
treats this property as placed in service on the first day of the sixth month of the short tax year, or August 1, 2005.
Not on first or last day of month.
For a short tax year not beginning on the first day of a month and not ending on the last day of a month, the tax year consists of the number of
days in the tax year. You determine the midpoint of the tax year by dividing the number of days in the tax year by 2. For the half-year convention,
you treat property as placed in service or disposed of on either the first day or the midpoint of a month. If the result of dividing the number of
days in the tax year by 2 is not the first day or the midpoint of a month, you treat the property as placed in service or disposed of on the nearest
preceding first day or midpoint of a month.
Mid-quarter convention.
To determine if you must use the mid-quarter convention, compare the basis of property you place in service in the last 3 months of your tax year
to that of property you place in service during the full tax year. The length of your tax year does not matter. If you have a short tax year of 3
months or less, use the mid-quarter convention for all applicable property you place in service during that tax year.
You treat property under the mid-quarter convention as placed in service or disposed of on the midpoint of the quarter of the tax year in which it
is placed in service or disposed of. Divide a short tax year into 4 quarters and determine the midpoint of each quarter.
For a short tax year of 4 or 8 full calendar months, determine quarters on the basis of whole months. The midpoint of each quarter is either the
first day or the midpoint of a month. Treat property as placed in service or disposed of on this midpoint.
To determine the midpoint of a quarter for a short tax year of other than 4 or 8 full calendar months, complete the following steps.
Determine the number of days in your short tax year.
Determine the number of days in each quarter by dividing the number of days in your short tax year by 4.
Determine the midpoint of each quarter by dividing the number of days in each quarter by 2.
If the result of (3) gives you a midpoint of a quarter that is on a day other than the first day or midpoint of a month, treat the property as
placed in service or disposed of on the nearest preceding first day or midpoint of that month.
Example.
Tara Corporation, a calendar year taxpayer, was incorporated and began business on March 15. It has a short tax year of 9 months,
ending on December 31. During December, it placed property in service for which it must use the mid-quarter convention. This is a short tax year of
other than 4 or 8 full calendar months, so it must determine the midpoint of each quarter.
First, it determines that its short tax year beginning March 15 and ending December 31 consists of 292 days.
Next, it divides 292 by 4 to determine the length of each quarter, 73 days.
Finally, it divides 73 by 2 to determine the midpoint of each quarter, the 37th day.
The following table shows the quarters of Tara Corporation's short tax year, the midpoint of each quarter, and the date in each quarter that Tara
must treat its property as placed in service.
The last quarter of the short tax year begins on October 20, which is 73 days from December 31, the end of the tax year. The 37th day of the last
quarter is November 25, which is the midpoint of the quarter. November 25 is not the first day or the midpoint of November, so Tara Corporation must
treat the property as placed in service in the middle of November (the nearest preceding first day or midpoint of that month).
Property Placed in Service in a Short
Tax YearModified ACRS (MACRS):Figuring, short tax yearShort tax year:Figuring depreciation
To figure your MACRS depreciation deduction for the short tax year, you must first determine the depreciation for a full tax year. You do this by
multiplying your basis in the property by the applicable depreciation rate. Then, determine the depreciation for the short tax year. Do this by
multiplying the depreciation for a full tax year by a fraction. The numerator (top number) of the fraction is the number of months (including parts of
a month) the property is treated as in service during the tax year (applying the applicable convention). The denominator (bottom number) is 12. See
Depreciation After a Short Tax Year, later, for information on how to figure depreciation in later years.
Example 1—half-year convention.
Tara Corporation, with a short tax year beginning March 15 and ending December 31, placed in service on March 16 an item of 5-year property with a
basis of $1,000. This is the only property the corporation placed in service during the short tax year. Tara does not elect to claim a section 179
deduction and the property does not qualify for a special depreciation allowance. The depreciation method for this property is the 200% declining
balance method. The depreciation rate is 40% and Tara applies the half-year convention.
Tara treats the property as placed in service on August 1. (The determination of this August 1 date is explained in the example illustrating the
half-year convention under Using the Applicable Convention in a Short Tax Year, earlier.) Tara is allowed 5 months of depreciation for the
short tax year that consists of 10 months. The corporation first multiplies the basis ($1,000) by 40% (the declining balance rate) to get the
depreciation for a full tax year of $400. The corporation then multiplies $400 by to get the short tax year depreciation of $167.
Example 2—mid-quarter convention.
Tara Corporation, with a short tax year beginning March 15 and ending on December 31, placed in service on October 16 an item of 5-year property
with a basis of $1,000. Tara does not elect to claim a section 179 deduction and the property does not qualify for a special depreciation allowance.
The depreciation method for this property is the 200% declining balance method. The depreciation rate is 40%. The corporation must apply the
mid-quarter convention because the property was the only item placed in service that year and it was placed in service in the last 3 months of the tax
year.
Tara treats the property as placed in service on September 1. (This date is shown in the table provided in the example illustrating the mid-quarter
convention under Using the Applicable Convention in a Short Tax Year, earlier, for property that Tara Corporation placed in service during
the quarter that begins on August 8 and ends on October 19.) Under MACRS, Tara is allowed 4 months of depreciation for the short tax year that
consists of 10 months. The corporation first multiplies the basis ($1,000) by 40% to get the depreciation for a full tax year of $400. The corporation
then multiplies $400 by to get the short tax year depreciation of $133.
Property Placed in Service Before a Short Tax Year
If you have a short tax year after the tax year in which you began depreciating property, you must change the way you figure depreciation for that
property. If you were using the percentage tables, you can no longer use them. You must figure depreciation for the short tax year and each later tax
year as explained next.
Depreciation After a Short Tax Year
You can use either of the following methods to figure the depreciation for years after a short tax year.
The simplified method.
The allocation method.
You must use the method you choose consistently.
Using the simplified method for a 12-month year.
Under the simplified method, you figure the depreciation for a later 12-month year in the recovery period by multiplying the adjusted basis of your
property at the beginning of the year by the applicable depreciation rate.
Example.
Assume the same facts as in Example 1 under Property Placed in Service in a Short Tax Year, earlier. The Tara Corporation
claimed depreciation of $167 for its short tax year. The adjusted basis on January 1 of the next year is $833 ($1,000 − $167). Tara's
depreciation for that next year is 40% of $833, or $333.
Using the simplified method for a short year.
If a later tax year in the recovery period is a short tax year, you figure depreciation for that year by multiplying the adjusted basis of the
property at the beginning of the tax year by the applicable depreciation rate, and then by a fraction. The fraction's numerator is the number of
months (including parts of a month) in the tax year. Its denominator is 12.
Using the simplified method for an early disposition.
If you dispose of property in a later tax year before the end of the recovery period, determine the depreciation for the year of disposition by
multiplying the adjusted basis of the property at the beginning of the tax year by the applicable depreciation rate and then multiplying the result by
a fraction. The fraction's numerator is the number of months (including parts of a month) the property is treated as in service during the tax year
(applying the applicable convention). Its denominator is 12.
Using the allocation method for a 12-month or short tax year.
Under the allocation method, you figure the depreciation for each later tax year by allocating to that year the depreciation attributable to the
parts of the recovery years that fall within that year. Whether your tax year is a 12-month or short tax year, you figure the depreciation by
determining which recovery years are included in that year. For each recovery year included, multiply the depreciation attributable to that recovery
year by a fraction. The fraction's numerator is the number of months (including parts of a month) that are included in both the tax year and the
recovery year. Its denominator is 12. The allowable depreciation for the tax year is the sum of the depreciation figured for each recovery year.
Example.
Assume the same facts as in Example 1 under Property Placed in Service in a Short Tax Year, earlier. The Tara Corporation's
first tax year after the short tax year is a full year of 12 months, beginning January 1 and ending December 31. The first recovery year for the
5-year property placed in service during the short tax year extends from August 1 to July 31. Tara deducted 5 months of the first recovery year on its
short-year tax return. Seven months of the first recovery year and 5 months of the second recovery year fall within the next tax year. The
depreciation for the next tax year is $333, which is the sum of the following.
$233—The depreciation for the first recovery year
($400 × ).
$100—The depreciation for the second recovery year. This is figured by multiplying the adjusted basis of $600 ($1,000 − $400) by
40%, then multiplying the $240 result by .
Using the allocation method for an early disposition.
If you dispose of property before the end of the recovery period in a later tax year, determine the depreciation for the year of disposition by
multiplying the depreciation figured for each recovery year or part of a recovery year included in the tax year by a fraction. The numerator of the
fraction is the number of months (including parts of months) the property is treated as in service in the tax year (applying the applicable
convention). The denominator is 12. If there is more than one recovery year in the tax year, you add together the depreciation for each recovery year.
How Do You Use General Asset Accounts?
Adjusted basis
Amortization
Amount realized
Basis
Clean-fuel vehicle
Clean-fuel vehicle refueling property
Convention
Disposition
Exchange
Placed in service
Recovery period
Section 1245 property
Unadjusted basis
To make it easier to figure MACRS depreciation, you can group separate properties into one or more general asset accounts (GAAs). You then can
depreciate all the properties in each account as a single item of property.
Property you cannot include.
You cannot include property in a GAA if you use it in both a personal activity and a trade or business (or for the production of income) in the
year in which you first place it in service. If property you included in a GAA is later used in a personal activity, see Terminating GAA
Treatment, later.
Property generating foreign source income.
For information on the GAA treatment of property that generates foreign source income, see sections 1.168(i)-1(f) and 1.168(i)-1T(f) of the
regulations.
Change in use.
Special rules apply to figuring depreciation for property in a GAA for which the use changes during the tax year. Examples include a change in use
resulting in a shorter recovery period and/or more accelerated depreciation method or a change in use resulting in a longer recovery period and/or a
less accelerated depreciation method. See sections 1.168(i)-1(h) and 1.168(i)-4 of the regulations.
Grouping PropertyGeneral asset account:Grouping property in
Each GAA must include only property you placed in service in the same year and that has the following in common.
Asset class, if any.
Recovery period.
Depreciation method.
Convention.
The following rules also apply when you establish a GAA.
No asset class. Properties without an asset class, but with the same depreciation method, recovery period, and convention, can be
grouped into the same GAA.
Mid-quarter convention. Property subject to the mid-quarter convention can only be grouped into a GAA with property placed in
service in the same quarter of the tax year.
Mid-month convention. Property subject to the mid-month convention can only be grouped into a GAA with property placed in service
in the same month of the tax year.
Passenger automobiles. Passenger automobiles subject to the limits on passenger automobile depreciation must be grouped into a
separate GAA.
Figuring Depreciation for a GAA
After you have set up a GAA, you generally figure the MACRS depreciation for it by using the applicable depreciation method, recovery period, and
convention for the property in the GAA. For each GAA, record the depreciation allowance in a separate depreciation reserve account.
Example.
Make & Sell, a calendar-year corporation, set up a GAA for ten machines. The machines cost a total of $10,000 and were placed in service in
June 2005. One of the machines cost $8,200 and the rest cost a total of $1,800. This GAA is depreciated under the 200% declining balance method with a
5-year recovery period and a half-year convention. Make & Sell did not claim the section 179 deduction on the machines and the machines did not
qualify for a special depreciation allowance. The depreciation allowance for 2005 is $2,000 [($10,000 × 40%) ÷ 2]. As of January 1, 2006,
the depreciation reserve account is $2,000.
Passenger automobiles.
To figure depreciation on passenger automobiles in a GAA, apply the deduction limits discussed in chapter 5 under Do the Passenger Automobile
Limits Apply. Multiply the amount determined using these limits by the number of automobiles originally included in the account, reduced by the
total number of automobiles removed from the GAA as discussed in Terminating GAA Treatment, later.
Disposing of GAA PropertyDisposition:General asset account propertyGeneral asset account:Disposing of property
When you dispose of property included in a GAA, the following rules generally apply.
Neither the unadjusted depreciable basis (defined later) nor the depreciation reserve account of the GAA is affected. You continue to
depreciate the account as if the disposition had not occurred.
The property is treated as having an adjusted basis of zero, so you cannot realize a loss on the disposition. If the property is transferred
to a supplies, scrap, or similar account, its basis in that account is zero.
Any amount realized on the disposition is treated as ordinary income, up to the limit discussed later under Treatment of amount
realized .
However, these rules do not apply to any disposition described later under Terminating GAA Treatment.
Disposition.
Property in a GAA is considered disposed of when you do any of the following.
Permanently withdraw it from use in your trade or business or from the production of income.
Transfer it to a supplies, scrap, or similar account.
Sell, exchange, retire, physically abandon, or destroy it.
The retirement of a structural component of real property is not a disposition.
Treatment of amount realized.
When you dispose of property in a GAA, you must recognize any amount realized from the disposition as ordinary income, up to a limit. The limit is:
The unadjusted depreciable basis of the GAA plus
Any expensed costs for property in the GAA that are subject to recapture as depreciation (not including any expensed costs for property that
you removed from the GAA under the rules discussed later under Terminating GAA Treatment), minus
Any amount previously recognized as ordinary income upon the disposition of other property from the GAA.
Unadjusted depreciable basis.
The unadjusted depreciable basis of a GAA is the total of the unadjusted depreciable bases of all the property in the GAA. The unadjusted
depreciable basis of an item of property in a GAA is the amount you would use to figure gain or loss on its sale, but figured without reducing your
original basis by any depreciation allowed or allowable in earlier years. However, you do reduce your original basis by other amounts, including any
amortization deduction, section 179 deduction, special depreciation allowance, deduction for a clean-fuel vehicle or clean-fuel vehicle refueling
property placed in service before January 1, 2006, and electric vehicle credit.
Expensed costs.
Expensed costs that are subject to recapture as depreciation include the following.
The section 179 deduction.
The deduction for clean-fuel vehicles or clean-fuel vehicle refueling property placed in service before January 1, 2006.
Amortization deductions for the following.
Pollution control facilities.
Removal of barriers for the elderly and disabled.
Tertiary injectants.
Reforestation expenses.
Example 1.
The facts are the same as in the example under Figuring Depreciation for a GAA, earlier. In February 2006, Make & Sell sells the
machine that cost $8,200 to an unrelated person for $9,000. The machine is treated as having an adjusted basis of zero.
On its 2006 tax return, Make & Sell recognizes the $9,000 amount realized as ordinary income because it is not more than the GAA's unadjusted
depreciable basis ($10,000) plus any expensed cost (for example, the section 179 deduction) for property in the GAA ($0), minus any amounts previously
recognized as ordinary income because of dispositions of other property from the GAA ($0).
The unadjusted depreciable basis and depreciation reserve of the GAA are not affected by the sale of the machine. The depreciation allowance for
the GAA in 2006 is $3,200 [($10,000 − $2,000) × 40%].
Example 2.
Assume the same facts as in Example 1. In June 2007, Make & Sell sells seven machines to an unrelated person for a total of $1,100.
These machines are treated as having an adjusted basis of zero.
On its 2007 tax return, Make & Sell recognizes $1,000 as ordinary income. This is the GAA's unadjusted depreciable basis ($10,000) plus the
expensed costs ($0), minus the amount previously recognized as ordinary income ($9,000). The remaining amount realized of $100 ($1,100 − $1,000)
is section 1231 gain (discussed in chapter 3 of Publication 544).
The unadjusted depreciable basis and depreciation reserve of the GAA are not affected by the disposition of the machines. The depreciation
allowance for the GAA in 2007 is $1,920 [($10,000 − $5,200) × 40%].
Terminating GAA Treatment
You must remove the following property from a GAA.
Property you dispose of in a nonrecognition transaction or an abusive transaction.
Property you dispose of in a qualifying disposition or in a disposition of all the property in the GAA, if you choose to terminate GAA
treatment.
Property you dispose of in a like-kind exchange or an involuntary conversion.
Property you change to personal use.
Property for which you must recapture any allowable credit or deduction, such as the investment credit, the credit for qualified electric
vehicles, the section 179 deduction, or the deduction for clean-fuel vehicles and clean-fuel vehicle refueling property placed in service before
January 1, 2006.
If you remove property from a GAA, you must make the following adjustments.
Reduce the unadjusted depreciable basis of the GAA by the unadjusted depreciable basis of the property as of the first day of the tax year
in which the disposition, change in use, or recapture event occurs. (You can use any reasonable method that is consistently applied to determine the
unadjusted depreciable basis of the property you remove from a GAA.)
Reduce the depreciation reserve account by the depreciation allowed or allowable for the property (computed in the same way as computed for
the GAA) as of the end of the tax year immediately preceding the year in which the disposition, change in use, or recapture event occurs.
These adjustments have no effect on the recognition and character of prior dispositions subject to the rules discussed earlier under
Disposing of GAA Property.
If you dispose of GAA property in a nonrecognition transaction, you must remove it from the GAA. The following are nonrecognition transactions.
The receipt by one corporation of property distributed in complete liquidation of another corporation.
The transfer of property to a corporation solely in exchange for stock in that corporation if the transferor is in control of the
corporation immediately after the exchange.
The transfer of property by a corporation that is a party to a reorganization in exchange solely for stock and securities in another
corporation that is also a party to the reorganization.
The contribution of property to a partnership in exchange for an interest in the partnership.
The distribution of property (including money) from a partnership to a partner.
Any transaction between members of the same affiliated group during any year for which the group makes a consolidated return.
Rules for recipient (transferee).
The recipient of the property (the person to whom it is transferred) must include your (the transferor's) adjusted basis in the property in a GAA.
If you transferred either all of the property or the last item of property in a GAA, the recipient's basis in the property is the result of the
following.
The adjusted depreciable basis of the GAA as of the beginning of your tax year in which the transaction takes place,
minus
The depreciation allowable to you for the year of the transfer.
For this purpose, the adjusted depreciable basis of a GAA is the unadjusted depreciable basis of the GAA minus any depreciation allowed or
allowable for the GAA.
If you dispose of GAA property in an abusive transaction, you must remove it from the GAA. A disposition is an abusive transaction if it is not a
nonrecognition transaction (described earlier) or a like-kind exchange or involuntary conversion and a main purpose for the disposition is to get a
tax benefit or a result that would not be available without the use of a GAA. Examples of abusive transactions include the following.
A transaction with a main purpose of shifting income or deductions among taxpayers in a way that would not be possible without choosing to
use a GAA to take advantage of differing effective tax rates.
A choice to use a GAA with a main purpose of disposing of property from the GAA so that you can use an expiring net operating loss or
credit. For example, if you have a net operating loss carryover or a credit carryover, the following transactions will be considered abusive
transactions unless there is strong evidence to the contrary.
A transfer of GAA property to a related person.
A transfer of GAA property under an agreement where the property continues to be used, or is available for use, by you.
Figuring gain or loss.
You must determine the gain, loss, or other deduction due to an abusive transaction by taking into account the property's adjusted basis. The
adjusted basis of the property at the time of the disposition is the result of the following:
The unadjusted depreciable basis of the property, minus
The depreciation allowed or allowable for the property figured by using the depreciation method, recovery period, and convention that
applied to the GAA in which the property was included.
If there is a gain, the amount subject to recapture as ordinary income is the smaller of the following.
The depreciation allowed or allowable for the property, including any expensed cost (such as section 179 deductions or the additional
depreciation allowed or allowable for the property).
The result of the following:
The original unadjusted depreciable basis of the GAA (plus, for section 1245 property originally included in the GAA, any expensed cost),
minus
The total gain previously recognized as ordinary income on the disposition of property from the GAA.
Qualifying dispositions.
If you dispose of GAA property in a qualifying disposition, you can choose to remove the property from the GAA. A qualifying disposition is one
that does not involve all the property, or the last item of property, remaining in a GAA and that is described by any of the following.
A disposition that is a direct result of fire, storm, shipwreck, other casualty, or theft.
A charitable contribution for which a deduction is allowed.
A disposition that is a direct result of a cessation, termination, or disposition of a business, manufacturing or other income-producing
process, operation, facility, plant, or other unit (other than by transfer to a supplies, scrap, or similar account).
A nontaxable transaction other than a nonrecognition transaction (described earlier), a like-kind exchange or involuntary conversion, or a
transaction that is nontaxable only because it is a disposition from a GAA.
If you choose to remove the property from the GAA, figure your gain, loss, or other deduction resulting from the disposition in the manner
described earlier under Abusive transactions.
Like-kind exchanges and involuntary conversions.
If you dispose of GAA property as a result of a like-kind exchange or involuntary conversion, you must remove from the GAA the property that you
transferred. See chapter 1 of Publication 544 for information on these transactions. Figure your gain, loss, or other deduction resulting from the
disposition in the manner described earlier under Abusive transactions.
Example.
Sankofa, a calendar-year corporation, maintains one GAA for 12 machines. Each machine costs $15,000 and was placed in service in 2005. Of the 12
machines, nine cost a total of $135,000 and are used in Sankofa's New York plant and three machines cost $45,000 and are used in Sankofa's New Jersey
plant. Assume this GAA uses the 200% declining balance depreciation method, a 5-year recovery period, and a half-year convention. Sankofa does not
claim the section 179 deduction and the machines do not qualify for a special depreciation allowance. As of January 1, 2007, the depreciation reserve
account for the GAA is $93,600.
In May 2007, Sankofa sells its entire manufacturing plant in New Jersey to an unrelated person. The sales proceeds allocated to each of the three
machines at the New Jersey plant is $5,000. This transaction is a qualifying disposition, so Sankofa chooses to remove the three machines from the GAA
and figure the gain, loss, or other deduction by taking into account their adjusted bases.
For Sankofa's 2007 return, the depreciation allowance for the GAA is figured as follows. As of December 31, 2006, the depreciation allowed or
allowable for the three machines at the New Jersey plant is $23,400. As of January 1, 2007, the unadjusted depreciable basis of the GAA is reduced
from $180,000 to $135,000 ($180,000 minus the $45,000 unadjusted depreciable bases of the three machines), and the depreciation reserve account is
decreased from $93,600 to $70,200 ($93,600 minus $23,400 depreciation allowed or allowable for the three machines as of December 31, 2006.) The
depreciation allowance for the GAA in 2007 is $25,920 [($135,000 − $70,200) × 40%].
For Sankofa's 2007 return, gain or loss for each of the three machines at the New Jersey plant is determined as follows. The depreciation allowed
or allowable in 2007 for each machine is $1,440 [(($15,000 − $7,800) × 40%) ÷ 2]. The adjusted basis of each machine is $5,760 (the
adjusted depreciable basis of $7,200 removed from the account less the $1,440 depreciation allowed or allowable in 2007). As a result, the loss
recognized in 2007 for each machine is $760 ($5,000 − $5,760). This loss is subject to section 1231 treatment. See chapter 3 of Publication 544
for information on section 1231 losses.
Disposition of all property in a GAA.
If you dispose of all the property, or the last item of property, in a GAA, you can choose to end the GAA. If you make this choice, you figure the
gain or loss by comparing the adjusted depreciable basis of the GAA with the amount realized.
If there is a gain, the amount subject to recapture as ordinary income is limited to the result of the following.
The depreciation allowed or allowable for the GAA, including any expensed cost (such as section 179 deductions or the additional
depreciation allowed or allowable for the GAA), minus
The total gain previously recognized as ordinary income on the disposition of property from the GAA.
Like-kind exchanges and involuntary conversions.
If you dispose of all the property or the last item of property in a GAA as a result of a like-kind exchange or involuntary conversion, the GAA
terminates. You must figure the gain or loss in the manner described above under Disposition of all property in a GAA.
Example.
Duforcelf, a calendar-year corporation, maintains a GAA for 1,000 calculators that cost a total of $60,000 and were placed in service in 2005.
Assume this GAA is depreciated under the 200% declining balance method, has a recovery period of 5 years, and uses a half-year convention. Duforcelf
does not claim the section 179 deduction and the calculators do not qualify for a special depreciation allowance. In 2006, Duforcelf sells 200 of the
calculators to an unrelated person for $10,000. The $10,000 is recognized as ordinary income.
In March 2007, Duforcelf sells the remaining calculators in the GAA to an unrelated person for $35,000. Duforcelf decides to end the GAA.
On the date of the disposition, the adjusted depreciable basis of the account is $23,040 (unadjusted depreciable basis of $60,000 minus the
depreciation allowed or allowable of $36,960). In 2007, Duforcelf recognizes a gain of $11,960. This is the amount realized of $35,000 minus the
adjusted depreciable basis of $23,040. The gain subject to recapture as ordinary income is limited to the depreciation allowed or allowable minus the
amounts previously recognized as ordinary income ($36,960 − $10,000 = $26,960). Therefore, the entire gain of $11,960 is recaptured as ordinary
income.
Electing To Use a GAAElection:General asset account
An election to include property in a GAA is made separately by each owner of the property. This means that an election to include property in a GAA
must be made by each member of a consolidated group and at the partnership or S corporation level (and not by each partner or shareholder separately).
How to make the election.
Make the election by completing line 18 of Form 4562.
When to make the election.
You must make the election on a timely filed tax return (including extensions) for the year in which you place in service the property included in
the GAA. However, if you timely filed your return for the year without making the election, you still can make the election by filing an amended
return within 6 months of the due date of the return (excluding extensions). Attach the election to the amended return and write Filed pursuant to
section 301.9100-2 on the election statement.
You must maintain records that identify the property included in each GAA, that establish the unadjusted depreciable basis and depreciation reserve
of the GAA, and that reflect the amount realized during the year upon dispositions from each GAA. However, see chapter 2 for the recordkeeping
requirements for section 179 property.
Revoking an election.Revoking:General asset account election
You can revoke an election to use a GAA only in the following situations.
You include in the GAA property that generates foreign source income, both United States and foreign source income, or combined gross income
of an FSC, a DISC, or a possessions corporation and its related supplier, and that inclusion results in a substantial distortion of
income.
You remove property from the GAA as described under Terminating GAA Treatment, earlier.
When you dispose of property that you depreciated using MACRS, any gain on the disposition generally is recaptured (included in income) as ordinary
income up to the amount of the depreciation previously allowed or allowable for the property. Depreciation, for this purpose, includes the following.
Any section 179 deduction claimed on the property.
Any deduction under section 179B of the Internal Revenue Code for capital costs to comply with Environmental Protection Agency sulfur
regulations.
Any deduction under section 179C of the Internal Revenue Code for certain qualified refinery property placed in service after August 8,
2005.
Any deduction under section 190 of the Internal Revenue Code for removal of barriers to the disabled and the elderly.
Any deduction under section 193 of the Internal Revenue Code for tertiary injectants.
Any special depreciation allowance previously allowed or allowable for the property (unless you elected not to claim it).
Any deduction claimed for clean-fuel vehicles and clean-fuel vehicle refueling property placed in service before January 1,
2006.
There is no recapture for residential rental and nonresidential real property unless that property is qualified property for which you claimed
a special depreciation allowance. For more information on depreciation recapture, see Publication 544.
Additional Rules for Listed Property
This chapter discusses the deduction limits and other special rules that apply to certain listed property. Listed property includes cars and other
property used for transportation, property used for entertainment, and certain computers and cellular phones.
Deductions for listed property (other than certain leased property) are subject to the following special rules and limits.
Deduction for employees. If your use of the property is not for your employer's convenience or is not required as a condition of
your employment, you cannot deduct depreciation or rent expenses for your use of the property as an employee.
Business-use requirement. If the property is not used predominantly (more than 50%) for qualified business use, you cannot claim
the section 179 deduction or a special depreciation allowance. In addition, you must figure any depreciation deduction under the Modified Accelerated
Cost Recovery System (MACRS) using the straight line method over the ADS recovery period. You may also have to recapture (include in income) any
excess depreciation claimed in previous years. A similar inclusion amount applies to certain leased property.
Passenger automobile limits and rules. Annual limits apply to depreciation deductions (including section 179 deductions) for
certain passenger automobiles. You can continue to deduct depreciation for the unrecovered basis resulting from these limits after the end of the
recovery period.
This chapter defines listed property and explains the special rules and depreciation deduction limits that apply, including the special inclusion
amount rule for leased property. It also discusses the recordkeeping rules for listed property and explains how to report information about the
property on your tax return.
For information on the limits on depreciation deductions for listed property placed in service before 1987, see Publication 534.
Publication463 Travel, Entertainment, Gift, and Car Expenses535Business Expenses587 Business Use of Your Home (Including Use by Daycare Providers) Form (and Instructions)Employee Business Expenses Unreimbursed Employee Business Expenses Depreciation and Amortization Sales of Business Property
See chapter 6 for information about getting publications and forms.
What Is Listed Property?Listed property:DefinedProperty:Listed
Capitalized
Commuting
Improvement
Recovery period
Straight line method
Listed property is any of the following.
Passenger automobiles weighing 6,000 pounds or less.
Any other property used for transportation, unless it is an excepted vehicle.
Property generally used for entertainment, recreation, or amusement (including photographic, phonographic, communication, and
video-recording equipment).
Computers and related peripheral equipment, unless used only at a regular business establishment and owned or leased by the person operating
the establishment. A regular business establishment includes a portion of a dwelling unit that is used both regularly and exclusively for business as
discussed in Publication 587.
ComputerListed property
Cellular telephones (or similar telecommunication equipment).
Cellular telephoneListed property
Improvements to listed property.Listed property:Improvements to
An improvement made to listed property that must be capitalized is treated as a new item of depreciable property. The recovery period and method of
depreciation that apply to the listed property as a whole also apply to the improvement. For example, if you must depreciate the listed property using
the straight line method, you also must depreciate the improvement using the straight line method.
A passenger automobile is any four-wheeled vehicle made primarily for use on public streets, roads, and highways and rated at 6,000 pounds or less
of unloaded gross vehicle weight (6,000 pounds or less of gross vehicle weight for trucks and vans). It includes any part, component, or other item
physically attached to the automobile or usually included in the purchase price of an automobile.
The following vehicles are not considered passenger automobiles for these purposes.
An ambulance, hearse, or combination ambulance-hearse used directly in a trade or business.
A vehicle used directly in the trade or business of transporting persons or property for pay or hire.
A truck or van that is a qualified nonpersonal use vehicle.
Qualified nonpersonal use vehicles.
Qualified nonpersonal use vehicles are vehicles that by their nature are not likely to be used more than a minimal amount for personal purposes.
They include the trucks and vans listed as excepted vehicles under Other Property Used for Transportation, next. They also include trucks
and vans that have been specially modified so that they are not likely to be used more than a minimal amount for personal purposes, such as by
installation of permanent shelving and painting the vehicle to display advertising or the company's name.
Although vehicles used to transport persons or property for pay or hire and vehicles rated at more than the 6,000-pound threshold are not passenger
automobiles, they are still other property used for transportation (discussed next). They are therefore listed property items subject to the
special rules for such property other than the passenger automobile limits and rules.
For a detailed discussion of passenger automobiles, including leased passenger automobiles, see Publication 463.
Other Property Used
for Transportation
Other property used for transportation includes trucks, buses, boats, airplanes, motorcycles, and any other vehicles used to transport persons or
goods.
Excepted vehicles.
Other property used for transportation does not include the following qualified nonpersonal use vehicles (defined earlier under Passenger
Automobiles).
Clearly marked police and fire vehicles.
Unmarked vehicles used by law enforcement officers if the use is officially authorized.
Ambulances used as such and hearses used as such.
Any vehicle with a loaded gross vehicle weight of over 14,000 pounds that is designed to carry cargo.
Delivery trucks with seating only for the driver, or only for the driver plus a folding jump seat.
Qualified moving vans.
Qualified specialized utility repair trucks.
School buses used in transporting students and employees of schools.
Other buses with a capacity of at least 20 passengers that are used as passenger buses.
Tractors and other special purpose farm vehicles.
Clearly marked police and fire vehicle.
A clearly marked police or fire vehicle is a vehicle that meets all the following requirements.
It is owned or leased by a governmental unit or an agency or instrumentality of a governmental unit.
It is required to be used for commuting by a police officer or fire fighter who, when not on a regular shift, is on call at all
times.
It is prohibited from being used for personal use (other than commuting) outside the limit of the police officer's arrest powers or the fire
fighter's obligation to respond to an emergency.
It is clearly marked with painted insignia or words that make it readily apparent that it is a police or fire vehicle. A marking on a
license plate is not a clear marking for these purposes.
Qualified moving van.
A qualified moving van is any truck or van used by a professional moving company for moving household or business goods if the following
requirements are met.
No personal use of the van is allowed other than for travel to and from a move site or for minor personal use, such as a stop for lunch on
the way from one move site to another.
Personal use for travel to and from a move site happens no more than five times a month on average.
Personal use is limited to situations in which it is more convenient to the employer, because of the location of the employee's residence in
relation to the location of the move site, for the van not to be returned to the employer's business location.
Qualified specialized utility repair truck.
A truck is a qualified specialized utility repair truck if it is not a van or pickup truck and all the following apply.
The truck was specifically designed for and is used to carry heavy tools, testing equipment, or parts.
Shelves, racks, or other permanent interior construction has been installed to carry and store the tools, equipment, or parts and would make
it unlikely that the truck would be used, other than minimally, for personal purposes.
The employer requires the employee to drive the truck home in order to be able to respond in emergency situations for purposes of restoring
or maintaining electricity, gas, telephone, water, sewer, or steam utility services.
Computers and Related
Peripheral EquipmentListed property:Computer
A computer is a programmable, electronically activated device capable of accepting information, applying prescribed processes to the information,
and supplying the results of those processes with or without human intervention. It consists of a central processing unit with extensive storage,
logic, arithmetic, and control capabilities.
Related peripheral equipment is any auxiliary machine which is designed to be controlled by the central processing unit of a computer.
The following are neither computers nor related peripheral equipment.
Any equipment that is an integral part of other property that is not a computer.
Typewriters, calculators, adding and accounting machines, copiers, duplicating equipment, and similar equipment.
Equipment of a kind used primarily for the user's amusement or entertainment, such as video games.
Can Employees Claim
a Deduction?Employee deduction, listed propertyDepreciation:Deduction:EmployeeDepreciation:Deduction:Listed propertyListed property:Employee deductionEmployee:Depreciation deduction
If you are an employee, you can claim a depreciation deduction for the use of your listed property (whether owned or rented) in performing services
as an employee only if your use is a business use. The use of your property in performing services as an employee is a business use only if both the
following requirements are met.
The use is for your employer's convenience.
The use is required as a condition of your employment.
If these requirements are not met, you cannot deduct depreciation (including the section 179 deduction) or rent expenses for your use of the
property as an employee.
Whether the use of listed property is for your employer's convenience must be determined from all the facts. The use is for your employer's
convenience if it is for a substantial business reason of the employer. The use of listed property during your regular working hours to carry on your
employer's business generally is for the employer's convenience.
Condition of employment.Listed property:Condition of employment
Whether the use of listed property is a condition of your employment depends on all the facts and circumstances. The use of property must be
required for you to perform your duties properly. Your employer does not have to require explicitly that you use the property. However, a mere
statement by the employer that the use of the property is a condition of your employment is not sufficient.
Example 1.
Virginia Sycamore is employed as a courier with We Deliver, which provides local courier services. She owns and uses a motorcycle to deliver
packages to downtown offices. We Deliver explicitly requires all delivery persons to own a car or motorcycle for use in their employment. Virginia's
use of the motorcycle is for the convenience of We Deliver and is required as a condition of employment.
Example 2.
Bill Nelson is an inspector for Uplift, a construction company with many sites in the local area. He must travel to these sites on a regular basis.
Uplift does not furnish an automobile or explicitly require him to use his own automobile. However, it pays him for any costs he incurs in traveling
to the various sites. The use of his own automobile or a rental automobile is for the convenience of Uplift and is required as a condition of
employment.
Example 3.
Assume the same facts as in Example 2 except that Uplift furnishes a car to Bill, who chooses to use his own car and receive payment for
using it. The use of his own car is neither for the convenience of Uplift nor required as a condition of employment.
Example 4.
Marilyn Lee is a pilot for Y Company, a small charter airline. Y requires pilots to obtain 80 hours of flight time annually in addition to flight
time spent with the airline. Pilots usually can obtain these hours by flying with the Air Force Reserve or by flying part-time with another airline.
Marilyn owns her own airplane. The use of her airplane to obtain the required flight hours is neither for the convenience of the employer nor required
as a condition of employment.
Example 5.
David Rule is employed as an engineer with Zip, an engineering contracting firm. He occasionally takes work home at night rather than work late in
the office. He owns and uses a home computer which is virtually identical to the office model. His use of the computer is neither for the convenience
of his employer nor required as a condition of employment.
What Is the Business-Use
Requirement?Depreciation deduction:Listed propertyBusiness-use requirement, listed property
Adjusted basis
Business/investment use
Capitalized
Commuting
Declining balance method
Fair market value (FMV)
Nonresidential real property
Placed in service
Recapture
Recovery period
Straight line method
You can claim the section 179 deduction and a special depreciation allowance for listed property and depreciate listed property using GDS and a
declining balance method if the property meets the business-use requirement. To meet this requirement, listed property must be used predominantly
(more than 50% of its total use) for qualified business use. If this requirement is not met, the following rules apply.
Property not used predominantly for qualified business use during the year it is placed in service does not qualify for the section 179
deduction.
Property not used predominantly for qualified business use during the year it is placed in service does not qualify for a special
depreciation allowance.
Any depreciation deduction under MACRS for property not used predominantly for qualified business use during any year must be figured using
the straight line method over the ADS recovery period. This rule applies each year of the recovery period.
Excess depreciation on property previously used predominantly for qualified business use must be recaptured (included in income) in the
first year in which it is no longer used predominantly for qualified business use.
A lessee must add an inclusion amount to income in the first year in which the leased property is not used predominantly for qualified
business use.
Being required to use the straight line method for an item of listed property not used predominantly for qualified business use is not the same as
electing the straight line method. It does not mean that you have to use the straight line method for other property in the same class as the item of
listed property.
Exception for leased property.
The business-use requirement generally does not apply to any listed property leased or held for leasing by anyone regularly engaged in the business
of leasing listed property.
You are considered regularly engaged in the business of leasing listed property only if you enter into contracts for the leasing of listed property
with some frequency over a continuous period of time. This determination is made on the basis of the facts and circumstances in each case and takes
into account the nature of your business in its entirety. Occasional or incidental leasing activity is insufficient. For example, if you lease only
one passenger automobile during a tax year, you are not regularly engaged in the business of leasing automobiles. An employer who allows an employee
to use the employer's property for personal purposes and charges the employee for the use is not regularly engaged in the business of leasing the
property used by the employee.
How To Allocate Use
To determine whether the business-use requirement is met, you must allocate the use of any item of listed property used for more than one purpose
during the year among its various uses.
For passenger automobiles and other means of transportation, allocate the property's use on the basis of mileage. You determine the percentage of
qualified business use by dividing the number of miles you drove the vehicle for business purposes during the year by the total number of miles you
drove the vehicle for all purposes (including business miles) during the year.
For other listed property, allocate the property's use on the basis of the most appropriate unit of time the property is actually used (rather than
merely being available for use). For example, you can determine the percentage of business use of a computer by dividing the number of hours you used
the computer for business purposes during the year by the total number of hours you used the computer for all purposes (including business use) during
the year.
Entertainment use.
Treat the use of listed property for entertainment, recreation, or amusement purposes as a business use only to the extent you can deduct expenses
(other than interest and property tax expenses) due to its use as an ordinary and necessary business expense.
Commuting use.Commuting
The use of an automobile for commuting is not business use, regardless of whether work is performed during the trip. For example, a business
telephone call made on a car telephone while commuting to work does not change the character of the trip from commuting to business. This is also true
for a business meeting held in a car while commuting to work. Similarly, a business call made on an otherwise personal trip does not change the
character of a trip from personal to business. The fact that an automobile is used to display material that advertises the owner's or user's trade or
business does not convert an otherwise personal use into business use.
Use of your automobile by another person.
If someone else uses your automobile, do not treat that use as business use unless one of the following conditions applies.
That use is directly connected with your business.
You properly report the value of the use as income to the other person and withhold tax on the income where required.
You are paid a fair market rent.
Treat any payment to you for the use of the automobile as a rent payment for purposes of item (3).
Employee deductions.
If you are an employee, do not treat your use of listed property as business use unless it is for your employer's convenience and is required as a
condition of your employment. See Can Employees Claim a Deduction, earlier.
Qualified Business UseListed property:Qualified business use
Qualified business use of listed property is any use of the property in your trade or business. However, it does not include the following uses.
The leasing of property to any 5% owner or related person (to the extent the property is used by a 5% owner or person related to the owner
or lessee of the property).
The use of property as pay for the services of a 5% owner or related person.
The use of property as pay for services of any person (other than a 5% owner or related person), unless the value of the use is included in
that person's gross income and income tax is withheld on that amount where required.
Property does not stop being used predominantly for qualified business use because of a transfer at death.
Exception for leasing or compensatory use of aircraft.
Treat the leasing or compensatory use of any aircraft by a 5% owner or related person as a qualified business use if at least 25% of the total use
of the aircraft during the year is for a qualified business use.
5% owner.Listed property:5% owner
For a business entity that is not a corporation, a 5% owner is any person who owns more than 5% of the capital or profits interest in the business.
For a corporation, a 5% owner is any person who owns, or is considered to own, either of the following.
More than 5% of the outstanding stock of the corporation.
Stock possessing more than 5% of the total combined voting power of all stock in the corporation.
Related persons.Related personsListed property:Related person
For a description of related persons, see Related persons in the discussion on property owned or used in 1986 under Can You Use
MACRS To Depreciate Your Property in chapter 1. For this purpose, however, treat as related persons only the relationships listed in items (1)
through (10) of that discussion and substitute 50% for 10% each place it appears.
Examples.
The following examples illustrate whether the use of business property is qualified business use.
Example 1.
John Maple is the sole proprietor of a plumbing contracting business. John employs his brother, Richard, in the business. As part of Richard's pay,
he is allowed to use one of the company automobiles for personal use. The company includes the value of the personal use of the automobile in
Richard's gross income and properly withholds tax on it. The use of the automobile is pay for the performance of services by a related person, so it
is not a qualified business use.
Example 2.
John, in Example 1, allows unrelated employees to use company automobiles for personal purposes. He does not include the value of the
personal use of the company automobiles as part of their compensation and he does not withhold tax on the value of the use of the automobiles. This
use of company automobiles by employees is not a qualified business use.
Example 3.
James Company Inc. owns several automobiles that its employees use for business purposes. The employees also are allowed to take the automobiles
home at night. The fair market value of each employee's use of an automobile for any personal purpose, such as commuting to and from work, is reported
as income to the employee and James Company withholds tax on it. This use of company automobiles by employees, even for personal purposes, is a
qualified business use for the company.
Investment Use
The use of property to produce income in a nonbusiness activity (investment use) is not a qualified business use. However, you can treat the
investment use as business use to figure the depreciation deduction for the property in a given year.
Example 1.
Sarah Bradley uses a home computer 50% of the time to manage her investments. She also uses the computer 40% of the time in her part-time consumer
research business. Sarah's home computer is listed property because it is not used at a regular business establishment. She does not use the computer
predominantly for qualified business use. Therefore, she cannot elect a section 179 deduction or claim a special depreciation allowance for the
computer. She must depreciate it using the straight line method over the ADS recovery period. (Her combined business/investment use for determining
her depreciation deduction is 90%.)
Example 2.
If Sarah uses her computer 30% of the time to manage her investments and 60% of the time in her consumer research business, it is used
predominantly for qualified business use. She can elect a section 179 deduction and, if she does not deduct all the computer's cost, she can claim a
special depreciation allowance and depreciate the computer using the 200% declining balance method over the GDS recovery period. (Her combined
business/investment use for determining her depreciation deduction is 90%.)
Recapture of Excess DepreciationRecapture:Listed propertyDepreciation:Recapture
If you used listed property more than 50% in a qualified business use in the year you placed it in service, you must recapture (include in income)
excess depreciation in the first year you use it 50% or less. You also increase the adjusted basis of your property by the same amount.
Excess depreciation is:
The depreciation allowable for the property (including any section 179 deduction and special depreciation allowance claimed) for years
before the first year you do not use the property predominantly for qualified business use, minus
The depreciation that would have been allowable for those years if you had not used the property predominantly for qualified business use in
the year you placed it in service.
To determine the amount in (2) above, you must refigure the depreciation using the straight line method and the ADS recovery period.
Example.
In June 2001, Ellen Rye purchased and placed in service a pickup truck that cost $18,000. She used it only for qualified business use for 2001
through 2004. Ellen claimed a section 179 deduction of $10,000 based on the purchase of the truck. She began depreciating it using the 200% DB method
over a 5-year GDS recovery period. (The pickup truck's gross vehicle weight was over 6,000 pounds, so it was not subject to the passenger automobile
limits discussed later under Do the Passenger Automobile Limits Apply.) During 2005, she used the truck 50% for business and 50% for
personal purposes. She includes $4,018 excess depreciation in her gross income for 2005. The excess depreciation is determined as follows.
Total section 179 deduction ($10,000) and depreciation claimed ($6,618) for 2001 through
2004. (Depreciation is from Table A-1.)$16,618Minus: Depreciation allowable (Table A-8):2001 – 10% of $18,000$1,8002002 – 20% of $18,0003,6002003 – 20% of $18,0003,6002004 – 20% of $18,0003,60012,600Excess depreciation$4,018
If Ellen's use of the truck does not change to 50% for business and 50% for personal purposes until 2007, there will be no excess depreciation. The
total depreciation allowable using Table A-8 through 2007 will be $18,000, which equals the total of the section 179 deduction and depreciation she
will have claimed.
Where to figure and report recapture.
Use Form 4797, Part IV, to figure the recapture amount. Report the recapture amount as other income on the same form or schedule on which you took
the depreciation deduction. For example, report the recapture amount as other income on Schedule C (Form 1040) if you took the depreciation deduction
on Schedule C. If you took the depreciation deduction on Form 2106, report the recapture amount as other income on Form 1040, line 21.
Lessee's Inclusion AmountListed property:Leased
If you use leased listed property other than a passenger automobile for business/investment use, you must include an amount in your income in the
first year your qualified business-use percentage is 50% or less. Your qualified business-use percentage is the part of the property's total use that
is qualified business use (defined earlier). For the inclusion amount rules for a leased passenger automobile, see Leasing a Car in chapter
4 of Publication 463.
The inclusion amount is the sum of Amount A and Amount B, described next. However, see the special rules for the inclusion amount, later, if your
lease begins in the last 9 months of your tax year or is for less than one year.
Amount A.
Amount A is:
The fair market value of the property, multiplied by
The business/investment use for the first tax year the qualified business-use percentage is 50% or less, multiplied by
The applicable percentage from Table A-19 in Appendix A.
The fair market value of the property is the value on the first day of the lease term. If the capitalized cost of an item of listed property is
specified in the lease agreement, you must treat that amount as the fair market value.
Amount B.
Amount B is:
The fair market value of the property, multiplied by
The average of the business/investment use for all tax years the property was leased that precede the first tax year the qualified
business-use percentage is 50% or less, multiplied by
The applicable percentage from Table A-20 in Appendix A.
Maximum inclusion amount.
The inclusion amount cannot be more than the sum of the deductible amounts of rent for the tax year in which the lessee must include the amount in
gross income.
The following worksheet is provided to help you figure the inclusion amount for leased listed property.
<BLD>Inclusion Amount Worksheet
<L>for Leased Listed Property </BLD>1.Fair market value2.Business/investment use for first year business use is 50% or less3.Multiply line 1 by line 2.4.Rate (%) from Table A-195.Multiply line 3 by line 4. This is Amount A.6.Fair market value7.Average business/investment use for years property leased before the first year business use is 50% or less8.Multiply line 6 by line 79.Rate (%) from Table A-2010.Multiply line 8 by line 9. This is Amount B.11.Add line 5 and line 10. This is your inclusion amount. Enter here and as other income on the form or schedule
on which you originally took the deduction (for example, Schedule C or F (Form 1040), Form 1040, Form 1120, etc.)
Example.
On February 1, 2003, Larry House, a calendar year taxpayer, leased and placed in service a computer with a fair market value of $3,000. The lease
is for a period of 5 years. Larry does not use the computer at a regular business establishment, so it is listed property. His business use of the
property (all of which is qualified business use) is 80% in 2003, 60% in 2004, and 40% in 2005. He must add an inclusion amount to gross income for
2005, the first tax year his qualified business-use percentage is 50% or less. The computer has a 5-year recovery period under both GDS and ADS. 2005
is the third tax year of the lease, so the applicable percentage from Table A-19 is −19.8%. The applicable percentage from Table A-20 is 22.0%.
Larry's deductible rent for the computer for 2005 is $800.
Larry uses the Inclusion Amount Worksheet for Leased Listed Property to figure the amount he must include in income for 2005. His
inclusion amount is $224, which is the sum of −$238 (Amount A) and $462 (Amount B).
<BLD>Inclusion Amount Worksheet
<L>for Leased Listed Property </BLD>1.Fair market value$3,0002.Business/investment use for first year business use is 50% or less40%3.Multiply line 1 by line 2.1,2004.Rate (%) from Table A-19−19.8%5.Multiply line 3 by line 4. This is Amount A.−2386.Fair market value3,0007.Average business/investment use for years property leased before the first year business use is 50% or less70%8.Multiply line 6 by line 72,1009.Rate (%) from Table A-2022.0%10.Multiply line 8 by line 9. This is Amount B.46211.Add line 5 and line 10. This is your inclusion amount. Enter here and as other income on the
form or schedule on which you originally took the deduction (for example, Schedule C or F (Form 1040), Form 1040, Form 1120, etc.)$224
Lease beginning in the last 9 months of your tax year.
The inclusion amount is subject to a special rule if all the following apply.
The lease term begins within 9 months before the close of your tax year.
You do not use the property predominantly (more than 50%) for qualified business use during that part of the tax year.
The lease term continues into your next tax year.
Under this special rule, add the inclusion amount to income in the next tax year. Figure the inclusion amount by taking into account the
average of the business/investment use for both tax years (line 2 of the Inclusion Amount Worksheet for Leased Listed Property) and the
applicable percentage for the tax year the lease term begins. (Skip lines 6 through 9 of the worksheet and enter zero on line 10.)
Example 1.
On August 1, 2004, Julie Rule, a calendar year taxpayer, leased and placed in service an item of listed property. The property is 5-year property
with a fair market value of $10,000. Her property has a recovery period of 5 years under ADS. The lease is for 5 years. Her business use of the
property was 50% in 2004 and 90% in 2005. She paid rent of $3,600 for 2005, of which $3,240 is deductible. She must include $147 in income in 2005.
The $147 is the sum of Amount A and Amount B. Amount A is $147 ($10,000 × 70% × 2.1%), the product of the fair market value, the average
business use for 2004 and 2005, and the applicable percentage for year one from Table A-19. Amount B is zero.
Lease for less than one year.
A special rule for the inclusion amount applies if the lease term is less than one year and you do not use the property predominantly (more than
50%) for qualified business use. The amount included in income is the inclusion amount (figured as described in the preceding discussions) multiplied
by a fraction. The numerator of the fraction is the number of days in the lease term and the denominator is 365 (or 366 for leap years).
The lease term for listed property other than residential rental or nonresidential real property includes options to renew. If you have two or more
successive leases that are part of the same transaction (or a series of related transactions) for the same or substantially similar property, treat
them as one lease.
Example 2.
On October 1, 2004, John Joyce, a calendar year taxpayer, leased and placed in service an item of listed property that is 3-year property. This
property had a fair market value of $15,000 and a recovery period of 5 years under ADS. The lease term was 6 months (ending on March 31, 2005), during
which he used the property 45% in business. He must include $71 in income in 2005. The $71 is the sum of Amount A and Amount B. Amount A is $71
($15,000 × 45% × 2.1% × 182/365), the product of the fair market value, the average business use for both years, and the applicable
percentage for year one from Table A-19, prorated for the length of the lease. Amount B is zero.
Where to report inclusion amount.
Report the inclusion amount figured as described in the preceding discussions as other income on the same form or schedule on which you took the
deduction for your rental costs. For example, report the inclusion amount as other income on Schedule C (Form 1040) if you took the deduction on
Schedule C. (If you took the deduction for rental costs on Form 2106, report the inclusion amount as other income on Form 1040, line 21.)
Do the Passenger Automobile Limits Apply?Deduction limit:AutomobileLimit on deduction:AutomobilePassenger automobile:Limit on
Basis
Clean-fuel vehicle
Convention
Placed in service
Recovery period
The depreciation deduction, including the section 179 deduction, you can claim for a passenger automobile each year is limited. (For the definition
of a passenger automobile, see Passenger Automobiles under What Is Listed Property, earlier.)
This section describes the maximum depreciation deduction amounts for 2005 and explains how to deduct, after the recovery period, the unrecovered
basis of your property that results from applying the passenger automobile limit.
Exception for clean-fuel modifications.Deduction limit:Exception for clean-fuel modifications
The passenger automobile limits do not apply to any costs you pay to retrofit parts and components to modify an automobile placed in service before
January 1, 2006, to permit it to run on a clean-burning fuel. The limits apply only to the cost of the automobile without the modification.
Exception for leased cars.
The passenger automobile limits generally do not apply to passenger automobiles leased or held for leasing by anyone regularly engaged in the
business of leasing passenger automobiles. For information on when you are considered regularly engaged in the business of leasing listed property,
including passenger automobiles, see Exception for leased property, earlier, under What Is the Business-Use Requirement.
Maximum Depreciation DeductionMaximum deduction:Passenger automobilesPassenger automobile:Maximum depreciation deduction
The passenger automobile limits are the maximum depreciation amounts you can deduct for a passenger automobile. They are based on the date you
placed the automobile in service.
Passenger Automobiles
The maximum deduction amounts for most passenger automobiles are shown in the following table.
<BLD>Maximum Depreciation Deduction
<L> for Passenger Automobiles</BLD>Date4th & Placed1st 2nd 3rd Later In ServiceYear Year Year Years 2005 $2,960$4,700$2,850$1,675 2004 10,610
14,8002,8501,675 5/06/2003–
12/31/2003 10,710
24,9002,9501,775 1/01/2003–
5/05/2003 7,660
34,9002,9501,775 2002 7,660
34,9002,9501,775 2001 7,660
44,9002,9501,775 20003,060 4,9002,9501,775 19993,060 5,0002,9501,775 19983,160 5,0002,9501,775 19973,160 5,0003,0501,775 1If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the
vehicle is qualified Liberty Zone property, the maximum deduction is $2,960. 2If you acquired the vehicle before 5/06/03, the maximum deduction is $7,660. If you elected not to claim any special
depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum
deduction is $3,060. 3If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the
vehicle is qualified Liberty Zone property, the maximum deduction is $3,060.4 If you acquired the vehicle before 9/11/01, you elected not to claim any special depreciation allowance for the vehicle, the
vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $3,060.
If your business/investment use of the automobile is less than 100%, you must reduce the maximum deduction amount by multiplying the maximum amount
by the percentage of business/investment use determined on an annual basis during the tax year.
If you have a short tax year, you must reduce the maximum deduction amount by multiplying the maximum amount by a fraction. The numerator of the
fraction is the number of months and partial months in the short tax year and the denominator is 12.
Example.
On April 15, 2005, Virginia Hart bought and placed in service a new car for $14,500. She used the car only in her business. She files her tax
return based on the calendar year. She does not elect a section 179 deduction. Under MACRS, a car is 5-year property. Since she placed her car in
service on April 15 and used it only for business, she uses the percentages in Table A-1 to figure her MACRS depreciation on the car. Virginia
multiplies the $14,500 unadjusted basis of her car by 0.20 to get her MACRS depreciation of $2,900 for 2005. This $2,900 is below the maximum
depreciation deduction of $2,960 for passenger automobiles placed in service in 2005. She can deduct the full $2,900.
Electric VehiclesPassenger automobile:Electric vehiclesElectric vehicleMaximum deduction:Electric vehicles
The maximum depreciation deductions for passenger automobiles that are produced to run primarily on electricity are higher than those for other
automobiles. The maximum deduction amounts for electric cars are shown in the following table.
<BLD>Maximum Depreciation Deduction
<L>For Electric Vehicles</BLD>Date4th & Placed1st 2nd 3rd LaterIn ServiceYear Year Year Years2005 $8,880$14,200$8,450$5,1252004 31,830
114,3008,5505,1255/06/2003–
12/31/2003 32,030
214,6008,7505,2251/01/2003–
5/05/2003 22,880
314,6008,7505,2252002 22,980
414,7008,7505,3252001 23,080
514,8008,8505,3252000 9,28014,8008,8505,3251999 9,28014,9008,9505,3251998 9,38015,0008,9505,4251997 9,48015,1009,0505,4251If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the
vehicle is qualified Liberty Zone property, the maximum deduction is $8,880.2If you acquired the vehicle before 5/06/03, the maximum deduction is $22,880. If you elected not to claim any special
depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum
deduction is $9,080. 3 If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the
vehicle is qualified Liberty Zone property, the maximum deduction is $9,080. 4 If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the
vehicle is qualified Liberty Zone property, the maximum deduction is $9,180. 5 If you acquired the vehicle before 9/11/01, you elected not to claim any special depreciation allowance for the vehicle, the
vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $9,280.
For more information on electric vehicles, see chapter 12 of Publication 535.
Trucks and VansPassenger automobile:TrucksPassenger automobile:VansTrucksVansMaximum deduction:TrucksMaximum deduction:Vans
The maximum depreciation deductions for trucks and vans are higher than those for other passenger automobiles. This includes vehicles such as
minivans and sport utility vehicles that are built on a truck chassis. The maximum deduction amounts for trucks and vans are shown in the following
table.
<BLD>Maximum Depreciation Deduction
<L>For Trucks and Vans</BLD>Date4th & Placed1st 2nd 3rd LaterIn ServiceYear Year Year Years2005$3,260 $5,200$3,150$1,875200410,910
15,3003,1501,8755/06/2003–
12/31/2003 11,010
25,4003,2501,9751/01/2003–
5/05/2003 7,960
35,4003,2501,9751If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the
vehicle is qualified Liberty Zone property, the maximum deduction is $3,260.2 If you acquired the vehicle before 5/06/03, the maximum deduction is $7,960. If you elected not to claim any special
depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum
deduction is $3,360. 3 If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the
vehicle is qualified Liberty Zone property, the maximum deduction is $3,360.
Depreciation Worksheet for
Passenger Automobiles
You can use the following worksheet to figure your depreciation deduction using the percentage tables. Then use the information from this worksheet
to prepare Form 4562.
Worksheet:Passenger automobile
<BLD>Depreciation Worksheet for
<L>Passenger Automobiles </BLD>Part I 1.MACRS system (GDS or ADS)2.Property class3.Date placed in service4.Recovery period5.Method and convention6.Depreciation rate (from tables)7.Maximum depreciation deduction for this year from the appropriate table8.Business/investment-use percentage9.Multiply line 7 by line 8. This is your adjusted maximum depreciation deduction10.Section 179 deduction claimed this year (not more than line 9). Enter -0- if this is not the year you
placed the car in service.Note. 1) If line 10 is equal to line 9, stop here. Your combined section 179 and depreciation deduction is limited to the amount on line 9.
2) If line 10 is less than line 9, complete Part II.Part II 11.Subtract line 10 from line 9. This is the maximum amount you can deduct for depreciation12.Cost or other basis (reduced by any section 179A deduction
1 or credit for electric vehicles
2)13.Multiply line 12 by line 8. This is your business/investment cost14.Section 179 deduction and any special depreciation allowance claimed in the year you placed the car in
service15.Subtract line 14 from line 13. This is your basis for depreciation16.Multiply line 15 by line 6. This is your tentative MACRS depreciation deduction17.Enter the lesser of line 11 or line 16. This is your MACRS depreciation deduction1The section 179A deduction is for clean-fuel vehicles or clean-fuel vehicle refueling property placed in service before January 1, 2006.
When figuring the amount to enter on line 12, do not reduce your cost or other basis by any section 179 deduction you claimed for your
car.2Reduce the basis by the lesser of $4,000 or 10% of the cost of the vehicle even if the credit is less than that amount.
The following example shows how to figure your depreciation deduction using the worksheet.
Example.
On September 26, 2005, Donald Banks bought and placed in service a new car for $18,000. He used the car 60% for business during 2005. He files his
tax return based on the calendar year. Under GDS, his car is 5-year property. Donald is electing a section 179 deduction of $1,000 on the car. He uses
Table A-1 to determine the depreciation rate. Donald's MACRS depreciation deduction is limited to $466, as shown in the following worksheet.
<BLD>Depreciation Worksheet for
<L>Passenger Automobiles </BLD>Part I 1.MACRS system (GDS or ADS)GDS2.Property class5-year3.Date placed in service9/26/054.Recovery period5-Year5.Method and convention200% DB/Half-Year6.Depreciation rate (from tables).207.Maximum depreciation deduction for this year from the appropriate table$2,9608.Business/investment-use percentage60%9.Multiply line 7 by line 8. This is your adjusted maximum depreciation deduction$1,77610.Section 179 deduction claimed this year (not more than line 9). Enter -0- if this is not the year you
placed the car in service.$1,000Note.1) If line 10 is equal to line 9, stop here. Your combined section 179 and depreciation deduction is limited to the amount on line 9.
2) If line 10 is less than line 9, complete Part II.Part II 11.Subtract line 10 from line 9. This is the maximum amount you can deduct for depreciation$76612.Cost or other basis (reduced by any section 179A deduction
1 or credit for electric vehicles
2)$18,00013.Multiply line 12 by line 8. This is your business/investment cost$10,80014.Section 179 deduction and any special depreciation allowance claimed in year you placed the car in
service$1,00015.Subtract line 14 from line 13. This is your basis for depreciation$9,80016.Multiply line 15 by line 6. This is your tentative MACRS depreciation deduction$1,96017.Enter the lesser of line 11 or line 16. This is your MACRS depreciation deduction$7761The section 179A deduction is for clean-fuel vehicles or clean-fuel vehicle refueling property placed in service before January 1, 2006.
When figuring the amount to enter on line 12, do not reduce your cost or other basis by any section 179 deduction you claimed for your
car.2Reduce the basis by the lesser of $4,000 or 10% of the cost of the vehicle even if the credit is less than that amount.
Deductions After the
Recovery Period
If the depreciation deductions for your automobile are reduced under the passenger automobile limits, you will have unrecovered basis in your
automobile at the end of the recovery period. If you continue to use the automobile for business, you can deduct that unrecovered basis after the
recovery period ends. You can claim a depreciation deduction in each succeeding tax year until you recover your full basis in the car. The maximum
amount you can deduct each year is determined by the date you placed the car in service and your business/investment-use percentage. See Maximum
Depreciation Deduction, earlier.
Unrecovered basis is the cost or other basis of the passenger automobile reduced by any clean-fuel vehicle deduction, electric vehicle credit,
depreciation, and section 179 deductions that would have been allowable if you had used the car 100% for business and investment use and the passenger
automobile limits had not applied.
You cannot claim a depreciation deduction for listed property other than passenger automobiles after the recovery period ends. There is no
unrecovered basis at the end of the recovery period because you are considered to have used this property 100% for business and investment purposes
during all of the recovery period.
Example.
In May 2000, you bought and placed in service a car costing $30,000. The car was 5-year property under GDS (MACRS). You did not elect a section 179
deduction for the car. You used the car exclusively for business during the recovery period (2000 through 2005). You figured your depreciation as
shown below.
At the end of 2005, you had an unrecovered basis of $13,812 ($30,000 − $16,188). If in 2006 and later years you continue to use the car 100%
for business, you can deduct each year the lesser of $1,775 or your remaining unrecovered basis.
If your business use of the car had been less than 100% during any year, your depreciation deduction would have been less than the maximum amount
allowable for that year. However, in figuring your unrecovered basis in the car, you would still reduce your basis by the maximum amount allowable as
if the business use had been 100%. For example, if you had used your car 60% for business instead of 100%, your allowable depreciation deductions
would have been $9,713 ($16,188 × 60%), but you still would have to reduce your basis by $16,188 to determine your unrecovered basis.
Deductions For Passenger Automobiles Acquired in a Trade-in
If you acquire a passenger automobile in a trade-in, depreciate the carryover basis separately as if the trade-in did not occur. If the automobile
acquired in the trade-in is qualified Liberty Zone property or qualified Gulf Opportunity Zone property, the carryover basis is eligible for a special
depreciation allowance. See Qualified Liberty Zone Property and Qualified Gulf Opportunity Zone Property in chapter 3.
Depreciate the part of the new automobile's basis that exceeds its carryover basis (excess basis) as if it were newly placed in service property. This
excess basis is the additional cash paid for the new automobile in the trade-in.
The depreciation figured for the two components of the basis (carryover basis and excess basis) is subject to a single passenger automobile limit.
Special rules apply in determining the passenger automobile limits. These rules and examples are discussed in section 1.168(i)-6T(d)(3) of the
regulations.
Instead of figuring depreciation for the carryover basis and the excess basis separately, you can elect to treat the old automobile as disposed of
and both of the basis components for the new automobile as if placed in service at the time of the trade-in. For more information, including how to
make this election, see Election out under Property Acquired in a Like-kind Exchange or Involuntary Conversion in chapter 4 and
sections 1.168(i)-6T(i) and 1.168(i)-6T(j) of the regulations.
What Records Must Be Kept?
Business/investment use
Circumstantial evidence
Documentary evidence
You cannot take any depreciation or section 179 deduction for the use of listed property unless you can prove your business/investment use with
adequate records or with sufficient evidence to support your own statements. The period of time you must keep these records is discussed later under
How Long To Keep Records.
To meet the adequate records requirement, you must maintain an account book, diary, log, statement of expense, trip sheet, or similar record or
other documentary evidence that, together with the receipt, is sufficient to establish each element of an expenditure or use. You do not have to
record information in an account book, diary, or similar record if the information is already shown on the receipt. However, your records should back
up your receipts in an orderly manner.
Elements of expenditure or use.
Your records or other documentary evidence must support all the following.
The amount of each separate expenditure, such as the cost of acquiring the item, maintenance and repair costs, capital improvement costs,
lease payments, and any other expenses.
The amount of each business and investment use (based on an appropriate measure, such as mileage for vehicles and time for other listed
property), and the total use of the property for the tax year.
The date of the expenditure or use.
The business or investment purpose for the expenditure or use.
Written documents of your expenditure or use are generally better evidence than oral statements alone. You do not have to keep a daily log.
However, some type of record containing the elements of an expenditure or the business or investment use of listed property made at or near the time
of the expenditure or use and backed up by other documents is preferable to a statement you prepare later.
Timeliness.
You must record the elements of an expenditure or use at the time you have full knowledge of the elements. An expense account statement made from
an account book, diary, or similar record prepared or maintained at or near the time of the expenditure or use generally is considered a timely record
if, in the regular course of business:
The statement is given by an employee to the employer, or
The statement is given by an independent contractor to the client or customer.
For example, a log maintained on a weekly basis, that accounts for use during the week, will be considered a record made at or near the time of
use.
Business purpose supported.
Generally, an adequate record of business purpose must be in the form of a written statement. However, the amount of detail necessary to establish
a business purpose depends on the facts and circumstances of each case. A written explanation of the business purpose will not be required if the
purpose can be determined from the surrounding facts and circumstances. For example, a salesperson visiting customers on an established sales route
will not normally need a written explanation of the business purpose of his or her travel.
Business use supported.
An adequate record contains enough information on each element of every business or investment use. The amount of detail required to support the
use depends on the facts and circumstances. For example, a taxpayer who uses a truck for both business and personal purposes and whose only business
use of the truck is to make customer deliveries on an established route can satisfy the requirement by recording the length of the route, including
the total number of miles driven during the tax year and the date of each trip at or near the time of the trips.
Although you generally must prepare an adequate written record, you can prepare a record of the business use of listed property in a computer
memory device that uses a logging program.
Separate or combined expenditures or uses.
Each use by you normally is considered a separate use. However, you can combine repeated uses as a single item.
Record each expenditure as a separate item. Do not combine it with other expenditures. If you choose, however, you can combine amounts you spent
for the use of listed property during a tax year, such as for gasoline or automobile repairs. If you combine these expenses, you do not need to
support the business purpose of each expense. Instead, you can divide the expenses based on the total business use of the listed property.
You can account for uses that can be considered part of a single use, such as a round trip or uninterrupted business use, by a single record. For
example, you can account for the use of a truck to make deliveries at several locations that begin and end at the business premises and can include a
stop at the business in between deliveries by a single record of miles driven. You can account for the use of a passenger automobile by a salesperson
for a business trip away from home over a period of time by a single record of miles traveled. Minimal personal use (such as a stop for lunch between
two business stops) is not an interruption of business use.
Confidential information.
If any of the information on the elements of an expenditure or use is confidential, you do not need to include it in the account book or similar
record if you record it at or near the time of the expenditure or use. You must keep it elsewhere and make it available as support to the IRS director
for your area on request.
Substantial compliance.
If you have not fully supported a particular element of an expenditure or use, but have complied with the adequate records requirement for the
expenditure or use to the satisfaction of the IRS director for your area, you can establish this element by any evidence the IRS director for your
area deems adequate.
If you fail to establish to the satisfaction of the IRS director for your area that you have substantially complied with the adequate records
requirement for an element of an expenditure or use, you must establish the element as follows.
By your own oral or written statement containing detailed information as to the element.
By other evidence sufficient to establish the element.
If the element is the cost or amount, time, place, or date of an expenditure or use, its supporting evidence must be direct evidence, such as oral
testimony by witnesses or a written statement setting forth detailed information about the element or the documentary evidence. If the element is the
business purpose of an expenditure, its supporting evidence can be circumstantial evidence.
Sampling.
You can maintain an adequate record for part of a tax year and use that record to support your business and investment use of listed property for
the entire tax year if it can be shown by other evidence that the periods for which you maintain an adequate record are representative of the use
throughout the year.
Example 1.
Denise Williams, a sole proprietor and calendar year taxpayer, operates an interior decorating business out of her home. She uses her automobile
for local business visits to the homes or offices of clients, for meetings with suppliers and subcontractors, and to pick up and deliver items to
clients. There is no other business use of the automobile, but she and family members also use it for personal purposes. She maintains adequate
records for the first 3 months of the year showing that 75% of the automobile use was for business. Subcontractor invoices and paid bills show that
her business continued at approximately the same rate for the rest of the year. If there is no change in circumstances, such as the purchase of a
second car for exclusive use in her business, the determination that her combined business/investment use of the automobile for the tax year is 75%
rests on sufficient supporting evidence.
Example 2.
Assume the same facts as in Example 1, except that Denise maintains adequate records during the first week of every month showing that
75% of her use of the automobile is for business. Her business invoices show that her business continued at the same rate during the later weeks of
each month so that her weekly records are representative of the automobile's business use throughout the month. The determination that her
business/investment use of the automobile for the tax year is 75% rests on sufficient supporting evidence.
Example 3.
Bill Baker, a sole proprietor and calendar year taxpayer, is a salesman in a large metropolitan area for a company that manufactures household
products. For the first 3 weeks of each month, he occasionally uses his own automobile for business travel within the metropolitan area. During these
weeks, his business use of the automobile does not follow a consistent pattern. During the fourth week of each month, he delivers all business orders
taken during the previous month. The business use of his automobile, as supported by adequate records, is 70% of its total use during that fourth
week. The determination based on the record maintained during the fourth week of the month that his business/investment use of the automobile for the
tax year is 70% does not rest on sufficient supporting evidence because his use during that week is not representative of use during other periods.
Loss of records.
When you establish that failure to produce adequate records is due to loss of the records through circumstances beyond your control, such as
through fire, flood, earthquake, or other casualty, you have the right to support a deduction by reasonable reconstruction of your expenditures and
use.
How Long To Keep Records
For listed property, you must keep records for as long as any recapture can still occur. Recapture can occur in any tax year of the recovery
period.
How Is Listed Property Information Reported?
Commuting
Standard mileage rate
Listed property:Reporting on Form 4562
You must provide the information about your listed property requested in Part V of Form 4562, Section A, if you claim either of the following
deductions.
Any deduction for a vehicle.
A depreciation deduction for any other listed property.
If you claim any deduction for a vehicle, you also must provide the information requested in Section B. (If you provide the vehicle for your
employee's use, the employee must give you this information.) If you provide any vehicle for use by an employee, you must first answer the questions
in Section C to see if you meet an exception to completing Section B for that vehicle.
Vehicles used by your employees.
You do not have to complete Section B, Part V, for vehicles used by your employees who are not more-than-5% owners or related persons if you meet
at least one of the following requirements.
You maintain a written policy statement that prohibits one of the following uses of the vehicles.
All personal use including commuting.
Personal use, other than commuting, by employees who are not officers, directors, or 1%-or-more owners.
You treat all use of the vehicles by your employees as personal use.
You provide more than five vehicles for use by your employees, and you keep in your records the information on their use given to you by the
employees.
For demonstrator automobiles provided to full-time salespersons, you maintain a written policy statement that limits the total mileage
outside the salesperson's normal working hours and prohibits use of the automobile by anyone else, for vacation trips, or to store personal
possessions.
Exceptions.
If you file Form 2106, 2106-EZ, or Schedule C-EZ (Form 1040), and you are not required to file Form 4562, report information about listed property
on that form and not on Form 4562. Also, if you file Schedule C (Form 1040) and are claiming the standard mileage rate or actual vehicle expenses
(except depreciation) and you are not required to file Form 4562 for any other reason, report vehicle information in Part IV of Schedule C and not on
Form 4562.
How To Get Tax HelpMore informationTax helpFree tax servicesTax helpHelpTax helpAssistanceTax helpPublicationsTax helpTTY/TDD information
You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get information from the IRS in several
ways. By selecting the method that is best for you, you will have quick and easy access to tax help.
Contacting your Taxpayer Advocate.Taxpayer Advocate
If you have attempted to deal with an IRS problem unsuccessfully, you should contact your Taxpayer Advocate.
The Taxpayer Advocate independently represents your interests and concerns within the IRS by protecting your rights and resolving problems that
have not been fixed through normal channels. While Taxpayer Advocates cannot change the tax law or make a technical tax decision, they can clear up
problems that resulted from previous contacts and ensure that your case is given a complete and impartial review.
To contact your Taxpayer Advocate:
Call the Taxpayer Advocate toll free at
1-877-777-4778.
Call, write, or fax the Taxpayer Advocate office in your area.
For more information, see Publication 1546, How To Get Help With Unresolved Tax Problems (now available in Chinese, Korean, Russian, and
Vietnamese, in addition to English and Spanish).
Free tax services.
To find out what services are available, get Publication 910, IRS Guide to Free Tax Services. It contains a list of free tax publications and an
index of tax topics. It also describes other free tax information services, including tax education and assistance programs and a list of TeleTax
topics.
Internet. You can access the IRS website 24 hours a day, 7 days a week, at
www.irs.gov to:
E-file your return. Find out about commercial tax preparation and e-file services available free to eligible
taxpayers.
Check the status of your 2005 refund. Click on Where's My Refund. Be sure to wait at least 6 weeks from the date you filed your
return (3 weeks if you filed electronically). Have your 2005 tax return available because you will need to know your social security number, your
filing status, and the exact whole dollar amount of your refund.
Download forms, instructions, and publications.
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Search publications online by topic or keyword.
View Internal Revenue Bulletins (IRBs) published in the last few years.
Figure your withholding allowances using our Form W-4 calculator.
Sign up to receive local and national tax news by email.
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Ordering forms, instructions, and publications. Call 1-800-829-3676 to order current-year forms, instructions, and publications
and prior-year forms and instructions. You should receive your order within 10 days.
Asking tax questions. Call the IRS with your tax questions at 1-800-829-1040.
Solving problems. You can get face-to-face help solving tax problems every business day in IRS Taxpayer Assistance Centers. An
employee can explain IRS letters, request adjustments to your account, or help you set up a payment plan. Call your local Taxpayer Assistance Center
for an appointment. To find the number, go to
www.irs.gov/localcontacts or
look in the phone book under United States Government, Internal Revenue Service.
TTY/TDD equipment. If you have access to TTY/TDD equipment, call 1-800-829-4059 to ask tax questions or to order forms and
publications.
TeleTax topics. Call 1-800-829-4477 and press 2 to listen to pre-recorded messages covering various tax topics.
Refund information. If you would like to check the status of your 2005 refund, call 1-800-829-4477 and press 1 for automated
refund information or call 1-800-829-1954. Be sure to wait at least 6 weeks from the date you filed your return (3 weeks if you filed electronically).
Have your 2005 tax return available because you will need to know your social security number, your filing status, and the exact whole dollar amount
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Products. You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and
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have questions about how the tax law applies to your individual tax return, or you're more comfortable talking with someone in person, visit your
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Appendix A--Modified Accelerated Cost Recovery System Percentage Table Guide--General Depreciation System--Alternative Depreciation
SystemSummary: These charts are used to locate which table you are to use to find the percentage rate of depreciation on property. Chart 1 is used
for all property other than residential rental and nonresidential real. Chart 2 is used for residential rental and nonresidential real property. Chart
3 is for income inclusion amount rates for Modified Accelerated Cost Recovery System Leased Listed Property.Tables A-1 and A-2Summary: These tables are used to determine the percentage rate used in calculating the depreciation of property. Table A-1 is for 3-, 5-, 7-,
10-, 15-, and 20-Year Property using the Half-Year Convention and lists the percentages for years 1 through 21 under each category of recovery period.
Table A-2 is for 3-, 5-, 7-, 10-, 15-, and 20-Year Property using Mid-Quarter Convention and Placed in Service in First Quarter and lists the
percentages for years 1 through 21 under each category of recovery period.Tables A-3 and A-4Summary: These tables are used to determine the percentage rate used in calculating the depreciation of property. Table A-3 is for 3-, 5-, 7-,
10-, 15-, and 20-Year Property using the Mid-Quarter Convention and Placed in Service in Second Quarter and lists the percentages for years 1 through
21 under each category of recovery period. Table A-4 is for 3-, 5-, 7-, 10-, 15-, and 20-Year Property using Mid-Quarter Convention and Placed in
Service in Third Quarter and lists the percentages for years 1 through 21 under each category of recovery period.Tables A-5 and A-6Summary: These tables are used to determine the percentage rate used in calculating the depreciation of property. Table A-5 is for 3-, 5-, 7-,
10-, 15-, and 20-Year Property using the Mid-Quarter Convention and Placed in Service in Fourth Quarter and lists the percentages for years 1 through
21 under each category of recovery period. Table A-6 is for Residential Rental Property using Mid-Month Convention and Straight Line
depreciation--27.5 Years and lists the percentages for years 1 through 29 by month placed in service.Tables A-7 and A-7aSummary: These tables are used to determine the percentage rate used in calculating the depreciation of property. Table A-7 is for
Nonresidential Real Property, using the Mid-Month Convention and Straight Line depreciation--31.5 years and lists the percentages for years 1 through
33 by month placed in service. Table A-7a is for Nonresidential Real Property, using the Mid-Month Convention and Straight Line depreciation--39 years
and lists the percentages for years 1, 2-39, and 40 by month placed in service.Table A-8Summary: This table is used to determine the percentage rate used in calculating the depreciation of property. It lists the percentages for
property based on the Straight Line method of depreciation using the Half-Year Convention. This section of the table is for years 1 through 10 with
recovery periods from 2.5 years to 9.5 years and years 1 through 18 with recovery periods from 10 years to 17
years.Table A-8--(Continued)Summary: This table is used to determine the percentage rate used in calculating the depreciation of property. It lists the percentages for
property based on the Straight Line method of depreciation using the Half-Year Convention. This section of the table is for years 1 through 51 with
recovery period increments from 18 to 50 years.Table A-9Summary: This table is used to determine the percentage rate used in calculating the depreciation of property. It lists the percentages for
property based on the Straight Line method of depreciation using the Mid-Quarter Convention and Placed in Service in First Quarter. This section of
the table is for years 1 through 10 with recovery periods from 2.5 years to 9.5 years and years 1 through 18 with recovery periods from 10 years to 17
years.Table A-9--(Continued)Summary: This table is used to determine the percentage rate used in calculating the depreciation of property. It lists the percentages for
property based on the Straight Line method of depreciation using the Mid-Quarter Convention and Placed in Service in First Quarter. This section of
the table is for years 1 through 51 with recovery period increments from 18 to 50 years.Table A-10Summary: This table is used to determine the percentage rate used in calculating the depreciation of property. It lists the percentages for
property based on the Straight Line method of depreciation using the Mid-Quarter Convention and Placed in Service in Second Quarter. This section of
the table is for years 1 through 10 with recovery periods from 2.5 to 9.5 years and for years 1 through 18 with recovery periods from 10 years to 17
years.Table A-10--(Continued)Summary: This table is used to determine the percentage rate used in calculating the depreciation of property. It lists the percentages for
property based on the Straight Line method of depreciation using the Mid-Quarter Convention and Placed in Service in Second Quarter. This section of
the table is for years 1 through 51 with recovery period increments from 18 to 50 years.Table A-11Summary: This table is used to determine the percentage rate used in calculating the depreciation of property. It lists the percentages for
property based on the Straight Line method of depreciation using the Mid-Quarter Convention and Placed in Service in Third Quarter. This section of
the table is for years 1 through 11 with recovery periods from 2.5 to 9.5 years and for years 1 through 18 with recovery periods from 10 years to 17
years.Table A-11--(Continued)Summary: This table is used to determine the percentage rate used in calculating the depreciation of property. It lists the percentages for
property based on the Straight Line method of depreciation using the Mid-Quarter Convention and Placed in Service in Third Quarter. This section of
the table is for years 1 through 51 with recovery period increments from 18 to 50 years.Table A-12Summary: This table is used to determine the percentage rate used in calculating the depreciation of property. It lists the percentages for
property based on the Straight Line method of depreciation using the Mid-Quarter Convention and Placed in Service in Fourth Quarter. This section of
the table is for years 1 through 11 with recovery periods from 2.5 to 9.5 years and for years 1 through 18 with recovery periods from 10 years to 17
years.Table A-12--(Continued)Summary: This table is used to determine the percentage rate used in calculating the depreciation of property. It lists the percentages for
property based on the Straight Line method of depreciation using the Mid-Quarter Convention and Placed in Service in Fourth Quarter. This section of
the table is for years 1 through 51 with recovery period increments from 18years to 50 years.Tables A-13 and A-14Summary: These tables are used to determine the percentage rate used in calculating the depreciation of property. Table A-13 lists the
percentages for property based on the Straight Line method of depreciation using the Mid-Month Convention and lists for years 1, 2-40, and 41 by month
placed in service. Table A-14 lists the percentages for property based on 150% Declining Balance method using Half-Year Convention and lists for years
1 through 10 with recovery periods of 2.5 to 9.5 years and for year 1 through 18 with recovery periods of 10 to 17
years.Table A-14--(Continued)Summary: This table is used to determine the percentage rate used in calculating the depreciation of property. It lists the percentages for
property based on 150% Declining Balance method using Half-Year Convention and lists for years 1 through 51 with recovery period increments of 18
through 50 years.Table A-15Summary: This table is used to determine the percentage rate used in calculating the depreciation of property. It lists the percentages for
property based on the 150% Declining Balance method of depreciation using the Mid-Quarter Convention, Placed in Service in First Quarter. This section
of the table is for years 1 through 10 with recovery periods from 2.5 to 9.5 years and for years 1 through 18 with recovery periods from 10 to 17
years.Table A-15--(Continued)Summary: This table is used to determine the percentage rate used in calculating the depreciation of property. It lists the percentages for
property based on the 150% Declining Balance method of depreciation using the Mid-Quarter Convention, Placed in Service in First Quarter. This section
of the table is for years 1 through 51 with recovery period increments from 18 to 50 years.Table A-16Summary: This table is used to determine the percentage rate used in calculating the depreciation of property. It lists the percentages for
property based on the 150% Declining Balance method of depreciation using the Mid-Quarter Convention, Placed in Service in Second Quarter. This
section of the table is for years 1 through 10 with recovery periods from 2.5 to 9.5 years and for years 1 through 18 with recovery periods from 10 to
17 years.Table A-16--(Continued)Summary: This table is used to determine the percentage rate used in calculating the depreciation of property. It lists the percentages for
property based on the 150% Declining Balance method of depreciation using the Mid-Quarter Convention, Placed in Service in Second Quarter. This
section of the table is for years 1 through 51 with recovery period increments from 18 to 50 years.Table A-17Summary: This table is used to determine the percentage rate used in calculating the depreciation of property. It lists the percentages for
property based on the 150% Declining Balance method of depreciation using the Mid-Quarter Convention, Placed in Service in Third Quarter. This section
of the table is for years 1 through 11 with recovery periods from 2.5 to 9.5 years and for years 1 through 18 with recovery periods from 10 to 17
years.Table A-17--(Continued)Summary: This table is used to determine the percentage rate used in calculating the depreciation of property. It lists the percentages for
property based on the 150% Declining Balance method of depreciation using the Mid-Quarter Convention, Placed in Service in Third Quarter. This section
of the table is for years 1 through 51 with recovery period increments from 18 to 50 years.Table A-18Summary: This table is used to determine the percentage rate used in calculating the depreciation of property. It lists the percentages for
property based on the 150% Declining Balance method of depreciation using the Mid-Quarter Convention, Placed in Service in Fourth Quarter. This
section of the table is for years 1 through 11 with recovery periods from 2.5 to 9.5 years and for years 1 through 18 with recovery periods from 10 to
17 years.Table A-18--(Continued)Summary: This table is used to determine the percentage rate used in calculating the depreciation of property. It lists the percentages for
property based on the 150% Declining Balance method of depreciation using the Mid-Quarter Convention, Placed in Service in Fourth Quarter. This
section of the table is for years 1 through 51 with recovery period increments from 18 to 50 years.RATES TO FIGURE INCLUSION AMOUNTS FOR LEASED LISTED PROPERTY Tables A-19 and A-20Summary: These tables are for determining the percentages used for depreciation on Leased Listed Property. They each list the recovery periods
of property under Alternative Depreciation System for: less than 7 years, 7 to 10 years, and more than 10 years and determine the percentage for each
by the first tax year during lease in which business use is 50% or less.Appendix B — Table of Class Lives and Recovery Periods
The Table of Class Lives and Recovery Periods has two sections. The first section, Specific Depreciable Assets Used In All Business
Activities, Except As Noted, generally lists assets used in all business activities. It is shown as Table B-1. The second section,
Depreciable Assets Used In The Following Activities, describes assets used only in certain activities. It is shown as Table B-2.
How To Use the Tables
You will need to look at both Table B-1 and B-2 to find the correct recovery period. Generally, if the property is listed in Table B-1 you use the
recovery period shown in that table. However, if the property is specifically listed in Table B-2 under the type of activity in which it is used, you
use the recovery period listed under the activity in that table. Use the tables in the order shown below to determine the recovery period of your
depreciable property.
Table B-1.
Check Table B-1 for a description of the property. If it is described in Table B-1, also check Table B-2 to find the activity in which the property
is being used. If the activity is described in Table B-2, read the text (if any) under the title to determine if the property is specifically included
in that asset class. If it is, use the recovery period shown in the appropriate column of Table B-2 following the description of the activity. If the
activity is not described in Table B-2 or if the activity is described but the property either is not specifically included in or is specifically
excluded from that asset class, then use the recovery period shown in the appropriate column following the description of the property in Table B-1.
Tax-exempt use property subject to a lease.
The recovery period for ADS cannot be less than 125 percent of the lease term for any property leased under a leasing arrangement to a tax-exempt
organization, governmental unit, or foreign person or entity (other than a partnership).
Table B-2.
If the property is not listed in Table B-1, check Table B-2 to find the activity in which the property is being used and use the recovery period
shown in the appropriate column following the description.
Property not in either table.
If the activity or the property is not included in either table, check the end of Table B-2 to find Certain Property for Which Recovery
Periods Assigned. This property generally has a recovery period of 7 years for GDS or 12 years for ADS. See Which Property Class Applies
Under GDS and Which Recovery Period Applies in chapter 4 for the class lives or the recovery periods for GDS and ADS for the
following.
Residential rental property and nonresidential real property (also see Appendix A, Chart 2).
Qualified rent-to-own property.
A motorsport entertainment complex.
Any retail motor fuels outlet.
Any qualified leasehold improvement property placed in service before January 1, 2006.
Any qualified restaurant property placed in service before January 1, 2006.
Initial clearing and grading land improvements for gas utility property and electric utility transmission and distribution
plants.
Any water utility property.
Certain electric transmission property used in the transmission at 69 or more kilovolts of electricity for sale and placed in service after
April 11, 2005.
Natural gas gathering and distribution lines placed in service after April 11, 2005.
Example 1.
Richard Green is a paper manufacturer. During the year, he made substantial improvements to the land on which his paper plant is located. He checks
Table B-1 and finds land improvements under asset class 00.3. He then checks Table B-2 and finds his activity, paper manufacturing, under asset class
26.1, Manufacture of Pulp and Paper. He uses the recovery period under this asset class because it specifically includes land improvements.
The land improvements have a 13-year class life and a 7-year recovery period for GDS. If he elects to use ADS, the recovery period is 13 years. If
Richard only looked at Table B-1, he would select asset class 00.3, Land Improvements, and incorrectly use a recovery period of 15 years
for GDS or 20 years for ADS.
Example 2.
Sam Plower produces rubber products. During the year, he made substantial improvements to the land on which his rubber plant is located. He checks
Table B-1 and finds land improvements under asset class 00.3. He then checks Table B-2 and finds his activity, producing rubber products, under asset
class 30.1, Manufacture of Rubber Products. Reading the headings and descriptions under asset class 30.1, Sam finds that it does not
include land improvements. Therefore, Sam uses the recovery period under asset class 00.3. The land improvements have a 20-year class life and a
15-year recovery period for GDS. If he elects to use ADS, the recovery period is 20 years.
Example 3.
Pam Martin owns a retail clothing store. During the year, she purchased a desk and a cash register for use in her business. She checks Table B-1
and finds office furniture under asset class 00.11. Cash registers are not listed in any of the asset classes in Table B-1. She then checks Table B-2
and finds her activity, retail store, under asset class 57.0, Distributive Trades and Services, which includes assets used in
wholesale and retail trade. This asset class does not specifically list office furniture or a cash register. She looks back at Table B-1 and
uses asset class 00.11 for the desk. The desk has a 10-year class life and a 7-year recovery period for GDS. If she elects to use ADS, the recovery
period is 10 years. For the cash register, she uses asset class 57.0 because cash registers are not listed in Table B-1 but it is an asset
used in her retail business. The cash register has a 9-year class life and a 5-year recovery period for GDS. If she elects to use the ADS method, the
recovery period is 9 years.
Table B-1. Table of Class Lives and Recovery PeriodsSummary: This table lists the recovery periods (in years) for specific depreciable assets used in all business activities except as noted. The
table lists the asset class, description of asset, the recovery periods for: Class Life (in years), General Depreciation System (Modified Accelerated
Cost Recovery System) and Alternative Depreciation System. This section lists the asset classes of 00.11--Office Furniture, Fixtures, and Equipment to
00.4--Industrian Steam and Electric Generation and/or Distribution Systems.Table B-2. Table of Class Lives and Recovery PeriodsSummary: This table lists the recovery periods (in years) for depreciable assets used listed business activities. The table lists the asset
class, description of asset, the recovery periods for: Class Life (in years), General Depreciation System (Modified Accelerated Cost Recovery System)
and Alternative Depreciation System. This section lists the asset classes of 01.1--Agriculture to 20.5--Manufacture of Food and Beverages--Special
Handling Devices.Table B-2. Table of Class Lives and Recovery PeriodsSummary: This table lists the recovery periods (in years) for depreciable assets used listed business activities. The table lists the asset
class, description of asset, the recovery periods for: Class Life (in years), General Depreciation System (Modified Accelerated Cost Recovery System)
and Alternative Depreciation System. This section lists the asset classes of 21.0--Manufacture of Tobacco and Tobacco Products to 26.1--Manufacture of
Pulp and Paper.Table B-2. Table of Class Lives and Recovery PeriodsSummary: This table lists the recovery periods (in years) for depreciable assets used listed business activities. The table lists the asset
class, description of asset, the recovery periods for: Class Life (in years), General Depreciation System (Modified Accelerated Cost Recovery System)
and Alternative Depreciation System. This section lists the asset classes of 26.2--Manufacture of Converted Paper, Paperboard, and Pulp Products to
32.3--Manufacture of Other Stone and Clay Products.Table B-2. Table of Class Lives and Recovery PeriodsSummary: This table lists the recovery periods (in years) for depreciable assets used listed business activities. The table lists the asset
class, description of asset, the recovery periods for: Class Life (in years), General Depreciation System (Modified Accelerated Cost Recovery System)
and Alternative Depreciation System. This section lists the asset classes of 33.2--Manufacture of Primary Nonferrous Metals to 36.1--Any Semiconductor
Manufacturing Equipment.Table B-2. Table of Class Lives and Recovery PeriodsSummary: This table lists the recovery periods (in years) for depreciable assets used listed business activities. The table lists the asset
class, description of asset, the recovery periods for: Class Life (in years), General Depreciation System (Modified Accelerated Cost Recovery System)
and Alternative Depreciation System. This section lists the asset classes of 37.11--Manufacture of Motor Vehicles to 39.0--Manufacture of Athletic,
Jewelry, and Other Goods and Railroad Transportation.Table B-2. Table of Class Lives and Recovery PeriodsSummary: This table lists the recovery periods (in years) for depreciable assets used listed business activities. The table lists the asset
class, description of asset, the recovery periods for: Class Life (in years), General Depreciation System (Modified Accelerated Cost Recovery System)
and Alternative Depreciation System. This section lists the asset classes of 40.1--Railroad Machinery and Equipment, Roadway accounts and Equipment
accounts to 46.0--Pipeline Transportation.Table B-2. Table of Class Lives and Recovery PeriodsSummary: This table lists the recovery periods (in years) for depreciable assets used listed business activities. The table lists the asset
class, description of asset, the recovery periods for: Class Life (in years), General Depreciation System (Modified Accelerated Cost Recovery System)
and Alternative Depreciation System. This section lists the asset classes of 48.11--Telephone Communications and Telephone Central Office Buildings to
48.39--Telegraph, Ocean Cable, and Satellite Communications--Support and Service Equipment and Cable Television.Table B-2. Table of Class Lives and Recovery PeriodsSummary: This table lists the recovery periods (in years) for depreciable assets used listed business activities. The table lists the asset
class, description of asset, the recovery periods for: Class Life (in years), General Depreciation System (Modified Accelerated Cost Recovery System)
and Alternative Depreciation System. This section lists the asset classes of 48.41--Cable Television--Headend to 49.25--Liquefied Natural Gas
Plant.Table B-2. Table of Class Lives and Recovery PeriodsSummary: This table lists the recovery periods (in years) for depreciable assets used listed business activities. The table lists the asset
class, description of asset, the recovery periods for: Class Life (in years), General Depreciation System (Modified Accelerated Cost Recovery System)
and Alternative Depreciation System. This section lists the asset classes of 49.3--Water Utilities to (no asset class) Certain Property for Which
Recovery Periods Assigned .GlossaryAbstract fees:
Expenses generally paid by a buyer to research the title of real property.
Active conduct of a trade or business:
Generally, for the section 179 deduction, a taxpayer is considered to conduct a trade or business actively if he or she meaningfully participates
in the management or operations of the trade or business. A mere passive investor in a trade or business does not actively conduct the trade or
business.
Adjusted basis:
The original cost of property, plus certain additions and improvements, minus certain deductions such as depreciation allowed or allowable and
casualty losses.
Amortization:
A ratable deduction for the cost of intangible property over its useful life.
Amount realized:
The total of all money received plus the fair market value of all property or services received from a sale or exchange. The amount realized also
includes any liabilities assumed by the buyer and any liabilities to which the property transferred is subject, such as real estate taxes or a
mortgage.
Basis:
A measure of an individual's investment in property for tax purposes.
Business/investment use:
Usually, a percentage showing how much an item of property, such as an automobile, is used for business and investment purposes.
Capitalized:
Expended or treated as an item of a capital nature. A capitalized amount is not deductible as a current expense and must be included in the basis
of property.
Circumstantial evidence:
Details or facts which indirectly point to other facts.
Class life:
A number of years that establishes the property class and recovery period for most types of property under the General Depreciation System (GDS)
and Alternative Depreciation System (ADS).
Clean-fuel vehicle property:
Either of the following kinds of property.
Motor vehicles produced by an original equipment manufacturer and designed to be propelled by a clean-burning fuel.
Any property installed on a motor vehicle to enable it to be propelled by a clean-burning fuel if:
The property is an engine (or modification of an engine) that can use a clean-burning fuel, or
The property is used to store or deliver that fuel to the engine or to exhaust gases from the combustion of that fuel.
Clean-fuel vehicle refueling property:
Any property (other than a building or its structural components) used to:
Store or dispense a clean-burning fuel into the fuel tank of a motor vehicle propelled by the fuel, but only if the storage or dispensing is
at the point where the fuel is delivered into the tank, or
Recharge motor vehicles propelled by electricity, but only if the property is located at the point where the vehicles are
recharged.
Commuting:
Travel between a personal home and work or job site within the area of an individual's tax home.
Convention:
A method established under the Modified Accelerated Cost Recovery System (MACRS) to determine the portion of the year to depreciate property both
in the year the property is placed in service and in the year of disposition.
Declining balance method:
An accelerated method to depreciate property. The General Depreciation System (GDS) of MACRS uses the 150% and 200% declining balance methods for
certain types of property. A depreciation rate (percentage) is determined by dividing the declining balance percentage by the recovery period for the
property.
Disposition:
The permanent withdrawal from use in a trade or business or from the production of income.
Documentary evidence:
Written records that establish certain facts.
Exchange:
To barter, swap, part with, give, or transfer property for other property or services.
Fair market value (FMV):
The price that property brings when it is offered for sale by one who is willing but not obligated to sell, and is bought by one who is willing or
desires to buy but is not compelled to do so.
Fiduciary:
The one who acts on behalf of another as a guardian, trustee, executor, administrator, receiver, or conservator.
Fungible commodity:
A commodity of a nature that one part may be used in place of another part.
Goodwill:
An intangible property such as the advantage or benefit received in property beyond its mere value. It is not confined to a name but can also be
attached to a particular area where business is transacted, to a list of customers, or to other elements of value in business as a going concern.
Grantor:
The one who transfers property to another.
Improvement:
An addition to or partial replacement of property that adds to its value, appreciably lengthens the time you can use it, or adapts it to a
different use.
Intangible property:
Property that has value but cannot be seen or touched, such as goodwill, patents, copyrights, and computer software.
Listed property:
Passenger automobiles; any other property used for transportation; property of a type generally used for entertainment, recreation or amusement;
computers and their peripheral equipment (unless used only at a regular business establishment and owned or leased by the person operating the
establishment); and cellular telephones or similar telecommunications equipment.
Nonresidential real property:
Most real property other than residential rental property.
Placed in service:
Ready and available for a specific use whether in a trade or business, the production of income, a tax-exempt activity, or a personal activity.
Property class:
A category for property under MACRS. It generally determines the depreciation method, recovery period, and convention.
Recapture:
To include as income on your return an amount allowed or allowable as a deduction in a prior year.
Recovery period:
The number of years over which the basis of an item of property is recovered.
Remainder interest:
That part of an estate that is left after all the other provisions of a will have been satisfied.
Residential rental property:
Real property, generally buildings or structures, if 80% or more of its annual gross rental income is from dwelling units.
Salvage value:
An estimated value of property at the end of its useful life. Not used under MACRS.
Section 1245 property:
Property that is or has been subject to an allowance for depreciation or amortization. Section 1245 property includes personal property, single
purpose agricultural and horticultural structures, storage facilities used in connection with the distribution of petroleum or primary products of
petroleum, and railroad grading or tunnel bores.
Section 1250 property:
Real property (other than section 1245 property) which is or has been subject to an allowance for depreciation.
Standard mileage rate:
The established amount for optional use in determining a tax deduction for automobiles instead of deducting depreciation and actual operating
expenses.
Straight line method:
A way to figure depreciation for property that ratably deducts the same amount for each year in the recovery period. The rate (in percentage terms)
is determined by dividing 1 by the number of years in the recovery period.
Structural components:
Parts that together form an entire structure, such as a building. The term includes those parts of a building such as walls, partitions, floors,
and ceilings, as well as any permanent coverings such as paneling or tiling, windows and doors, and all components of a central air conditioning or
heating system including motors, compressors, pipes and ducts. It also includes plumbing fixtures such as sinks, bathtubs, electrical wiring and
lighting fixtures, and other parts that form the structure.
Tangible property:
Property you can see or touch, such as buildings, machinery, vehicles, furniture, and equipment.
Tax-exempt:
Not subject to tax.
Term interest:
A life interest in property, an interest in property for a term of years, or an income interest in a trust. It generally refers to a present or
future interest in income from property or the right to use property that terminates or fails upon the lapse of time, the occurrence of an event, or
the failure of an event to occur.
Unadjusted basis:
The basis of an item of property for purposes of figuring gain on a sale without taking into account any depreciation taken in earlier years but
with adjustments for other amounts, including amortization, the section 179 deduction, any special depreciation allowance, any deduction claimed for
clean-fuel vehicles or clean-fuel vehicle refueling property placed in service before January 1, 2006, and any electric vehicle credit.
Unit-of-production method:
A way to figure depreciation for certain property. It is determined by estimating the number of units that can be produced before the property is
worn out. For example, if it is estimated that a machine will produce 1000 units before its useful life ends, and it actually produces 100 units in a
year, the percentage to figure depreciation for that year is 10% of the machine's cost less its salvage value.
Useful life:
An estimate of how long an item of property can be expected to be usable in trade or business or to produce income.
Tax Publications for Business Taxpayers and Commonly Used Tax FormsSummary: This is a listing of tax publications and commonly used tax forms. The text states:Tax Publications for Business TaxpayersSee How To Get Tax Help for a variety of ways to get publications, including by computer, phone, and mail.General Guides1--Your Rights as a Taxpayer17--Your Federal Income Tax (For Individuals)334--Tax Guide for Small Business (For Individuals Who Use Schedule C or C-E.Z.)509--Tax Calendars for 2004553--Highlights of 2003 Tax Changes910--Guide to Free Tax ServicesEmployer's Guides15--Circular E, Employer's Tax Guide15-A--Employer's Supplemental Tax Guide15-B--Employer's Tax Guide to Fringe Benefits51--Circular A, Agricultural Employer's Tax Guide80--Circular S.S., Federal Tax Guide For Employers in the U.S. Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern
Mariana Islands179--Circular P.R. Guia Contributiva Federal Para Patronos Puertorriqueños926--Household Employer's Tax GuideSpecialized Publications225--Farmer's Tax Guide378--Fuel Tax Credits and Refunds463--Travel, Entertainment, Gift, and Car Expenses505--Tax Withholding and Estimated Tax510--Excise Taxes for 2004515--Withholding of Tax on Nonresident Aliens and Foreign Entities517--Social Security and Other Information for Members of the Clergy and Religious Workers527--Residential Rental Property533--Self-Employment Tax534--Depreciating Property Placed in Service Before 1987535--Business Expenses536--Net Operating Losses (N.O.L.s) for Individuals, Estates, and Trusts537--Installment Sales538--Accounting Periods and Methods541--Partnerships542--Corporations544--Sales and Other Dispositions of Assets551--Basis of Assets556--Examination of Returns, Appeal Rights, and Claims for Refund560--Retirement Plans for Small Business (S.E.P., S.I.M.P.L.E., and Qualified Plans)561--Determining the Value of Donated Property583--Starting a Business and Keeping Records587--Business Use of Your Home (Including Use by Day-Care Providers)594--The I.R.S. Collection Process595--Tax Highlights for Commercial Fishermen597--Information on the United States-Canada Income Tax Treaty598--Tax on Unrelated Business Income of Exempt Organizations686--Certification for Reduced Tax Rates in Tax Treaty Countries901--U.S. Tax Treaties908--Bankruptcy Tax Guide911--Direct Sellers925--Passive Activity and At-Risk Rules946--How To Depreciate Property947--Practice Before the I.R.S. and Power of Attorney954--Tax Incentives for Empowerment Zones and Other Distressed Communities1544--Reporting Cash Payments of Over $10,0001546--The Taxpayer Advocate Service of the I.R.S.Spanish Language Publications1SP--Derechos del Contribuyente579SP--Cómo Preparar la Declaración de Impuesto Federal594SP--Comprendiendo el Proceso de Cobro850--English-Spanish Glossary of Words and Phrases Used in Publications Issued by the Internal Revenue Service1544SP--Informe de Pagos en Efectivo en Exceso de $10,000 (Recibidos en una Ocupación o Negocio)Commonly Used Tax FormsSee How To Get Tax Help for a variety of ways to get forms, including by computer, fax, phone, and mail. Items with an asterisk are available
by fax. For these orders only, use the catalog number when ordering.
Form Number
Form Title
Catalog Number
W-2
Wage and Tax Statement
10134
W-4
Employee's Withholding Allowance Certificate (available by fax)
10220
940
Employer's Annual Federal Unemployment (F.U.T.A.) Tax Return (available by fax)
11234
940-E.Z.
Employer's Annual Federal Unemployment (F.U.T.A.) Tax Return (available by fax)
10983
941
Employer's Quarterly Federal Tax Return
17001
1040
U.S. Individual Income Tax Return (available by fax)
11320
Schedule A & B (Form 1040)
Itemized Deductions & Interest and Ordinary Dividends (available by fax)
11330
Schedule C (Form 1040)
Profit or Loss From Business (available by fax)
11334
Schedule C-E.Z. (Form 1040)
Net Profit From Business (available by fax)
14374
Schedule D (Form 1040)
Capital Gains and Losses (available by fax)
11338
Schedule D-1 (Form 1040)
Continuation Sheet for Schedule D
10424
Schedule E (Form 1040)
Supplemental Income and Loss (available by fax)
11344
Schedule F (Form 1040)
Profit or Loss From Farming (available by fax)
11346
Schedule H (Form 1040)
Household Employment Taxes (available by fax)
12187
Schedule J (Form 1040)
Farm Income Averaging (available by fax)
25513
Schedule R (Form 1040)
Credit for the Elderly or the Disabled (available by fax)
11359
Schedule S.E. (Form 1040)
Self-Employment Tax (available by fax)
11358
1040-E.S.
Estimated Tax for Individuals (available by fax)
11340
1040X
Amended U.S. Individual Income Tax Return (available by fax)
11360
1065
U.S. Return of Partnership Income
11390
Schedule D (Form 1065)
Capital Gains and Losses
11393
Schedule K-1 (Form 1065)
Partner's Share of Income, Credits, Deductions, etc.
11394
1120
U.S. Corporation Income Tax Return
11450
1120-A
U.S. Corporation Short-Form Income Tax Return
11456
1120S
U.S. Income Tax Return for an S Corporation
11510
Schedule D (Form 1120S)
Capital Gains and Losses and Built-In Gains
11516
Schedule K-1 (Form 1120S)
Shareholder's Share of Income, Credits, Deductions, etcetera
11520
2106
Employee Business Expenses (available by fax)
11700
2106-E.Z.
Unreimbursed Employee Business Expenses (available by fax)
20604
2210
Underpayment of Estimated Tax by Individuals, Estates, and Trusts (available by fax)
11744
2441
Child and Dependent Care Expenses (available by fax)
11862
2848
Power of Attorney and Declaration of Representative (available by fax)
11980
3800
General Business Credit
12392
3903
Moving Expenses (available by fax)
12490
4562
Depreciation and Amortization (available by fax)
12906
4797
Sales of Business Property (available by fax)
13086
4868
Application for Automatic Extension of Time To File U.S. Individual Income Tax Return (available by fax)
13141
5329
Additional Taxes on Qualified Plans (Including I.R.A.s) and Other Tax-Favored Accounts
13329
6252
Installment Sale Income (available by fax)
13601
8283
Non-cash Charitable Contributions (available by fax)
62299
8300
Report of Cash Payments Over $10,000 Received in a Trade or Business (available by fax)
62133
8582
Passive Activity Loss Limitations (available by fax)
63704
8606
Nondeductible I.R.A.s (available by fax)
63966
8822
Change of Address (available by fax)
12081
8829
Expenses for Business Use of Your Home (available by fax)
