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1040x 2010 Instructions

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1040x 2010 Instructions

1040x 2010 instructions Accelerated Cost Recovery System (ACRS) Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: ACRS Defined What Can and Cannot Be Depreciated Under ACRSRecovery Property Nonrecovery Property How To Figure the DeductionUnadjusted Basis Classes of Recovery Property Recovery Periods Alternate ACRS Method (Modified Straight Line Method) ACRS Deduction in Short Tax Year DispositionsEarly dispositions of ACRS property other than 15-, 18-, or 19-year real property. 1040x 2010 instructions Dispositions — mass asset accounts. 1040x 2010 instructions Early dispositions — 15-year real property. 1040x 2010 instructions Early dispositions — 18- and 19-year real property. 1040x 2010 instructions Depreciation Recapture Topics - This chapter discusses: The definition of ACRS What can and cannot be depreciated under ACRS How to figure the deduction Dispositions Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 551 Basis of Assets 583 Starting a Business and Keeping Records Form (and Instructions) 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization The Accelerated Cost Recovery System (ACRS) applies to property first used before 1987. 1040x 2010 instructions It is the name given to tax rules for getting back (recovering) through depreciation deductions the cost of property used in a trade or business or to produce income. 1040x 2010 instructions These rules are mandatory and generally apply to tangible property placed in service after 1980 and before 1987. 1040x 2010 instructions If you placed property in service during this period, you must continue to figure your depreciation under ACRS. 1040x 2010 instructions If you used listed property placed in service after June 18, 1984, less than 50% for business in 1995, see Predominant Use Test in chapter 3. 1040x 2010 instructions Listed property includes cars, other means of transportation, and certain computers. 1040x 2010 instructions Any additions or improvements placed in service after 1986, including any components of a building (such as plumbing, wiring, storm windows, etc. 1040x 2010 instructions ), are depreciated using MACRS, discussed in chapter 3 of Publication 946. 1040x 2010 instructions It does not matter that the underlying property is depreciated under ACRS or one of the other methods. 1040x 2010 instructions ACRS Defined ACRS consists of accelerated depreciation methods and an alternate ACRS method that could have been elected. 1040x 2010 instructions The alternate ACRS method used a recovery percentage based on a modified straight line method. 1040x 2010 instructions The law prescribes fixed percentages to be uses for each class of property. 1040x 2010 instructions Property depreciable under ACRS is called recovery property. 1040x 2010 instructions The recovery class of property determines the recovery period. 1040x 2010 instructions Generally, the class life of property places it in a 3-year, 5-year, 10-year, 15-year, 18-year, or 19-year recovery class. 1040x 2010 instructions Under ACRS, the prescribed percentages are used to recover the unadjusted basis of recovery property. 1040x 2010 instructions To figure a depreciation deduction, you multiply the prescribed percentage for the recovery class by the unadjusted basis of the recovery property. 1040x 2010 instructions You must continue to figure your depreciation under ACRS for property placed in service after 1980 and before 1987. 1040x 2010 instructions For property you placed in service after 1986, you must use MACRS, discussed in chapter 3 of Publication 946. 1040x 2010 instructions What Can and Cannot Be Depreciated Under ACRS ACRS applies to most depreciable tangible property placed in service after 1980 and before 1987. 1040x 2010 instructions It includes new or used and real or personal property. 1040x 2010 instructions The property must be for use in a trade or business or for the production of income. 1040x 2010 instructions Property you acquired before 1981 or after 1986 is not ACRS recovery property. 1040x 2010 instructions For information on depreciating property acquired before 1981, see chapter 2. 1040x 2010 instructions For information on depreciating property acquired after 1986, see chapter 3 of Publication 946. 1040x 2010 instructions Recovery Property Recovery property under ACRS is tangible depreciable property placed in service after 1980 and before 1987. 1040x 2010 instructions It generally includes new or used property that you acquired after 1980 and before 1987 for use in your trade or business or for the production of income. 1040x 2010 instructions Nonrecovery Property You cannot use ACRS for property you placed in service before 1981 or after 1986. 1040x 2010 instructions Nonrecovery property also includes: Intangible property, Property you elected to exclude from ACRS that is properly depreciated under a method of depreciation that is not based on a term of years, Certain public utility property, and Certain property acquired and excluded from ACRS because of the antichurning rules. 1040x 2010 instructions Intangible property. 1040x 2010 instructions   Intangible property is not depreciated under ACRS. 1040x 2010 instructions Property depreciated under methods not expressed in a term of years. 1040x 2010 instructions   Certain property depreciated under a method not expressed in a term of years is not depreciated under ACRS. 1040x 2010 instructions This included any property: If you made an irrevocable election to exclude such property, and In the first year that you could have claimed depreciation, you properly used the unit-of-production method or any method of depreciation not expressed in a term of years (not including the retirement-replacement-betterment method). 1040x 2010 instructions Public utility property. 1040x 2010 instructions   Public utility property for which the taxpayer does not use a normalization method of accounting is excluded from ACRS and is subject to depreciation under a special rule. 1040x 2010 instructions Additions or improvements to ACRS property after 1986. 1040x 2010 instructions   Any additions or improvements placed in service after 1986, including any components of a building (plumbing, wiring, storm windows, etc. 1040x 2010 instructions ) are depreciated using MACRS, discussed in chapter 3 of Publication 946. 1040x 2010 instructions It does not matter that the underlying property is depreciated under ACRS or one of the other methods. 1040x 2010 instructions How To Figure the Deduction After you determine that your property can be depreciated under ACRS, you are ready to figure your deduction. 1040x 2010 instructions Because the conventions are built into the percentage table rates, you only need to know the following: The unadjusted basis of your recovery property, The classes of recovery property, The recovery periods, and Whether to use the prescribed percentages based on accelerated methods or percentages based on using the alternate ACRS method. 1040x 2010 instructions Unadjusted Basis To figure your ACRS deduction, you multiply the unadjusted basis in your recovery property by its applicable percentage for the year. 1040x 2010 instructions Unadjusted basis is the same amount you would use to figure gain on a sale, but it is figured without taking into account any depreciation taken in earlier years. 1040x 2010 instructions However, reduce your original basis by the amount of amortization taken on the property and by any section 179 deduction claimed as discussed in chapter 2 of Publication 946. 1040x 2010 instructions If you buy property, your unadjusted basis is usually its cost minus any amortized amount and minus any section 179 deduction elected. 1040x 2010 instructions If you acquire property in some other way, such as by inheriting it, getting it as a gift, or building it yourself, you figure your unadjusted basis under other rules. 1040x 2010 instructions See Publication 551. 1040x 2010 instructions Classes of Recovery Property All recovery property under ACRS is in one of the following classes. 1040x 2010 instructions The class for your property was determined when you began to depreciate it. 1040x 2010 instructions 3-Year Property 3-year property includes automobiles, light-duty trucks (actual unloaded weight less than 13,000 pounds), and tractor units for use over-the-road. 1040x 2010 instructions Race horses over 2 years old when placed in service are 3-year property. 1040x 2010 instructions Any other horses over 12 years old when you placed them in service are also included in the 3-year property class. 1040x 2010 instructions The ACRS percentages for 3-year recovery property are: Recovery Period Percentage 1st year 25% 2nd year 38% 3rd year 37% If you used the percentages above to depreciate your 3-year recovery property, your property, except for certain passenger automobiles, is fully depreciated. 1040x 2010 instructions You cannot claim depreciation for this property after 1988. 1040x 2010 instructions 5-Year Property 5-year property includes computers, copiers, and equipment, such as office furniture and fixtures. 1040x 2010 instructions It also includes single purpose agricultural or horticultural structures and petroleum storage facilities (other than buildings and their structural components). 1040x 2010 instructions The ACRS percentages for 5-year recovery property are: Recovery period Percentage 1st year 15% 2nd year 22% 3rd through 5th year 21% If you used the percentages above to depreciate your 5-year recovery property, it is fully depreciated. 1040x 2010 instructions You cannot claim depreciation for this property after 1990. 1040x 2010 instructions 10-Year Property 10-year property includes certain real property such as theme-park structures and certain public utility property. 1040x 2010 instructions Manufactured homes (including mobile homes) and railroad tank cars are also 10-year property. 1040x 2010 instructions You do not treat a building, and its structural components, as 10-year property by reason of a change in use after you placed the property in service. 1040x 2010 instructions For example, a building (15-year real property) that was placed in service in 1981 and was converted to a theme-park structure in 1986 remains 15-year real property. 1040x 2010 instructions The ACRS percentages for 10-year recovery property are: Recovery Period Percentage 1st year 8% 2nd year 14% 3rd year 12% 4th through 6th year 10% 7th through 10th year 9% If you used the percentages above, you cannot claim depreciation for this property after 1995. 1040x 2010 instructions Example. 1040x 2010 instructions On April 21, 1986, you bought and placed in service a new mobile home for $26,000 to be used as rental property. 1040x 2010 instructions You paid $10,000 cash and signed a note for $16,000 giving you an unadjusted basis of $26,000. 1040x 2010 instructions On June 8, 1986, you bought and placed in service a used mobile home for use as rental property at a total cost of $11,500. 1040x 2010 instructions The total unadjusted basis of your 10-year recovery property placed in service in 1986 was $37,500 ($26,000 + $11,500). 1040x 2010 instructions Your ACRS deduction was $3,000 (8% × $37,500). 1040x 2010 instructions In 1987, your ACRS deduction was $5,250 (14% × $37,500). 1040x 2010 instructions In 1988, your ACRS deduction was $4,500 (12% × $37,500). 1040x 2010 instructions In 1989, 1990, and 1991, your ACRS deduction was $3,750 (10% × $37,500). 1040x 2010 instructions In 1992, 1993, 1994, and 1995 your deduction for each year is $3,375 (9% × $37,500). 1040x 2010 instructions 15-Year Real Property 15-year real property is real property that is recovery property placed in service before March 16, 1984. 1040x 2010 instructions It includes all real property, such as buildings, other than that designated as 5-year or 10-year property. 1040x 2010 instructions Unlike the 3-, 5-, or 10-year classes of property, the percentages for 15-year real property depend on when you placed the property in service during your tax year. 1040x 2010 instructions You could group 15-year real property by month and year placed in service. 1040x 2010 instructions In Table 1, at the end of this publication in the Appendix, find the month in your tax year that you placed the property in service in your trade or business or for the production of income. 1040x 2010 instructions You use the percentages listed under that month for each year of the recovery period to determine your depreciation deduction each year. 1040x 2010 instructions Example. 1040x 2010 instructions On March 5, 1984, you placed an apartment building in service in your business. 1040x 2010 instructions It is 15-year real property. 1040x 2010 instructions After subtracting the value of the land, your unadjusted basis in the building is $250,000. 1040x 2010 instructions You use the calendar year as your tax year. 1040x 2010 instructions March is the third month of your tax year. 1040x 2010 instructions Your ACRS deduction for 1984 was $25,000 (10% × $250,000). 1040x 2010 instructions For 1985, the percentage for the third month of the second year of the recovery period is 11%. 1040x 2010 instructions Your deduction was $27,500 (11% × $250,000). 1040x 2010 instructions For the third, fourth, and fifth years of the recovery period (1986, 1987, and 1988), the percentages are 9%, 8%, and 7%. 1040x 2010 instructions For 1989 through 1992, the percentage for the third month is 6%. 1040x 2010 instructions Your deduction each year is $15,000 (6% × $250,000). 1040x 2010 instructions For 1993, 1994, and 1995, the percentage for the third month is 5%. 1040x 2010 instructions Your depreciation deduction is $12,500 (5% × $250,000) for 1993, 1994, and 1995. 1040x 2010 instructions Low-Income Housing Low-income housing that was assigned a 15-year recovery period under ACRS includes the following types of property: Federally assisted housing projects where the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by direct loan or tax abatement under similar provisions of state or local laws. 1040x 2010 instructions Low-income rental housing for which a depreciation deduction for rehabilitation expenditures is allowed. 1040x 2010 instructions Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under the provisions of state or local laws that authorize similar subsidies for low-income families. 1040x 2010 instructions Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. 1040x 2010 instructions The ACRS percentages for low-income housing real property, like the regular 15-year real property percentages, depend on when you placed the property in service. 1040x 2010 instructions Find the month in your tax year in Table 2 or 3 at the end of this publication in the Appendix that you first placed the property in service as rental housing. 1040x 2010 instructions Use the percentages listed under that month for each year of the recovery period. 1040x 2010 instructions Table 2 shows percentages for low-income housing placed in service before May 9, 1985. 1040x 2010 instructions Table 3 shows percentages for low-income housing placed in service after May 8, 1985, and before 1987. 1040x 2010 instructions Example. 1040x 2010 instructions In May 1986, you acquired and placed in service a house that qualified as low-income rental housing under item 3) of the above listing. 1040x 2010 instructions You use the calendar year as your tax year. 1040x 2010 instructions You use Table C–3 because the property was placed in service after May 8, 1985. 1040x 2010 instructions Your unadjusted basis for the property, not including the land, was $59,000. 1040x 2010 instructions Your deduction for 1986 through 2001 is shown in the following table. 1040x 2010 instructions Year Rate Deduction 1986 8. 1040x 2010 instructions 9% $5,251 1987 12. 1040x 2010 instructions 1% 7,139 1988 10. 1040x 2010 instructions 5% 6,195 1989 9. 1040x 2010 instructions 1% 5,369 1990 7. 1040x 2010 instructions 9% 4,661 1991 6. 1040x 2010 instructions 9% 4,071 1992 5. 1040x 2010 instructions 9% 3,481 1993 5. 1040x 2010 instructions 2% 3,068 1994 4. 1040x 2010 instructions 6% 2,714 1995 4. 1040x 2010 instructions 6% 2,714 1996 4. 1040x 2010 instructions 6% 2,714 1997 4. 1040x 2010 instructions 6% 2,714 1998 4. 1040x 2010 instructions 6% 2,714 1999 4. 1040x 2010 instructions 5% 2,655 2000 4. 1040x 2010 instructions 5% 2,655 2001 1. 1040x 2010 instructions 5% 885 18-Year Real Property 18-year real property is real property that is recovery property placed in service after March 15, 1984, and before May 9, 1985. 1040x 2010 instructions It includes real property, such as buildings, other than that designated as 5-year, 10-year, 15-year real property, or low-income housing. 1040x 2010 instructions The ACRS percentages for 18-year real property depend on when you placed the property in service in your trade or business or for the production of income during your tax year. 1040x 2010 instructions There are also tables for 18-year real property in the Appendix. 1040x 2010 instructions Table 4 shows the percentages for 18-year real property you placed in service after June 22, 1984, and before May 9, 1985. 1040x 2010 instructions Table 5 is for 18-year real property placed in service after March 15, 1984, and before June 23, 1984. 1040x 2010 instructions Find the month in your tax year that you placed the property in service in a trade or business or for the production of income. 1040x 2010 instructions Use the percentages listed under that month for each year of the recovery period. 1040x 2010 instructions Example. 1040x 2010 instructions On April 28, 1985, you bought and placed in service a rental house. 1040x 2010 instructions The house, not including the land, cost $95,000. 1040x 2010 instructions This is your unadjusted basis for the house. 1040x 2010 instructions You use the calendar year as your tax year. 1040x 2010 instructions Because the house was placed in service after June 22, 1984, and before May 9, 1985, it is 18-year real property. 1040x 2010 instructions You use Table 4 to figure your deduction for the house. 1040x 2010 instructions April is the fourth month of your tax year. 1040x 2010 instructions Your deduction for 1985 through 2003 is shown in the following table. 1040x 2010 instructions Year Rate Deduction 1985 7. 1040x 2010 instructions 0% $6,650 1986 9. 1040x 2010 instructions 0% 8,550 1987 8. 1040x 2010 instructions 0% 7,600 1988 7. 1040x 2010 instructions 0% 6,650 1989 7. 1040x 2010 instructions 0% 6,650 1990 6. 1040x 2010 instructions 0% 5,700 1991 5. 1040x 2010 instructions 0% 4,750 1992 5. 1040x 2010 instructions 0% 4,750 1993 5. 1040x 2010 instructions 0% 4,750 1994 5. 1040x 2010 instructions 0% 4,750 1995 5. 1040x 2010 instructions 0% 4,750 1996 5. 1040x 2010 instructions 0% 4,750 1997 5. 1040x 2010 instructions 0% 4,750 1998 4. 1040x 2010 instructions 0% 3,800 1999 4. 1040x 2010 instructions 0% 3,800 2000 4. 1040x 2010 instructions 0% 3,800 2001 4. 1040x 2010 instructions 0% 3,800 2002 4. 1040x 2010 instructions 0% 3,800 2003 1. 1040x 2010 instructions 0% 950 19-Year Real Property 19-year real property is real property that is recovery property placed in service after May 8, 1985, and before 1987. 1040x 2010 instructions It includes all real property, other than that designated as 5-year, 10-year, 15-year, or 18-year real property, or low-income housing. 1040x 2010 instructions The ACRS percentages for 19-year real property depend on when you placed the property in service in a trade or business or for the production of income during your tax year. 1040x 2010 instructions Table 6 shows the percentages for 19-year real property. 1040x 2010 instructions You find the month in your tax year that you placed the property in service. 1040x 2010 instructions You use the percentages listed under that month for each year of the recovery period. 1040x 2010 instructions Recovery Periods Each item of recovery property is assigned to a class of property. 1040x 2010 instructions The classes of recovery property establish the recovery periods over which the unadjusted basis of items in a class is recovered. 1040x 2010 instructions The classes of property are: 3-Year property 5-Year property 10-Year property 15-Year real property Low-income housing 18-Year real property 19-Year real property Alternate ACRS Method (Modified Straight Line Method) ACRS provides an alternate ACRS method that could be elected. 1040x 2010 instructions This alternate ACRS method uses a recovery percentage based on a modified straight line method. 1040x 2010 instructions This alternate ACRS method generally uses percentages other than those from the tables. 1040x 2010 instructions If you elected the alternate ACRS method, you determine the recovery period by using the following schedule. 1040x 2010 instructions This schedule is for other than 18- and 19-year real property and low-income housing: In the case of: You could have elected a recovery period of: 3-year property 3, 5, or 12 years 5-year property 5, 12, or 25 years 15-year real property 15, 35, or 45 years Percentages. 1040x 2010 instructions   The straight-line percentages for the alternate ACRS method are: Recovery Period Percentage 5 years 20. 1040x 2010 instructions 00% 10 years 10. 1040x 2010 instructions 00% 12 years 8. 1040x 2010 instructions 333% 15 years 6. 1040x 2010 instructions 667% 25 years 4. 1040x 2010 instructions 00% 35 years 2. 1040x 2010 instructions 857%   You apply the percentage to the unadjusted basis(defined earlier) of the property to figure your ACRS deduction. 1040x 2010 instructions There are tables for 18- and 19-year real property later in this publication in the Appendix. 1040x 2010 instructions For 15-year real property, see 15-year real property, later. 1040x 2010 instructions 3-, 5-, and 10-year property. 1040x 2010 instructions   If you elected to use an alternate recovery percentage, you have to use the same recovery percentage for all property in that class that you placed in service in that tax year. 1040x 2010 instructions This applies throughout the recovery period you selected. 1040x 2010 instructions Half-year convention. 1040x 2010 instructions   If you elected the alternate method, only a half-year of depreciation was deducted for the year you placed the property in service. 1040x 2010 instructions This applied regardless of when in the tax year you placed the property in service. 1040x 2010 instructions For each of the remaining years in the recovery period, you take a full year's deduction. 1040x 2010 instructions If you hold the property for the entire recovery period, a half-year of depreciation is allowable for the year following the end of the recovery period. 1040x 2010 instructions Example. 1040x 2010 instructions You operate a small upholstery business. 1040x 2010 instructions On March 19, 1986, you bought and placed in service a $13,000 light-duty panel truck to be used in your business and a $500 electric saw. 1040x 2010 instructions You elected to use the alternate ACRS method. 1040x 2010 instructions You did not elect to take a section 179 deduction. 1040x 2010 instructions You decided to recover the cost of the truck, which is 3-year recovery property, over 5 years. 1040x 2010 instructions The saw is 5-year property, but you decided to recover its cost over 12 years. 1040x 2010 instructions For 1986, your ACRS deduction reflected the half-year convention. 1040x 2010 instructions In the first year, you deducted half of the amount determined for a full year. 1040x 2010 instructions Your ACRS deduction for 1986 is as follows: Light-duty truck   5 years straight line = 20% 20% ÷ $13,000 = $2,600 Half-year convention -½ of $2,600= $1,300. 1040x 2010 instructions 00     Electric saw   12 years straight line = 8. 1040x 2010 instructions 333% 8. 1040x 2010 instructions 333% ÷ $500 = $41. 1040x 2010 instructions 67 Half-year convention -½ of $41. 1040x 2010 instructions 67= 20. 1040x 2010 instructions 84 Total ACRS deduction for 1986 $1,320. 1040x 2010 instructions 84       You take a full year of depreciation for both the truck and the saw for the years 1987 through 1990. 1040x 2010 instructions Your ACRS deduction for each of those years is as follows: Light-duty truck   5 years straight line = 20% 20% ÷ $13,000 = $2,600     Electric saw     12 years straight line = 8. 1040x 2010 instructions 333% 8. 1040x 2010 instructions 333% ÷ $500 = $41. 1040x 2010 instructions 67 Total annual ACRS deduction for 1987 through 1990 $2,641. 1040x 2010 instructions 67       In 1991, you take a half-year of depreciation for the truck and a full year of depreciation for the saw. 1040x 2010 instructions Your ACRS deduction for 1991 is as follows: Light-duty truck   5 years straight line = 20% 20% ÷ $13,000 = $2,600 Half-year convention -½ of $2,600= $1,300. 1040x 2010 instructions 00     Electric saw   12 years straight line = 8. 1040x 2010 instructions 333% 8. 1040x 2010 instructions 333% ÷ $500 = $41. 1040x 2010 instructions 67 Total ACRS deduction for 1991 $1,341. 1040x 2010 instructions 67       The truck is fully depreciated after 1991. 1040x 2010 instructions You take a full year of depreciation for the saw for the years 1992 through 1997. 1040x 2010 instructions Your ACRS deduction for each of those years is as follows: Electric saw     12 years straight line = 8. 1040x 2010 instructions 333% 8. 1040x 2010 instructions 333% ÷ $500 = $41. 1040x 2010 instructions 67 Total annual ACRS deduction for 1992 through 1997 $41. 1040x 2010 instructions 67       You take a half-year of depreciation for the saw for 1998. 1040x 2010 instructions Your ACRS deduction for 1998 is as follows: Electric saw   12 years straight line = 8. 1040x 2010 instructions 333% 8. 1040x 2010 instructions 333% ÷ $500 = $41. 1040x 2010 instructions 67 Half-year convention -½ of $41. 1040x 2010 instructions 67= 20. 1040x 2010 instructions 84 Total ACRS deduction for 1998 $20. 1040x 2010 instructions 84       The saw is fully depreciated after 1998. 1040x 2010 instructions 15-year real property. 1040x 2010 instructions   Under ACRS, you could also elect to use the alternate ACRS method for 15-year real property. 1040x 2010 instructions The alternate ACRS method allows you to depreciate your 15-year real property using the straight line ACRS method over the alternate recovery periods of 15, 35, or 45 years. 1040x 2010 instructions If you selected a 15-year recovery period, you use the percentage (6. 1040x 2010 instructions 667%) from the schedule above. 1040x 2010 instructions You prorate this percentage for the number of months the property was in service in the first year. 1040x 2010 instructions If you selected a 35- or 45-year recovery period, you use either Table 11 or 15. 1040x 2010 instructions Alternate periods for 18-year real property. 1040x 2010 instructions   For 18-year real property, the alternate recovery periods are 18, 35, or 45 years. 1040x 2010 instructions The percentages for 18-year real property under the alternate method are in Tables 7, 8, 10, 11, 14, and 15 in the Appendix. 1040x 2010 instructions There are two tables for each alternate recovery period. 1040x 2010 instructions One table shows the percentage for property placed in service after June 22, 1984. 1040x 2010 instructions The other table has the percentages for property placed in service after March 15, 1984, and before June 23, 1984. 1040x 2010 instructions Alternate periods for 19-year real property. 1040x 2010 instructions   For 19-year real property, the alternate recovery periods are 19, 35, or 45 years. 1040x 2010 instructions If you selected a 19-year recovery period, use Table 9 to determine your deduction. 1040x 2010 instructions If you select a 35- or 45-year recovery period, use either Table 13 or 14. 1040x 2010 instructions Example. 1040x 2010 instructions You placed in service an apartment building on August 3, 1986. 1040x 2010 instructions The building is 19-year real property. 1040x 2010 instructions The sales contract allocated $300,000 to the building and $100,000 to the land. 1040x 2010 instructions You use the calendar year as your tax year. 1040x 2010 instructions You chose the alternate ACRS method over a recovery period of 35 years. 1040x 2010 instructions For 1986, you figure your ACRS deduction usingTable 13. 1040x 2010 instructions August is the eighth month of your tax year. 1040x 2010 instructions The percentage from Table 13 for the eighth month is 1. 1040x 2010 instructions 1%. 1040x 2010 instructions Your deduction was $3,300 ($300,000 ÷ 1. 1040x 2010 instructions 1%). 1040x 2010 instructions The deduction rate from ACRS Table 13 for years 2 through 20 is 2. 1040x 2010 instructions 9% so that your deduction in 1987 through 2005 is $8,700 ($300,000 ÷ 2. 1040x 2010 instructions 9%). 1040x 2010 instructions Alternate periods for low-income housing. 1040x 2010 instructions   For low-income housing, the alternate recovery periods are 15, 35, or 45 years. 1040x 2010 instructions If you selected a 15-year period for this property, use 6. 1040x 2010 instructions 667% as the percentage. 1040x 2010 instructions If you selected a 35- or 45-year period, use either Table 11, 12, or 15. 1040x 2010 instructions Election. 1040x 2010 instructions   You had to make the election to use the alternate ACRS method by the return due date (including extensions) for the tax year you placed the property in service. 1040x 2010 instructions Revocation of election. 1040x 2010 instructions   Your election to use an alternate ACRS method, once made, can be changed only with the consent of the Commissioner. 1040x 2010 instructions The Commissioner grants consent only in extraordinary circumstances. 1040x 2010 instructions Any request for a revocation will be considered a request for a ruling. 1040x 2010 instructions ACRS Deduction in Short Tax Year For a tax year that is less than 12 months, the ACRS deduction is prorated on a 12-month basis. 1040x 2010 instructions Figure the amount of the ACRS deduction for a short tax year as follows: First, you figure the ACRS deduction for a full year. 1040x 2010 instructions You figure this by multiplying the unadjusted basis by the recovery percentage. 1040x 2010 instructions You then multiply the ACRS deduction determined for a full tax year by a fraction. 1040x 2010 instructions The numerator (top number) of the fraction is the number of months in the short tax year and the denominator (bottom number) is 12. 1040x 2010 instructions For example, a corporation placed in service in June 1986 an item of 3-year property with an unadjusted basis of $10,000. 1040x 2010 instructions The corporation files a tax return, because of a change in its accounting period, for the 6-month short tax year ending June 30, 1986. 1040x 2010 instructions The full year's ACRS deduction for this item is $2,500 ($10,000 ÷ 25%), the first year percentage from the 3-year table. 1040x 2010 instructions The ACRS deduction for the short tax year is $1,250 ($2,500 ÷ 6/12). 1040x 2010 instructions You use the full ACRS percentages during the remaining years of the recovery period. 1040x 2010 instructions For the first tax year after the recovery period, the unrecovered basis will be deductible. 1040x 2010 instructions Exception. 1040x 2010 instructions   For the tax year in which you placed 15-, 18-, or 19-year real property in service or in the tax year you dispose of it, you compute the ACRS deduction for the number of months that the property is in service during that tax year. 1040x 2010 instructions You compute the number of months using either a full month or mid-month convention. 1040x 2010 instructions This is true regardless of the number of months in the tax year and the recovery period and method used. 1040x 2010 instructions Dispositions A disposition is the permanent withdrawal of property from use in your trade or business or in the production of income. 1040x 2010 instructions You can make a withdrawal by sale, exchange, retirement, abandonment, or destruction. 1040x 2010 instructions You generally recognize gain or loss on the disposition of an asset by sale. 1040x 2010 instructions However, nonrecognition rules can allow you to postpone some gain. 1040x 2010 instructions See Publication 544. 1040x 2010 instructions If you physically abandon property, you can deduct as a loss the adjusted basis of the asset at the time of its abandonment. 1040x 2010 instructions Your intent must be to discard the asset so that you will not use it again or retrieve it for sale, exchange, or other disposition. 1040x 2010 instructions Early dispositions. 1040x 2010 instructions   The disposal of an asset before the end of its specified recovery period, is referred to as an early disposition. 1040x 2010 instructions When an early disposition occurs, the depreciation deduction in the year of disposition depends on the class of property involved. 1040x 2010 instructions Early dispositions of ACRS property other than 15-, 18-, or 19-year real property. 1040x 2010 instructions   Generally, you get no ACRS deduction for the tax year in which you dispose of or retire recovery property, except for 15-, 18-, and 19-year real property. 1040x 2010 instructions This means there is no depreciation deduction under ACRS in the year you dispose of or retire any of your 3-, 5-, or 10-year recovery property. 1040x 2010 instructions Dispositions — mass asset accounts. 1040x 2010 instructions   The law provides a special rule to avoid the calculation of gain on the disposition of assets from mass asset accounts. 1040x 2010 instructions A mass asset account includes items usually minor in value in relation to the group, numerous in quantity, impractical to separately identify, and not usually accounted for on a separate basis, but on a total dollar value. 1040x 2010 instructions Examples of mass assets include minor items of office, plant, and store furniture and fixtures. 1040x 2010 instructions   Under the special rule, if you elected to use a mass asset account, you recognize gain to the extent of the proceeds from the disposition of the asset. 1040x 2010 instructions You leave the unadjusted basis of the property in the account until recovered in future years. 1040x 2010 instructions If you did this, include the total proceeds realized from the disposition in income on the tax return for the year of disposition. 1040x 2010 instructions Early dispositions — 15-year real property. 1040x 2010 instructions   If you dispose of 15-year real property, you base your ACRS deduction for the year of disposition on the number of months in use. 1040x 2010 instructions You use a full-month convention. 1040x 2010 instructions For a disposition at any time during a particular month before the end of the recovery period, no deduction is allowed for the month of disposition. 1040x 2010 instructions This applies whether you use the regular ACRS method or elected the alternate ACRS method. 1040x 2010 instructions Example. 1040x 2010 instructions You purchased and placed in service a rental house on March 2, 1984, for $98,000 (not including the cost of land). 1040x 2010 instructions You file your return based on a calendar year. 1040x 2010 instructions Your rate from Table 1 for the third month is 10%. 1040x 2010 instructions Your ACRS deduction for 1984 was $9,800 ($98. 1040x 2010 instructions 000 ÷ 10%). 1040x 2010 instructions For 1985 through 1988, you figured your ACRS deductions using 11%, 9%, 8%, and 7% ÷ $98,000. 1040x 2010 instructions For 1989 through 1992, you figured your ACRS deductions using 6% for each year. 1040x 2010 instructions The deduction each year was $98,000 ÷ 6%. 1040x 2010 instructions For 1993 and 1994, the ACRS deduction is ($98,000 ÷ 5%) $4,900 for each year. 1040x 2010 instructions You sell the house on June 1, 1995. 1040x 2010 instructions You figure your ACRS deduction for 1995 for the full year and then prorate that amount for the months of use. 1040x 2010 instructions The full ACRS deduction for 1995 is $4,900 ($98,000 ÷ 5%). 1040x 2010 instructions You then prorate this amount to the 5 months in 1995 during which it was rented. 1040x 2010 instructions Your ACRS deduction for 1995 is $2,042 ($4,900 ÷ 5/12). 1040x 2010 instructions Early dispositions — 18- and 19-year real property. 1040x 2010 instructions   If you dispose of 18- or 19-year real property, you base your ACRS deduction for the year of disposition on the number of months in use. 1040x 2010 instructions For 18-year property placed in service before June 23, 1984, use a full-month convention on a disposition. 1040x 2010 instructions For 18-year property placed in service after June 22, 1984, and for 19-year property, determine the number of months in use by using the mid-month convention. 1040x 2010 instructions Under the mid-month convention,treat real property disposed of any time during a month as disposed of in the middle of that month. 1040x 2010 instructions Count the month of disposition as half a month of use. 1040x 2010 instructions Example. 1040x 2010 instructions You purchased and placed in service a rental house on July 2, 1984, for $100,000 (not including the cost of land). 1040x 2010 instructions You file your return based on a calendar year. 1040x 2010 instructions Your rate from Table 4 for the seventh month is 4%. 1040x 2010 instructions You figured your ACRS deduction for 1984 was $4,000 ($100,000 ÷ 4%). 1040x 2010 instructions In 1985 through 1994, your ACRS deductions were 9%, 8%, 8%, 7%, 6%, 6%, 5%, 5%, and 5% ÷ $100,000. 1040x 2010 instructions You sell the house on September 24, 1995. 1040x 2010 instructions Figure your ACRS deduction for 1995 for the months of use. 1040x 2010 instructions The full ACRS deduction for 1995 is $5,000 ($100,000 ÷ 5%). 1040x 2010 instructions Prorate this amount for the 8. 1040x 2010 instructions 5 months in 1995 that you held the property. 1040x 2010 instructions Under the mid-month convention, you count September as half a month. 1040x 2010 instructions Your ACRS deduction for 1995 is $3,542 ($5,000 ÷ 8. 1040x 2010 instructions 5/12). 1040x 2010 instructions Depreciation Recapture If you dispose of property depreciated under ACRS that is section 1245 recovery property, you will generally recognize gain or loss. 1040x 2010 instructions Gain recognized on a disposition is ordinary income to the extent of prior depreciation deductions taken. 1040x 2010 instructions This recapture rule applies to all personal property in the 3-year, 5-year, and 10-year classes. 1040x 2010 instructions You recapture gain on manufactured homes and theme park structures in the 10-year class as section 1245 property. 1040x 2010 instructions Section 1245 property generally includes all personal property. 1040x 2010 instructions See Section 1245 property in chapter 4 of Publication 544 for more information. 1040x 2010 instructions You treat dispositions of section 1250 real property on which you have a gain as section 1245 recovery property. 1040x 2010 instructions You recognize gain on this property as ordinary income to the extent of prior depreciation deductions taken. 1040x 2010 instructions Section 1250 property includes most real property. 1040x 2010 instructions See Section 1250 property in chapter 4 of Publication 544 for more information. 1040x 2010 instructions This rule applies to all section 1250 real property except the following property: Any 15-, 18-, or 19-year real property that is residential rental property. 1040x 2010 instructions Any 15-, 18-, or 19-year real property that you elected to depreciate using the alternate ACRS method. 1040x 2010 instructions Any 15-, 18-, or 19-year real property that is subsidized low-income housing. 1040x 2010 instructions For these recapture rules, you treat the section 179 deduction and 50% of the investment credit that reduced your basis as depreciation. 1040x 2010 instructions See Publication 544 for further discussion of dispositions of section 1245 and 1250 property. 1040x 2010 instructions Prev  Up  Next   Home   More Online Publications
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The 1040x 2010 Instructions

1040x 2010 instructions 1. 1040x 2010 instructions   Definitions You Need To Know Table of Contents Other options. 1040x 2010 instructions Exception. 1040x 2010 instructions Certain terms used in this publication are defined below. 1040x 2010 instructions The same term used in another publication may have a slightly different meaning. 1040x 2010 instructions Annual additions. 1040x 2010 instructions   Annual additions are the total of all your contributions in a year, employee contributions (not including rollovers), and forfeitures allocated to a participant's account. 1040x 2010 instructions Annual benefits. 1040x 2010 instructions   Annual benefits are the benefits to be paid yearly in the form of a straight life annuity (with no extra benefits) under a plan to which employees do not contribute and under which no rollover contributions are made. 1040x 2010 instructions Business. 1040x 2010 instructions   A business is an activity in which a profit motive is present and economic activity is involved. 1040x 2010 instructions Service as a newspaper carrier under age 18 or as a public official is not a business. 1040x 2010 instructions Common-law employee. 1040x 2010 instructions   A common-law employee is any individual who, under common law, would have the status of an employee. 1040x 2010 instructions A leased employee can also be a common-law employee. 1040x 2010 instructions   A common-law employee is a person who performs services for an employer who has the right to control and direct the results of the work and the way in which it is done. 1040x 2010 instructions For example, the employer: Provides the employee's tools, materials, and workplace, and Can fire the employee. 1040x 2010 instructions   Common-law employees are not self-employed and cannot set up retirement plans for income from their work, even if that income is self-employment income for social security tax purposes. 1040x 2010 instructions For example, common-law employees who are ministers, members of religious orders, full-time insurance salespeople, and U. 1040x 2010 instructions S. 1040x 2010 instructions citizens employed in the United States by foreign governments cannot set up retirement plans for their earnings from those employments, even though their earnings are treated as self-employment income. 1040x 2010 instructions   However, an individual may be a common-law employee and a self-employed person as well. 1040x 2010 instructions For example, an attorney can be a corporate common-law employee during regular working hours and also practice law in the evening as a self-employed person. 1040x 2010 instructions In another example, a minister employed by a congregation for a salary is a common-law employee even though the salary is treated as self-employment income for social security tax purposes. 1040x 2010 instructions However, fees reported on Schedule C (Form 1040), Profit or Loss From Business, for performing marriages, baptisms, and other personal services are self-employment earnings for qualified plan purposes. 1040x 2010 instructions Compensation. 1040x 2010 instructions   Compensation for plan allocations is the pay a participant received from you for personal services for a year. 1040x 2010 instructions You can generally define compensation as including all the following payments. 1040x 2010 instructions Wages and salaries. 1040x 2010 instructions Fees for professional services. 1040x 2010 instructions Other amounts received (cash or noncash) for personal services actually rendered by an employee, including, but not limited to, the following items. 1040x 2010 instructions Commissions and tips. 1040x 2010 instructions Fringe benefits. 1040x 2010 instructions Bonuses. 1040x 2010 instructions   For a self-employed individual, compensation means the earned income, discussed later, of that individual. 1040x 2010 instructions   Compensation generally includes amounts deferred in the following employee benefit plans. 1040x 2010 instructions These amounts are elective deferrals. 1040x 2010 instructions Qualified cash or deferred arrangement (section 401(k) plan). 1040x 2010 instructions Salary reduction agreement to contribute to a tax-sheltered annuity (section 403(b) plan), a SIMPLE IRA plan, or a SARSEP. 1040x 2010 instructions Section 457 nonqualified deferred compensation plan. 1040x 2010 instructions Section 125 cafeteria plan. 1040x 2010 instructions   However, an employer can choose to exclude elective deferrals under the above plans from the definition of compensation. 1040x 2010 instructions The limit on elective deferrals is discussed in chapter 2 under Salary Reduction Simplified Employee Pension (SARSEP) and in chapter 4. 1040x 2010 instructions Other options. 1040x 2010 instructions   In figuring the compensation of a participant, you can treat any of the following amounts as the employee's compensation. 1040x 2010 instructions The employee's wages as defined for income tax withholding purposes. 1040x 2010 instructions The employee's wages you report in box 1 of Form W-2, Wage and Tax Statement. 1040x 2010 instructions The employee's social security wages (including elective deferrals). 1040x 2010 instructions   Compensation generally cannot include either of the following items. 1040x 2010 instructions Nontaxable reimbursements or other expense allowances. 1040x 2010 instructions Deferred compensation (other than elective deferrals). 1040x 2010 instructions SIMPLE plans. 1040x 2010 instructions   A special definition of compensation applies for SIMPLE plans. 1040x 2010 instructions See chapter 3. 1040x 2010 instructions Contribution. 1040x 2010 instructions   A contribution is an amount you pay into a plan for all those participating in the plan, including self-employed individuals. 1040x 2010 instructions Limits apply to how much, under the contribution formula of the plan, can be contributed each year for a participant. 1040x 2010 instructions Deduction. 1040x 2010 instructions   A deduction is the plan contributions you can subtract from gross income on your federal income tax return. 1040x 2010 instructions Limits apply to the amount deductible. 1040x 2010 instructions Earned income. 1040x 2010 instructions   Earned income is net earnings from self-employment, discussed later, from a business in which your services materially helped to produce the income. 1040x 2010 instructions   You can also have earned income from property your personal efforts helped create, such as royalties from your books or inventions. 1040x 2010 instructions Earned income includes net earnings from selling or otherwise disposing of the property, but it does not include capital gains. 1040x 2010 instructions It includes income from licensing the use of property other than goodwill. 1040x 2010 instructions   Earned income includes amounts received for services by self-employed members of recognized religious sects opposed to social security benefits who are exempt from self-employment tax. 1040x 2010 instructions   If you have more than one business, but only one has a retirement plan, only the earned income from that business is considered for that plan. 1040x 2010 instructions Employer. 1040x 2010 instructions   An employer is generally any person for whom an individual performs or did perform any service, of whatever nature, as an employee. 1040x 2010 instructions A sole proprietor is treated as his or her own employer for retirement plan purposes. 1040x 2010 instructions However, a partner is not an employer for retirement plan purposes. 1040x 2010 instructions Instead, the partnership is treated as the employer of each partner. 1040x 2010 instructions Highly compensated employee. 1040x 2010 instructions   A highly compensated employee is an individual who: Owned more than 5% of the interest in your business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or For the preceding year, received compensation from you of more than $115,000 (if the preceding year is 2012, 2013, or 2014) and, if you so choose, was in the top 20% of employees when ranked by compensation. 1040x 2010 instructions Leased employee. 1040x 2010 instructions   A leased employee who is not your common-law employee must generally be treated as your employee for retirement plan purposes if he or she does all the following. 1040x 2010 instructions Provides services to you under an agreement between you and a leasing organization. 1040x 2010 instructions Has performed services for you (or for you and related persons) substantially full time for at least 1 year. 1040x 2010 instructions Performs services under your primary direction or control. 1040x 2010 instructions Exception. 1040x 2010 instructions   A leased employee is not treated as your employee if all the following conditions are met. 1040x 2010 instructions Leased employees are not more than 20% of your non-highly compensated work force. 1040x 2010 instructions The employee is covered under the leasing organization's qualified pension plan. 1040x 2010 instructions The leasing organization's plan is a money purchase pension plan that has all the following provisions. 1040x 2010 instructions Immediate participation. 1040x 2010 instructions (This requirement does not apply to any individual whose compensation from the leasing organization in each plan year during the 4-year period ending with the plan year is less than $1,000. 1040x 2010 instructions ) Full and immediate vesting. 1040x 2010 instructions A nonintegrated employer contribution rate of at least 10% of compensation for each participant. 1040x 2010 instructions However, if the leased employee is your common-law employee, that employee will be your employee for all purposes, regardless of any pension plan of the leasing organization. 1040x 2010 instructions Net earnings from self-employment. 1040x 2010 instructions   For SEP and qualified plans, net earnings from self-employment is your gross income from your trade or business (provided your personal services are a material income-producing factor) minus allowable business deductions. 1040x 2010 instructions Allowable deductions include contributions to SEP and qualified plans for common-law employees and the deduction allowed for the deductible part of your self-employment tax. 1040x 2010 instructions   Net earnings from self-employment does not include items excluded from gross income (or their related deductions) other than foreign earned income and foreign housing cost amounts. 1040x 2010 instructions   For the deduction limits, earned income is net earnings for personal services actually rendered to the business. 1040x 2010 instructions You take into account the income tax deduction for the deductible part of self-employment tax and the deduction for contributions to the plan made on your behalf when figuring net earnings. 1040x 2010 instructions   Net earnings include a partner's distributive share of partnership income or loss (other than separately stated items, such as capital gains and losses). 1040x 2010 instructions It does not include income passed through to shareholders of S corporations. 1040x 2010 instructions Guaranteed payments to limited partners are net earnings from self-employment if they are paid for services to or for the partnership. 1040x 2010 instructions Distributions of other income or loss to limited partners are not net earnings from self-employment. 1040x 2010 instructions   For SIMPLE plans, net earnings from self-employment is the amount on line 4 of Short Schedule SE or line 6 of Long Schedule SE (Form 1040), Self-Employment Tax, before subtracting any contributions made to the SIMPLE plan for yourself. 1040x 2010 instructions Qualified plan. 1040x 2010 instructions   A qualified plan is a retirement plan that offers a tax-favored way to save for retirement. 1040x 2010 instructions You can deduct contributions made to the plan for your employees. 1040x 2010 instructions Earnings on these contributions are generally tax free until distributed at retirement. 1040x 2010 instructions Profit-sharing, money purchase, and defined benefit plans are qualified plans. 1040x 2010 instructions A 401(k) plan is also a qualified plan. 1040x 2010 instructions Participant. 1040x 2010 instructions   A participant is an eligible employee who is covered by your retirement plan. 1040x 2010 instructions See the discussions of the different types of plans for the definition of an employee eligible to participate in each type of plan. 1040x 2010 instructions Partner. 1040x 2010 instructions   A partner is an individual who shares ownership of an unincorporated trade or business with one or more persons. 1040x 2010 instructions For retirement plans, a partner is treated as an employee of the partnership. 1040x 2010 instructions Self-employed individual. 1040x 2010 instructions   An individual in business for himself or herself, and whose business is not incorporated, is self-employed. 1040x 2010 instructions Sole proprietors and partners are self-employed. 1040x 2010 instructions Self-employment can include part-time work. 1040x 2010 instructions   Not everyone who has net earnings from self-employment for social security tax purposes is self-employed for qualified plan purposes. 1040x 2010 instructions See Common-law employee and Net earnings from self-employment , earlier. 1040x 2010 instructions   In addition, certain fishermen may be considered self-employed for setting up a qualified plan. 1040x 2010 instructions See Publication 595, Capital Construction Fund for Commercial Fishermen, for the special rules used to determine whether fishermen are self-employed. 1040x 2010 instructions Sole proprietor. 1040x 2010 instructions   A sole proprietor is an individual who owns an unincorporated business by himself or herself, including a single member limited liability company that is treated as a disregarded entity for tax purposes. 1040x 2010 instructions For retirement plans, a sole proprietor is treated as both an employer and an employee. 1040x 2010 instructions Prev  Up  Next   Home   More Online Publications