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1049ez 2. 1049ez   Depreciation of Rental Property Table of Contents The BasicsWhat Rental Property Can Be Depreciated? When Does Depreciation Begin and End? Depreciation Methods Basis of Depreciable Property Claiming the Special Depreciation Allowance MACRS DepreciationDepreciation Systems Property Classes Under GDS Recovery Periods Under GDS Conventions Figuring Your Depreciation Deduction Figuring MACRS Depreciation Under ADS Claiming the Correct Amount of Depreciation You recover the cost of income producing property through yearly tax deductions. 1049ez You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. 1049ez Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. 1049ez You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures and equipment, as an expense. 1049ez You can deduct depreciation only on the part of your property used for rental purposes. 1049ez Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. 1049ez You may have to use Form 4562 to figure and report your depreciation. 1049ez See Which Forms To Use in chapter 3. 1049ez Also see Publication 946. 1049ez Section 179 deduction. 1049ez   The section 179 deduction is a means of recovering part or all of the cost of certain qualifying property in the year you place the property in service. 1049ez This deduction is not allowed for property used in connection with residential rental property. 1049ez See chapter 2 of Publication 946. 1049ez Alternative minimum tax (AMT). 1049ez   If you use accelerated depreciation, you may be subject to the AMT. 1049ez Accelerated depreciation allows you to deduct more depreciation earlier in the recovery period than you could deduct using a straight line method (same deduction each year). 1049ez   The prescribed depreciation methods for rental real estate are not accelerated, so the depreciation deduction is not adjusted for the AMT. 1049ez However, accelerated methods are generally used for other property connected with rental activities (for example, appliances and wall-to-wall carpeting). 1049ez   To find out if you are subject to the AMT, see the Instructions for Form 6251. 1049ez The Basics The following section discusses the information you will need to have about the rental property and the decisions to be made before figuring your depreciation deduction. 1049ez What Rental Property Can Be Depreciated? You can depreciate your property if it meets all the following requirements. 1049ez You own the property. 1049ez You use the property in your business or income-producing activity (such as rental property). 1049ez The property has a determinable useful life. 1049ez The property is expected to last more than one year. 1049ez Property you own. 1049ez   To claim depreciation, you usually must be the owner of the property. 1049ez You are considered as owning property even if it is subject to a debt. 1049ez Rented property. 1049ez   Generally, if you pay rent for property, you cannot depreciate that property. 1049ez Usually, only the owner can depreciate it. 1049ez However, if you make permanent improvements to leased property, you may be able to depreciate the improvements. 1049ez See Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. 1049ez Cooperative apartments. 1049ez   If you are a tenant-stockholder in a cooperative housing corporation and rent your cooperative apartment to others, you can deduct depreciation on your stock in the corporation. 1049ez See chapter 4, Special Situations. 1049ez Property having a determinable useful life. 1049ez   To be depreciable, your property must have a determinable useful life. 1049ez This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. 1049ez What Rental Property Cannot Be Depreciated? Certain property cannot be depreciated. 1049ez This includes land and certain excepted property. 1049ez Land. 1049ez   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. 1049ez But if it does, the loss is accounted for upon disposition. 1049ez The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. 1049ez   Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. 1049ez 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. 1049ez Example. 1049ez You built a new house to use as a rental and paid for grading, clearing, seeding, and planting bushes and trees. 1049ez Some of the bushes and trees were planted right next to the house, while others were planted around the outer border of the lot. 1049ez If you replace the house, you would have to destroy the bushes and trees right next to it. 1049ez These bushes and trees are closely associated with the house, so they have a determinable useful life. 1049ez Therefore, you can depreciate them. 1049ez Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. 1049ez Excepted property. 1049ez   Even if the property meets all the requirements listed earlier under What Rental Property Can Be Depreciated , you cannot depreciate the following property. 1049ez Property placed in service and disposed of (or taken out of business use) in the same year. 1049ez Equipment used to build capital improvements. 1049ez You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. 1049ez For more information, see chapter 1 of Publication 946. 1049ez When Does Depreciation Begin and End? You begin to depreciate your rental property when you place it in service for the production of income. 1049ez You stop depreciating it either when you have fully recovered your cost or other basis, or when you retire it from service, whichever happens first. 1049ez Placed in Service You place property in service in a rental activity when it is ready and available for a specific use in that activity. 1049ez Even if you are not using the property, it is in service when it is ready and available for its specific use. 1049ez Example 1. 1049ez On November 22 of last year, you purchased a dishwasher for your rental property. 1049ez The appliance was delivered on December 7, but was not installed and ready for use until January 3 of this year. 1049ez Because the dishwasher was not ready for use last year, it is not considered placed in service until this year. 1049ez If the appliance had been installed and ready for use when it was delivered in December of last year, it would have been considered placed in service in December, even if it was not actually used until this year. 1049ez Example 2. 1049ez On April 6, you purchased a house to use as residential rental property. 1049ez You made extensive repairs to the house and had it ready for rent on July 5. 1049ez You began to advertise the house for rent in July and actually rented it beginning September 1. 1049ez The house is considered placed in service in July when it was ready and available for rent. 1049ez You can begin to depreciate the house in July. 1049ez Example 3. 1049ez You moved from your home in July. 1049ez During August and September you made several repairs to the house. 1049ez On October 1, you listed the property for rent with a real estate company, which rented it on December 1. 1049ez The property is considered placed in service on October 1, the date when it was available for rent. 1049ez Conversion to business use. 1049ez   If you place property in service in a personal activity, you cannot claim depreciation. 1049ez However, if you change the property's use to business or the production of income, you can begin to depreciate it at the time of the change. 1049ez You place the property in service for business or income-producing use on the date of the change. 1049ez Example. 1049ez You bought a house and used it as your personal home several years before you converted it to rental property. 1049ez 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. 1049ez You can begin to claim depreciation in the year you converted it to rental property because at that time its use changed to the production of income. 1049ez Idle Property Continue to claim a deduction for depreciation on property used in your rental activity even if it is temporarily idle (not in use). 1049ez For example, if you must make repairs after a tenant moves out, you still depreciate the rental property during the time it is not available for rent. 1049ez Cost or Other Basis Fully Recovered You must stop depreciating property when the total of your yearly depreciation deductions equals your cost or other basis of your property. 1049ez For this purpose, your yearly depreciation deductions include any depreciation that you were allowed to claim, even if you did not claim it. 1049ez See Basis of Depreciable Property , later. 1049ez 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. 1049ez 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. 1049ez You sell or exchange the property. 1049ez You convert the property to personal use. 1049ez You abandon the property. 1049ez The property is destroyed. 1049ez Depreciation Methods Generally, you must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate residential rental property placed in service after 1986. 1049ez If you placed rental property in service before 1987, you are using one of the following methods. 1049ez ACRS (Accelerated Cost Recovery System) for property placed in service after 1980 but before 1987. 1049ez Straight line or declining balance method over the useful life of property placed in service before 1981. 1049ez See MACRS Depreciation , later, for more information. 1049ez Rental property placed in service before 2013. 1049ez   Continue to use the same method of figuring depreciation that you used in the past. 1049ez Use of real property changed. 1049ez   Generally, you 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. 1049ez This includes your residence that you changed to rental use. 1049ez See Property Owned or Used in 1986 in Publication 946, chapter 1, for those situations in which MACRS is not allowed. 1049ez Improvements made after 1986. 1049ez   Treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. 1049ez As a result, you can depreciate that improvement as separate property under MACRS if it is the type of property that otherwise qualifies for MACRS depreciation. 1049ez For more information about improvements, see Additions or improvements to property , later in this chapter under Recovery Periods Under GDS. 1049ez This publication discusses MACRS depreciation only. 1049ez If you need information about depreciating property placed in service before 1987, see Publication 534. 1049ez Basis of Depreciable Property The basis of property used in a rental activity is generally its adjusted basis when you place it in service in that activity. 1049ez This is its cost or other basis when you acquired it, adjusted for certain items occurring before you place it in service in the rental activity. 1049ez If you depreciate your property under MACRS, you may also have to reduce your basis by certain deductions and credits with respect to the property. 1049ez Basis and adjusted basis are explained in the following discussions. 1049ez If you used the property for personal purposes before changing it to rental use, its basis for depreciation is the lesser of its adjusted basis or its fair market value when you change it to rental use. 1049ez See Basis of Property Changed to Rental Use in chapter 4. 1049ez Cost Basis The basis of property you buy is usually its cost. 1049ez The cost is the amount you pay for it in cash, in debt obligation, in other property, or in services. 1049ez Your cost also includes amounts you pay for: Sales tax charged on the purchase (but see Exception next), Freight charges to obtain the property, and Installation and testing charges. 1049ez Exception. 1049ez   If you deducted state and local general sales taxes as an itemized deduction on Schedule A (Form 1040), do not include those sales taxes as part of your cost basis. 1049ez Such taxes were deductible before 1987 and after 2003. 1049ez Loans with low or no interest. 1049ez   If you buy property on any time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, less the amount considered to be unstated interest. 1049ez See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. 1049ez Real property. 1049ez   If you buy real property, such as a building and land, certain fees and other expenses you pay are part of your cost basis in the property. 1049ez Real estate taxes. 1049ez   If you buy real property and agree to pay real estate taxes on it that were owed by the seller and the seller does not reimburse you, the taxes you pay are treated as part of your basis in the property. 1049ez You cannot deduct them as taxes paid. 1049ez   If you reimburse the seller for real estate taxes the seller paid for you, you can usually deduct that amount. 1049ez Do not include that amount in your basis in the property. 1049ez Settlement fees and other costs. 1049ez   The following settlement fees and closing costs for buying the property are part of your basis in the property. 1049ez Abstract fees. 1049ez Charges for installing utility services. 1049ez Legal fees. 1049ez Recording fees. 1049ez Surveys. 1049ez Transfer taxes. 1049ez Title insurance. 1049ez Any 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. 1049ez   The following are settlement fees and closing costs you cannot include in your basis in the property. 1049ez Fire insurance premiums. 1049ez Rent or other charges relating to occupancy of the property before closing. 1049ez Charges connected with getting or refinancing a loan, such as: Points (discount points, loan origination fees), Mortgage insurance premiums, Loan assumption fees, Cost of a credit report, and Fees for an appraisal required by a lender. 1049ez   Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. 1049ez Assumption of a mortgage. 1049ez   If you buy property and become liable for an existing mortgage on the property, your basis is the amount you pay for the property plus the amount remaining to be paid on the mortgage. 1049ez Example. 1049ez You buy a building for $60,000 cash and assume a mortgage of $240,000 on it. 1049ez Your basis is $300,000. 1049ez Separating cost of land and buildings. 1049ez   If you buy buildings and your cost includes the cost of the land on which they stand, you must divide the cost between the land and the buildings to figure the basis for depreciation of the buildings. 1049ez The part of the cost that you allocate to each asset is the ratio of the fair market value of that asset to the fair market value of the whole property at the time you buy it. 1049ez   If you are not certain of the fair market values of the land and the buildings, you can divide the cost between them based on their assessed values for real estate tax purposes. 1049ez Example. 1049ez You buy a house and land for $200,000. 1049ez The purchase contract does not specify how much of the purchase price is for the house and how much is for the land. 1049ez The latest real estate tax assessment on the property was based on an assessed value of $160,000, of which $136,000 was for the house and $24,000 was for the land. 1049ez You can allocate 85% ($136,000 ÷ $160,000) of the purchase price to the house and 15% ($24,000 ÷ $160,000) of the purchase price to the land. 1049ez Your basis in the house is $170,000 (85% of $200,000) and your basis in the land is $30,000 (15% of $200,000). 1049ez Basis Other Than Cost You cannot use cost as a basis for property that you received: In return for services you performed; In an exchange for other property; As a gift; From your spouse, or from your former spouse as the result of a divorce; or As an inheritance. 1049ez If you received property in one of these ways, see Publication 551 for information on how to figure your basis. 1049ez Adjusted Basis To figure 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 for business or the production of income. 1049ez The result of these adjustments to the basis is the adjusted basis. 1049ez Increases to basis. 1049ez   You must increase the basis of any property by the cost of all items properly added to a capital account. 1049ez These include the following. 1049ez The cost of any additions or improvements made before placing your property into service as a rental that have a useful life of more than 1 year. 1049ez Amounts spent after a casualty to restore the damaged property. 1049ez The cost of extending utility service lines to the property. 1049ez Legal fees, such as the cost of defending and perfecting title, or settling zoning issues. 1049ez Additions or improvements. 1049ez   Add to the basis of your property the amount an addition or improvement actually cost you, including any amount you borrowed to make the addition or improvement. 1049ez This includes all direct costs, such as material and labor, but does not include your own labor. 1049ez It also includes all expenses related to the addition or improvement. 1049ez   For example, if you had an architect draw up plans for remodeling your property, the architect's fee is a part of the cost of the remodeling. 1049ez Or, if you had your lot surveyed to put up a fence, the cost of the survey is a part of the cost of the fence. 1049ez   Keep separate accounts for depreciable additions or improvements made after you place the property in service in your rental activity. 1049ez For information on depreciating additions or improvements, see Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. 1049ez    The cost of landscaping improvements is usually treated as an addition to the basis of the land, which is not depreciable. 1049ez However, see What Rental Property Cannot Be Depreciated, earlier. 1049ez Assessments for local improvements. 1049ez   Assessments for items which tend to increase the value of property, such as streets and sidewalks, must be added to the basis of the property. 1049ez For example, if your city installs curbing on the street in front of your house, and assesses you and your neighbors for its cost, you must add the assessment to the basis of your property. 1049ez Also add the cost of legal fees paid to obtain a decrease in an assessment levied against property to pay for local improvements. 1049ez You cannot deduct these items as taxes or depreciate them. 1049ez    However, you can deduct as taxes, charges or assessments for maintenance, repairs, or interest charges related to the improvements. 1049ez Do not add them to your basis in the property. 1049ez Deducting vs. 1049ez capitalizing costs. 1049ez   Do not add to your basis costs you can deduct as current expenses. 1049ez However, there are certain costs you can choose either to deduct or to capitalize. 1049ez If you capitalize these costs, include them in your basis. 1049ez If you deduct them, do not include them in your basis. 1049ez   The costs you may choose to deduct or capitalize include carrying charges, such as interest and taxes, that you must pay to own property. 1049ez   For more information about deducting or capitalizing costs and how to make the election, see Carrying Charges in Publication 535, chapter 7. 1049ez Decreases to basis. 1049ez   You must decrease the basis of your property by any items that represent a return of your cost. 1049ez These include the following. 1049ez Insurance or other payment you receive as the result of a casualty or theft loss. 1049ez Casualty loss not covered by insurance for which you took a deduction. 1049ez Amount(s) you receive for granting an easement. 1049ez Residential energy credits you were allowed before 1986, or after 2005, if you added the cost of the energy items to the basis of your home. 1049ez Exclusion from income of subsidies for energy conservation measures. 1049ez Special depreciation allowance claimed on qualified property. 1049ez Depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. 1049ez If you did not deduct enough or deducted too much in any year, see Depreciation under Decreases to Basis in Publication 551. 1049ez   If your rental property was previously used as your main home, you must also decrease the basis by the following. 1049ez Gain you postponed from the sale of your main home before May 7, 1997, if the replacement home was converted to your rental property. 1049ez District of Columbia first-time homebuyer credit allowed on the purchase of your main home after August 4, 1997 and before January 1, 2012. 1049ez Amount of qualified principal residence indebtedness discharged on or after January 1, 2007. 1049ez Claiming the Special Depreciation Allowance For 2013, your residential rental property may qualify for a special depreciation allowance. 1049ez This allowance is figured before you figure your regular depreciation deduction. 1049ez See Publication 946, chapter 3, for details. 1049ez Also see the Instructions for Form 4562, Line 14. 1049ez If you qualify for, but choose not to take, a special depreciation allowance, you must attach a statement to your return. 1049ez The details of this election are in Publication 946, chapter 3, and the Instructions for Form 4562, Line 14. 1049ez MACRS Depreciation Most business and investment property placed in service after 1986 is depreciated using MACRS. 1049ez This section explains how to determine which MACRS depreciation system applies to your property. 1049ez It also discusses other information you need to know before you can figure depreciation under MACRS. 1049ez This information includes the property's: Recovery class, Applicable recovery period, Convention, Placed-in-service date, Basis for depreciation, and Depreciation method. 1049ez Depreciation Systems MACRS consists of two systems that determine how you depreciate your property—the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). 1049ez You must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. 1049ez Excluded Property You cannot use MACRS for certain personal property (such as furniture or appliances) placed in service in your rental property in 2013 if it had been previously placed in service before 1987 when MACRS became effective. 1049ez In most cases, personal property is excluded from MACRS if you (or a person related to you) owned or used it in 1986 or if your tenant is a person (or someone related to the person) who owned or used it in 1986. 1049ez However, the property is not excluded if your 2013 deduction under MACRS (using a half-year convention) is less than the deduction you would have under ACRS. 1049ez For more information, see What Method Can You Use To Depreciate Your Property? in Publication 946, chapter 1. 1049ez Electing ADS If you choose, you can use the ADS method for most property. 1049ez Under ADS, you use the straight line method of depreciation. 1049ez The election of ADS for one item in a class of property generally applies to all property in that class that is placed in service during the tax year of the election. 1049ez However, the election applies on a property-by-property basis for residential rental property and nonresidential real property. 1049ez If you choose to use ADS for your residential rental property, the election must be made in the first year the property is placed in service. 1049ez Once you make this election, you can never revoke it. 1049ez For property placed in service during 2013, you make the election to use ADS by entering the depreciation on Form 4562, Part III, Section C, line 20c. 1049ez Property Classes Under GDS Each item of property that can be depreciated under MACRS is assigned to a property class, determined by its class life. 1049ez The property class generally determines the depreciation method, recovery period, and convention. 1049ez The property classes under GDS are: 3-year property, 5-year property, 7-year property, 10-year property, 15-year property, 20-year property, Nonresidential real property, and Residential rental property. 1049ez Under MACRS, property that you placed in service during 2013 in your rental activities generally falls into one of the following classes. 1049ez 5-year property. 1049ez This class includes computers and peripheral equipment, office machinery (typewriters, calculators, copiers, etc. 1049ez ), automobiles, and light trucks. 1049ez This class also includes appliances, carpeting, furniture, etc. 1049ez , used in a residential rental real estate activity. 1049ez Depreciation on automobiles, other property used for transportation, computers and related peripheral equipment, and property of a type generally used for entertainment, recreation, or amusement is limited. 1049ez See chapter 5 of Publication 946. 1049ez 7-year property. 1049ez This class includes office furniture and equipment (desks, file cabinets, etc. 1049ez ). 1049ez This class also includes any property that does not have a class life and that has not been designated by law as being in any other class. 1049ez 15-year property. 1049ez This class includes roads, fences, and shrubbery (if depreciable). 1049ez Residential rental property. 1049ez This class includes any real property that is a rental building or structure (including a mobile home) for which 80% or more of the gross rental income for the tax year is from dwelling units. 1049ez It does not include a unit in a hotel, motel, inn, or other establishment where more than half of the units are used on a transient basis. 1049ez If you live in any part of the building or structure, the gross rental income includes the fair rental value of the part you live in. 1049ez The other property classes do not generally apply to property used in rental activities. 1049ez These classes are not discussed in this publication. 1049ez See Publication 946 for more information. 1049ez Recovery Periods Under GDS The recovery period of property is the number of years over which you recover its cost or other basis. 1049ez The recovery periods are generally longer under ADS than GDS. 1049ez The recovery period of property depends on its property class. 1049ez Under GDS, the recovery period of an asset is generally the same as its property class. 1049ez Class lives and recovery periods for most assets are listed in Appendix B of Publication 946. 1049ez See Table 2-1 for recovery periods of property commonly used in residential rental activities. 1049ez Qualified Indian reservation property. 1049ez   Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations. 1049ez For more information, see chapter 4 of Publication 946. 1049ez Additions or improvements to property. 1049ez   Treat additions or improvements you make to your depreciable rental property as separate property items for depreciation purposes. 1049ez   The property class and recovery period of the addition or improvement is the one that would apply to the original property if you had placed it in service at the same time as the addition or improvement. 1049ez   The recovery period for an addition or improvement to property begins on the later of: The date the addition or improvement is placed in service, or The date the property to which the addition or improvement was made is placed in service. 1049ez Example. 1049ez You own a residential rental house that you have been renting since 1986 and depreciating under ACRS. 1049ez You built an addition onto the house and placed it in service in 2013. 1049ez You must use MACRS for the addition. 1049ez Under GDS, the addition is depreciated as residential rental property over 27. 1049ez 5 years. 1049ez Table 2-1. 1049ez MACRS Recovery Periods for Property Used in Rental Activities   MACRS Recovery Period   Type of Property General Depreciation System Alternative Depreciation System   Computers and their peripheral equipment 5 years 5 years   Office machinery, such as: Typewriters Calculators Copiers 5 years 6 years   Automobiles 5 years 5 years   Light trucks 5 years 5 years   Appliances, such as: Stoves Refrigerators 5 years 9 years   Carpets 5 years 9 years   Furniture used in rental property 5 years 9 years   Office furniture and equipment, such as: Desks Files 7 years 10 years   Any property that does not have a class life and that has not been designated by law as being in any other class 7 years 12 years   Roads 15 years 20 years   Shrubbery 15 years 20 years   Fences 15 years 20 years   Residential rental property (buildings or structures) and structural components such as furnaces, waterpipes, venting, etc. 1049ez 27. 1049ez 5 years 40 years   Additions and improvements, such as a new roof The same recovery period as that of the property to which the addition or improvement is made, determined as if the property were placed in service at the same time as the addition or improvement. 1049ez   Conventions A convention is a method established under MACRS to set the beginning and end of the recovery period. 1049ez 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. 1049ez Mid-month convention. 1049ez    A mid-month convention is used for all residential rental property and nonresidential real property. 1049ez Under this convention, you treat all property placed in service, or disposed of, during any month as placed in service, or disposed of, at the midpoint of that month. 1049ez Mid-quarter convention. 1049ez   A mid-quarter convention must be used if the mid-month convention does not apply and the total depreciable basis of MACRS property placed in service in the last 3 months of a tax year (excluding nonresidential real property, residential rental property, and property placed in service and disposed of in the same year) is more than 40% of the total basis of all such property you place in service during the year. 1049ez   Under this convention, you treat all property placed in service, or disposed of, during any quarter of a tax year as placed in service, or disposed of, at the midpoint of the quarter. 1049ez Example. 1049ez During the tax year, Tom Martin purchased the following items to use in his rental property. 1049ez He elects not to claim the special depreciation allowance discussed earlier. 1049ez A dishwasher for $400 that he placed in service in January. 1049ez Used furniture for $100 that he placed in service in September. 1049ez A refrigerator for $800 that he placed in service in October. 1049ez Tom uses the calendar year as his tax year. 1049ez The total basis of all property placed in service that year is $1,300. 1049ez The $800 basis of the refrigerator placed in service during the last 3 months of his tax year exceeds $520 (40% × $1,300). 1049ez Tom must use the mid-quarter convention instead of the half-year convention for all three items. 1049ez Half-year convention. 1049ez    The half-year convention is used if neither the mid-quarter convention nor the mid-month convention applies. 1049ez 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 that tax year. 1049ez   If this convention applies, you deduct a half year of depreciation for the first year and the last year that you depreciate the property. 1049ez You deduct a full year of depreciation for any other year during the recovery period. 1049ez Figuring Your Depreciation Deduction You can figure your MACRS depreciation deduction in one of two ways. 1049ez The deduction is substantially the same both ways. 1049ez You can either: Actually compute the deduction using the depreciation method and convention that apply over the recovery period of the property, or Use the percentage from the MACRS percentage tables. 1049ez In this publication we will use the percentage tables. 1049ez For instructions on how to compute the deduction, see chapter 4 of Publication 946. 1049ez Residential rental property. 1049ez   You must use the straight line method and a mid-month convention for residential rental property. 1049ez In the first year that you claim depreciation for residential rental property, you can claim depreciation only for the number of months the property is in use, and you must use the mid-month convention (explained under Conventions , earlier). 1049ez 5-, 7-, or 15-year property. 1049ez   For property in the 5- or 7-year class, use the 200% declining balance method and a half-year convention. 1049ez However, in limited cases you must use the mid-quarter convention, if it applies. 1049ez For property in the 15-year class, use the 150% declining balance method and a half-year convention. 1049ez   You can also choose to use the 150% declining balance method for property in the 5- or 7-year class. 1049ez The choice to use the 150% method for one item in a class of property applies to all property in that class that is placed in service during the tax year of the election. 1049ez You make this election on Form 4562. 1049ez In Part III, column (f), enter “150 DB. 1049ez ” Once you make this election, you cannot change to another method. 1049ez   If you use either the 200% or 150% declining balance method, you figure your deduction using the straight line method in the first tax year that the straight line method gives you an equal or larger deduction. 1049ez   You can also choose to use the straight line method with a half-year or mid-quarter convention for 5-, 7-, or 15-year property. 1049ez The choice to use the straight line method for one item in a class of property applies to all property in that class that is placed in service during the tax year of the election. 1049ez You elect the straight line method on Form 4562. 1049ez In Part III, column (f), enter “S/L. 1049ez ” Once you make this election, you cannot change to another method. 1049ez MACRS Percentage Tables You can use the percentages in Table 2-2, earlier, to compute annual depreciation under MACRS. 1049ez The tables show the percentages for the first few years or until the change to the straight line method is made. 1049ez See Appendix A of Publication 946 for complete tables. 1049ez The percentages in Tables 2-2a, 2-2b, and 2-2c make the change from declining balance to straight line in the year that straight line will give a larger deduction. 1049ez If you elect to use the straight line method for 5-, 7-, or 15-year property, or the 150% declining balance method for 5- or 7-year property, use the tables in Appendix A of Publication 946. 1049ez How to use the percentage tables. 1049ez   You must apply the table rates to your property's unadjusted basis (defined below) each year of the recovery period. 1049ez   Once you begin using a percentage table to figure depreciation, you must continue to use it for the entire recovery period unless there is an adjustment to the basis of your property for a reason other than: Depreciation allowed or allowable, or An addition or improvement that is depreciated as a separate item of property. 1049ez   If there is an adjustment for any reason other than (1) or (2), for example, because of a deductible casualty loss, you can no longer use the table. 1049ez For the year of the adjustment and for the remaining recovery period, figure depreciation using the property's adjusted basis at the end of the year and the appropriate depreciation method, as explained earlier under Figuring Your Depreciation Deduction . 1049ez See Figuring the Deduction Without Using the Tables in Publication 946, chapter 4. 1049ez Unadjusted basis. 1049ez   This is the same basis you would use to figure gain on a sale (see Basis of Depreciable Property , earlier), but without reducing your original basis by any MACRS depreciation taken in earlier years. 1049ez   However, you do reduce your original basis by other amounts claimed on the property, including: Any amortization, Any section 179 deduction, and Any special depreciation allowance. 1049ez For more information, see chapter 4 of Publication 946. 1049ez Please click here for the text description of the image. 1049ez Table 2-2 Tables 2-2a, 2-2b, and 2-2c. 1049ez   The percentages in these tables take into account the half-year and mid-quarter conventions. 1049ez Use Table 2-2a for 5-year property, Table 2-2b for 7-year property, and Table 2-2c for 15-year property. 1049ez Use the percentage in the second column (half-year convention) unless you are required to use the mid-quarter convention (explained earlier). 1049ez If you must use the mid-quarter convention, use the column that corresponds to the calendar year quarter in which you placed the property in service. 1049ez Example 1. 1049ez You purchased a stove and refrigerator and placed them in service in June. 1049ez Your basis in the stove is $600 and your basis in the refrigerator is $1,000. 1049ez Both are 5-year property. 1049ez Using the half-year convention column in Table 2-2a, the depreciation percentage for Year 1 is 20%. 1049ez For that year your depreciation deduction is $120 ($600 × . 1049ez 20) for the stove and $200 ($1,000 × . 1049ez 20) for the refrigerator. 1049ez For Year 2, the depreciation percentage is 32%. 1049ez That year's depreciation deduction will be $192 ($600 × . 1049ez 32) for the stove and $320 ($1,000 × . 1049ez 32) for the refrigerator. 1049ez Example 2. 1049ez Assume the same facts as in Example 1, except you buy the refrigerator in October instead of June. 1049ez Since the refrigerator was placed in service in the last 3 months of the tax year, and its basis ($1,000) is more than 40% of the total basis of all property placed in service during the year ($1,600 × . 1049ez 40 = $640), you are required to use the mid-quarter convention to figure depreciation on both the stove and refrigerator. 1049ez Because you placed the refrigerator in service in October, you use the fourth quarter column of Table 2-2a and find the depreciation percentage for Year 1 is 5%. 1049ez Your depreciation deduction for the refrigerator is $50 ($1,000 x . 1049ez 05). 1049ez Because you placed the stove in service in June, you use the second quarter column of Table 2-2a and find the depreciation percentage for Year 1 is 25%. 1049ez For that year, your depreciation deduction for the stove is $150 ($600 x . 1049ez 25). 1049ez Table 2-2d. 1049ez    Use this table when you are using the GDS 27. 1049ez 5 year option for residential rental property. 1049ez Find the row for the month that you placed the property in service. 1049ez Use the percentages listed for that month to figure your depreciation deduction. 1049ez The mid-month convention is taken into account in the percentages shown in the table. 1049ez Continue to use the same row (month) under the column for the appropriate year. 1049ez Example. 1049ez You purchased a single family rental house for $185,000 and placed it in service on February 8. 1049ez The sales contract showed that the building cost $160,000 and the land cost $25,000. 1049ez Your basis for depreciation is its original cost, $160,000. 1049ez This is the first year of service for your residential rental property and you decide to use GDS which has a recovery period of 27. 1049ez 5 years. 1049ez Using Table 2-2d, you find that the percentage for property placed in service in February of Year 1 is 3. 1049ez 182%. 1049ez That year's depreciation deduction is $5,091 ($160,000 x . 1049ez 03182). 1049ez Figuring MACRS Depreciation Under ADS Table 2–1, earlier, shows the ADS recovery periods for property used in rental activities. 1049ez See Appendix B in Publication 946 for other property. 1049ez If your property is not listed in Appendix B, it is considered to have no class life. 1049ez Under ADS, personal property with no class life is depreciated using a recovery period of 12 years. 1049ez Use the mid-month convention for residential rental property and nonresidential real property. 1049ez For all other property, use the half-year or mid-quarter convention, as appropriate. 1049ez See Publication 946 for ADS depreciation tables. 1049ez Claiming the Correct Amount of Depreciation You should claim the correct amount of depreciation each tax year. 1049ez If you did not claim all the depreciation you were entitled to deduct, you must still reduce your basis in the property by the full amount of depreciation that you could have deducted. 1049ez For more information, see Depreciation under Decreases to Basis in Publication 551. 1049ez If you deducted an incorrect amount of depreciation for property in any year, you may be able to make a correction by filing Form 1040X, Amended U. 1049ez S. 1049ez Individual Income Tax Return. 1049ez If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amount of depreciation. 1049ez Filing an amended return. 1049ez   You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. 1049ez You claimed the incorrect amount because of a mathematical error made in any year. 1049ez You claimed the incorrect amount because of a posting error made in any year. 1049ez You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. 1049ez You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. 1049ez   Generally, you adopt a method of accounting for depreciation by using a permissible method of determining depreciation when you file your first tax return for the property used in your rental activity. 1049ez This also occurs when you use the same impermissible method of determining depreciation (for example, using the wrong MACRS recovery period) in two or more consecutively filed tax returns. 1049ez   If an amended return is allowed, you must file it by the later of the following dates. 1049ez 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. 1049ez A return filed before an unextended due date is considered filed on that due date. 1049ez 2 years from the time you paid your tax for that year. 1049ez Changing your accounting method. 1049ez   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. 1049ez In some instances, that consent is automatic. 1049ez For more information, see Changing Your Accounting Method in Publication 946,  chapter 1. 1049ez Prev  Up  Next   Home   More Online Publications
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IRS Clarifies Temporary ITIN Application Requirements for Noncitizens with Tax Extensions and Many Foreign Students

Effective Oct. 2, 2012, the IRS implemented two separate clarifying changes to its temporary procedures for issuing Individual Taxpayer Identification Numbers (ITINs).  

First, the IRS will allow individuals studying in the United States under the Student Exchange Visitors Program (SEVP) to get ITINs under a streamlined procedure. SEVP participants already provide documentation to the Department of Homeland Security under the requirements of that program, and will need a letter from their educational institution verifying their status.

Second, the IRS is creating special procedures for taxpayers who have an approved Tax Year 2011 extension to file their completed tax returns.

Under these temporary procedures, eligible taxpayers will be allowed to have their original documents certified by a Certifying Acceptance Agent (CAA) or a SEVP approved institution as appropriate rather than mailing originals to the IRS. Extension filers that choose to not submit originals documents or copies certified by the issuing agency, must apply through a CAA and individuals studying under the SEVP will be required to apply through a university, college or other SEVP-approved institution. For both groups, these temporary procedures cover applications for the primary applicant, their spouse and dependents.

Designed specifically for tax-administration purposes, ITINs are only issued to people who are not eligible to obtain a Social Security Number. ITINs assist the IRS with the collection of taxes from foreign nationals, nonresident aliens and others who have filing or payment obligations under U.S. law. The tightened interim guidelines, announced in June, remain in effect for most other noncitizens. More information about ITINs and these interim guidelines can be found at 2012 ITIN Review Frequently Asked Questions.

The temporary procedures apply to these two groups of taxpayers:

  1. Noncitizens that have filed extensions: These are noncitizens who requested an extension of time to file a 2011 federal income tax return for resident and nonresident aliens and choose to not submit originals documents or copies certified by the issuing agency. The ITINs issued under this procedure are temporary, expiring one year from the extended return due date (e.g., Oct. 15, 2013). The noncitizens must submit their W-7 and related identification documents through a CAA, along with Form W-7 and related attachments. See below for special instructions for CAAs. 
  2. SEVP Students: These are individuals admitted to the U.S. under an F, J or M visa who receive taxable scholarship, fellowship or other grants reportable by the school on Form W-2 or Form 1042-S. See below for special instructions for SEVP institutions, including a sample certification letter.

As previously announced, the IRS is in the process of conducting a review of its ITIN procedures.  Final rules will be issued before the start of the 2013 filing season. 

Related Information:

 

Page Last Reviewed or Updated: 18-Sep-2013

The 1049ez

1049ez 5. 1049ez   Additional Rules for Listed Property Table of Contents Introduction Useful Items - You may want to see: What Is Listed Property?Passenger Automobiles Other Property Used for Transportation Computers and Related Peripheral Equipment Can Employees Claim a Deduction? What Is the Business-Use Requirement?How To Allocate Use Qualified Business Use Recapture of Excess Depreciation Lessee's Inclusion Amount Do the Passenger Automobile Limits Apply?Maximum Depreciation Deduction Deductions After the Recovery Period Deductions For Passenger Automobiles Acquired in a Trade-in What Records Must Be Kept?Adequate Records How Is Listed Property Information Reported? Introduction This chapter discusses the deduction limits and other special rules that apply to certain listed property. 1049ez Listed property includes cars and other property used for transportation, property used for entertainment, and certain computers. 1049ez Deductions for listed property (other than certain leased property) are subject to the following special rules and limits. 1049ez Deduction for employees. 1049ez 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. 1049ez Business-use requirement. 1049ez 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. 1049ez 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. 1049ez You may also have to recapture (include in income) any excess depreciation claimed in previous years. 1049ez A similar inclusion amount applies to certain leased property. 1049ez Passenger automobile limits and rules. 1049ez Annual limits apply to depreciation deductions (including section 179 deductions and any special depreciation allowance) for certain passenger automobiles. 1049ez You can continue to deduct depreciation for the unrecovered basis resulting from these limits after the end of the recovery period. 1049ez 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. 1049ez It also discusses the recordkeeping rules for listed property and explains how to report information about the property on your tax return. 1049ez Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 535 Business Expenses 587 Business Use of Your Home (Including Use by Daycare Providers) Form (and Instructions) 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 4562 Depreciation and Amortization 4797 Sales of Business Property See chapter 6 for information about getting publications and forms. 1049ez What Is Listed Property? Listed property is any of the following. 1049ez Passenger automobiles (as defined later). 1049ez Any other property used for transportation, unless it is an excepted vehicle. 1049ez Property generally used for entertainment, recreation, or amusement (including photographic, phonographic, communication, and video-recording equipment). 1049ez Computers and related peripheral equipment, unless used only at a regular business establishment and owned or leased by the person operating the establishment. 1049ez 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. 1049ez Improvements to listed property. 1049ez   An improvement made to listed property that must be capitalized is treated as a new item of depreciable property. 1049ez The recovery period and method of depreciation that apply to the listed property as a whole also apply to the improvement. 1049ez 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. 1049ez Passenger Automobiles 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). 1049ez It includes any part, component, or other item physically attached to the automobile at the time of purchase or usually included in the purchase price of an automobile. 1049ez The following vehicles are not considered passenger automobiles for these purposes. 1049ez An ambulance, hearse, or combination ambulance-hearse used directly in a trade or business. 1049ez A vehicle used directly in the trade or business of transporting persons or property for pay or hire. 1049ez A truck or van that is a qualified nonpersonal use vehicle. 1049ez Qualified nonpersonal use vehicles. 1049ez   Qualified nonpersonal use vehicles are vehicles that by their nature are not likely to be used more than a minimal amount for personal purposes. 1049ez They include the trucks and vans listed as excepted vehicles under Other Property Used for Transportation , next. 1049ez 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. 1049ez For a detailed discussion of passenger automobiles, including leased passenger automobiles, see  Publication 463. 1049ez Other Property Used for Transportation 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” and are subject to the special rules for listed property. 1049ez Other property used for transportation includes trucks, buses, boats, airplanes, motorcycles, and any other vehicles used to transport persons or goods. 1049ez Excepted vehicles. 1049ez   Other property used for transportation does not include the following qualified nonpersonal use vehicles (defined earlier under Passenger Automobiles ). 1049ez Clearly marked police and fire vehicles. 1049ez Unmarked vehicles used by law enforcement officers if the use is officially authorized. 1049ez Ambulances used as such and hearses used as such. 1049ez Any vehicle with a loaded gross vehicle weight of over 14,000 pounds that is designed to carry cargo. 1049ez Bucket trucks (cherry pickers), cement mixers, dump trucks (including garbage trucks), flatbed trucks, and refrigerated trucks. 1049ez Combines, cranes and derricks, and forklifts. 1049ez Delivery trucks with seating only for the driver, or only for the driver plus a folding jump seat. 1049ez Qualified moving vans. 1049ez Qualified specialized utility repair trucks. 1049ez School buses used in transporting students and employees of schools. 1049ez Other buses with a capacity of at least 20 passengers that are used as passenger buses. 1049ez Tractors and other special purpose farm vehicles. 1049ez Clearly marked police and fire vehicle. 1049ez   A clearly marked police or fire vehicle is a vehicle that meets all the following requirements. 1049ez It is owned or leased by a governmental unit or an agency or instrumentality of a governmental unit. 1049ez 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. 1049ez 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. 1049ez It is clearly marked with painted insignia or words that make it readily apparent that it is a police or fire vehicle. 1049ez A marking on a license plate is not a clear marking for these purposes. 1049ez Qualified moving van. 1049ez   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. 1049ez 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. 1049ez Personal use for travel to and from a move site happens no more than five times a month on average. 1049ez 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. 1049ez Qualified specialized utility repair truck. 1049ez   A truck is a qualified specialized utility repair truck if it is not a van or pickup truck and all the following apply. 1049ez The truck was specifically designed for and is used to carry heavy tools, testing equipment, or parts. 1049ez 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. 1049ez 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. 1049ez Computers and Related Peripheral Equipment 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. 1049ez It consists of a central processing unit with extensive storage, logic, arithmetic, and control capabilities. 1049ez Related peripheral equipment is any auxiliary machine which is designed to be controlled by the central processing unit of a computer. 1049ez The following are neither computers nor related peripheral equipment. 1049ez Any equipment that is an integral part of other property that is not a computer. 1049ez Typewriters, calculators, adding and accounting machines, copiers, duplicating equipment, and similar equipment. 1049ez Equipment of a kind used primarily for the user's amusement or entertainment, such as video games. 1049ez Can Employees Claim a 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. 1049ez The use of your property in performing services as an employee is a business use only if both the following requirements are met. 1049ez The use is for your employer's convenience. 1049ez The use is required as a condition of your employment. 1049ez 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. 1049ez Employer's convenience. 1049ez   Whether the use of listed property is for your employer's convenience must be determined from all the facts. 1049ez The use is for your employer's convenience if it is for a substantial business reason of the employer. 1049ez The use of listed property during your regular working hours to carry on your employer's business generally is for the employer's convenience. 1049ez Condition of employment. 1049ez   Whether the use of listed property is a condition of your employment depends on all the facts and circumstances. 1049ez The use of property must be required for you to perform your duties properly. 1049ez Your employer does not have to require explicitly that you use the property. 1049ez However, a mere statement by the employer that the use of the property is a condition of your employment is not sufficient. 1049ez Example 1. 1049ez Virginia Sycamore is employed as a courier with We Deliver, which provides local courier services. 1049ez She owns and uses a motorcycle to deliver packages to downtown offices. 1049ez We Deliver explicitly requires all delivery persons to own a car or motorcycle for use in their employment. 1049ez Virginia's use of the motorcycle is for the convenience of We Deliver and is required as a condition of employment. 1049ez Example 2. 1049ez Bill Nelson is an inspector for Uplift, a construction company with many sites in the local area. 1049ez He must travel to these sites on a regular basis. 1049ez Uplift does not furnish an automobile or explicitly require him to use his own automobile. 1049ez However, it pays him for any costs he incurs in traveling to the various sites. 1049ez The use of his own automobile or a rental automobile is for the convenience of Uplift and is required as a condition of employment. 1049ez Example 3. 1049ez 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. 1049ez The use of his own car is neither for the convenience of Uplift nor required as a condition of employment. 1049ez Example 4. 1049ez Marilyn Lee is a pilot for Y Company, a small charter airline. 1049ez Y requires pilots to obtain 80 hours of flight time annually in addition to flight time spent with the airline. 1049ez Pilots usually can obtain these hours by flying with the Air Force Reserve or by flying part-time with another airline. 1049ez Marilyn owns her own airplane. 1049ez 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. 1049ez Example 5. 1049ez David Rule is employed as an engineer with Zip, an engineering contracting firm. 1049ez He occasionally takes work home at night rather than work late in the office. 1049ez He owns and uses a home computer which is virtually identical to the office model. 1049ez His use of the computer is neither for the convenience of his employer nor required as a condition of employment. 1049ez What Is the Business-Use Requirement? 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. 1049ez To meet this requirement, listed property must be used predominantly (more than 50% of its total use) for qualified business use. 1049ez If this requirement is not met, the following rules apply. 1049ez Property not used predominantly for qualified business use during the year it is placed in service does not qualify for the section 179 deduction. 1049ez Property not used predominantly for qualified business use during the year it is placed in service does not qualify for a special depreciation allowance. 1049ez 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. 1049ez This rule applies each year of the recovery period. 1049ez 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. 1049ez 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. 1049ez 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. 1049ez 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. 1049ez Exception for leased property. 1049ez   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. 1049ez   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. 1049ez 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. 1049ez Occasional or incidental leasing activity is insufficient. 1049ez For example, if you lease only one passenger automobile during a tax year, you are not regularly engaged in the business of leasing automobiles. 1049ez 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. 1049ez 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. 1049ez For passenger automobiles and other means of transportation, allocate the property's use on the basis of mileage. 1049ez 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. 1049ez 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). 1049ez 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. 1049ez Entertainment use. 1049ez   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. 1049ez Commuting use. 1049ez   The use of an automobile for commuting is not business use, regardless of whether work is performed during the trip. 1049ez 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. 1049ez This is also true for a business meeting held in a car while commuting to work. 1049ez Similarly, a business call made on an otherwise personal trip does not change the character of a trip from personal to business. 1049ez 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. 1049ez Use of your automobile by another person. 1049ez   If someone else uses your automobile, do not treat that use as business use unless one of the following conditions applies. 1049ez That use is directly connected with your business. 1049ez You properly report the value of the use as income to the other person and withhold tax on the income where required. 1049ez You are paid a fair market rent. 1049ez Treat any payment to you for the use of the automobile as a rent payment for purposes of item (3). 1049ez Employee deductions. 1049ez   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. 1049ez See Can Employees Claim a Deduction , earlier. 1049ez Qualified Business Use Qualified business use of listed property is any use of the property in your trade or business. 1049ez However, it does not include the following uses. 1049ez 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). 1049ez The use of property as pay for the services of a 5% owner or related person. 1049ez 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. 1049ez Property does not stop being used predominantly for qualified business use because of a transfer at death. 1049ez Exception for leasing or compensatory use of aircraft. 1049ez   Treat the leasing of any aircraft by a 5% owner or related person, or the compensatory use of any aircraft, 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. 1049ez 5% owner. 1049ez   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. 1049ez   For a corporation, a 5% owner is any person who owns, or is considered to own, either of the following. 1049ez More than 5% of the outstanding stock of the corporation. 1049ez Stock possessing more than 5% of the total combined voting power of all stock in the corporation. 1049ez Related persons. 1049ez   For a description of related persons, see Related persons in the discussion on property owned or used in 1986 under What Method Can You Use To Depreciate Your Property in chapter 1 . 1049ez 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. 1049ez Examples. 1049ez   The following examples illustrate whether the use of business property is qualified business use. 1049ez Example 1. 1049ez John Maple is the sole proprietor of a plumbing contracting business. 1049ez John employs his brother, Richard, in the business. 1049ez As part of Richard's pay, he is allowed to use one of the company automobiles for personal use. 1049ez The company includes the value of the personal use of the automobile in Richard's gross income and properly withholds tax on it. 1049ez The use of the automobile is pay for the performance of services by a related person, so it is not a qualified business use. 1049ez Example 2. 1049ez John, in Example 1, allows unrelated employees to use company automobiles for personal purposes. 1049ez 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. 1049ez This use of company automobiles by employees is not a qualified business use. 1049ez Example 3. 1049ez James Company Inc. 1049ez owns several automobiles that its employees use for business purposes. 1049ez The employees also are allowed to take the automobiles home at night. 1049ez 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. 1049ez This use of company automobiles by employees, even for personal purposes, is a qualified business use for the company. 1049ez Investment Use The use of property to produce income in a nonbusiness activity (investment use) is not a qualified business use. 1049ez However, you can treat the investment use as business use to figure the depreciation deduction for the property in a given year. 1049ez Example 1. 1049ez Sarah Bradley uses a home computer 50% of the time to manage her investments. 1049ez She also uses the computer 40% of the time in her part-time consumer research business. 1049ez Sarah's home computer is listed property because it is not used at a regular business establishment. 1049ez She does not use the computer predominantly for qualified business use. 1049ez Therefore, she cannot elect a section 179 deduction or claim a special depreciation allowance for the computer. 1049ez She must depreciate it using the straight line method over the ADS recovery period. 1049ez Her combined business/investment use for determining her depreciation deduction is 90%. 1049ez Example 2. 1049ez 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. 1049ez 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. 1049ez Her combined business/investment use for determining her depreciation deduction is 90%. 1049ez Recapture of Excess Depreciation 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. 1049ez You also increase the adjusted basis of your property by the same amount. 1049ez 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. 1049ez To determine the amount in (2) above, you must refigure the depreciation using the straight line method and the ADS recovery period. 1049ez Example. 1049ez In June 2009, Ellen Rye purchased and placed in service a pickup truck that cost $18,000. 1049ez She used it only for qualified business use for 2009 through 2012. 1049ez Ellen claimed a section 179 deduction of $10,000 based on the purchase of the truck. 1049ez She began depreciating it using the 200% DB method over a 5-year GDS recovery period. 1049ez 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. 1049ez During 2013, she used the truck 50% for business and 50% for personal purposes. 1049ez She includes $4,018 excess depreciation in her gross income for 2013. 1049ez The excess depreciation is determined as follows. 1049ez Total section 179 deduction ($10,000) and depreciation claimed ($6,618) for 2009 through 2012. 1049ez (Depreciation is from Table A-1. 1049ez ) $16,618 Minus: Depreciation allowable (Table A-8):     2009 – 10% of $18,000 $1,800   2010 – 20% of $18,000 3,600   2011 – 20% of $18,000 3,600   2012 – 20% of $18,000 3,600 12,600 Excess depreciation $4,018 If Ellen's use of the truck does not change to 50% for business and 50% for personal purposes until 2015, there will be no excess depreciation. 1049ez The total depreciation allowable using Table A-8 through 2015 will be $18,000, which equals the total of the section 179 deduction and depreciation she will have claimed. 1049ez Where to figure and report recapture. 1049ez   Use Form 4797, Part IV, to figure the recapture amount. 1049ez Report the recapture amount as other income on the same form or schedule on which you took the depreciation deduction. 1049ez For example, report the recapture amount as other income on Schedule C (Form 1040) if you took the depreciation deduction on Schedule C. 1049ez If you took the depreciation deduction on Form 2106, report the recapture amount as other income on Form 1040, line 21. 1049ez Lessee's Inclusion Amount 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. 1049ez Your qualified business-use percentage is the part of the property's total use that is qualified business use (defined earlier). 1049ez For the inclusion amount rules for a leased passenger automobile, see Leasing a Car in chapter 4 of Publication 463. 1049ez The inclusion amount is the sum of Amount A and Amount B, described next. 1049ez 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. 1049ez Amount A. 1049ez   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 . 1049ez   The fair market value of the property is the value on the first day of the lease term. 1049ez 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. 1049ez Amount B. 1049ez   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 . 1049ez Maximum inclusion amount. 1049ez   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. 1049ez Inclusion amount worksheet. 1049ez   The following worksheet is provided to help you figure the inclusion amount for leased listed property. 1049ez Inclusion Amount Worksheet for Leased Listed Property 1. 1049ez Fair market value   2. 1049ez Business/investment use for first year business use is 50% or less   3. 1049ez Multiply line 1 by line 2. 1049ez   4. 1049ez Rate (%) from Table A-19   5. 1049ez Multiply line 3 by line 4. 1049ez This is Amount A. 1049ez   6. 1049ez Fair market value   7. 1049ez Average business/investment use for years property leased before the first year business use is 50% or less . 1049ez . 1049ez . 1049ez . 1049ez . 1049ez . 1049ez . 1049ez . 1049ez . 1049ez . 1049ez . 1049ez . 1049ez . 1049ez   8. 1049ez Multiply line 6 by line 7   9. 1049ez Rate (%) from Table A-20   10. 1049ez Multiply line 8 by line 9. 1049ez This is Amount B. 1049ez   11. 1049ez Add line 5 and line 10. 1049ez This is your inclusion amount. 1049ez 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. 1049ez )         Example. 1049ez On February 1, 2011, Larry House, a calendar year taxpayer, leased and placed in service a computer with a fair market value of $3,000. 1049ez The lease is for a period of 5 years. 1049ez Larry does not use the computer at a regular business establishment, so it is listed property. 1049ez His business use of the property (all of which is qualified business use) is 80% in 2011, 60% in 2012, and 40% in 2013. 1049ez He must add an inclusion amount to gross income for 2013, the first tax year his qualified business-use percentage is 50% or less. 1049ez The computer has a 5-year recovery period under both GDS and ADS. 1049ez 2013 is the third tax year of the lease, so the applicable percentage from Table A-19 is −19. 1049ez 8%. 1049ez The applicable percentage from Table A-20 is 22. 1049ez 0%. 1049ez Larry's deductible rent for the computer for 2013 is $800. 1049ez Larry uses the Inclusion amount worksheet. 1049ez to figure the amount he must include in income for 2013. 1049ez His inclusion amount is $224, which is the sum of −$238 (Amount A) and $462 (Amount B). 1049ez Inclusion Amount Worksheet for Leased Listed Property 1. 1049ez Fair market value $3,000   2. 1049ez Business/investment use for first year business use is 50% or less 40 % 3. 1049ez Multiply line 1 by line 2. 1049ez 1,200   4. 1049ez Rate (%) from Table A-19 −19. 1049ez 8 % 5. 1049ez Multiply line 3 by line 4. 1049ez This is Amount A. 1049ez −238   6. 1049ez Fair market value 3,000   7. 1049ez Average business/investment use for years property leased before the first year business use is 50% or less 70 % 8. 1049ez Multiply line 6 by line 7 2,100   9. 1049ez Rate (%) from Table A-20 22. 1049ez 0 % 10. 1049ez Multiply line 8 by line 9. 1049ez This is Amount B. 1049ez 462   11. 1049ez Add line 5 and line 10. 1049ez This is your inclusion amount. 1049ez 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. 1049ez ) $224           Lease beginning in the last 9 months of your tax year. 1049ez    The inclusion amount is subject to a special rule if all the following apply. 1049ez The lease term begins within 9 months before the close of your tax year. 1049ez You do not use the property predominantly (more than 50%) for qualified business use during that part of the tax year. 1049ez The lease term continues into your next tax year. 1049ez Under this special rule, add the inclusion amount to income in the next tax year. 1049ez 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. 1049ez Skip lines 6 through 9 of the worksheet and enter zero on line 10. 1049ez Example 1. 1049ez On August 1, 2012, Julie Rule, a calendar year taxpayer, leased and placed in service an item of listed property. 1049ez The property is 5-year property with a fair market value of $10,000. 1049ez Her property has a recovery period of 5 years under ADS. 1049ez The lease is for 5 years. 1049ez Her business use of the property was 50% in 2012 and 90% in 2013. 1049ez She paid rent of $3,600 for 2012, of which $3,240 is deductible. 1049ez She must include $147 in income in 2013. 1049ez The $147 is the sum of Amount A and Amount B. 1049ez Amount A is $147 ($10,000 × 70% × 2. 1049ez 1%), the product of the fair market value, the average business use for 2012 and 2013, and the applicable percentage for year one from Table A-19 . 1049ez Amount B is zero. 1049ez Lease for less than one year. 1049ez   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. 1049ez The amount included in income is the inclusion amount (figured as described in the preceding discussions) multiplied by a fraction. 1049ez The numerator of the fraction is the number of days in the lease term and the denominator is 365 (or 366 for leap years). 1049ez   The lease term for listed property other than residential rental or nonresidential real property includes options to renew. 1049ez 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. 1049ez Example 2. 1049ez On October 1, 2012, John Joyce, a calendar year taxpayer, leased and placed in service an item of listed property that is 3-year property. 1049ez This property had a fair market value of $15,000 and a recovery period of 5 years under ADS. 1049ez The lease term was 6 months (ending on March 31, 2013), during which he used the property 45% in business. 1049ez He must include $71 in income in 2013. 1049ez The $71 is the sum of Amount A and Amount B. 1049ez Amount A is $71 ($15,000 × 45% × 2. 1049ez 1% × 183/365), 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. 1049ez Amount B is zero. 1049ez Where to report inclusion amount. 1049ez   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. 1049ez For example, report the inclusion amount as other income on Schedule C (Form 1040) if you took the deduction on Schedule C. 1049ez If you took the deduction for rental costs on Form 2106, report the inclusion amount as other income on Form 1040, line 21. 1049ez Do the Passenger Automobile Limits Apply? The depreciation deduction, including the section 179 deduction and special depreciation allowance, you can claim for a passenger automobile (defined earlier) each year is limited. 1049ez This section describes the maximum depreciation deduction amounts for 2013 and explains how to deduct, after the recovery period, the unrecovered basis of your property that results from applying the passenger automobile limit. 1049ez Exception for leased cars. 1049ez   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. 1049ez 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 . 1049ez Maximum Depreciation Deduction The passenger automobile limits are the maximum depreciation amounts you can deduct for a passenger automobile. 1049ez They are based on the date you placed the automobile in service. 1049ez Passenger Automobiles The maximum deduction amounts for most passenger automobiles are shown in the following table. 1049ez Maximum Depreciation Deduction for Passenger Automobiles Date       4th & Placed 1st 2nd 3rd Later In Service Year Year Year Years 2013 $11,1601 $5,100 $3,050 $1,875 2012 11,1601 5,100 3,050 1,875 2011 11,0602 4,900 2,950 1,775 2010 11,0602  4,900 2,950 1,775 2009 10,9603 4,800 2,850 1,775 2008 10,9603  4,800 2,850 1,775 2007 3,060 4,900 2,850 1,775 2006 2,960 4,800 2,850 1,775 2005 2,960 4,700 2,850 1,675 2004 10,6104 4,800 2,850 1,675 5/06/2003– 12/31/2003 10,7105 4,900 2,950 1,775 1/01/2003– 5/05/2003 7,6606 4,900 2,950 1,775 1If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,160. 1049ez 2If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,060. 1049ez 3If you elected not to claim any special depreciation allowance for the vehicle or the vehicle is not qualified property, the maximum deduction is $2,960. 1049ez 4If 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. 1049ez 5If you acquired the vehicle before 5/06/03, the maximum deduction is $7,660. 1049ez 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. 1049ez 6If 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. 1049ez 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. 1049ez If you have a short tax year, you must reduce the maximum deduction amount by multiplying the maximum amount by a fraction. 1049ez The numerator of the fraction is the number of months and partial months in the short tax year and the denominator is 12. 1049ez Example. 1049ez On April 15, 2013, Virginia Hart bought and placed in service a new car for $14,500. 1049ez She used the car only in her business. 1049ez She files her tax return based on the calendar year. 1049ez She does not elect a section 179 deduction and elected not to claim any special depreciation allowance for the car. 1049ez Under MACRS, a car is 5-year property. 1049ez 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. 1049ez Virginia multiplies the $14,500 unadjusted basis of her car by 0. 1049ez 20 to get her MACRS depreciation of $2,900 for 2013. 1049ez This $2,900 is below the maximum depreciation deduction of $3,160 for passenger automobiles placed in service in 2013. 1049ez She can deduct the full $2,900. 1049ez Electric Vehicles The maximum depreciation deductions for passenger automobiles that are produced to run primarily on electricity are higher than those for other automobiles. 1049ez The maximum deduction amounts for electric vehicles placed in service after August 5, 1997, and before January 1, 2007, are shown in the following table. 1049ez Owners of electric vehicles placed in service after December 31, 2006, should use the table of maximum deduction amounts later for electric vehicles classified as passenger automobiles or use the table of maximum deduction amounts for trucks and vans later, for electric vehicles classified as trucks and vans. 1049ez Maximum Depreciation Deduction For Electric Vehicles Date       4th & Placed 1st 2nd 3rd Later In Service Year Year Year Years 2006 $8,980 $14,400 $8,650 $5,225 2005 8,880 14,200 8,450 5,125 2004 31,8301 14,300 8,550 5,125 5/06/2003– 12/31/2003 32,0302 14,600 8,750 5,225 1/01/2003– 5/05/2003 22,8803 14,600 8,750 5,225 1If you elected not to claim any special depreciation allowance for the vehicle or the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $8,880. 1049ez 2If you acquired the vehicle before 5/06/03, the maximum deduction is $22,880. 1049ez 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. 1049ez 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. 1049ez Trucks and Vans The maximum depreciation deductions for trucks and vans placed in service after 2002 are higher than those for other passenger automobiles. 1049ez The maximum deduction amounts for trucks and vans are shown in the following table. 1049ez Maximum Depreciation Deduction For Trucks and Vans Date       4th & Placed 1st 2nd 3rd Later In Service Year Year Year Years 2013 $11,3601 $5,400 $3,250 $1,975 2012 11,3601 5,300 3,150 1,875 2011 11,2602 5,200 3,150 1,875 2010 11,1603 5,100 3,050 1,875 2009 11,0604 4,900 2,950 1,775 2008 11,1605 5,100 3,050 1,875 2007 3,260 5,200 3,050 1,875 2006 3,260 5,200 3,150 1,875 2005 3,260 5,200 3,150 1,875 2004 10,9106 5,300 3,150 1,875 5/06/2003– 12/31/2003 11,0107 5,400 3,250 1,975 1/01/2003– 5/05/2003 7,9608 5,400 3,250 1,975 1 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,360. 1049ez 2 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,260. 1049ez 3 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,160. 1049ez 4 If you elect not to claim any special depreciation allowance for the vehicle or the vehicle is not qualified property, the maximum deduction is $3,060. 1049ez 5If you elected not to claim any special depreciation allowance for the vehicle or the vehicle is not qualified property, the maximum deduction is $3,160. 1049ez 6If 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, or the maximum deduction is $3,260. 1049ez 7 If you acquired the vehicle before 5/06/03, the maximum deduction is $7,960. 1049ez 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. 1049ez 8 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. 1049ez Depreciation Worksheet for Passenger Automobiles You can use the following worksheet to figure your depreciation deduction using the percentage tables. 1049ez Then use the information from this worksheet to prepare Form 4562. 1049ez Depreciation Worksheet for Passenger Automobiles   Part I   1. 1049ez MACRS system (GDS or ADS)     2. 1049ez Property class     3. 1049ez Date placed in service     4. 1049ez Recovery period     5. 1049ez Method and convention     6. 1049ez Depreciation rate (from tables)     7. 1049ez Maximum depreciation deduction for this year from the appropriate table       8. 1049ez Business/investment-use percentage       9. 1049ez Multiply line 7 by line 8. 1049ez This is your adjusted maximum depreciation deduction       10. 1049ez Section 179 deduction claimed this year (not more than line 9). 1049ez Enter -0- if this is not the year you placed the car in service. 1049ez         Note. 1049ez  1) If line 10 is equal to line 9, stop here. 1049ez Your combined section 179 and depreciation deduction (including your special depreciation allowance) is limited to the amount on line 9. 1049ez  2) If line 10 is less than line 9, complete Part II. 1049ez   Part II   11. 1049ez Subtract line 10 from line 9. 1049ez This is the limit on the amount you can deduct for depreciation (including any special depreciation allowance )       12. 1049ez Cost or other basis (reduced by any alternative motor vehicle credit 1or credit for electric vehicles 2)       13. 1049ez Multiply line 12 by line 8. 1049ez This is your business/investment cost       14. 1049ez Section 179 deduction claimed in the year you placed the car in service       15. 1049ez Subtract line 14 from line 13. 1049ez This is your tentative basis for depreciation       16. 1049ez Multiply line 15 by . 1049ez 50 if the 50% special depreciation allowance applies. 1049ez This is your special depreciation allowance. 1049ez Enter -0- if this is not the year you placed the car in service, the car is not qualified property, or you elected not to claim a special depreciation allowance       Note 1) If line 16 is equal to line 11, stop here. 1049ez Your depreciation deduction (including your special depreciation allowance) is limited to the amount on line 11. 1049ez  2) If line 16 is less than line 11, complete Part III. 1049ez   Part III   17. 1049ez Subtract line 16 from 11. 1049ez This is the limit on the amount you can deduct for MACRS depreciation       18. 1049ez Subtract line 16 from line 15. 1049ez This is your basis for depreciation. 1049ez       19. 1049ez Multiply line 18 by line 6. 1049ez This is your tentative MACRS depreciation deduction. 1049ez       20. 1049ez Enter the lesser of line 17 or line 19. 1049ez This is your MACRS depreciation deduction. 1049ez     1 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. 1049ez 2 Reduce 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. 1049ez             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. 1049ez If you continue to use the automobile for business, you can deduct that unrecovered basis after the recovery period ends. 1049ez You can claim a depreciation deduction in each succeeding tax year until you recover your full basis in the car. 1049ez 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. 1049ez See Maximum Depreciation Deduction , earlier. 1049ez 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. 1049ez You cannot claim a depreciation deduction for listed property other than passenger automobiles after the recovery period ends. 1049ez 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. 1049ez Example. 1049ez In May 2007, you bought and placed in service a car costing $31,500. 1049ez The car was 5-year property under GDS (MACRS). 1049ez You did not elect a section 179 deduction and elected not to claim any special depreciation allowance for the car. 1049ez You used the car exclusively for business during the recovery period (2007 through 2012). 1049ez You figured your depreciation as shown below. 1049ez Year Percentage Amount Limit   Allowed 2007 20. 1049ez 0% $6,300 $2,960   $2,960 2008 32. 1049ez 0 10,080 4,800   4,800 2009 19. 1049ez 2 6,048 2,850   2,850 2010 11. 1049ez 52 3,629 1,675   1,675 2011 11. 1049ez 52 3,629 1,675   1,675 2012 5. 1049ez 76 1,814 1,675   1,675 Total   $15,635 At the end of 2012, you had an unrecovered basis of $15,865 ($31,500 − $15,635). 1049ez If in 2013 and later years you continue to use the car 100% for business, you can deduct each year the lesser of $1,675 or your remaining unrecovered basis. 1049ez 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. 1049ez 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%. 1049ez For example, if you had used your car 60% for business instead of 100%, your allowable depreciation deductions would have been $9,519 ($15,865 × 60%), but you still would have to reduce your basis by $15,865 to determine your unrecovered basis. 1049ez 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. 1049ez 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. 1049ez This excess basis is the additional cash paid for the new automobile in the trade-in. 1049ez The depreciation figured for the two components of the basis (carryover basis and excess basis) is subject to a single passenger automobile limit. 1049ez Special rules apply in determining the passenger automobile limits. 1049ez These rules and examples are discussed in section 1. 1049ez 168(i)-6(d)(3) of the regulations. 1049ez 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. 1049ez 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. 1049ez 168(i)-6(i) and 1. 1049ez 168(i)-6(j) of the regulations. 1049ez What Records Must Be Kept? 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. 1049ez For listed property, you must keep records for as long as any recapture can still occur. 1049ez Recapture can occur in any tax year of the recovery period. 1049ez Adequate 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. 1049ez You do not have to record information in an account book, diary, or similar record if the information is already shown on the receipt. 1049ez However, your records should back up your receipts in an orderly manner. 1049ez Elements of expenditure or use. 1049ez   Your records or other documentary evidence must support all the following. 1049ez 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. 1049ez 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. 1049ez The date of the expenditure or use. 1049ez The business or investment purpose for the expenditure or use. 1049ez   Written documents of your expenditure or use are generally better evidence than oral statements alone. 1049ez You do not have to keep a daily log. 1049ez 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. 1049ez Timeliness. 1049ez   You must record the elements of an expenditure or use at the time you have full knowledge of the elements. 1049ez 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. 1049ez   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. 1049ez Business purpose supported. 1049ez   Generally, an adequate record of business purpose must be in the form of a written statement. 1049ez However, the amount of detail necessary to establish a business purpose depends on the facts and circumstances of each case. 1049ez A written explanation of the business purpose will not be required if the purpose can be determined from the surrounding facts and circumstances. 1049ez 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. 1049ez Business use supported. 1049ez   An adequate record contains enough information on each element of every business or investment use. 1049ez The amount of detail required to support the use depends on the facts and circumstances. 1049ez 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. 1049ez   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. 1049ez Separate or combined expenditures or uses. 1049ez   Each use by you normally is considered a separate use. 1049ez However, you can combine repeated uses as a single item. 1049ez   Record each expenditure as a separate item. 1049ez Do not combine it with other expenditures. 1049ez 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. 1049ez If you combine these expenses, you do not need to support the business purpose of each expense. 1049ez Instead, you can divide the expenses based on the total business use of the listed property. 1049ez   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. 1049ez 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. 1049ez 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. 1049ez Minimal personal use (such as a stop for lunch between two business stops) is not an interruption of business use. 1049ez Confidential information. 1049ez   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. 1049ez You must keep it elsewhere and make it available as support to the IRS director for your area on request. 1049ez Substantial compliance. 1049ez   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. 1049ez   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. 1049ez By your own oral or written statement containing detailed information as to the element. 1049ez By other evidence sufficient to establish the element. 1049ez   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. 1049ez If the element is the business purpose of an expenditure, its supporting evidence can be circumstantial evidence. 1049ez Sampling. 1049ez   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. 1049ez Example 1. 1049ez Denise Williams, a sole proprietor and calendar year taxpayer, operates an interior decorating business out of her home. 1049ez 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. 1049ez There is no other business use of the automobile, but she and family members also use it for personal purposes. 1049ez She maintains adequate records for the first 3 months of the year showing that 75% of the automobile use was for business. 1049ez Subcontractor invoices and paid bills show that her business continued at approximately the same rate for the rest of the year. 1049ez 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. 1049ez Example 2. 1049ez 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. 1049ez 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. 1049ez The determination that her business/investment use of the automobile for the tax year is 75% rests on sufficient supporting evidence. 1049ez Example 3. 1049ez Bill Baker, a sole proprietor and calendar year taxpayer, is a salesman in a large metropolitan area for a company that manufactures household products. 1049ez For the first 3 weeks of each month, he occasionally uses his own automobile for business travel within the metropolitan area. 1049ez During these weeks, his business use of the automobile does not follow a consistent pattern. 1049ez During the fourth week of each month, he delivers all business orders taken during the previous month. 1049ez The business use of his automobile, as supported by adequate records, is 70% of its total use during that fourth week. 1049ez 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. 1049ez Loss of records. 1049ez   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. 1049ez How Is Listed Property Information Reported? 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. 1049ez Any deduction for a vehicle. 1049ez A depreciation deduction for any other listed property. 1049ez If you claim any deduction for a vehicle, you also must provide the information requested in Section B. 1049ez If you provide the vehicle for your employee's use, the employee must give you this information. 1049ez 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. 1049ez Vehicles used by your employees. 1049ez   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. 1049ez You maintain a written policy statement that prohibits one of the following uses of the vehicles. 1049ez All personal use including commuting. 1049ez Personal use, other than commuting, by employees who are not officers, directors, or 1%-or-more owners. 1049ez You treat all use of the vehicles by your employees as personal use. 1049ez 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. 1049ez 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. 1049ez Exceptions. 1049ez   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. 1049ez 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. 1049ez Prev  Up  Next   Home   More Online Publications