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File 2006 Federal Taxes Free

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File 2006 Federal Taxes Free

File 2006 federal taxes free Publication 514 - Main Content Table of Contents Choosing To Take Credit or DeductionChoice Applies to All Qualified Foreign Taxes Making or Changing Your Choice Why Choose the Credit?Credit for Taxes Paid or Accrued Foreign Currency and Exchange Rates Foreign Tax Redetermination Who Can Take the Credit?U. File 2006 federal taxes free S. File 2006 federal taxes free Citizens Resident Aliens Nonresident Aliens What Foreign Taxes Qualify for the Credit?Tax Must Be Imposed on You You Must Have Paid or Accrued the Tax Tax Must Be the Legal and Actual Foreign Tax Liability Tax Must Be an Income Tax (or Tax in Lieu of Income Tax) Foreign Taxes for Which You Cannot Take a CreditTaxes on Excluded Income Taxes for Which You Can Only Take an Itemized Deduction Taxes on Foreign Mineral Income Taxes From International Boycott Operations Taxes on Combined Foreign Oil and Gas Income Taxes of U. File 2006 federal taxes free S. File 2006 federal taxes free Persons Controlling Foreign Corporations and Partnerships Taxes Related to a Foreign Tax Credit Splitting Event How To Figure the CreditLimit on the Credit Separate Limit Income Allocation of Foreign Taxes Foreign Taxes From a Partnership or an S Corporation Figuring the Limit Qualified Dividends Capital Gains and Losses Allocation of Foreign and U. File 2006 federal taxes free S. File 2006 federal taxes free Losses Tax Treaties Carryback and CarryoverTime Limit on Tax Assessment Claim for Refund Taxes All Credited or All Deducted Married Couples How To Claim the CreditForm 1116 Records To Keep Simple Example — Filled-In Form 1116Part I—Taxable Income or Loss From Sources Outside the United States (for Category Checked Above) Part II—Foreign Taxes Paid or Accrued Part III—Figuring the Credit Part IV—Summary of Credits From Separate Parts III Comprehensive Example — Filled-In Form 1116Foreign earned income. File 2006 federal taxes free Employee business expenses. File 2006 federal taxes free Forms 1116 Computation of Taxable Income Part I—Taxable Income or Loss From Sources Outside the United States (for Category Checked Above) Part II—Foreign Taxes Paid or Accrued Part III—Figuring the Credit Part IV—Summary of Credits From Separate Parts III Unused Foreign Taxes How To Get Tax HelpLow Income Taxpayer Clinics Choosing To Take Credit or Deduction You can choose whether to take the amount of any qualified foreign taxes paid or accrued during the year as a foreign tax credit or as an itemized deduction. File 2006 federal taxes free You can change your choice for each year's taxes. File 2006 federal taxes free To choose the foreign tax credit, in most cases you must complete Form 1116 and attach it to your U. File 2006 federal taxes free S. File 2006 federal taxes free tax return. File 2006 federal taxes free However, you may qualify for the exception that allows you to claim the foreign tax credit without using Form 1116. File 2006 federal taxes free See How To Figure the Credit , later. File 2006 federal taxes free To choose to claim the taxes as an itemized deduction, use Schedule A (Form 1040), Itemized Deductions. File 2006 federal taxes free Figure your tax both ways—claiming the credit and claiming the deduction. File 2006 federal taxes free Then fill out your return the way that benefits you more. File 2006 federal taxes free See Why Choose the Credit, later. File 2006 federal taxes free Choice Applies to All Qualified Foreign Taxes As a general rule, you must choose to take either a credit or a deduction for all qualified foreign taxes. File 2006 federal taxes free If you choose to take a credit for qualified foreign taxes, you must take the credit for all of them. File 2006 federal taxes free You cannot deduct any of them. File 2006 federal taxes free Conversely, if you choose to deduct qualified foreign taxes, you must deduct all of them. File 2006 federal taxes free You cannot take a credit for any of them. File 2006 federal taxes free See What Foreign Taxes Qualify for the Credit , later, for the meaning of qualified foreign taxes. File 2006 federal taxes free There are exceptions to this general rule, which are described next. File 2006 federal taxes free Exceptions for foreign taxes not allowed as a credit. File 2006 federal taxes free   Even if you claim a credit for other foreign taxes, you can deduct any foreign tax that is not allowed as a credit if: You paid the tax to a country for which a credit is not allowed because it provides support for acts of international terrorism, or because the United States does not have or does not conduct diplomatic relations with it or recognize its government and that government is not otherwise eligible to purchase defense articles or services under the Arms Export Control Act, You paid withholding tax on dividends from foreign corporations whose stock you did not hold for the required period of time, You paid withholding tax on income or gain (other than dividends) from property you did not hold for the required period of time, You paid withholding tax on income or gain to the extent you had to make related payments on positions in substantially similar or related property, You participated in or cooperated with an international boycott, You paid taxes in connection with the purchase or sale of oil or gas, or You paid or accrued taxes on income or gain in connection with a covered asset acquisition. File 2006 federal taxes free Covered asset acquisitions include certain acquisitions that result in a stepped-up basis for U. File 2006 federal taxes free S. File 2006 federal taxes free tax purposes. File 2006 federal taxes free For more information, see Internal Revenue Code section 901(m). File 2006 federal taxes free The IRS intends to issue guidance that will explain this provision in greater detail. File 2006 federal taxes free   For more information on these items, see Taxes for Which You Can Only Take an Itemized Deduction , later, under Foreign Taxes for Which You Cannot Take a Credit. File 2006 federal taxes free Foreign taxes that are not income taxes. File 2006 federal taxes free   In most cases, only foreign income taxes qualify for the foreign tax credit. File 2006 federal taxes free Other taxes, such as foreign real and personal property taxes, do not qualify. File 2006 federal taxes free But you may be able to deduct these other taxes even if you claim the foreign tax credit for foreign income taxes. File 2006 federal taxes free   In most cases, you can deduct these other taxes only if they are expenses incurred in a trade or business or in the production of income. File 2006 federal taxes free However, you can deduct foreign real property taxes that are not trade or business expenses as an itemized deduction on Schedule A (Form 1040). File 2006 federal taxes free Carrybacks and carryovers. File 2006 federal taxes free   There is a limit on the credit you can claim in a tax year. File 2006 federal taxes free If your qualified foreign taxes exceed the credit limit, you may be able to carry over or carry back the excess to another tax year. File 2006 federal taxes free If you deduct qualified foreign taxes in a tax year, you cannot use a carryback or carryover in that year. File 2006 federal taxes free That is because you cannot take both a deduction and a credit for qualified foreign taxes in the same tax year. File 2006 federal taxes free   For more information on the limit, see How To Figure the Credit , later. File 2006 federal taxes free For more information on carrybacks and carryovers, see Carryback and Carryover , later. File 2006 federal taxes free Making or Changing Your Choice You can make or change your choice to claim a deduction or credit at any time during the period within 10 years from the regular due date for filing the return (without regard to any extension of time to file) for the tax year in which the taxes were actually paid or accrued. File 2006 federal taxes free You make or change your choice on your tax return (or on an amended return) for the year your choice is to be effective. File 2006 federal taxes free Example. File 2006 federal taxes free You paid foreign taxes for the last 13 years and chose to deduct them on your U. File 2006 federal taxes free S. File 2006 federal taxes free income tax returns. File 2006 federal taxes free You were timely in both filing your returns and paying your U. File 2006 federal taxes free S. File 2006 federal taxes free tax liability. File 2006 federal taxes free In February 2013, you file an amended return for tax year 2002 choosing to take a credit for your 2002 foreign taxes because you now realize that the credit is more advantageous than the deduction for that year. File 2006 federal taxes free Because the regular due date of your 2002 return was April 15, 2003, this choice is timely (within 10 years). File 2006 federal taxes free Because there is a limit on the credit for your 2002 foreign tax, you have unused 2002 foreign taxes. File 2006 federal taxes free Ordinarily, you first carry back unused foreign taxes arising in 2002 to, and claim them as a credit in, the 2 preceding tax years. File 2006 federal taxes free If you are unable to claim all of them in those 2 years, you carry them forward to the 10 years following the year in which they arose. File 2006 federal taxes free Because you originally chose to deduct your foreign taxes and the 10-year period for changing the choice for 2000 and 2001 has passed, you cannot change your choice and carry the unused 2002 foreign taxes back to tax years 2000 and 2001. File 2006 federal taxes free Because the 10-year periods for changing the choice have not passed for your 2003 through 2012 income tax returns, you can still choose to claim the credit for those years and carry forward any unused 2002 foreign taxes. File 2006 federal taxes free However, you must reduce the unused 2002 foreign taxes that you carry forward by the amount that would have been allowed as a carryback if you had timely carried back the foreign tax to tax years 2000 and 2001. File 2006 federal taxes free You cannot take a credit or a deduction for foreign taxes paid on income you exclude under the foreign earned income exclusion or the foreign housing exclusion. File 2006 federal taxes free See Foreign Earned Income and Housing Exclusions under Foreign Taxes for Which You Cannot Take a Credit, later. File 2006 federal taxes free Why Choose the Credit? The foreign tax credit is intended to relieve you of a double tax burden when your foreign source income is taxed by both the United States and the foreign country. File 2006 federal taxes free In most cases, if the foreign tax rate is higher than the U. File 2006 federal taxes free S. File 2006 federal taxes free rate, there will be no U. File 2006 federal taxes free S. File 2006 federal taxes free tax on the foreign income. File 2006 federal taxes free If the foreign tax rate is lower than the U. File 2006 federal taxes free S. File 2006 federal taxes free rate, U. File 2006 federal taxes free S. File 2006 federal taxes free tax on the foreign income will be limited to the difference between the rates. File 2006 federal taxes free The foreign tax credit can only reduce U. File 2006 federal taxes free S. File 2006 federal taxes free taxes on foreign source income; it cannot reduce U. File 2006 federal taxes free S. File 2006 federal taxes free taxes on U. File 2006 federal taxes free S. File 2006 federal taxes free source income. File 2006 federal taxes free Although no one rule covers all situations, in most cases it is better to take a credit for qualified foreign taxes than to deduct them as an itemized deduction. File 2006 federal taxes free This is because: A credit reduces your actual U. File 2006 federal taxes free S. File 2006 federal taxes free income tax on a dollar-for-dollar basis, while a deduction reduces only your income subject to tax, You can choose to take the foreign tax credit even if you do not itemize your deductions. File 2006 federal taxes free You then are allowed the standard deduction in addition to the credit, and If you choose to take the foreign tax credit, and the taxes paid or accrued exceed the credit limit for the tax year, you may be able to carry over or carry back the excess to another tax year. File 2006 federal taxes free (See Limit on credit under How To Figure the Credit, later. File 2006 federal taxes free ) Example 1. File 2006 federal taxes free For 2013, you and your spouse have adjusted gross income of $80,300, including $20,000 of dividend income from foreign sources. File 2006 federal taxes free None of the dividends are qualified dividends. File 2006 federal taxes free You file a joint return and can claim two $3,900 exemptions. File 2006 federal taxes free You had to pay $2,000 in foreign income taxes on the dividend income. File 2006 federal taxes free If you take the foreign taxes as an itemized deduction, your total itemized deductions are $15,000. File 2006 federal taxes free Your taxable income then is $57,500 and your tax is $7,736. File 2006 federal taxes free If you take the credit instead, your itemized deductions are only $13,000. File 2006 federal taxes free Your taxable income then is $59,500 and your tax before the credit is $8,036. File 2006 federal taxes free After the credit, however, your tax is only $6,036. File 2006 federal taxes free Therefore, your tax is $1,700 lower ($7,736 − $6,036) by taking the credit. File 2006 federal taxes free Example 2. File 2006 federal taxes free In 2013, you receive investment income of $5,000 from a foreign country, which imposes a tax of $1,500 on that income. File 2006 federal taxes free You report on your U. File 2006 federal taxes free S. File 2006 federal taxes free return this income as well as $56,000 of U. File 2006 federal taxes free S. File 2006 federal taxes free source wages and an allowable $49,000 partnership loss from a U. File 2006 federal taxes free S. File 2006 federal taxes free partnership. File 2006 federal taxes free Your share of the partnership's gross income is $25,000 and your share of its expenses is $74,000. File 2006 federal taxes free You are single, entitled to one $3,900 exemption, and have other itemized deductions of $6,850. File 2006 federal taxes free If you deduct the foreign tax on your U. File 2006 federal taxes free S. File 2006 federal taxes free return, your taxable income is a negative $250 ($5,000 + $56,000 − $49,000 − $1,500 − $6,850 − $3,900) and your tax is $0. File 2006 federal taxes free If you take the credit instead, your taxable income is $1,250 ($5,000 + $56,000 − $49,000 − $3,900 − $6,850) and your tax before the credit is $126. File 2006 federal taxes free You can take a credit of only $113 because of limits discussed later. File 2006 federal taxes free Your tax after the credit is $13 ($126 − $113), which is $13 more than if you deduct the foreign tax. File 2006 federal taxes free If you choose the credit, you will have unused foreign taxes of $1,387 ($1,500 − $113). File 2006 federal taxes free When deciding whether to take the credit or the deduction this year, you will need to consider whether you can benefit from a carryback or carryover of that unused foreign tax. File 2006 federal taxes free Credit for Taxes Paid or Accrued You can claim the credit for a qualified foreign tax in the tax year in which you pay it or accrue it, depending on your method of accounting. File 2006 federal taxes free “Tax year” refers to the tax year for which your U. File 2006 federal taxes free S. File 2006 federal taxes free return is filed, not the tax year for which your foreign return is filed. File 2006 federal taxes free Accrual method of accounting. File 2006 federal taxes free   If you use an accrual method of accounting, you can claim the credit only in the year in which you accrue the tax. File 2006 federal taxes free You are using an accrual method of accounting if you report income when you earn it, rather than when you receive it, and you deduct your expenses when you incur them, rather than when you pay them. File 2006 federal taxes free   In most cases, foreign taxes accrue when all the events have taken place that fix the amount of the tax and your liability to pay it. File 2006 federal taxes free Generally, this occurs on the last day of the tax year for which your foreign return is filed. File 2006 federal taxes free Contesting your foreign tax liability. File 2006 federal taxes free   If you are contesting your foreign tax liability, you cannot accrue it and take a credit until the amount of foreign tax due is finally determined. File 2006 federal taxes free However, if you choose to pay the tax liability you are contesting, you can take a credit for the amount you pay before a final determination of foreign tax liability is made. File 2006 federal taxes free Once your liability is determined, the foreign tax credit is allowable for the year to which the foreign tax relates. File 2006 federal taxes free If the amount of foreign taxes taken as a credit differs from the final foreign tax liability, you may have to adjust the credit, as discussed later under Foreign Tax Redetermination . File 2006 federal taxes free You may have to post a bond. File 2006 federal taxes free   If you claim a credit for taxes accrued but not paid, you may have to post an income tax bond to guarantee your payment of any tax due in the event the amount of foreign tax paid differs from the amount claimed. File 2006 federal taxes free   The IRS can request this bond at any time without regard to the Time Limit on Tax Assessment discussed later under Carryback and Carryover. File 2006 federal taxes free Cash method of accounting. File 2006 federal taxes free   If you use the cash method of accounting, you can choose to take the credit either in the year you pay the tax or in the year you accrue it. File 2006 federal taxes free You are using the cash method of accounting if you report income in the year you actually or constructively receive it, and deduct expenses in the year you pay them. File 2006 federal taxes free Choosing to take credit in the year taxes accrue. File 2006 federal taxes free   Even if you use the cash method of accounting, you can choose to take a credit for foreign taxes in the year they accrue. File 2006 federal taxes free You make the choice by checking the box in Part II of Form 1116. File 2006 federal taxes free Once you make that choice, you must follow it in all later years and take a credit for foreign taxes in the year they accrue. File 2006 federal taxes free   In addition, the choice to take the credit when foreign taxes accrue applies to all foreign taxes qualifying for the credit. File 2006 federal taxes free You cannot take a credit for some foreign taxes when paid and take a credit for others when accrued. File 2006 federal taxes free   If you make the choice to take the credit when foreign taxes accrue and pay them in a later year, you cannot claim a deduction for any part of the previously accrued taxes. File 2006 federal taxes free Credit based on taxes paid in earlier year. File 2006 federal taxes free   If, in earlier years, you took the credit based on taxes paid, and this year you choose to take the credit based on taxes accrued, you may be able to take the credit this year for taxes from more than one year. File 2006 federal taxes free Example. File 2006 federal taxes free Last year you took the credit based on taxes paid. File 2006 federal taxes free This year you chose to take the credit based on taxes accrued. File 2006 federal taxes free During the year you paid foreign income taxes owed for last year. File 2006 federal taxes free You also accrued foreign income taxes for this year that you did not pay by the end of the year. File 2006 federal taxes free You can base the credit on your return for this year on both last year's taxes that you paid and this year's taxes that you accrued. File 2006 federal taxes free Foreign Currency and Exchange Rates U. File 2006 federal taxes free S. File 2006 federal taxes free income tax is imposed on income expressed in U. File 2006 federal taxes free S. File 2006 federal taxes free dollars, while in most cases the foreign tax is imposed on income expressed in foreign currency. File 2006 federal taxes free Therefore, fluctuations in the value of the foreign currency relative to the U. File 2006 federal taxes free S. File 2006 federal taxes free dollar may affect the foreign tax credit. File 2006 federal taxes free Translating foreign currency into U. File 2006 federal taxes free S. File 2006 federal taxes free dollars. File 2006 federal taxes free   If you receive all or part of your income or pay some or all of your expenses in foreign currency, you must translate the foreign currency into U. File 2006 federal taxes free S. File 2006 federal taxes free dollars. File 2006 federal taxes free How and when you do this depends on your functional currency. File 2006 federal taxes free In most cases, your functional currency is the U. File 2006 federal taxes free S. File 2006 federal taxes free dollar unless you are required to use the currency of a foreign country. File 2006 federal taxes free   You must make all federal income tax determinations in your functional currency. File 2006 federal taxes free The U. File 2006 federal taxes free S. File 2006 federal taxes free dollar is the functional currency for all taxpayers except some qualified business units. File 2006 federal taxes free A qualified business unit is a separate and clearly identified unit of a trade or business that maintains separate books and records. File 2006 federal taxes free Unless you are self-employed, your functional currency is the U. File 2006 federal taxes free S. File 2006 federal taxes free dollar. File 2006 federal taxes free   Even if you are self-employed and have a qualified business unit, your functional currency is the U. File 2006 federal taxes free S. File 2006 federal taxes free dollar if any of the following apply. File 2006 federal taxes free You conduct the business primarily in dollars. File 2006 federal taxes free The principal place of business is located in the United States. File 2006 federal taxes free You choose to or are required to use the dollar as your functional currency. File 2006 federal taxes free The business books and records are not kept in the currency of the economic environment in which a significant part of the business activities is conducted. File 2006 federal taxes free   If your functional currency is the U. File 2006 federal taxes free S. File 2006 federal taxes free dollar, you must immediately translate into dollars all items of income, expense, etc. File 2006 federal taxes free , that you receive, pay, or accrue in a foreign currency and that will affect computation of your income tax. File 2006 federal taxes free If there is more than one exchange rate, use the one that most properly reflects your income. File 2006 federal taxes free In most cases, you can get exchange rates from banks and U. File 2006 federal taxes free S. File 2006 federal taxes free Embassies. File 2006 federal taxes free   If your functional currency is not the U. File 2006 federal taxes free S. File 2006 federal taxes free dollar, make all income tax determinations in your functional currency. File 2006 federal taxes free At the end of the year, translate the results, such as income or loss, into U. File 2006 federal taxes free S. File 2006 federal taxes free dollars to report on your income tax return. File 2006 federal taxes free    For more information, write to: Internal Revenue Service International Section Philadelphia, PA 19255-0725 Rate of exchange for foreign taxes paid. File 2006 federal taxes free   Use the rate of exchange in effect on the date you paid the foreign taxes to the foreign country unless you meet the exception discussed next. File 2006 federal taxes free If your tax was withheld in foreign currency, use the rate of exchange in effect for the date on which the tax was withheld. File 2006 federal taxes free If you make foreign estimated tax payments, you use the rate of exchange in effect for the date on which you made the estimated tax payment. File 2006 federal taxes free   The exchange rate rules discussed here apply even if the foreign taxes are paid or accrued with respect to a foreign tax credit splitting event (discussed later). File 2006 federal taxes free Exception. File 2006 federal taxes free   If you claim the credit for foreign taxes on an accrual basis, in most cases you must use the average exchange rate for the tax year to which the taxes relate. File 2006 federal taxes free This rule applies to accrued taxes relating to tax years beginning after 1997 and only under the following conditions. File 2006 federal taxes free The foreign taxes are paid on or after the first day of the tax year to which they relate. File 2006 federal taxes free The foreign taxes are paid not later than 2 years after the close of the tax year to which they relate. File 2006 federal taxes free The foreign tax liability is not denominated in an inflationary currency (defined in the Form 1116 instructions). File 2006 federal taxes free (This condition applies to taxes paid or accrued in tax years beginning after November 6, 2007. File 2006 federal taxes free )   For all other foreign taxes, you should use the exchange rate in effect on the date you paid them. File 2006 federal taxes free Election to use exchange rate on date paid. File 2006 federal taxes free   If you have accrued foreign taxes that you are otherwise required to convert using the average exchange rate, you may elect to use the exchange rate in effect on the date the foreign taxes are paid if the taxes are denominated in a nonfunctional foreign currency. File 2006 federal taxes free If any of the accrued taxes are unpaid, you must translate them into U. File 2006 federal taxes free S. File 2006 federal taxes free dollars using the exchange rate on the last day of the U. File 2006 federal taxes free S. File 2006 federal taxes free tax year to which those taxes relate. File 2006 federal taxes free You may make the election for all nonfunctional currency foreign income taxes or only those nonfunctional currency foreign income taxes that are attributable to qualified business units with a U. File 2006 federal taxes free S. File 2006 federal taxes free dollar functional currency. File 2006 federal taxes free Once made, the election applies to the tax year for which made and all subsequent tax years unless revoked with the consent of the IRS. File 2006 federal taxes free The election is available for tax years beginning after 2004. File 2006 federal taxes free It must be made by the due date (including extensions) for filing the tax return for the first tax year to which the election applies. File 2006 federal taxes free Make the election by attaching a statement to the applicable tax return. File 2006 federal taxes free The statement must identify whether the election is made for all foreign taxes or only for foreign taxes attributable to qualified business units with a U. File 2006 federal taxes free S. File 2006 federal taxes free dollar functional currency. File 2006 federal taxes free Foreign Tax Redetermination A foreign tax redetermination is any change in your foreign tax liability that may affect your U. File 2006 federal taxes free S. File 2006 federal taxes free foreign tax credit claimed. File 2006 federal taxes free The year in which to claim the credit remains the year to which the foreign taxes paid or accrued relate, even if the change in foreign tax liability occurs in a later year. File 2006 federal taxes free If a foreign tax redetermination occurs, a redetermination of your U. File 2006 federal taxes free S. File 2006 federal taxes free tax liability is required if any of the following conditions apply. File 2006 federal taxes free The accrued taxes when paid differ from the amounts claimed as a credit. File 2006 federal taxes free The accrued taxes you claimed as a credit in one tax year are not paid within 2 years after the end of that tax year. File 2006 federal taxes free If this applies to you, you must reduce the credit previously claimed by the amount of the unpaid taxes. File 2006 federal taxes free You will not be allowed a credit for the unpaid taxes until you pay them. File 2006 federal taxes free When you pay the accrued taxes, a new foreign tax redetermination occurs and you must translate the taxes into U. File 2006 federal taxes free S. File 2006 federal taxes free dollars using the exchange rate as of the date they were paid. File 2006 federal taxes free The foreign tax credit is allowed for the year to which the foreign tax relates. File 2006 federal taxes free See Rate of exchange for foreign taxes paid , earlier, under Foreign Currency and Exchange Rates. File 2006 federal taxes free The foreign taxes you paid are refunded in whole or in part. File 2006 federal taxes free For taxes taken into account when accrued but translated into dollars on the date of payment, the dollar value of the accrued tax differs from the dollar value of the tax paid because of fluctuations in the exchange rate between the date of accrual and the date of payment. File 2006 federal taxes free However, no redetermination is required if the change in foreign tax liability for each foreign country is solely attributable to exchange rate fluctuations and is less than the smaller of: $10,000, or 2% of the total dollar amount of the foreign tax initially accrued for that foreign country for the U. File 2006 federal taxes free S. File 2006 federal taxes free tax year. File 2006 federal taxes free In this case, you must adjust your U. File 2006 federal taxes free S. File 2006 federal taxes free tax in the tax year in which the accrued foreign taxes are paid. File 2006 federal taxes free Notice to the Internal Revenue Service (IRS) of Redetermination You are required to notify the IRS about a foreign tax credit redetermination that affects your U. File 2006 federal taxes free S. File 2006 federal taxes free tax liability for each tax year affected by the redetermination. File 2006 federal taxes free In most cases, you must file Form 1040X, Amended U. File 2006 federal taxes free S. File 2006 federal taxes free Individual Income Tax Return, with a revised Form 1116 and a statement that contains information sufficient for the IRS to redetermine your U. File 2006 federal taxes free S. File 2006 federal taxes free tax liability for the year or years affected. File 2006 federal taxes free See Contents of statement , later. File 2006 federal taxes free You are not required to attach Form 1116 for a tax year affected by a redetermination if: The amount of your creditable taxes paid or accrued during the tax year is not more than $300 ($600 if married filing a joint return) as a result of the foreign tax redetermination, and You meet the requirements listed under Exemption from foreign tax credit limit under How To Figure the Credit, later. File 2006 federal taxes free There are other exceptions to this requirement. File 2006 federal taxes free They are discussed later under Due date of notification to IRS . File 2006 federal taxes free Contents of statement. File 2006 federal taxes free   The statement must include all of the following. File 2006 federal taxes free Your name, address, and taxpayer identification number. File 2006 federal taxes free The tax year or years that are affected by the foreign tax redetermination. File 2006 federal taxes free The date or dates the foreign taxes were accrued, if applicable. File 2006 federal taxes free The date or dates the foreign taxes were paid. File 2006 federal taxes free The amount of foreign taxes paid or accrued on each date (in foreign currency) and the exchange rate used to translate each amount. File 2006 federal taxes free Information sufficient to determine any interest due from or owing to you, including the amount of any interest paid to you by the foreign government and the dates received. File 2006 federal taxes free   In the case of any foreign taxes that were not paid before the date two years after the close of the tax year to which those taxes relate, you must provide the amount of those taxes in foreign currency and the exchange rate that was used to translate that amount when originally claimed as a credit. File 2006 federal taxes free   If any foreign tax was refunded in whole or in part, you must provide the date and amount (in foreign currency) of each refund, the exchange rate that was used to translate each amount when originally claimed as a credit, and the exchange rate for the date the refund was received (for purposes of computing foreign currency gain or loss under Internal Revenue Code section 988). File 2006 federal taxes free Due date of notification to IRS. File 2006 federal taxes free   If you pay less foreign tax than you originally claimed a credit for, in most cases you must file a notification by the due date (with extensions) of your original return for your tax year in which the foreign tax redetermination occurred. File 2006 federal taxes free There is no limit on the time the IRS has to redetermine and assess the correct U. File 2006 federal taxes free S. File 2006 federal taxes free tax due. File 2006 federal taxes free If you pay more foreign tax than you originally claimed a credit for, you have 10 years to file a claim for refund of U. File 2006 federal taxes free S. File 2006 federal taxes free taxes. File 2006 federal taxes free See Time Limit on Refund Claims , later. File 2006 federal taxes free   Exceptions to this due date are explained in the next two paragraphs. File 2006 federal taxes free Multiple redeterminations of U. File 2006 federal taxes free S. File 2006 federal taxes free tax liability for same tax year. File 2006 federal taxes free   Where more than one foreign tax redetermination requires a redetermination of U. File 2006 federal taxes free S. File 2006 federal taxes free tax liability for the same tax year and those redeterminations occur in the same tax year or within two consecutive tax years, you can file for that tax year one notification (Form 1040X with a Form 1116 and the required statement) that reflects all those tax redeterminations. File 2006 federal taxes free If you choose to file one notification, the due date for that notification is the due date of the original return (with extensions) for the year in which the first foreign tax redetermination that reduced your foreign tax liability occurred. File 2006 federal taxes free However, foreign tax redeterminations with respect to the tax year for which a redetermination of U. File 2006 federal taxes free S. File 2006 federal taxes free tax liability is required may occur after the due date for providing that notification. File 2006 federal taxes free In this situation, you may have to file more than one Form 1040X for that tax year. File 2006 federal taxes free Additional U. File 2006 federal taxes free S. File 2006 federal taxes free tax due eliminated by foreign tax credit carryback or carryover. File 2006 federal taxes free   If a foreign tax redetermination requires a redetermination of U. File 2006 federal taxes free S. File 2006 federal taxes free tax liability that would otherwise result in an additional amount of U. File 2006 federal taxes free S. File 2006 federal taxes free tax due, but the additional tax is eliminated by a carryback or carryover of an unused foreign tax, you do not have to amend your tax return for the year affected by the redetermination. File 2006 federal taxes free Instead, you can notify the IRS by attaching a statement to the original return for the tax year in which the foreign tax redetermination occurred. File 2006 federal taxes free You must file the statement by the due date (with extensions) of that return. File 2006 federal taxes free The statement must show the amount of the unused foreign taxes paid or accrued and a detailed schedule showing the computation of the carryback or carryover (including the amounts carried back or over to the year for which a redetermination on U. File 2006 federal taxes free S. File 2006 federal taxes free tax liability is required). File 2006 federal taxes free Failure-to-notify penalty. File 2006 federal taxes free   If you fail to notify the IRS of a foreign tax redetermination and cannot show reasonable cause for the failure, you may have to pay a penalty. File 2006 federal taxes free   For each month, or part of a month, that the failure continues, you pay a penalty of 5% of the tax due resulting from a redetermination of your U. File 2006 federal taxes free S. File 2006 federal taxes free tax. File 2006 federal taxes free This penalty cannot be more than 25% of the tax due. File 2006 federal taxes free Foreign tax refund. File 2006 federal taxes free   If you receive a foreign tax refund without interest from the foreign government, you will not have to pay interest on the amount of tax due resulting from the adjustment to your U. File 2006 federal taxes free S. File 2006 federal taxes free tax for the time before the date of the refund. File 2006 federal taxes free   However, if you receive a foreign tax refund with interest, you must pay interest to the IRS up to the amount of the interest paid to you by the foreign government. File 2006 federal taxes free The interest you must pay cannot be more than the interest you would have had to pay on taxes that were unpaid for any other reason for the same period. File 2006 federal taxes free Interest also is owed from the time you receive a refund until you pay the additional tax due. File 2006 federal taxes free Foreign tax imposed on foreign refund. File 2006 federal taxes free   If your foreign tax refund is taxed by the foreign country, you cannot take a separate credit or deduction for this additional foreign tax. File 2006 federal taxes free However, when you refigure the foreign tax credit taken for the original foreign tax, reduce the amount of the refund by the foreign tax paid on the refund. File 2006 federal taxes free Example. File 2006 federal taxes free You paid a foreign income tax of $3,000 in 2011, and received a foreign tax refund of $500 in 2013 on which a foreign tax of $100 was imposed. File 2006 federal taxes free When you refigure your credit for 2011, you must reduce the $3,000 you paid by $400. File 2006 federal taxes free Time Limit on Refund Claims You have 10 years to file a claim for refund of U. File 2006 federal taxes free S. File 2006 federal taxes free tax if you find that you paid or accrued a larger foreign tax than you claimed a credit for. File 2006 federal taxes free The 10-year period begins the day after the regular due date for filing the return (without extensions) for the year in which the taxes were actually paid or accrued. File 2006 federal taxes free You have 10 years to file your claim regardless of whether you claim the credit for taxes paid or taxes accrued. File 2006 federal taxes free The 10-year period applies to claims for refund or credit based on: Fixing math errors in figuring qualified foreign taxes, Reporting qualified foreign taxes not originally reported on the return, or Any other change in the size of the credit (including one caused by correcting the foreign tax credit limit). File 2006 federal taxes free The special 10-year period also applies to making or changing your choice to claim a deduction or credit for foreign taxes. File 2006 federal taxes free See Making or Changing Your Choice discussed earlier under Choosing To Take Credit or Deduction. File 2006 federal taxes free Who Can Take the Credit? U. File 2006 federal taxes free S. File 2006 federal taxes free citizens, resident aliens, and nonresident aliens who paid foreign income tax and are subject to U. File 2006 federal taxes free S. File 2006 federal taxes free tax on foreign source income may be able to take a foreign tax credit. File 2006 federal taxes free U. File 2006 federal taxes free S. File 2006 federal taxes free Citizens If you are a U. File 2006 federal taxes free S. File 2006 federal taxes free citizen, you are taxed by the United States on your worldwide income wherever you live. File 2006 federal taxes free You are normally entitled to take a credit for foreign taxes you pay or accrue. File 2006 federal taxes free Resident Aliens If you are a resident alien of the United States, you can take a credit for foreign taxes subject to the same general rules as U. File 2006 federal taxes free S. File 2006 federal taxes free citizens. File 2006 federal taxes free If you are a bona fide resident of Puerto Rico for the entire tax year, you also come under the same rules. File 2006 federal taxes free Usually, you can take a credit only for those foreign taxes imposed on income you actually or constructively received while you had resident alien status. File 2006 federal taxes free For information on alien status, see Publication 519. File 2006 federal taxes free Nonresident Aliens If you are a nonresident alien, you cannot take the credit in most cases. File 2006 federal taxes free However, you may be able to take the credit if: You were a bona fide resident of Puerto Rico during your entire tax year, or You pay or accrue tax to a foreign country or U. File 2006 federal taxes free S. File 2006 federal taxes free possession on income from foreign sources that is effectively connected with a trade or business in the United States. File 2006 federal taxes free But if you must pay tax to a foreign country or U. File 2006 federal taxes free S. File 2006 federal taxes free possession on income from U. File 2006 federal taxes free S. File 2006 federal taxes free sources only because you are a citizen or a resident of that country or U. File 2006 federal taxes free S. File 2006 federal taxes free possession, do not use that tax in figuring the amount of your credit. File 2006 federal taxes free For information on alien status and effectively connected income, see Publication 519. File 2006 federal taxes free What Foreign Taxes Qualify for the Credit? In most cases, the following four tests must be met for any foreign tax to qualify for the credit. File 2006 federal taxes free The tax must be imposed on you. File 2006 federal taxes free You must have paid or accrued the tax. File 2006 federal taxes free The tax must be the legal and actual foreign tax liability. File 2006 federal taxes free The tax must be an income tax (or a tax in lieu of an income tax). File 2006 federal taxes free Certain foreign taxes do not qualify for the credit even if the four tests are met. File 2006 federal taxes free See Foreign Taxes for Which You Cannot Take a Credit, later. File 2006 federal taxes free Tax Must Be Imposed on You You can claim a credit only for foreign taxes that are imposed on you by a foreign country or U. File 2006 federal taxes free S. File 2006 federal taxes free possession. File 2006 federal taxes free For example, a tax that is deducted from your wages is considered to be imposed on you. File 2006 federal taxes free You cannot shift the right to claim the credit by contract or other means. File 2006 federal taxes free Foreign country. File 2006 federal taxes free   A foreign country includes any foreign state and its political subdivisions. File 2006 federal taxes free Income, war profits, and excess profits taxes paid or accrued to a foreign city or province qualify for the foreign tax credit. File 2006 federal taxes free U. File 2006 federal taxes free S. File 2006 federal taxes free possessions. File 2006 federal taxes free   For foreign tax credit purposes, all qualified taxes paid to U. File 2006 federal taxes free S. File 2006 federal taxes free possessions are considered foreign taxes. File 2006 federal taxes free For this purpose, U. File 2006 federal taxes free S. File 2006 federal taxes free possessions include Puerto Rico and American Samoa. File 2006 federal taxes free   When the term “foreign country” is used in this publication, it includes U. File 2006 federal taxes free S. File 2006 federal taxes free possessions unless otherwise stated. File 2006 federal taxes free You Must Have Paid or Accrued the Tax In most cases, you can claim the credit only if you paid or accrued the foreign tax to a foreign country or U. File 2006 federal taxes free S. File 2006 federal taxes free possession. File 2006 federal taxes free However, the paragraphs that follow describe some instances in which you can claim the credit even if you did not directly pay or accrue the tax yourself. File 2006 federal taxes free Joint return. File 2006 federal taxes free   If you file a joint return, you can claim the credit based on the total foreign income taxes paid or accrued by you and your spouse. File 2006 federal taxes free Combined income. File 2006 federal taxes free   If foreign tax is imposed on the combined income of two or more persons (for example, spouses), the tax is allocated among, and considered paid by, these persons on a pro rata basis in proportion to each person's portion of the combined income, as determined under foreign law and Regulations section 1. File 2006 federal taxes free 901-2(f)(3)(iii). File 2006 federal taxes free Combined income with respect to each foreign tax that is imposed on a combined basis (and combined income subject to tax exemption or preferential tax rates) is computed separately, and the tax on that combined income is allocated separately. File 2006 federal taxes free   These rules apply to foreign taxes paid or accrued in tax years beginning after February 14, 2012. File 2006 federal taxes free However, you can choose to apply the new rules to foreign taxes paid or accrued in tax years beginning after December 31, 2010, and before February 15, 2012. File 2006 federal taxes free For more details, see paragraphs (f) and (h) of Regulations section 1. File 2006 federal taxes free 901-2. File 2006 federal taxes free For similar rules applicable to prior tax years, see Regulations section 1. File 2006 federal taxes free 901-2 (revised as of April 1, 2011). File 2006 federal taxes free Example. File 2006 federal taxes free You and your spouse reside in Country X, which imposes income tax on your combined incomes. File 2006 federal taxes free Both of you use the “u” as your functional currency. File 2006 federal taxes free Country X apportions tax based on income. File 2006 federal taxes free You had income of 30,000u and your spouse had income of 20,000u. File 2006 federal taxes free Your filing status on your U. File 2006 federal taxes free S. File 2006 federal taxes free income tax return is married filing separately. File 2006 federal taxes free You can claim only 60% (30,000u/50,000u) of the foreign taxes imposed on your income on your U. File 2006 federal taxes free S income tax return. File 2006 federal taxes free Your spouse can claim only 40% (20,000u/50,000u). File 2006 federal taxes free Partner or S corporation shareholder. File 2006 federal taxes free   If you are a member of a partnership, or a shareholder in an S corporation, you can claim the credit based on your proportionate share of the foreign income taxes paid or accrued by the partnership or the S corporation. File 2006 federal taxes free These amounts will be shown on the Schedule K-1 you receive from the partnership or S corporation. File 2006 federal taxes free However, if you are a shareholder in an S corporation that in turn owns stock in a foreign corporation, you cannot claim a credit for your share of foreign taxes paid by the foreign corporation. File 2006 federal taxes free Beneficiary. File 2006 federal taxes free   If you are a beneficiary of an estate or trust, you may be able to claim the credit based on your proportionate share of foreign income taxes paid or accrued by the estate or trust. File 2006 federal taxes free This amount will be shown on the Schedule K-1 you receive from the estate or trust. File 2006 federal taxes free However, you must show that the tax was imposed on income of the estate and not on income received by the decedent. File 2006 federal taxes free Mutual fund shareholder. File 2006 federal taxes free   If you are a shareholder of a mutual fund or other regulated investment company (RIC), you may be able to claim the credit based on your share of foreign income taxes paid by the fund if it chooses to pass the credit on to its shareholders. File 2006 federal taxes free You should receive from the mutual fund or other RIC a Form 1099-DIV, or similar statement, showing your share of the foreign income, and your share of the foreign taxes paid. File 2006 federal taxes free If you do not receive this information, you will need to contact the fund. File 2006 federal taxes free Controlled foreign corporation shareholder. File 2006 federal taxes free   If you are a shareholder of a controlled foreign corporation and choose to be taxed at corporate rates on the amount you must include in gross income from that corporation, you can claim the credit based on your share of foreign taxes paid or accrued by the controlled foreign corporation. File 2006 federal taxes free If you make this election, you must claim the credit by filing Form 1118, Foreign Tax Credit—Corporations. File 2006 federal taxes free Controlled foreign corporation. File 2006 federal taxes free   A controlled foreign corporation is a foreign corporation in which U. File 2006 federal taxes free S. File 2006 federal taxes free shareholders own more than 50% of the voting power or value of the stock. File 2006 federal taxes free You are considered a U. File 2006 federal taxes free S. File 2006 federal taxes free shareholder if you own, directly or indirectly, 10% or more of the total voting power of all classes of the foreign corporation's stock. File 2006 federal taxes free See Internal Revenue Code sections 951(b) and 958(b) for more information. File 2006 federal taxes free Tax Must Be the Legal and Actual Foreign Tax Liability The amount of foreign tax that qualifies is not necessarily the amount of tax withheld by the foreign country. File 2006 federal taxes free Only the legal and actual foreign tax liability that you paid or accrued during the year qualifies for the credit. File 2006 federal taxes free Foreign tax refund. File 2006 federal taxes free   You cannot take a foreign tax credit for income taxes paid to a foreign country if it is reasonably certain the amount would be refunded, credited, rebated, abated, or forgiven if you made a claim. File 2006 federal taxes free   For example, the United States has tax treaties with many countries allowing U. File 2006 federal taxes free S. File 2006 federal taxes free citizens and residents reductions in the rates of tax of those foreign countries. File 2006 federal taxes free However, some treaty countries require U. File 2006 federal taxes free S. File 2006 federal taxes free citizens and residents to pay the tax figured without regard to the lower treaty rates and then claim a refund for the amount by which the tax actually paid is more than the amount of tax figured using the lower treaty rate. File 2006 federal taxes free The qualified foreign tax is the amount figured using the lower treaty rate and not the amount actually paid, because the excess tax is refundable. File 2006 federal taxes free Subsidy received. File 2006 federal taxes free   Tax payments a foreign country returns to you in the form of a subsidy do not qualify for the foreign tax credit. File 2006 federal taxes free This rule applies even if the subsidy is given to a person related to you, or persons who participated with you in a transaction or a related transaction. File 2006 federal taxes free A subsidy can be provided by any means but must be determined, directly or indirectly, in relation to the amount of tax, or to the base used to figure the tax. File 2006 federal taxes free   The term “subsidy” includes any type of benefit. File 2006 federal taxes free Some ways of providing a subsidy are refunds, credits, deductions, payments, or discharges of obligations. File 2006 federal taxes free Shareholder receiving refund for corporate tax in integrated system. File 2006 federal taxes free   Under some foreign tax laws and treaties, a shareholder is considered to have paid part of the tax that is imposed on the corporation. File 2006 federal taxes free You may be able to claim a refund of these taxes from the foreign government. File 2006 federal taxes free You must include the refund (including any amount withheld) in your income in the year received. File 2006 federal taxes free Any tax withheld from the refund is a qualified foreign tax. File 2006 federal taxes free Example. File 2006 federal taxes free You are a shareholder of a French corporation. File 2006 federal taxes free You receive a $100 refund of the tax paid to France by the corporation on the earnings distributed to you as a dividend. File 2006 federal taxes free The French government imposes a 15% withholding tax ($15) on the refund you received. File 2006 federal taxes free You receive a check for $85. File 2006 federal taxes free You include $100 in your income. File 2006 federal taxes free The $15 of tax withheld is a qualified foreign tax. File 2006 federal taxes free Tax Must Be an Income Tax (or Tax in Lieu of Income Tax) In most cases, only income, war profits, and excess profits taxes (income taxes) qualify for the foreign tax credit. File 2006 federal taxes free Foreign taxes on wages, dividends, interest, and royalties qualify for the credit in most cases. File 2006 federal taxes free Furthermore, foreign taxes on income can qualify even though they are not imposed under an income tax law if the tax is in lieu of an income, war profits, or excess profits tax. File 2006 federal taxes free See Taxes in Lieu of Income Taxes , later. File 2006 federal taxes free Income Tax Simply because the levy is called an income tax by the foreign taxing authority does not make it an income tax for this purpose. File 2006 federal taxes free A foreign levy is an income tax only if it meets both of the following requirements. File 2006 federal taxes free It is a tax; that is, you have to pay it and you get no specific economic benefit (discussed below) from paying it. File 2006 federal taxes free The predominant character of the tax is that of an income tax in the U. File 2006 federal taxes free S. File 2006 federal taxes free sense. File 2006 federal taxes free A foreign levy may meet these requirements even if the foreign tax law differs from U. File 2006 federal taxes free S. File 2006 federal taxes free tax law. File 2006 federal taxes free The foreign law may include in income items that U. File 2006 federal taxes free S. File 2006 federal taxes free law does not include, or it may allow certain exclusions or deductions that U. File 2006 federal taxes free S. File 2006 federal taxes free law does not allow. File 2006 federal taxes free Specific economic benefit. File 2006 federal taxes free   In most cases, you get a specific economic benefit if you receive, or are considered to receive, an economic benefit from the foreign country imposing the levy, and: If there is a generally imposed income tax, the economic benefit is not available on substantially the same terms to all persons subject to the income tax, or If there is no generally imposed income tax, the economic benefit is not available on substantially the same terms to the population of the foreign country in general. File 2006 federal taxes free   You are considered to receive a specific economic benefit if you have a business transaction with a person who receives a specific economic benefit from the foreign country and, under the terms and conditions of the transaction, you receive directly or indirectly all or part of the benefit. File 2006 federal taxes free   However, see the exception discussed later under Pension, unemployment, and disability fund payments . File 2006 federal taxes free Economic benefits. File 2006 federal taxes free   Economic benefits include the following. File 2006 federal taxes free Goods. File 2006 federal taxes free Services. File 2006 federal taxes free Fees or other payments. File 2006 federal taxes free Rights to use, acquire, or extract resources, patents, or other property the foreign country owns or controls. File 2006 federal taxes free Discharges of contractual obligations. File 2006 federal taxes free   In most cases, the right or privilege merely to engage in business is not an economic benefit. File 2006 federal taxes free Dual-capacity taxpayers. File 2006 federal taxes free   If you are subject to a foreign country's levy and you also receive a specific economic benefit from that foreign country, you are a “dual-capacity taxpayer. File 2006 federal taxes free ” As a dual-capacity taxpayer, you cannot claim a credit for any part of the foreign levy, unless you establish that the amount paid under a distinct element of the foreign levy is a tax, rather than a compulsory payment for a direct or indirect specific economic benefit. File 2006 federal taxes free    For more information on how to establish amounts paid under separate elements of a levy, write to: Internal Revenue Service International Section Philadelphia, PA 19255-0725 Pension, unemployment, and disability fund payments. File 2006 federal taxes free   A foreign tax imposed on an individual to pay for retirement, old-age, death, survivor, unemployment, illness, or disability benefits, or for substantially similar purposes, is not payment for a specific economic benefit if the amount of the tax does not depend on the age, life expectancy, or similar characteristics of that individual. File 2006 federal taxes free    No deduction or credit is allowed, however, for social security taxes paid or accrued to a foreign country with which the United States has a social security agreement. File 2006 federal taxes free For more information about these agreements, see Publication 54. File 2006 federal taxes free Soak-up taxes. File 2006 federal taxes free   A foreign tax is not predominantly an income tax and does not qualify for credit to the extent it is a soak-up tax. File 2006 federal taxes free A tax is a soak-up tax to the extent that liability for it depends on the availability of a credit for it against income tax imposed by another country. File 2006 federal taxes free This rule applies only if and to the extent that the foreign tax would not be imposed if the credit were not available. File 2006 federal taxes free Penalties and interest. File 2006 federal taxes free   Amounts paid to a foreign government to satisfy a liability for interest, fines, penalties, or any similar obligation are not taxes and do not qualify for the credit. File 2006 federal taxes free Taxes not based on income. File 2006 federal taxes free   Foreign taxes based on gross receipts or the number of units produced, rather than on realized net income, do not qualify unless they are imposed in lieu of an income tax, as discussed next. File 2006 federal taxes free Taxes based on assets, such as property taxes, do not qualify for the credit. File 2006 federal taxes free Taxes in Lieu of Income Taxes A tax paid or accrued to a foreign country qualifies for the credit if it is imposed in lieu of an income tax otherwise generally imposed. File 2006 federal taxes free A foreign levy is a tax in lieu of an income tax only if: It is not payment for a specific economic benefit as discussed earlier, and The tax is imposed in place of, and not in addition to, an income tax otherwise generally imposed. File 2006 federal taxes free A tax in lieu of an income tax does not have to be based on realized net income. File 2006 federal taxes free A foreign tax imposed on gross income, gross receipts or sales, or the number of units produced or exported can qualify for the credit. File 2006 federal taxes free In most cases, a soak-up tax (discussed earlier) does not qualify as a tax in lieu of an income tax. File 2006 federal taxes free However, if the foreign country imposes a soak-up tax in lieu of an income tax, the amount that does not qualify for foreign tax credit is the lesser of the following amounts. File 2006 federal taxes free The soak-up tax. File 2006 federal taxes free The foreign tax you paid that is more than the amount you would have paid if you had been subject to the generally imposed income tax. File 2006 federal taxes free Foreign Taxes for Which You Cannot Take a Credit This part discusses the foreign taxes for which you cannot take a credit. File 2006 federal taxes free These are: Taxes on excluded income, Taxes for which you can only take an itemized deduction, Taxes on foreign mineral income, Taxes from international boycott operations, A portion of taxes on combined foreign oil and gas income, Taxes of U. File 2006 federal taxes free S. File 2006 federal taxes free persons controlling foreign corporations and partnerships who fail to file required information returns, and Taxes related to a foreign tax splitting event. File 2006 federal taxes free Taxes on Excluded Income You cannot take a credit for foreign taxes paid or accrued on certain income that is excluded from U. File 2006 federal taxes free S. File 2006 federal taxes free gross income. File 2006 federal taxes free Foreign Earned Income and Housing Exclusions You must reduce your foreign taxes available for the credit by the amount of those taxes paid or accrued on income that is excluded from U. File 2006 federal taxes free S. File 2006 federal taxes free income under the foreign earned income exclusion or the foreign housing exclusion. File 2006 federal taxes free See Publication 54 for more information on the foreign earned income and housing exclusions. File 2006 federal taxes free Wages completely excluded. File 2006 federal taxes free   If your wages are completely excluded, you cannot take a credit for any of the foreign taxes paid or accrued on these wages. File 2006 federal taxes free Wages partly excluded. File 2006 federal taxes free   If only part of your wages is excluded, you cannot take a credit for the foreign income taxes allocable to the excluded part. File 2006 federal taxes free You find the amount allocable to your excluded wages by multiplying the foreign tax paid or accrued on foreign earned income received or accrued during the tax year by a fraction. File 2006 federal taxes free   The numerator of the fraction is your foreign earned income and housing amounts excluded under the foreign earned income and housing exclusions for the tax year minus otherwise deductible expenses definitely related and properly apportioned to that income. File 2006 federal taxes free Deductible expenses do not include the foreign housing deduction. File 2006 federal taxes free   The denominator is your total foreign earned income received or accrued during the tax year minus all deductible expenses allocable to that income (including the foreign housing deduction). File 2006 federal taxes free If the foreign law taxes foreign earned income and some other income (for example, earned income from U. File 2006 federal taxes free S. File 2006 federal taxes free sources or a type of income not subject to U. File 2006 federal taxes free S. File 2006 federal taxes free tax), and the taxes on the other income cannot be segregated, the denominator of the fraction is the total amount of income subject to the foreign tax minus deductible expenses allocable to that income. File 2006 federal taxes free Example. File 2006 federal taxes free You are a U. File 2006 federal taxes free S. File 2006 federal taxes free citizen and a cash basis taxpayer, employed by Company X and living in Country A. File 2006 federal taxes free Your records show the following: Foreign earned income received $125,000 Unreimbursed business travel expenses 20,000 Income tax paid to Country A 30,000 Exclusion of foreign earned  income and housing allowance 97,600     Because you can exclude part of your wages, you cannot claim a credit for part of the foreign taxes. File 2006 federal taxes free To find that part, do the following. File 2006 federal taxes free First, find the amount of business expenses allocable to excluded wages and therefore not deductible. File 2006 federal taxes free To do this, multiply the otherwise deductible expenses by a fraction. File 2006 federal taxes free That fraction is the excluded wages over your foreign earned income. File 2006 federal taxes free   $20,000 × $97,600 $125,000 = $15,616             Next, find the numerator of the fraction by which you will multiply the foreign taxes paid. File 2006 federal taxes free To do this, subtract business expenses allocable to excluded wages ($15,616) from excluded wages ($97,600). File 2006 federal taxes free The result is $81,984. File 2006 federal taxes free Then, find the denominator of the fraction by subtracting all your deductible expenses from all your foreign earned income ($125,000 − $20,000 = $105,000). File 2006 federal taxes free Finally, multiply the foreign tax you paid by the resulting fraction. File 2006 federal taxes free   $30,000 × $81,984  $105,000 = $23,424 The amount of Country A tax you cannot take a credit for is $23,424. File 2006 federal taxes free Taxes on Income From Puerto Rico Exempt From U. File 2006 federal taxes free S. File 2006 federal taxes free Tax If you have income from Puerto Rican sources that is not taxable, you must reduce your foreign taxes paid or accrued by the taxes allocable to the exempt income. File 2006 federal taxes free For information on figuring the reduction, see Publication 570. File 2006 federal taxes free Possession Exclusion If you are a bona fide resident of American Samoa and exclude income from sources in American Samoa, you cannot take a credit for the taxes you pay or accrue on the excluded income. File 2006 federal taxes free For more information on this exclusion, see Publication 570. File 2006 federal taxes free Extraterritorial Income Exclusion You cannot take a credit for taxes you pay on qualifying foreign trade income excluded on Form 8873, Extraterritorial Income Exclusion. File 2006 federal taxes free However, see Internal Revenue Code section 943(d) for an exception for certain withholding taxes. File 2006 federal taxes free Taxes for Which You Can Only Take an Itemized Deduction You cannot claim a foreign tax credit for foreign income taxes paid or accrued under the following circumstances. File 2006 federal taxes free However, you can claim an itemized deduction for these taxes. File 2006 federal taxes free See Choosing To Take Credit or Deduction , earlier. File 2006 federal taxes free Taxes Imposed By Sanctioned Countries (Section 901(j) Income) You cannot claim a foreign tax credit for income taxes paid or accrued to any country if the income giving rise to the tax is for a period (the sanction period) during which: The Secretary of State has designated the country as one that repeatedly provides support for acts of international terrorism, The United States has severed or does not conduct diplomatic relations with the country, or The United States does not recognize the country's government, and that government is not otherwise eligible to purchase defense articles or services under the Arms Export Control Act. File 2006 federal taxes free The following countries meet this description for 2013. File 2006 federal taxes free Income taxes paid or accrued to these countries in 2013 do not qualify for the credit. File 2006 federal taxes free Cuba. File 2006 federal taxes free Iran. File 2006 federal taxes free Libya (but see Note later). File 2006 federal taxes free North Korea. File 2006 federal taxes free Sudan. File 2006 federal taxes free Syria. File 2006 federal taxes free Waiver of denial of the credit. File 2006 federal taxes free   A waiver can be granted to a sanctioned country if the President of the United States determines that granting the waiver is in the national interest of the United States and will expand trade and investment opportunities for U. File 2006 federal taxes free S. File 2006 federal taxes free companies in the sanctioned country. File 2006 federal taxes free The President must report to Congress his intentions to grant the waiver and his reasons for granting the waiver not less than 30 days before the date on which the waiver is granted. File 2006 federal taxes free Note. File 2006 federal taxes free Effective December 10, 2004, the President granted a waiver to Libya. File 2006 federal taxes free Income taxes arising on or after this date qualify for the credit if they meet the other requirements in this publication. File 2006 federal taxes free Limit on credit. File 2006 federal taxes free   In figuring the foreign tax credit limit, discussed later, income from a sanctioned country is a separate category of foreign income unless a Presidential waiver is granted. File 2006 federal taxes free You must fill out a separate Form 1116 for this income. File 2006 federal taxes free This will prevent you from claiming a credit for foreign taxes paid or accrued to the sanctioned country. File 2006 federal taxes free Example. File 2006 federal taxes free You lived and worked in Iran until August, when you were transferred to Italy. File 2006 federal taxes free You paid taxes to each country on the income earned in that country. File 2006 federal taxes free You cannot claim a foreign tax credit for the foreign taxes paid on the income earned in Iran. File 2006 federal taxes free Because the income earned in Iran is a separate category of foreign income, you must fill out a separate Form 1116 for that income. File 2006 federal taxes free You cannot take a credit for taxes paid on the income earned in Iran, but that income is taxable by the United States. File 2006 federal taxes free Figuring the credit when a sanction ends. File 2006 federal taxes free    Table 1 lists the countries for which sanctions have ended or for which a Presidential waiver has been granted. File 2006 federal taxes free For any of these countries, you can claim a foreign tax credit for the taxes paid or accrued to that country on the income for the period that begins after the end of the sanction period or the date the Presidential waiver was granted. File 2006 federal taxes free Example. File 2006 federal taxes free The sanctions against Country X ended on July 31. File 2006 federal taxes free On August 19, you receive a distribution from a mutual fund of Country X income. File 2006 federal taxes free The fund paid Country X income tax for you on the distribution. File 2006 federal taxes free Because the distribution was made after the sanction ended, you may include the foreign tax paid on the distribution to compute your foreign tax credit. File 2006 federal taxes free Amounts for the nonsanctioned period. File 2006 federal taxes free   If a sanction period ends (or a Presidential waiver is granted) during your tax year and you are not able to determine the actual income and taxes for that period, you can allocate amounts to that period based on the number of days in the period that fall in your tax year. File 2006 federal taxes free Multiply the income or taxes for the year by the following fraction to determine the amounts allocable to that period. File 2006 federal taxes free   Number of nonsanctioned days in year  Number of days in year Example. File 2006 federal taxes free You are a calendar year filer and received $20,000 of income from Country X in 2013 on which you paid tax of $4,500. File 2006 federal taxes free Sanctions against Country X ended on July 11, 2013. File 2006 federal taxes free You are unable to determine how much of the income or tax is for the nonsanctioned period. File 2006 federal taxes free Because your tax year starts on January 1, and the Country X sanction ended on July 11, 2013, 173 days of your tax year are in the nonsanctioned period. File 2006 federal taxes free You would compute the income for the nonsanctioned period as follows. File 2006 federal taxes free 173 365 × $20,000 = $9,479             You would figure the tax for the nonsanctioned period as follows. File 2006 federal taxes free 173 365 × $4,500 = $2,133 To figure your foreign tax credit, you would use $9,479 as the income from Country X and $2,133 as the tax. File 2006 federal taxes free Further information. File 2006 federal taxes free   The rules for figuring the foreign tax credit after a country's sanction period ends are more fully explained in Revenue Ruling 92-62, Cumulative Bulletin 1992-2, page 193. File 2006 federal taxes free This Cumulative Bulletin can be found in many libraries and IRS offices. File 2006 federal taxes free Table 1. File 2006 federal taxes free Countries Removed From the Sanction List or Granted Presidential Waiver   Sanction Period Country Starting Date Ending Date Iraq February 1, 1991 June 27, 2004 Libya January 1, 1987 December 9, 2004* *Presidential waiver granted for qualified income taxes arising after December 9, 2004. File 2006 federal taxes free Taxes Imposed on Certain Dividends You cannot claim a foreign tax credit for withholding tax (defined later ) on dividends paid or accrued if either of the following applies to the dividends. File 2006 federal taxes free The dividends are on stock you held for less than 16 days during the 31-day period that begins 15 days before the ex-dividend date (defined later). File 2006 federal taxes free The dividends are for a period or periods totaling more than 366 days on preferred stock you held for less than 46 days during the 91-day period that begins 45 days before the ex-dividend date. File 2006 federal taxes free If the dividend is not for more than 366 days, rule (1) applies to the preferred stock. File 2006 federal taxes free When figuring how long you held the stock, count the day you sold it, but do not count the day you acquired it or any days on which you were protected from risk of loss. File 2006 federal taxes free Regardless of how long you held the stock, you cannot claim the credit to the extent you have an obligation under a short sale or otherwise to make payments related to the dividend for positions in substantially similar or related property. File 2006 federal taxes free Withholding tax. File 2006 federal taxes free   For this purpose, withholding tax includes any tax determined on a gross basis. File 2006 federal taxes free It does not include any tax which is in the nature of a prepayment of a tax imposed on a net basis. File 2006 federal taxes free Ex-dividend date. File 2006 federal taxes free   The ex-dividend date is the first date following the declaration of a dividend on which the purchaser of a stock is not entitled to receive the next dividend payment. File 2006 federal taxes free Example 1. File 2006 federal taxes free You bought common stock from a foreign corporation on November 3. File 2006 federal taxes free You sold the stock on November 19. File 2006 federal taxes free You received a dividend on this stock because you owned it on the ex-dividend date of November 5. File 2006 federal taxes free To claim the credit, you must have held the stock for at least 16 days within the 31-day period that began on October 21 (15 days before the ex-dividend date). File 2006 federal taxes free Because you held the stock for 16 days, from November 4 until November 19, you are entitled to the credit. File 2006 federal taxes free Example 2. File 2006 federal taxes free The facts are the same as in Example 1 except that you sold the stock on November 14. File 2006 federal taxes free You held the stock for only 11 days. File 2006 federal taxes free You are not entitled to the credit. File 2006 federal taxes free Exception. File 2006 federal taxes free   If you are a securities dealer who actively conducts business in a foreign country, you may be able to claim a foreign tax credit for qualified taxes paid on dividends regardless of how long you held the stock or whether you were obligated to make payments for positions in substantially similar or related property. File 2006 federal taxes free See section 901(k)(4) of the Internal Revenue Code for more information. File 2006 federal taxes free Taxes Withheld on Income or Gain (Other Than Dividends) For income or gain (other than dividends) paid or accrued on property, you cannot claim a foreign tax credit for withholding tax (defined later): If you have not held the property for at least 16 days during the 31-day period that begins 15 days before the date on which the right to receive the payment arises, or To the extent you have to make related payments on positions in substantially similar or related property. File 2006 federal taxes free When figuring how long you held the property, count the day you sold it, but do not count the day you acquired it or any days on which you were protected from risk of loss. File 2006 federal taxes free Withholding tax. File 2006 federal taxes free   For this purpose, withholding tax includes any tax determined on a gross basis. File 2006 federal taxes free It does not include any tax which is in the nature of a prepayment of a tax imposed on a net basis. File 2006 federal taxes free Exception for dealers. File 2006 federal taxes free   If you are a dealer in property who actively conducts business in a foreign country, you may be able to claim a foreign tax credit for qualified taxes withheld on income or gain from that property regardless of how long you held it or whether you have to make related payments on positions in substantially similar or related property. File 2006 federal taxes free See section 901(I)(2) of the Internal Revenue Code for more information. File 2006 federal taxes free Covered Asset Acquisition ???You cannot take a credit for the disqualified portion of any foreign tax paid or accrued in connection with a covered asset acquisition. File 2006 federal taxes free A covered asset acquisition includes certain acquisitions that result in a stepped-up basis for U. File 2006 federal taxes free S. File 2006 federal taxes free tax purposes but not for foreign tax purposes. File 2006 federal taxes free For more information, see Internal Revenue Code section 901(m). File 2006 federal taxes free The IRS intends to issue guidance that will explain this provision in greater detail. File 2006 federal taxes free Taxes in Connection With the Purchase or Sale of Oil or Gas You cannot claim a foreign tax credit for taxes paid or accrued to a foreign country in connection with the purchase or sale of oil or gas extracted in that country if you do not have an economic interest in the oil or gas, and the purchase price or sales price is different from the fair market value of the oil or gas at the time of purchase or sale. File 2006 federal taxes free Taxes on Foreign Mineral Income You must reduce any taxes paid or accrued to a foreign country or possession on mineral income from that country or possession if you were allowed a deduction for percentage depletion for any part of the mineral income. File 2006 federal taxes free For details, see Regulations section 1. File 2006 federal taxes free 901-3. File 2006 federal taxes free Taxes From International Boycott Operations If you participate in or cooperate with an international boycott during the tax year, your foreign taxes resulting from boycott activities will reduce the total taxes available for credit. File 2006 federal taxes free See the instructions for line 12 in the Form 1116 instructions to figure this reduction. File 2006 federal taxes free In most cases, this rule does not apply to employees with wages who are working and living in boycotting countries, or to retirees with pensions who are living in these countries. File 2006 federal taxes free List of boycotting countries. File 2006 federal taxes free   A list of the countries which may require participation in or cooperation with an international boycott is published by the Department of the Treasury. File 2006 federal taxes free As of November 2013, the following countries are listed. File 2006 federal taxes free Iraq. File 2006 federal taxes free Kuwait. File 2006 federal taxes free Lebanon. File 2006 federal taxes free Libya. File 2006 federal taxes free Qatar. File 2006 federal taxes free Saudi Arabia. File 2006 federal taxes free Syria. File 2006 federal taxes free United Arab Emirates. File 2006 federal taxes free Yemen. File 2006 federal taxes free    For information concerning changes to the list, write to: Internal Revenue Service International Section Philadelphia, PA 19255-0725 Determinations of whether the boycott rule applies. File 2006 federal taxes free   You may request a determination from the Internal Revenue Service as to whether a particular operation constitutes participation in or cooperation with an international boycott. File 2006 federal taxes free The procedures for obtaining a determination from the Service are outlined in Revenue Procedure 77-9 in Cumulative Bulletin 1977-1. File 2006 federal taxes free Cumulative Bulletins are available in most IRS offices and you are welcome to read them there. File 2006 federal taxes free Public inspection. File 2006 federal taxes free   A determination and any related background file is open to public inspection. File 2006 federal taxes free However, your identity and certain other information will remain confidential. File 2006 federal taxes free Reporting requirements. File 2006 federal taxes free   You must file a report with the IRS if you or any of the following persons have operations in or related to a boycotting country or with the government, a company, or a national of a boycotting country. File 2006 federal taxes free A foreign corporation in which you own 10% or more of the voting power of all voting stock but only if you own the stock of the foreign corporation directly or through foreign entities. File 2006 federal taxes free A partnership in which you are a partner. File 2006 federal taxes free A trust you are treated as owning. File 2006 federal taxes free Form 5713 required. File 2006 federal taxes free   If you have to file a report, you must use Form 5713, International Boycott Report, and attach all supporting schedules. File 2006 federal taxes free See the Instructions for Form 5713 for information on when and where to file the form. File 2006 federal taxes free Penalty for failure to file. File 2006 federal taxes free   If you willfully fail to make a report, in addition to other penalties, you may be fined $25,000 or imprisoned for no more than one year, or both. File 2006 federal taxes free Taxes on Combined Foreign Oil and Gas Income You must reduce your foreign taxes by a portion of any foreign taxes imposed on combined foreign oil and gas income. File 2006 federal taxes free The amount of the reduction is the amount by which your foreign oil and gas taxes exceed the amount of your combined foreign oil and gas income multiplied by a fraction equal to your pre-credit U. File 2006 federal taxes free S. File 2006 federal taxes free tax liability (Form 1040, line 44) divided by your worldwide taxable income. File 2006 federal taxes free You may be entitled to carry over to other years taxes reduced under this rule. File 2006 federal taxes free See Internal Revenue Code section 907(f). File 2006 federal taxes free Combined foreign oil and gas income means the sum of foreign oil related income and foreign oil and gas extraction income. File 2006 federal taxes free Foreign oil and gas taxes are the sum of foreign oil and gas extraction taxes and foreign oil related taxes. File 2006 federal taxes free Taxes of U. File 2006 federal taxes free S. File 2006 federal taxes free Persons Controlling Foreign Corporations and Partnerships If you had control of a foreign corporation or a foreign partnership for the annual accounting period of that corporation or partnership that ended with or within your tax year, you may have to file an annual information return. File 2006 federal taxes free If you do not file the required information return, you may have to reduce the foreign taxes that may be used for the foreign tax credit. File 2006 federal taxes free See Penalty for not filing Form 5471 or Form 8865 , later. File 2006 federal taxes free U. File 2006 federal taxes free S. File 2006 federal taxes free persons controlling foreign corporations. File 2006 federal taxes free   If you are a U. File 2006 federal taxes free S. File 2006 federal taxes free citizen or resident who had control of a foreign corporation for an uninterrupted period of at least 30 days during the annual accounting period of that corporation, you may have to file an annual information return on Form 5471, Information Return of U. File 2006 federal taxes free S. File 2006 federal taxes free Persons With Respect To Certain Foreign Corporations. File 2006 federal taxes free Under this rule, you generally had control of a foreign corporation if at any time during your tax year you owned: Stock possessing more than 50% of the total combined voting power of all classes of stock entitled to vote, or More than 50% of the total value of shares of all classes of stock of the foreign corporation. File 2006 federal taxes free U. File 2006 federal taxes free S. File 2006 federal taxes free persons controlling foreign partnerships. File 2006 federal taxes free   If you are a U. File 2006 federal taxes free S. File 2006 federal taxes free citizen or resident who had control of a foreign partnership at any time during the partnership's tax year, you may have to file
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File 2006 federal taxes free 4. File 2006 federal taxes free   Figuring Depreciation Under MACRS Table of Contents Introduction Useful Items - You may want to see: Which Depreciation System (GDS or ADS) Applies? Which Property Class Applies Under GDS?Rent-to-own dealer. File 2006 federal taxes free Rent-to-own contract. File 2006 federal taxes free What Is the Placed in Service Date? What Is the Basis for Depreciation? Which Recovery Period Applies?Recovery Periods Under GDS Recovery Periods Under ADS Additions and Improvements Which Convention Applies? Which Depreciation Method Applies?Depreciation Methods for Farm Property Electing a Different Method How Is the Depreciation Deduction Figured?Using the MACRS Percentage Tables Figuring the Deduction Without Using the Tables Figuring the Deduction for Property Acquired in a Nontaxable Exchange Figuring the Deduction for a Short Tax Year How Do You Use General Asset Accounts?Grouping Property Figuring Depreciation for a GAA Disposing of GAA Property Terminating GAA Treatment Electing To Use a GAA When Do You Recapture MACRS Depreciation? Introduction The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. File 2006 federal taxes free MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). File 2006 federal taxes free Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. File 2006 federal taxes free To be sure you can use MACRS to figure depreciation for your property, see What Method Can You Use To Depreciate Your Property in chapter 1. File 2006 federal taxes free This chapter explains how to determine which MACRS depreciation system applies to your property. File 2006 federal taxes free It also discusses other information you need to know before you can figure depreciation under MACRS. File 2006 federal taxes free This information includes the property's recovery class, placed in service date, and basis, as well as the applicable recovery period, convention, and depreciation method. File 2006 federal taxes free It explains how to use this information to figure your depreciation deduction and how to use a general asset account to depreciate a group of properties. File 2006 federal taxes free Finally, it explains when and how to recapture MACRS depreciation. File 2006 federal taxes free Useful Items - You may want to see: Publication 225 Farmer's Tax Guide 463 Travel, Entertainment, Gift, and Car  Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 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 See chapter 6 for information about getting publications and forms. File 2006 federal taxes free Which Depreciation System (GDS or ADS) Applies? Your use of either the General Depreciation System (GDS) or the Alternative Depreciation System (ADS) to depreciate property under MACRS determines what depreciation method and recovery period you use. File 2006 federal taxes free You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. File 2006 federal taxes free If you placed your property in service in 2013, complete Part III of Form 4562 to report depreciation using MACRS. File 2006 federal taxes free Complete section B of Part III to report depreciation using GDS, and complete section C of Part III to report depreciation using ADS. File 2006 federal taxes free If you placed your property in service before 2013 and are required to file Form 4562, report depreciation using either GDS or ADS on line 17 in Part III. File 2006 federal taxes free Required use of ADS. File 2006 federal taxes free   You must use ADS for the following property. File 2006 federal taxes free Listed property used 50% or less in a qualified business use. File 2006 federal taxes free See chapter 5 for information on listed property. File 2006 federal taxes free Any tangible property used predominantly outside the United States during the year. File 2006 federal taxes free Any tax-exempt use property. File 2006 federal taxes free Any tax-exempt bond-financed property. File 2006 federal taxes free All property used predominantly in a farming business and placed in service in any tax year during which an election not to apply the uniform capitalization rules to certain farming costs is in effect. File 2006 federal taxes free Any property imported from a foreign country for which an Executive Order is in effect because the country maintains trade restrictions or engages in other discriminatory acts. File 2006 federal taxes free If you are required to use ADS to depreciate your property, you cannot claim any special depreciation allowance (discussed in chapter 3) for the property. File 2006 federal taxes free Electing ADS. File 2006 federal taxes free   Although your property may qualify for GDS, you can elect to use ADS. File 2006 federal taxes free The election generally must cover all property in the same property class that you placed in service during the year. File 2006 federal taxes free However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. File 2006 federal taxes free Once you make this election, you can never revoke it. File 2006 federal taxes free   You make the election by completing line 20 in Part III of Form 4562. File 2006 federal taxes free Which Property Class Applies Under GDS? The following is a list of the nine property classifications under GDS and examples of the types of property included in each class. File 2006 federal taxes free These property classes are also listed under column (a) in section B, Part III, of Form 4562. File 2006 federal taxes free For detailed information on property classes, see Appendix B, Table of Class Lives and Recovery Periods, in this publication. File 2006 federal taxes free 3-year property. File 2006 federal taxes free Tractor units for over-the-road use. File 2006 federal taxes free Any race horse over 2 years old when placed in service. File 2006 federal taxes free (All race horses placed in service after December 31, 2008, and before January 1, 2014, are deemed to be 3-year property, regardless of age. File 2006 federal taxes free ) Any other horse (other than a race horse) over 12 years old when placed in service. File 2006 federal taxes free Qualified rent-to-own property (defined later). File 2006 federal taxes free 5-year property. File 2006 federal taxes free Automobiles, taxis, buses, and trucks. File 2006 federal taxes free Computers and peripheral equipment. File 2006 federal taxes free Office machinery (such as typewriters, calculators, and copiers). File 2006 federal taxes free Any property used in research and experimentation. File 2006 federal taxes free Breeding cattle and dairy cattle. File 2006 federal taxes free Appliances, carpets, furniture, etc. File 2006 federal taxes free , used in a residential rental real estate activity. File 2006 federal taxes free Certain geothermal, solar, and wind energy property. File 2006 federal taxes free 7-year property. File 2006 federal taxes free Office furniture and fixtures (such as desks, files, and safes). File 2006 federal taxes free Agricultural machinery and equipment. File 2006 federal taxes free Any property that does not have a class life and has not been designated by law as being in any other class. File 2006 federal taxes free Certain motorsports entertainment complex property (defined later) placed in service before January 1, 2014. File 2006 federal taxes free Any natural gas gathering line placed in service after April 11, 2005. File 2006 federal taxes free See Natural gas gathering line and electric transmission property , later. File 2006 federal taxes free 10-year property. File 2006 federal taxes free Vessels, barges, tugs, and similar water transportation equipment. File 2006 federal taxes free Any single purpose agricultural or horticultural structure. File 2006 federal taxes free Any tree or vine bearing fruits or nuts. File 2006 federal taxes free Qualified small electric meter and qualified smart electric grid system (defined later) placed in service on or after October 3, 2008. File 2006 federal taxes free 15-year property. File 2006 federal taxes free Certain improvements made directly to land or added to it (such as shrubbery, fences, roads, sidewalks, and bridges). File 2006 federal taxes free Any retail motor fuels outlet (defined later), such as a convenience store. File 2006 federal taxes free Any municipal wastewater treatment plant. File 2006 federal taxes free Any qualified leasehold improvement property (defined later) placed in service before January 1, 2014. File 2006 federal taxes free Any qualified restaurant property (defined later) placed in service before January 1, 2014. File 2006 federal taxes free Initial clearing and grading land improvements for gas utility property. File 2006 federal taxes free Electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity placed in service after April 11, 2005. File 2006 federal taxes free See Natural gas gathering line and electric transmission property , later. File 2006 federal taxes free Any natural gas distribution line placed in service after April 11, 2005 and before January 1, 2011. File 2006 federal taxes free Any qualified retail improvement property placed in service before January 1, 2014. File 2006 federal taxes free 20-year property. File 2006 federal taxes free Farm buildings (other than single purpose agricultural or horticultural structures). File 2006 federal taxes free Municipal sewers not classified as 25-year property. File 2006 federal taxes free Initial clearing and grading land improvements for electric utility transmission and distribution plants. File 2006 federal taxes free 25-year property. File 2006 federal taxes free This class is water utility property, which is either of the following. File 2006 federal taxes free Property that is an integral part of the gathering, treatment, or commercial distribution of water, and that, without regard to this provision, would be 20-year property. File 2006 federal taxes free Municipal sewers other than property placed in service under a binding contract in effect at all times since June 9, 1996. File 2006 federal taxes free Residential rental property. File 2006 federal taxes free This is any building or structure, such as a rental home (including a mobile home), if 80% or more of its gross rental income for the tax year is from dwelling units. File 2006 federal taxes free A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. File 2006 federal taxes free It does not include a unit in a hotel, motel, or other establishment where more than half the units are used on a transient basis. File 2006 federal taxes free If you occupy any part of the building or structure for personal use, its gross rental income includes the fair rental value of the part you occupy. File 2006 federal taxes free Nonresidential real property. File 2006 federal taxes free This is section 1250 property, such as an office building, store, or warehouse, that is neither residential rental property nor property with a class life of less than 27. File 2006 federal taxes free 5 years. File 2006 federal taxes free Qualified rent-to-own property. File 2006 federal taxes free   Qualified rent-to-own property is property held by a rent-to-own dealer for purposes of being subject to a rent-to-own contract. File 2006 federal taxes free It is tangible personal property generally used in the home for personal use. File 2006 federal taxes free It includes computers and peripheral equipment, televisions, videocassette recorders, stereos, camcorders, appliances, furniture, washing machines and dryers, refrigerators, and other similar consumer durable property. File 2006 federal taxes free Consumer durable property does not include real property, aircraft, boats, motor vehicles, or trailers. File 2006 federal taxes free   If some of the property you rent to others under a rent-to-own agreement is of a type that may be used by the renters for either personal or business purposes, you still can treat this property as qualified property as long as it does not represent a significant portion of your leasing property. File 2006 federal taxes free However, if this dual-use property does represent a significant portion of your leasing property, you must prove that this property is qualified rent-to-own property. File 2006 federal taxes free Rent-to-own dealer. File 2006 federal taxes free   You are a rent-to-own dealer if you meet all the following requirements. File 2006 federal taxes free You regularly enter into rent-to-own contracts (defined below) in the ordinary course of your business for the use of consumer property. File 2006 federal taxes free A substantial portion of these contracts end with the customer returning the property before making all the payments required to transfer ownership. File 2006 federal taxes free The property is tangible personal property of a type generally used within the home for personal use. File 2006 federal taxes free Rent-to-own contract. File 2006 federal taxes free   This is any lease for the use of consumer property between a rent-to-own dealer and a customer who is an individual which— Is titled “Rent-to-Own Agreement,” “Lease Agreement with Ownership Option,” or other similar language. File 2006 federal taxes free Provides a beginning date and a maximum period of time, not to exceed 156 weeks or 36 months from the beginning date, for which the contract can be in effect (including renewals or options to extend). File 2006 federal taxes free Provides for regular periodic (weekly or monthly) payments that can be either level or decreasing. File 2006 federal taxes free If the payments are decreasing, no payment can be less than 40% of the largest payment. File 2006 federal taxes free Provides for total payments that generally exceed the normal retail price of the property plus interest. File 2006 federal taxes free Provides for total payments that do not exceed $10,000 for each item of property. File 2006 federal taxes free Provides that the customer has no legal obligation to make all payments outlined in the contract and that, at the end of each weekly or monthly payment period, the customer can either continue to use the property by making the next payment or return the property in good working order with no further obligations and no entitlement to a return of any prior payments. File 2006 federal taxes free Provides that legal title to the property remains with the rent-to-own dealer until the customer makes either all the required payments or the early purchase payments required under the contract to acquire legal title. File 2006 federal taxes free Provides that the customer has no right to sell, sublease, mortgage, pawn, pledge, or otherwise dispose of the property until all contract payments have been made. File 2006 federal taxes free Motorsports entertainment complex. File 2006 federal taxes free   This is a racing track facility permanently situated on land that hosts one or more racing events for automobiles, trucks, or motorcycles during the 36-month period after the first day of the month in which the facility is placed in service. File 2006 federal taxes free The events must be open to the public for the price of admission. File 2006 federal taxes free Qualified smart electric grid system. File 2006 federal taxes free   A qualified smart electric grid system means any smart grid property used as part of a system for electric distribution grid communications, monitoring, and management placed in service after October 3, 2008, by a taxpayer who is a supplier of electrical energy or a provider of electrical energy services. File 2006 federal taxes free Smart grid property includes electronics and related equipment that is capable of: Sensing, collecting, and monitoring data of or from all portions of a utility's electric distribution grid, Providing real-time, two-way communications to monitor or to manage the grid, and Providing real-time analysis of an event prediction based on collected data that can be used to provide electric distribution system reliability, quality, and performance. File 2006 federal taxes free Retail motor fuels outlet. File 2006 federal taxes free   Real property is a retail motor fuels outlet if it is used to a substantial extent in the retail marketing of petroleum or petroleum products (whether or not it is also used to sell food or other convenience items) and meets any one of the following three tests. File 2006 federal taxes free It is not larger than 1,400 square feet. File 2006 federal taxes free 50% or more of the gross revenues generated from the property are derived from petroleum sales. File 2006 federal taxes free 50% or more of the floor space in the property is devoted to petroleum marketing sales. File 2006 federal taxes free A retail motor fuels outlet does not include any facility related to petroleum and natural gas trunk pipelines. File 2006 federal taxes free Qualified leasehold improvement property. File 2006 federal taxes free    Generally, this is any improvement to an interior part of a building (placed in service before January 1, 2014) that is nonresidential real property, provided all of the requirements discussed in chapter 3 under Qualified leasehold improvement property are met. File 2006 federal taxes free   In addition, an improvement made by the lessor does not qualify as qualified leasehold improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor's death or in any of the following types of transactions. File 2006 federal taxes free A transaction to which section 381(a) applies, A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business, A like-kind exchange, involuntary conversion, or reacquisition of real property to the extent that the basis in the property represents the carryover basis, or Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor's or distributor's basis in the property. File 2006 federal taxes free Examples include the following. File 2006 federal taxes free A complete liquidation of a subsidiary. File 2006 federal taxes free A transfer to a corporation controlled by the transferor. File 2006 federal taxes free An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. File 2006 federal taxes free Qualified restaurant property. File 2006 federal taxes free   Qualified restaurant property is any section 1250 property that is a building placed in service after December 31, 2008, and before January 1, 2014. File 2006 federal taxes free Also, more than 50% of the building's square footage must be devoted to preparation of meals and seating for on-premises consumption of prepared meals. File 2006 federal taxes free Qualified smart electric meter. File 2006 federal taxes free   A qualified smart electric meter is any time-based meter and related communication equipment which is placed in service by a supplier of electric energy or a provider of electric energy services and which is capable of being used by you as part of a system that: Measures and records electricity usage data on a time-differentiated basis in at least 24 separate time segments per day; Provides for the exchange of information between the supplier or provider and the customer's smart electric meter in support of time-based rates or other forms of demand response; Provides data to the supplier or provider so that the supplier or provider can provide energy usage information to customers electronically, and Provides all commercial and residential customers of such supplier or provider with net metering. File 2006 federal taxes free Net metering means allowing a customer a credit, if any, as complies with applicable federal and state laws and regulations for providing electricity to the supplier or provider. File 2006 federal taxes free Natural gas gathering line and electric transmission property. File 2006 federal taxes free   Any natural gas gathering line placed in service after April 11, 2005, is treated as 7-year property, and electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity and any natural gas distribution line placed in service after April 11, 2005, are treated as 15-year property, if the following requirements are met. File 2006 federal taxes free The original use of the property must have begun with you after April 11, 2005. File 2006 federal taxes free Original use means the first use to which the property is put, whether or not by you. File 2006 federal taxes free Therefore, property used by any person before April 12, 2005, is not original use. File 2006 federal taxes free Original use includes additional capital expenditures you incurred to recondition or rebuild your property. File 2006 federal taxes free However, original use does not include the cost of reconditioned or rebuilt property you acquired. File 2006 federal taxes free Property containing used parts will not be treated as reconditioned or rebuilt if the cost of the used parts is not more than 20% of the total cost of the property. File 2006 federal taxes free The property must not be placed in service under a binding contract in effect before April 12, 2005. File 2006 federal taxes free The property must not be self-constructed property (property you manufacture, construct, or produce for your own use), if you began the manufacture, construction, or production of the property before April 12, 2005. File 2006 federal taxes free Property that is manufactured, constructed, or produced for your use by another person under a written binding contract entered into by you or a related party before the manufacture, construction, or production of the property is considered to be manufactured, constructed, or produced by you. File 2006 federal taxes free What Is the Placed in Service Date? You begin to claim depreciation when your property is placed in service for either use in a trade or business or the production of income. File 2006 federal taxes free The placed in service date for your property is the date the property is ready and available for a specific use. File 2006 federal taxes free It is therefore not necessarily the date it is first used. File 2006 federal taxes free If you converted property held for personal use to use in a trade or business or for the production of income, treat the property as being placed in service on the conversion date. File 2006 federal taxes free See Placed in Service under When Does Depreciation Begin and End in chapter 1 for examples illustrating when property is placed in service. File 2006 federal taxes free What Is the Basis for Depreciation? The basis for depreciation of MACRS property is the property's cost or other basis multiplied by the percentage of business/investment use. File 2006 federal taxes free For a discussion of business/investment use, see Partial business or investment use under Property Used in Your Business or Income-Producing Activity in chapter 1 . File 2006 federal taxes free Reduce that amount by any credits and deductions allocable to the property. File 2006 federal taxes free The following are examples of some credits and deductions that reduce basis. File 2006 federal taxes free Any deduction for section 179 property. File 2006 federal taxes free Any deduction under section 179B of the Internal Revenue Code for capital costs to comply with Environmental Protection Agency sulfur regulations. File 2006 federal taxes free Any deduction under section 179C of the Internal Revenue Code for certain qualified refinery property placed in service after August 8, 2005, and before January 1, 2014. File 2006 federal taxes free Any deduction under section 179D of the Internal Revenue Code for certain energy efficient commercial building property placed in service after December 31, 2005, and before January 1, 2014. File 2006 federal taxes free Any deduction under section 179E of the Internal Revenue Code for qualified advanced mine safety equipment property placed in service after December 20, 2006, and before January 1, 2014 . File 2006 federal taxes free Any deduction for removal of barriers to the disabled and the elderly. File 2006 federal taxes free Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. File 2006 federal taxes free Any special depreciation allowance. File 2006 federal taxes free Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. File 2006 federal taxes free For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. File 2006 federal taxes free Enter the basis for depreciation under column (c) in Part III of Form 4562. File 2006 federal taxes free For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property in chapter 1 . File 2006 federal taxes free Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. File 2006 federal taxes free It is determined based on the depreciation system (GDS or ADS) used. File 2006 federal taxes free Recovery Periods Under GDS Under GDS, property that is not qualified Indian reservation property is depreciated over one of the following recovery periods. File 2006 federal taxes free Property Class Recovery Period 3-year property   3 years 1   5-year property   5 years     7-year property   7 years     10-year property   10 years     15-year property   15 years 2   20-year property   20 years     25-year property   25 years 3   Residential rental property   27. File 2006 federal taxes free 5 years     Nonresidential real property   39 years 4   15 years for qualified rent-to-own property placed in service before August 6, 1997. File 2006 federal taxes free 239 years for property that is a retail motor fuels outlet placed in service before August 20, 1996 (31. File 2006 federal taxes free 5 years if placed in service before May 13, 1993), unless you elected to depreciate it over 15 years. File 2006 federal taxes free 320 years for property placed in service before June 13, 1996, or under a binding contract in effect before June 10, 1996. File 2006 federal taxes free 431. File 2006 federal taxes free 5 years for property placed in service before May 13, 1993 (or before January 1, 1994, if the purchase or construction of the property is under a binding contract in effect before May 13, 1993, or if construction began before May 13, 1993). File 2006 federal taxes free The GDS recovery periods for property not listed above can be found in Appendix B, Table of Class Lives and Recovery Periods. File 2006 federal taxes free Residential rental property and nonresidential real property are defined earlier under Which Depreciation System (GDS or ADS) Applies. File 2006 federal taxes free Enter the appropriate recovery period on Form 4562 under column (d) in section B of Part III, unless already shown (for 25-year property, residential rental property, and nonresidential real property). File 2006 federal taxes free Office in the home. File 2006 federal taxes free   If your home is a personal-use single family residence and you begin to use part of your home as an office, depreciate that part of your home as nonresidential real property over 39 years (31. File 2006 federal taxes free 5 years if you began using it for business before May 13, 1993). File 2006 federal taxes free However, if your home is an apartment in an apartment building that you own and the building is residential rental property as defined earlier under Which Depreciation System (GDS or ADS) Applies , depreciate the part used as an office as residential rental property over 27. File 2006 federal taxes free 5 years. File 2006 federal taxes free See Publication 587 for a discussion of the tests you must meet to claim expenses, including depreciation, for the business use of your home. File 2006 federal taxes free Home changed to rental use. File 2006 federal taxes free   If you begin to rent a home that was your personal home before 1987, you depreciate it as residential rental property over 27. File 2006 federal taxes free 5 years. File 2006 federal taxes free Indian Reservation Property The recovery periods for qualified property you placed in service on an Indian reservation after 1993 and before 2014 are shorter than those listed earlier. File 2006 federal taxes free The following table shows these shorter recovery periods. File 2006 federal taxes free Property Class Recovery  Period 3-year property 2 years 5-year property 3 years 7-year property 4 years 10-year property 6 years 15-year property 9 years 20-year property 12 years Nonresidential real property 22 years Nonresidential real property is defined earlier under Which Property Class Applies Under GDS . File 2006 federal taxes free Use this chart to find the correct percentage table to use for qualified Indian reservation property. File 2006 federal taxes free IF your recovery period is: THEN use the following table in Appendix A: 2 years A-21 3 years A-1, A-2, A-3, A-4, or A-5 4 years A-22 6 years A-23 9 years A-14, A-15, A-16, A-17, or A-18 12 years A-14, A-15, A-16, A-17, or A-18 22 years A-24 Qualified property. File 2006 federal taxes free   Property eligible for the shorter recovery periods are 3-, 5-, 7-, 10-, 15-, and 20-year property and nonresidential real property. File 2006 federal taxes free You must use this property predominantly in the active conduct of a trade or business within an Indian reservation. File 2006 federal taxes free The rental of real property that is located on an Indian reservation is treated as the active conduct of a trade or business within an Indian reservation. File 2006 federal taxes free   The following property is not qualified property. File 2006 federal taxes free Property used or located outside an Indian reservation on a regular basis, other than qualified infrastructure property. File 2006 federal taxes free Property acquired directly or indirectly from a related person. File 2006 federal taxes free Property placed in service for purposes of conducting or housing class I, II, or III gaming activities. File 2006 federal taxes free These activities are defined in section 4 of the Indian Regulatory Act (25 U. File 2006 federal taxes free S. File 2006 federal taxes free C. File 2006 federal taxes free 2703). File 2006 federal taxes free Any property you must depreciate under ADS. File 2006 federal taxes free Determine whether property is qualified without regard to the election to use ADS and after applying the special rules for listed property not used predominantly for qualified business use (discussed in chapter 5). File 2006 federal taxes free Qualified infrastructure property. File 2006 federal taxes free   Item (1) above does not apply to qualified infrastructure property located outside the reservation that is used to connect with qualified infrastructure property within the reservation. File 2006 federal taxes free Qualified infrastructure property is property that meets all the following rules. File 2006 federal taxes free It is qualified property, as defined earlier, except that it is outside the reservation. File 2006 federal taxes free It benefits the tribal infrastructure. File 2006 federal taxes free It is available to the general public. File 2006 federal taxes free It is placed in service in connection with the active conduct of a trade or business within a reservation. File 2006 federal taxes free Infrastructure property includes, but is not limited to, roads, power lines, water systems, railroad spurs, and communications facilities. File 2006 federal taxes free Related person. File 2006 federal taxes free   For purposes of item (2) above, 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 for a description of related persons. File 2006 federal taxes free Indian reservation. File 2006 federal taxes free   The term Indian reservation means a reservation as defined in section 3(d) of the Indian Financing Act of 1974 (25 U. File 2006 federal taxes free S. File 2006 federal taxes free C. File 2006 federal taxes free 1452(d)) or section 4(10) of the Indian Child Welfare Act of 1978 (25 U. File 2006 federal taxes free S. File 2006 federal taxes free C. File 2006 federal taxes free 1903(10)). File 2006 federal taxes free Section 3(d) of the Indian Financing Act of 1974 defines reservation to include former Indian reservations in Oklahoma. File 2006 federal taxes free For a definition of the term “former Indian reservations in Oklahoma,” see Notice 98-45 in Internal Revenue Bulletin 1998-35. File 2006 federal taxes free Recovery Periods Under ADS The recovery periods for most property generally are longer under ADS than they are under GDS. File 2006 federal taxes free The following table shows some of the ADS recovery periods. File 2006 federal taxes free Property Recovery  Period Rent-to-own property 4 years Automobiles and light duty trucks 5 years Computers and peripheral equipment 5 years High technology telephone station equipment installed on customer premises 5 years High technology medical equipment 5 years Personal property with no class life 12 years Natural gas gathering lines 14 years Single purpose agricultural and horticultural structures 15 years Any tree or vine bearing fruit or nuts 20 years Initial clearing and grading land  improvements for gas utility property 20 years Initial clearing and grading land  improvements for electric utility  transmission and distribution plants 25 years Electric transmission property used in the transmission at 69 or more kilovolts of electricity 30 years Natural gas distribution lines 35 years Any qualified leasehold improvement property 39 years Any qualified restaurant property 39 years Nonresidential real property 40 years Residential rental property 40 years Section 1245 real property not listed in Appendix B 40 years Railroad grading and tunnel bore 50 years The ADS recovery periods for property not listed above can be found in the tables in Appendix B. File 2006 federal taxes free Rent-to-own property, qualified leasehold improvement property, qualified restaurant property, residential rental property, and nonresidential real property are defined earlier under Which Property Class Applies Under GDS . File 2006 federal taxes free Tax-exempt use property subject to a lease. File 2006 federal taxes free   The ADS recovery period for any property leased under a lease agreement to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership) cannot be less than 125% of the lease term. File 2006 federal taxes free Additions and Improvements An addition or improvement you make to depreciable property is treated as separate depreciable property. File 2006 federal taxes free See How Do You Treat Repairs and Improvements in chapter 1 for a definition of improvements. File 2006 federal taxes free Its property class and recovery period are the same as those that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. File 2006 federal taxes free The recovery period begins on the later of the following dates. File 2006 federal taxes free The date you place the addition or improvement in service. File 2006 federal taxes free The date you place in service the property to which you made the addition or improvement. File 2006 federal taxes free If the improvement you make is qualified leasehold improvement property, qualified restaurant property, or qualified retail improvement property, the GDS recovery period is 15 years (39 years under ADS). File 2006 federal taxes free Example. File 2006 federal taxes free You own a rental home that you have been renting out since 1981. File 2006 federal taxes free If you put an addition on the home and place the addition in service this year, you would use MACRS to figure your depreciation deduction for the addition. File 2006 federal taxes free Under GDS, the property class for the addition is residential rental property and its recovery period is 27. File 2006 federal taxes free 5 years because the home to which the addition is made would be residential rental property if you had placed it in service this year. File 2006 federal taxes free Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. File 2006 federal taxes free 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. File 2006 federal taxes free The mid-month convention. File 2006 federal taxes free   Use this convention for nonresidential real property, residential rental property, and any railroad grading or tunnel bore. File 2006 federal taxes free   Under this convention, you treat all property placed in service or disposed of during a month as placed in service or disposed of at the midpoint of the month. File 2006 federal taxes free This means that a one-half month of depreciation is allowed for the month the property is placed in service or disposed of. File 2006 federal taxes free   Your use of the mid-month convention is indicated by the “MM” already shown under column (e) in Part III of Form 4562. File 2006 federal taxes free The mid-quarter convention. File 2006 federal taxes free   Use this convention if the mid-month convention does not apply and the total depreciable bases of MACRS property you placed in service during the last 3 months of the tax year (excluding nonresidential real property, residential rental property, any railroad grading or tunnel bore, property placed in service and disposed of in the same year, and property that is being depreciated under a method other than MACRS) are more than 40% of the total depreciable bases of all MACRS property you placed in service during the entire year. File 2006 federal taxes free   Under this convention, you treat all property placed in service or disposed of during any quarter of the tax year as placed in service or disposed of at the midpoint of that quarter. File 2006 federal taxes free This means that 1½ months of depreciation is allowed for the quarter the property is placed in service or disposed of. File 2006 federal taxes free   If you use this convention, enter “MQ” under column (e) in Part III of Form 4562. File 2006 federal taxes free    For purposes of determining whether the mid-quarter convention applies, the depreciable basis of property you placed in service during the tax year reflects the reduction in basis for amounts expensed under section 179 and the part of the basis of property attributable to personal use. File 2006 federal taxes free However, it does not reflect any reduction in basis for any special depreciation allowance. File 2006 federal taxes free The half-year convention. File 2006 federal taxes free   Use this convention if neither the mid-quarter convention nor the mid-month convention applies. File 2006 federal taxes free   Under this convention, you treat all property placed in service or disposed of during a tax year as placed in service or disposed of at the midpoint of the year. File 2006 federal taxes free This means that a one-half year of depreciation is allowed for the year the property is placed in service or disposed of. File 2006 federal taxes free   If you use this convention, enter “HY” under column (e) in Part III of Form 4562. File 2006 federal taxes free Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. File 2006 federal taxes free The 200% declining balance method over a GDS recovery period. File 2006 federal taxes free The 150% declining balance method over a GDS recovery period. File 2006 federal taxes free The straight line method over a GDS recovery period. File 2006 federal taxes free The straight line method over an ADS recovery period. File 2006 federal taxes free For property placed in service before 1999, you could have elected the 150% declining balance method using the ADS recovery periods for certain property classes. File 2006 federal taxes free If you made this election, continue to use the same method and recovery period for that property. File 2006 federal taxes free Table 4–1 lists the types of property you can depreciate under each method. File 2006 federal taxes free It also gives a brief explanation of the method, including any benefits that may apply. File 2006 federal taxes free Depreciation Methods for Farm Property If you place personal property in service in a farming business after 1988, you generally must depreciate it under GDS using the 150% declining balance method unless you are a farmer who must depreciate the property under ADS using the straight line method or you elect to depreciate the property under GDS or ADS using the straight line method. File 2006 federal taxes free You can depreciate real property using the straight line method under either GDS or ADS. File 2006 federal taxes free Fruit or nut trees and vines. File 2006 federal taxes free   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a recovery period of 10 years. File 2006 federal taxes free ADS required for some farmers. File 2006 federal taxes free   If you elect not to apply the uniform capitalization rules to any plant produced in your farming business, you must use ADS. File 2006 federal taxes free You must use ADS for all property you place in service in any year the election is in effect. File 2006 federal taxes free See the regulations under section 263A of the Internal Revenue Code for information on the uniform capitalization rules that apply to farm property. File 2006 federal taxes free Electing a Different Method As shown in Table 4–1 , you can elect a different method for depreciation for certain types of property. File 2006 federal taxes free You must make the election by the due date of the return (including extensions) for the year you placed the property in service. File 2006 federal taxes free However, if you timely filed your return for the year without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). File 2006 federal taxes free Attach the election to the amended return and write “Filed pursuant to section 301. File 2006 federal taxes free 9100-2” on the election statement. File 2006 federal taxes free File the amended return at the same address you filed the original return. File 2006 federal taxes free Once you make the election, you cannot change it. File 2006 federal taxes free If you elect to use a different method for one item in a property class, you must apply the same method to all property in that class placed in service during the year of the election. File 2006 federal taxes free However, you can make the election on a property-by-property basis for nonresidential real and residential rental property. File 2006 federal taxes free 150% election. File 2006 federal taxes free   Instead of using the 200% declining balance method over the GDS recovery period for nonfarm property in the 3-, 5-, 7-, and 10-year property classes, you can elect to use the 150% declining balance method. File 2006 federal taxes free Make the election by entering “150 DB” under column (f) in Part III of Form 4562. File 2006 federal taxes free Straight line election. File 2006 federal taxes free   Instead of using either the 200% or 150% declining balance methods over the GDS recovery period, you can elect to use the straight line method over the GDS recovery period. File 2006 federal taxes free Make the election by entering  “S/L” under column (f) in Part III of Form 4562. File 2006 federal taxes free Election of ADS. File 2006 federal taxes free   As explained earlier under Which Depreciation System (GDS or ADS) Applies , you can elect to use ADS even though your property may come under GDS. File 2006 federal taxes free ADS uses the straight line method of depreciation over fixed ADS recovery periods. File 2006 federal taxes free Most ADS recovery periods are listed in Appendix B, or see the table under Recovery Periods Under ADS , earlier. File 2006 federal taxes free   Make the election by completing line 20 in Part III of Form 4562. File 2006 federal taxes free Farm property. File 2006 federal taxes free   Instead of using the 150% declining balance method over a GDS recovery period for property you use in a farming business (other than real property), you can elect to depreciate it using either of the following methods. File 2006 federal taxes free The straight line method over a GDS recovery period. File 2006 federal taxes free The straight line method over an ADS recovery period. File 2006 federal taxes free Table 4-1. File 2006 federal taxes free Depreciation Methods Note. File 2006 federal taxes free The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. File 2006 federal taxes free Method Type of Property Benefit GDS using 200% DB • Nonfarm 3-, 5-, 7-, and 10-year property • Provides a greater deduction during the earlier recovery years • Changes to SL when that method provides an equal or greater deduction GDS using 150% DB • All farm property (except real property) • All 15- and 20-year property (except qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property placed in service before January 1, 2014) • Nonfarm 3-, 5-, 7-, and 10-year property • Provides a greater deduction during the earlier recovery years • Changes to SL when that method provides an equal or greater deduction1 GDS using SL • Nonresidential real property • Qualified leasehold improvement property placed in service before January 1, 2014 • Qualified restaurant property placed in service before January 1, 2014 • Qualified retail improvement property placed in service before January 1, 2014 • Residential rental property • Trees or vines bearing fruit or nuts • Water utility property • All 3-, 5-, 7-, 10-, 15-, and 20-year property2 • Property for which you elected section 168(k)(4) • Provides for equal yearly deductions (except for the first and last years) ADS using SL • Listed property used 50% or less for business • Property used predominantly outside the U. File 2006 federal taxes free S. File 2006 federal taxes free  • Tax-exempt property • Tax-exempt bond-financed property • Farm property used when an election not to apply the uniform capitalization rules is in effect • Imported property3 • Any property for which you elect to use this method4 • Provides for equal yearly deductions (except for the first and last years) 1The MACRS percentage tables in Appendix A have the switch to the straight line method built into their rates 2See section 168(b)(5) of the Internal Revenue Code. File 2006 federal taxes free 3See section 168(g)(6) of the Internal Revenue Code 4See section 168(g)(7) of the Internal Revenue Code How Is the Depreciation Deduction Figured? To figure your depreciation deduction under MACRS, you first determine the depreciation system, property class, placed in service date, basis amount, recovery period, convention, and depreciation method that applies to your property. File 2006 federal taxes free Then, you are ready to figure your depreciation deduction. File 2006 federal taxes free You can figure it using a percentage table provided by the IRS, or you can figure it yourself without using the table. File 2006 federal taxes free Using the MACRS Percentage Tables To help you figure your deduction under MACRS, the IRS has established percentage tables that incorporate the applicable convention and depreciation method. File 2006 federal taxes free These percentage tables are in Appendix A near the end of this publication. File 2006 federal taxes free Which table to use. File 2006 federal taxes free    Appendix A contains the MACRS Percentage Table Guide, which is designed to help you locate the correct percentage table to use for depreciating your property. File 2006 federal taxes free The percentage tables immediately follow the guide. File 2006 federal taxes free Rules Covering the Use of the Tables The following rules cover the use of the percentage tables. File 2006 federal taxes free You must apply the rates in the percentage tables to your property's unadjusted basis. File 2006 federal taxes free You cannot use the percentage tables for a short tax year. File 2006 federal taxes free See Figuring the Deduction for a Short Tax Year, later, for information on the short tax year rules. File 2006 federal taxes free Once you start using the percentage tables for any item of property, you generally must continue to use them for the entire recovery period of the property. File 2006 federal taxes free You must stop using the tables if you adjust the basis of the property for any reason other than— Depreciation allowed or allowable, or An addition or improvement to that property that is depreciated as a separate item of property. File 2006 federal taxes free Basis adjustments other than those made due to the items listed in (4) include an increase in basis for the recapture of a clean-fuel deduction or credit and a reduction in basis for a casualty loss. File 2006 federal taxes free Basis adjustment due to recapture of clean-fuel vehicle deduction or credit. File 2006 federal taxes free   If you increase the basis of your property because of the recapture of part or all of a deduction for clean-fuel vehicles or the credit for clean-fuel vehicle refueling property placed in service before January 1, 2006, you cannot continue to use the percentage tables. File 2006 federal taxes free For the year of the adjustment and the remaining recovery period, you must figure the depreciation deduction yourself using the property's adjusted basis at the end of the year. File 2006 federal taxes free See Figuring the Deduction Without Using the Tables, later. File 2006 federal taxes free Basis adjustment due to casualty loss. File 2006 federal taxes free   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. File 2006 federal taxes free For the year of the adjustment and the remaining recovery period, you must figure the depreciation yourself using the property's adjusted basis at the end of the year. File 2006 federal taxes free See Figuring the Deduction Without Using the Tables, later. File 2006 federal taxes free Example. File 2006 federal taxes free On October 26, 2012, Sandra Elm, a calendar year taxpayer, bought and placed in service in her business a new item of 7-year property. File 2006 federal taxes free It cost $39,000 and she elected a section 179 deduction of $24,000. File 2006 federal taxes free She also took a special depreciation allowance of $7,500 [50% of $15,000 ($39,000 − $24,000)]. File 2006 federal taxes free Her unadjusted basis after the section 179 deduction and special depreciation allowance was $7,500 ($15,000 − $7,500). File 2006 federal taxes free She figured her MACRS depreciation deduction using the percentage tables. File 2006 federal taxes free For 2012, her MACRS depreciation deduction was $268. File 2006 federal taxes free In July 2013, the property was vandalized and Sandra had a deductible casualty loss of $3,000. File 2006 federal taxes free She must adjust the property's basis for the casualty loss, so she can no longer use the percentage tables. File 2006 federal taxes free Her adjusted basis at the end of 2013, before figuring her 2013 depreciation, is $4,232. File 2006 federal taxes free She figures that amount by subtracting the 2012 MACRS depreciation of $268 and the casualty loss of $3,000 from the unadjusted basis of $7,500. File 2006 federal taxes free She must now figure her depreciation for 2013 without using the percentage tables. File 2006 federal taxes free Figuring the Unadjusted Basis of Your Property You must apply the table rates to your property's unadjusted basis each year of the recovery period. File 2006 federal taxes free Unadjusted basis is the same basis amount you would use to figure gain on a sale, but you figure it without reducing your original basis by any MACRS depreciation taken in earlier years. File 2006 federal taxes free However, you do reduce your original basis by other amounts, including the following. File 2006 federal taxes free Any amortization taken on the property. File 2006 federal taxes free Any section 179 deduction claimed. File 2006 federal taxes free Any special depreciation allowance taken on the property. File 2006 federal taxes free For business property you purchase during the year, the unadjusted basis is its cost minus these and other applicable adjustments. File 2006 federal taxes free If you trade property, your unadjusted basis in the property received is the cash paid plus the adjusted basis of the property traded minus these adjustments. File 2006 federal taxes free MACRS Worksheet You can use this worksheet to help you figure your depreciation deduction using the percentage tables. File 2006 federal taxes free Use a separate worksheet for each item of property. File 2006 federal taxes free Then, use the information from this worksheet to prepare Form 4562. File 2006 federal taxes free Do not use this worksheet for automobiles. File 2006 federal taxes free Use the Depreciation Worksheet for Passenger Automobiles in chapter 5. File 2006 federal taxes free MACRS Worksheet Part I   1. File 2006 federal taxes free MACRS system (GDS or ADS)   2. File 2006 federal taxes free Property class   3. File 2006 federal taxes free Date placed in service   4. File 2006 federal taxes free Recovery period   5. File 2006 federal taxes free Method and convention   6. File 2006 federal taxes free Depreciation rate (from tables)   Part II   7. File 2006 federal taxes free Cost or other basis* $     8. File 2006 federal taxes free Business/investment use   %   9. File 2006 federal taxes free Multiply line 7 by line 8   $ 10. File 2006 federal taxes free Total claimed for section 179 deduction and other items   $ 11. File 2006 federal taxes free Subtract line 10 from line 9. File 2006 federal taxes free This is your tentative basis for depreciation   $ 12. File 2006 federal taxes free Multiply line 11 by . File 2006 federal taxes free 50 if the 50% special depreciation allowance applies. File 2006 federal taxes free This is your special depreciation allowance. File 2006 federal taxes free Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance   $ 13. File 2006 federal taxes free Subtract line 12 from line 11. File 2006 federal taxes free This is your basis for depreciation     14. File 2006 federal taxes free Depreciation rate (from line 6)     15. File 2006 federal taxes free Multiply line 13 by line 14. File 2006 federal taxes free This is your MACRS depreciation deduction   $ *If real estate, do not include cost (basis) of land. File 2006 federal taxes free The following example shows how to figure your MACRS depreciation deduction using the percentage tables and the MACRS worksheet. File 2006 federal taxes free Example. File 2006 federal taxes free You bought office furniture (7-year property) for $10,000 and placed it in service on August 11, 2013. File 2006 federal taxes free You use the furniture only for business. File 2006 federal taxes free This is the only property you placed in service this year. File 2006 federal taxes free You did not elect a section 179 deduction and the property is not qualified property for purposes of claiming a special depreciation allowance so your property's unadjusted basis is its cost, $10,000. File 2006 federal taxes free You use GDS and the half-year convention to figure your depreciation. File 2006 federal taxes free You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-1. File 2006 federal taxes free Multiply your property's unadjusted basis each year by the percentage for 7-year property given in Table A-1. File 2006 federal taxes free You figure your depreciation deduction using the MACRS worksheet as follows. File 2006 federal taxes free MACRS Worksheet Part I 1. File 2006 federal taxes free MACRS system (GDS or ADS) GDS 2. File 2006 federal taxes free Property class 7-year 3. File 2006 federal taxes free Date placed in service 8/11/13 4. File 2006 federal taxes free Recovery period 7-Year 5. File 2006 federal taxes free Method and convention 200%DB/Half-Year 6. File 2006 federal taxes free Depreciation rate (from tables) . File 2006 federal taxes free 1429 Part II 7. File 2006 federal taxes free Cost or other basis* $10,000     8. File 2006 federal taxes free Business/investment use 100 %   9. File 2006 federal taxes free Multiply line 7 by line 8   $10,000 10. File 2006 federal taxes free Total claimed for section 179 deduction and other items   -0- 11. File 2006 federal taxes free Subtract line 10 from line 9. File 2006 federal taxes free This is your tentative basis for depreciation   $10,000 12. File 2006 federal taxes free Multiply line 11 by . File 2006 federal taxes free 50 if the 50% special depreciation allowance applies. File 2006 federal taxes free This is your special depreciation allowance. File 2006 federal taxes free Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance   -0- 13. File 2006 federal taxes free Subtract line 12 from line 11. File 2006 federal taxes free This is your basis for depreciation   $10,000 14. File 2006 federal taxes free Depreciation rate (from line 6)   . File 2006 federal taxes free 1429 15. File 2006 federal taxes free Multiply line 13 by line 14. File 2006 federal taxes free This is your MACRS depreciation deduction   $1,429 *If real estate, do not include cost (basis) of land. File 2006 federal taxes free If there are no adjustments to the basis of the property other than depreciation, your depreciation deduction for each subsequent year of the recovery period will be as follows. File 2006 federal taxes free Year   Basis Percentage Deduction 2014 $ 10,000 24. File 2006 federal taxes free 49%   $2,449   2015   10,000 17. File 2006 federal taxes free 49   1,749   2016   10,000 12. File 2006 federal taxes free 49   1,249   2017   10,000 8. File 2006 federal taxes free 93   893   2018   10,000 8. File 2006 federal taxes free 92   892   2019   10,000 8. File 2006 federal taxes free 93   893   2020   10,000 4. File 2006 federal taxes free 46   446   Examples The following examples are provided to show you how to use the percentage tables. File 2006 federal taxes free In both examples, assume the following. File 2006 federal taxes free You use the property only for business. File 2006 federal taxes free You use the calendar year as your tax year. File 2006 federal taxes free You use GDS for all the properties. File 2006 federal taxes free Example 1. File 2006 federal taxes free You bought a building and land for $120,000 and placed it in service on March 8. File 2006 federal taxes free The sales contract showed that the building cost $100,000 and the land cost $20,000. File 2006 federal taxes free It is nonresidential real property. File 2006 federal taxes free The building's unadjusted basis is its original cost, $100,000. File 2006 federal taxes free You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-7a. File 2006 federal taxes free March is the third month of your tax year, so multiply the building's unadjusted basis, $100,000, by the percentages for the third month in Table A-7a. File 2006 federal taxes free Your depreciation deduction for each of the first 3 years is as follows: Year   Basis Percentage Deduction 1st $ 100,000 2. File 2006 federal taxes free 033%   $2,033   2nd   100,000 2. File 2006 federal taxes free 564   2,564   3rd   100,000 2. File 2006 federal taxes free 564   2,564   Example 2. File 2006 federal taxes free During the year, you bought a machine (7-year property) for $4,000, office furniture (7-year property) for $1,000, and a computer (5-year property) for $5,000. File 2006 federal taxes free You placed the machine in service in January, the furniture in September, and the computer in October. File 2006 federal taxes free You do not elect a section 179 deduction and none of these items is qualified property for purposes of claiming a special depreciation allowance. File 2006 federal taxes free You placed property in service during the last 3 months of the year, so you must first determine if you have to use the mid-quarter convention. File 2006 federal taxes free The total bases of all property you placed in service during the year is $10,000. File 2006 federal taxes free The $5,000 basis of the computer, which you placed in service during the last 3 months (the fourth quarter) of your tax year, is more than 40% of the total bases of all property ($10,000) you placed in service during the year. File 2006 federal taxes free Therefore, you must use the mid-quarter convention for all three items. File 2006 federal taxes free You refer to the MACRS Percentage Table Guide in Appendix A to determine which table you should use under the mid-quarter convention. File 2006 federal taxes free The machine is 7-year property placed in service in the first quarter, so you use Table A-2. File 2006 federal taxes free The furniture is 7-year property placed in service in the third quarter, so you use Table A-4. File 2006 federal taxes free Finally, because the computer is 5-year property placed in service in the fourth quarter, you use Table A-6. File 2006 federal taxes free Knowing what table to use for each property, you figure the depreciation for the first 2 years as follows. File 2006 federal taxes free Year Property Basis Percentage Deduction 1st Machine $4,000 25. File 2006 federal taxes free 00 $1,000   2nd Machine 4,000 21. File 2006 federal taxes free 43 857   1st Furniture 1,000 10. File 2006 federal taxes free 71 107   2nd Furniture 1,000 25. File 2006 federal taxes free 51 255   1st Computer 5,000 5. File 2006 federal taxes free 00 250   2nd Computer 5,000 38. File 2006 federal taxes free 00 1,900   Sale or Other Disposition Before the Recovery Period Ends If you sell or otherwise dispose of your property before the end of its recovery period, your depreciation deduction for the year of the disposition will be only part of the depreciation amount for the full year. File 2006 federal taxes free You have disposed of your property if you have permanently withdrawn it from use in your business or income-producing activity because of its sale, exchange, retirement, abandonment, involuntary conversion, or destruction. File 2006 federal taxes free After you figure the full-year depreciation amount, figure the deductible part using the convention that applies to the property. File 2006 federal taxes free Half-year convention used. File 2006 federal taxes free   For property for which you used a half-year convention, the depreciation deduction for the year of the disposition is half the depreciation determined for the full year. File 2006 federal taxes free Mid-quarter convention used. File 2006 federal taxes free   For property for which you used the mid-quarter convention, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter in which you disposed of the property. File 2006 federal taxes free Quarter Percentage First 12. File 2006 federal taxes free 5% Second 37. File 2006 federal taxes free 5 Third 62. File 2006 federal taxes free 5 Fourth 87. File 2006 federal taxes free 5 Example. File 2006 federal taxes free On December 2, 2010, you placed in service an item of 5-year property costing $10,000. File 2006 federal taxes free You did not claim a section 179 deduction and the property does not qualify for a special depreciation allowance. File 2006 federal taxes free Your unadjusted basis for the property was $10,000. File 2006 federal taxes free You used the mid-quarter convention because this was the only item of business property you placed in service in 2010 and it was placed in service during the last 3 months of your tax year. File 2006 federal taxes free Your property is in the 5-year property class, so you used Table A-5 to figure your depreciation deduction. File 2006 federal taxes free Your deductions for 2010, 2011, and 2012 were $500 (5% of $10,000), $3,800 (38% of $10,000), and $2,280 (22. File 2006 federal taxes free 80% of $10,000). File 2006 federal taxes free You disposed of the property on April 6, 2013. File 2006 federal taxes free To determine your depreciation deduction for 2013, first figure the deduction for the full year. File 2006 federal taxes free This is $1,368 (13. File 2006 federal taxes free 68% of $10,000). File 2006 federal taxes free April is in the second quarter of the year, so you multiply $1,368 by 37. File 2006 federal taxes free 5% to get your depreciation deduction of $513 for 2013. File 2006 federal taxes free Mid-month convention used. File 2006 federal taxes free   If you dispose of residential rental or nonresidential real property, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by a fraction. File 2006 federal taxes free The numerator of the fraction is the number of months (including partial months) in the year that the property is considered in service. File 2006 federal taxes free The denominator is 12. File 2006 federal taxes free Example. File 2006 federal taxes free On July 2, 2011, you purchased and placed in service residential rental property. File 2006 federal taxes free The property cost $100,000, not including the cost of land. File 2006 federal taxes free You used Table A-6 to figure your MACRS depreciation for this property. File 2006 federal taxes free You sold the property on March 2, 2013. File 2006 federal taxes free You file your tax return based on the calendar year. File 2006 federal taxes free A full year of depreciation for 2013 is $3,636. File 2006 federal taxes free This is $100,000 multiplied by . File 2006 federal taxes free 03636 (the percentage for the seventh month of the third recovery year) from Table A-6 . File 2006 federal taxes free You then apply the mid-month convention for the 2½ months of use in 2013. File 2006 federal taxes free Treat the month of disposition as one-half month of use. File 2006 federal taxes free Multiply $3,636 by the fraction, 2. File 2006 federal taxes free 5 over 12, to get your 2013 depreciation deduction of $757. File 2006 federal taxes free 50. File 2006 federal taxes free Figuring the Deduction Without Using the Tables Instead of using the rates in the percentage tables to figure your depreciation deduction, you can figure it yourself. File 2006 federal taxes free Before making the computation each year, you must reduce your adjusted basis in the property by the depreciation claimed the previous year. File 2006 federal taxes free Figuring MACRS deductions without using the tables generally will result in a slightly different amount than using the tables. File 2006 federal taxes free Declining Balance Method When using a declining balance method, you apply the same depreciation rate each year to the adjusted basis of your property. File 2006 federal taxes free You must use the applicable convention for the first tax year and you must switch to the straight line method beginning in the first year for which it will give an equal or greater deduction. File 2006 federal taxes free The straight line method is explained later. File 2006 federal taxes free You figure depreciation for the year you place property in service as follows. File 2006 federal taxes free Multiply your adjusted basis in the property by the declining balance rate. File 2006 federal taxes free Apply the applicable convention. File 2006 federal taxes free You figure depreciation for all other years (before the year you switch to the straight line method) as follows. File 2006 federal taxes free Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years. File 2006 federal taxes free Multiply this new adjusted basis by the same declining balance rate used in earlier years. File 2006 federal taxes free If you dispose of property before the end of its recovery period, see Using the Applicable Convention, later, for information on how to figure depreciation for the year you dispose of it. File 2006 federal taxes free Figuring depreciation under the declining balance method and switching to the straight line method is illustrated in Example 1 , later, under Examples. File 2006 federal taxes free Declining balance rate. File 2006 federal taxes free   You figure your declining balance rate by dividing the specified declining balance percentage (150% or 200% changed to a decimal) by the number of years in the property's recovery period. File 2006 federal taxes free For example, for 3-year property depreciated using the 200% declining balance method, divide 2. File 2006 federal taxes free 00 (200%) by 3 to get 0. File 2006 federal taxes free 6667, or a 66. File 2006 federal taxes free 67% declining balance rate. File 2006 federal taxes free For 15-year property depreciated using the 150% declining balance method, divide 1. File 2006 federal taxes free 50 (150%) by 15 to get 0. File 2006 federal taxes free 10, or a 10% declining balance rate. File 2006 federal taxes free   The following table shows the declining balance rate for each property class and the first year for which the straight line method gives an equal or greater deduction. File 2006 federal taxes free Property Class Method Declining Balance Rate Year 3-year 200% DB 66. File 2006 federal taxes free 667% 3rd 5-year 200% DB 40. File 2006 federal taxes free 0 4th 7-year 200% DB 28. File 2006 federal taxes free 571 5th 10-year 200% DB 20. File 2006 federal taxes free 0 7th 15-year 150% DB 10. File 2006 federal taxes free 0 7th 20-year 150% DB 7. File 2006 federal taxes free 5 9th Straight Line Method When using the straight line method, you apply a different depreciation rate each year to the adjusted basis of your property. File 2006 federal taxes free You must use the applicable convention in the year you place the property in service and the year you dispose of the property. File 2006 federal taxes free You figure depreciation for the year you place property in service as follows. File 2006 federal taxes free Multiply your adjusted basis in the property by the straight line rate. File 2006 federal taxes free Apply the applicable convention. File 2006 federal taxes free You figure depreciation for all other years (including the year you switch from the declining balance method to the straight line method) as follows. File 2006 federal taxes free Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years (under any method). File 2006 federal taxes free Determine the depreciation rate for the year. File 2006 federal taxes free Multiply the adjusted basis figured in (1) by the depreciation rate figured in (2). File 2006 federal taxes free If you dispose of property before the end of its recovery period, see Using the Applicable Convention , later, for information on how to figure depreciation for the year you dispose of it. File 2006 federal taxes free Straight line rate. File 2006 federal taxes free   You determine the straight line depreciation rate for any tax year by dividing the number 1 by the years remaining in the recovery period at the beginning of that year. File 2006 federal taxes free When figuring the number of years remaining, you must take into account the convention used in the year you placed the property in service. File 2006 federal taxes free If the number of years remaining is less than 1, the depreciation rate for that tax year is 1. File 2006 federal taxes free 0 (100%). File 2006 federal taxes free Using the Applicable Convention The applicable convention (discussed earlier under Which Convention Applies ) affects how you figure your depreciation deduction for the year you place your property in service and for the year you dispose of it. File 2006 federal taxes free It determines how much of the recovery period remains at the beginning of each year, so it also affects the depreciation rate for property you depreciate under the straight line method. File 2006 federal taxes free See Straight line rate in the previous discussion. File 2006 federal taxes free Use the applicable convention as explained in the following discussions. File 2006 federal taxes free Half-year convention. File 2006 federal taxes free   If this convention applies, you deduct a half-year of depreciation for the first year and the last year that you depreciate the property. File 2006 federal taxes free You deduct a full year of depreciation for any other year during the recovery period. File 2006 federal taxes free   Figure your depreciation deduction for the year you place the property in service by dividing the depreciation for a full year by 2. File 2006 federal taxes free If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. File 2006 federal taxes free If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final 6 months of the recovery period is the amount of your unrecovered basis in the property. File 2006 federal taxes free Mid-quarter convention. File 2006 federal taxes free   If this convention applies, the depreciation you can deduct for the first year you depreciate the property depends on the quarter in which you place the property in service. File 2006 federal taxes free   A quarter of a full 12-month tax year is a period of 3 months. File 2006 federal taxes free The first quarter in a year begins on the first day of the tax year. File 2006 federal taxes free The second quarter begins on the first day of the fourth month of the tax year. File 2006 federal taxes free The third quarter begins on the first day of the seventh month of the tax year. File 2006 federal taxes free The fourth quarter begins on the first day of the tenth month of the tax year. File 2006 federal taxes free A calendar year is divided into the following quarters. File 2006 federal taxes free Quarter Months First January, February, March Second April, May, June Third July, August, September Fourth October, November, December   Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by the percentage listed below for the quarter you place the property in service. File 2006 federal taxes free Quarter Percentage First 87. File 2006 federal taxes free 5% Second 62. File 2006 federal taxes free 5 Third 37. File 2006 federal taxes free 5 Fourth 12. File 2006 federal taxes free 5   If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter you dispose of the property. File 2006 federal taxes free Quarter Percentage First 12. File 2006 federal taxes free 5% Second 37. File 2006 federal taxes free 5 Third 62. File 2006 federal taxes free 5 Fourth 87. File 2006 federal taxes free 5   If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final quarter of the recovery period is the amount of your unrecovered basis in the property. File 2006 federal taxes free Mid-month convention. File 2006 federal taxes free   If this convention applies, the depreciation you can deduct for the first year that you depreciate the property depends on the month in which you place the property in service. File 2006 federal taxes free Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by a fraction. File 2006 federal taxes free The numerator of the fraction is the number of full months in the year that the property is in service plus ½ (or 0. File 2006 federal taxes free 5). File 2006 federal taxes free The denominator is 12. File 2006 federal taxes free   If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. File 2006 federal taxes free If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final month of the recovery period is the amount of your unrecovered basis in the property. File 2006 federal taxes free Example. File 2006 federal taxes free You use the calendar year and place nonresidential real property in service in August. File 2006 federal taxes free The property is in service 4 full months (September, October, November, and December). File 2006 federal taxes free Your numerator is 4. File 2006 federal taxes free 5 (4 full months plus 0. File 2006 federal taxes free 5). File 2006 federal taxes free You multiply the depreciation for a full year by 4. File 2006 federal taxes free 5/12, or 0. File 2006 federal taxes free 375. File 2006 federal taxes free Examples The following examples show how to figure depreciation under MACRS without using the percentage tables. File 2006 federal taxes free Figures are rounded for purposes of the examples. File 2006 federal taxes free Assume for all the examples that you use a calendar year as your tax year. File 2006 federal taxes free Example 1—200% DB method and half-year convention. File 2006 federal taxes free In February, you placed in service depreciable property with a 5-year recovery period and a basis of $1,000. File 2006 federal taxes free You do not elect to take the section 179 deduction and the property does not qualify for a special depreciation allowance. File 2006 federal taxes free You use GDS and the 200% declining balance (DB) method to figure your depreciation. File 2006 federal taxes free When the straight line (SL) method results in an equal or larger deduction, you switch to the SL method. File 2006 federal taxes free You did not place any property in service in the last 3 months of the year, so you must use the half-year convention. File 2006 federal taxes free First year. File 2006 federal taxes free You figure the depreciation rate under the 200% DB method by dividing 2 (200%) by 5 (the number of years in the recovery period). File 2006 federal taxes free The result is 40%. File 2006 federal taxes free You multiply the adjusted basis of the property ($1,000) by the 40% DB rate. File 2006 federal taxes free You apply the half-year convention by dividing the result ($400) by 2. File 2006 federal taxes free Depreciation for the first year under the 200% DB method is $200. File 2006 federal taxes free You figure the depreciation rate under the straight line (SL) method by dividing 1 by 5, the number of years in the recovery period. File 2006 federal taxes free The result is 20%. File 2006 federal taxes free You multiply the adjusted basis of the property ($1,000) by the 20% SL rate. File 2006 federal taxes free You apply the half-year convention by dividing the result ($200) by 2. File 2006 federal taxes free Depreciation for the first year under the SL method is $100. File 2006 federal taxes free The DB method provides a larger deduction, so you deduct the $200 figured under the 200% DB method. File 2006 federal taxes free Second year. File 2006 federal taxes free You reduce the adjusted basis ($1,000) by the depreciation claimed in the first year ($200). File 2006 federal taxes free You multiply the result ($800) by the DB rate (40%). File 2006 federal taxes free Depreciation for the second year under the 200% DB method is $320. File 2006 federal taxes free You figure the SL depreciation rate by dividing 1 by 4. File 2006 federal taxes free 5, the number of years remaining in the recovery period. File 2006 federal taxes free (Based on the half-year convention, you used only half a year of the recovery period in the first year. File 2006 federal taxes free ) You multiply the reduced adjusted basis ($800) by the result (22. File 2006 federal taxes free 22%). File 2006 federal taxes free Depreciation under the SL method for the second year is $178. File 2006 federal taxes free The DB method provides a larger deduction, so you deduct the $320 figured under the 200% DB method. File 2006 federal taxes free Third year. File 2006 federal taxes free You reduce the adjusted basis ($800) by the depreciation claimed in the second year ($320). File 2006 federal taxes free You multiply the result ($480) by the DB rate (40%). File 2006 federal taxes free Depreciation for the third year under the 200% DB method is $192. File 2006 federal taxes free You figure the SL depreciation rate by dividing 1 by 3. File 2006 federal taxes free 5. File 2006 federal taxes free You multiply the reduced adjusted basis ($480) by the result (28. File 2006 federal taxes free 57%). File 2006 federal taxes free Depreciation under the SL method for the third year is $137. File 2006 federal taxes free The DB method provides a larger deduction, so you deduct the $192 figured under the 200% DB method. File 2006 federal taxes free Fourth year. File 2006 federal taxes free You reduce the adjusted basis ($480) by the de