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Free efile federal 4. Free efile federal   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. Free efile federal Rent-to-own contract. Free efile federal 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. Free efile federal MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Free efile federal Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. Free efile federal 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. Free efile federal This chapter explains how to determine which MACRS depreciation system applies to your property. Free efile federal It also discusses other information you need to know before you can figure depreciation under MACRS. Free efile federal 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. Free efile federal 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. Free efile federal Finally, it explains when and how to recapture MACRS depreciation. Free efile federal 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. Free efile federal 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. Free efile federal You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Free efile federal If you placed your property in service in 2013, complete Part III of Form 4562 to report depreciation using MACRS. Free efile federal Complete section B of Part III to report depreciation using GDS, and complete section C of Part III to report depreciation using ADS. Free efile federal 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. Free efile federal Required use of ADS. Free efile federal   You must use ADS for the following property. Free efile federal Listed property used 50% or less in a qualified business use. Free efile federal See chapter 5 for information on listed property. Free efile federal Any tangible property used predominantly outside the United States during the year. Free efile federal Any tax-exempt use property. Free efile federal Any tax-exempt bond-financed property. Free efile federal 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. Free efile federal 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. Free efile federal 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. Free efile federal Electing ADS. Free efile federal   Although your property may qualify for GDS, you can elect to use ADS. Free efile federal The election generally must cover all property in the same property class that you placed in service during the year. Free efile federal However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. Free efile federal Once you make this election, you can never revoke it. Free efile federal   You make the election by completing line 20 in Part III of Form 4562. Free efile federal 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. Free efile federal These property classes are also listed under column (a) in section B, Part III, of Form 4562. Free efile federal For detailed information on property classes, see Appendix B, Table of Class Lives and Recovery Periods, in this publication. Free efile federal 3-year property. Free efile federal Tractor units for over-the-road use. Free efile federal Any race horse over 2 years old when placed in service. Free efile federal (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. Free efile federal ) Any other horse (other than a race horse) over 12 years old when placed in service. Free efile federal Qualified rent-to-own property (defined later). Free efile federal 5-year property. Free efile federal Automobiles, taxis, buses, and trucks. Free efile federal Computers and peripheral equipment. Free efile federal Office machinery (such as typewriters, calculators, and copiers). Free efile federal Any property used in research and experimentation. Free efile federal Breeding cattle and dairy cattle. Free efile federal Appliances, carpets, furniture, etc. Free efile federal , used in a residential rental real estate activity. Free efile federal Certain geothermal, solar, and wind energy property. Free efile federal 7-year property. Free efile federal Office furniture and fixtures (such as desks, files, and safes). Free efile federal Agricultural machinery and equipment. Free efile federal Any property that does not have a class life and has not been designated by law as being in any other class. Free efile federal Certain motorsports entertainment complex property (defined later) placed in service before January 1, 2014. Free efile federal Any natural gas gathering line placed in service after April 11, 2005. Free efile federal See Natural gas gathering line and electric transmission property , later. Free efile federal 10-year property. Free efile federal Vessels, barges, tugs, and similar water transportation equipment. Free efile federal Any single purpose agricultural or horticultural structure. Free efile federal Any tree or vine bearing fruits or nuts. Free efile federal Qualified small electric meter and qualified smart electric grid system (defined later) placed in service on or after October 3, 2008. Free efile federal 15-year property. Free efile federal Certain improvements made directly to land or added to it (such as shrubbery, fences, roads, sidewalks, and bridges). Free efile federal Any retail motor fuels outlet (defined later), such as a convenience store. Free efile federal Any municipal wastewater treatment plant. Free efile federal Any qualified leasehold improvement property (defined later) placed in service before January 1, 2014. Free efile federal Any qualified restaurant property (defined later) placed in service before January 1, 2014. Free efile federal Initial clearing and grading land improvements for gas utility property. Free efile federal 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. Free efile federal See Natural gas gathering line and electric transmission property , later. Free efile federal Any natural gas distribution line placed in service after April 11, 2005 and before January 1, 2011. Free efile federal Any qualified retail improvement property placed in service before January 1, 2014. Free efile federal 20-year property. Free efile federal Farm buildings (other than single purpose agricultural or horticultural structures). Free efile federal Municipal sewers not classified as 25-year property. Free efile federal Initial clearing and grading land improvements for electric utility transmission and distribution plants. Free efile federal 25-year property. Free efile federal This class is water utility property, which is either of the following. Free efile federal 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. Free efile federal Municipal sewers other than property placed in service under a binding contract in effect at all times since June 9, 1996. Free efile federal Residential rental property. Free efile federal 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. Free efile federal A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. Free efile federal 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. Free efile federal 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. Free efile federal Nonresidential real property. Free efile federal 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. Free efile federal 5 years. Free efile federal Qualified rent-to-own property. Free efile federal   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. Free efile federal It is tangible personal property generally used in the home for personal use. Free efile federal It includes computers and peripheral equipment, televisions, videocassette recorders, stereos, camcorders, appliances, furniture, washing machines and dryers, refrigerators, and other similar consumer durable property. Free efile federal Consumer durable property does not include real property, aircraft, boats, motor vehicles, or trailers. Free efile federal   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. Free efile federal 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. Free efile federal Rent-to-own dealer. Free efile federal   You are a rent-to-own dealer if you meet all the following requirements. Free efile federal You regularly enter into rent-to-own contracts (defined below) in the ordinary course of your business for the use of consumer property. Free efile federal A substantial portion of these contracts end with the customer returning the property before making all the payments required to transfer ownership. Free efile federal The property is tangible personal property of a type generally used within the home for personal use. Free efile federal Rent-to-own contract. Free efile federal   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. Free efile federal 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). Free efile federal Provides for regular periodic (weekly or monthly) payments that can be either level or decreasing. Free efile federal If the payments are decreasing, no payment can be less than 40% of the largest payment. Free efile federal Provides for total payments that generally exceed the normal retail price of the property plus interest. Free efile federal Provides for total payments that do not exceed $10,000 for each item of property. Free efile federal 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. Free efile federal 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. Free efile federal 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. Free efile federal Motorsports entertainment complex. Free efile federal   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. Free efile federal The events must be open to the public for the price of admission. Free efile federal Qualified smart electric grid system. Free efile federal   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. Free efile federal 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. Free efile federal Retail motor fuels outlet. Free efile federal   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. Free efile federal It is not larger than 1,400 square feet. Free efile federal 50% or more of the gross revenues generated from the property are derived from petroleum sales. Free efile federal 50% or more of the floor space in the property is devoted to petroleum marketing sales. Free efile federal A retail motor fuels outlet does not include any facility related to petroleum and natural gas trunk pipelines. Free efile federal Qualified leasehold improvement property. Free efile federal    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. Free efile federal   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. Free efile federal 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. Free efile federal Examples include the following. Free efile federal A complete liquidation of a subsidiary. Free efile federal A transfer to a corporation controlled by the transferor. Free efile federal An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. Free efile federal Qualified restaurant property. Free efile federal   Qualified restaurant property is any section 1250 property that is a building placed in service after December 31, 2008, and before January 1, 2014. Free efile federal 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. Free efile federal Qualified smart electric meter. Free efile federal   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. Free efile federal 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. Free efile federal Natural gas gathering line and electric transmission property. Free efile federal   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. Free efile federal The original use of the property must have begun with you after April 11, 2005. Free efile federal Original use means the first use to which the property is put, whether or not by you. Free efile federal Therefore, property used by any person before April 12, 2005, is not original use. Free efile federal Original use includes additional capital expenditures you incurred to recondition or rebuild your property. Free efile federal However, original use does not include the cost of reconditioned or rebuilt property you acquired. Free efile federal 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. Free efile federal The property must not be placed in service under a binding contract in effect before April 12, 2005. Free efile federal 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. Free efile federal 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. Free efile federal 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. Free efile federal The placed in service date for your property is the date the property is ready and available for a specific use. Free efile federal It is therefore not necessarily the date it is first used. Free efile federal 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. Free efile federal See Placed in Service under When Does Depreciation Begin and End in chapter 1 for examples illustrating when property is placed in service. Free efile federal 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. Free efile federal 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 . Free efile federal Reduce that amount by any credits and deductions allocable to the property. Free efile federal The following are examples of some credits and deductions that reduce basis. Free efile federal Any deduction for section 179 property. Free efile federal Any deduction under section 179B of the Internal Revenue Code for capital costs to comply with Environmental Protection Agency sulfur regulations. Free efile federal 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. Free efile federal 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. Free efile federal 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 . Free efile federal Any deduction for removal of barriers to the disabled and the elderly. Free efile federal Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. Free efile federal Any special depreciation allowance. Free efile federal Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. Free efile federal For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. Free efile federal Enter the basis for depreciation under column (c) in Part III of Form 4562. Free efile federal 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 . Free efile federal Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. Free efile federal It is determined based on the depreciation system (GDS or ADS) used. Free efile federal Recovery Periods Under GDS Under GDS, property that is not qualified Indian reservation property is depreciated over one of the following recovery periods. Free efile federal 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. Free efile federal 5 years     Nonresidential real property   39 years 4   15 years for qualified rent-to-own property placed in service before August 6, 1997. Free efile federal 239 years for property that is a retail motor fuels outlet placed in service before August 20, 1996 (31. Free efile federal 5 years if placed in service before May 13, 1993), unless you elected to depreciate it over 15 years. Free efile federal 320 years for property placed in service before June 13, 1996, or under a binding contract in effect before June 10, 1996. Free efile federal 431. Free efile federal 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). Free efile federal The GDS recovery periods for property not listed above can be found in Appendix B, Table of Class Lives and Recovery Periods. Free efile federal Residential rental property and nonresidential real property are defined earlier under Which Depreciation System (GDS or ADS) Applies. Free efile federal 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). Free efile federal Office in the home. Free efile federal   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. Free efile federal 5 years if you began using it for business before May 13, 1993). Free efile federal 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. Free efile federal 5 years. Free efile federal See Publication 587 for a discussion of the tests you must meet to claim expenses, including depreciation, for the business use of your home. Free efile federal Home changed to rental use. Free efile federal   If you begin to rent a home that was your personal home before 1987, you depreciate it as residential rental property over 27. Free efile federal 5 years. Free efile federal 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. Free efile federal The following table shows these shorter recovery periods. Free efile federal 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 . Free efile federal Use this chart to find the correct percentage table to use for qualified Indian reservation property. Free efile federal 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. Free efile federal   Property eligible for the shorter recovery periods are 3-, 5-, 7-, 10-, 15-, and 20-year property and nonresidential real property. Free efile federal You must use this property predominantly in the active conduct of a trade or business within an Indian reservation. Free efile federal 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. Free efile federal   The following property is not qualified property. Free efile federal Property used or located outside an Indian reservation on a regular basis, other than qualified infrastructure property. Free efile federal Property acquired directly or indirectly from a related person. Free efile federal Property placed in service for purposes of conducting or housing class I, II, or III gaming activities. Free efile federal These activities are defined in section 4 of the Indian Regulatory Act (25 U. Free efile federal S. Free efile federal C. Free efile federal 2703). Free efile federal Any property you must depreciate under ADS. Free efile federal 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). Free efile federal Qualified infrastructure property. Free efile federal   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. Free efile federal Qualified infrastructure property is property that meets all the following rules. Free efile federal It is qualified property, as defined earlier, except that it is outside the reservation. Free efile federal It benefits the tribal infrastructure. Free efile federal It is available to the general public. Free efile federal It is placed in service in connection with the active conduct of a trade or business within a reservation. Free efile federal Infrastructure property includes, but is not limited to, roads, power lines, water systems, railroad spurs, and communications facilities. Free efile federal Related person. Free efile federal   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. Free efile federal Indian reservation. Free efile federal   The term Indian reservation means a reservation as defined in section 3(d) of the Indian Financing Act of 1974 (25 U. Free efile federal S. Free efile federal C. Free efile federal 1452(d)) or section 4(10) of the Indian Child Welfare Act of 1978 (25 U. Free efile federal S. Free efile federal C. Free efile federal 1903(10)). Free efile federal Section 3(d) of the Indian Financing Act of 1974 defines reservation to include former Indian reservations in Oklahoma. Free efile federal For a definition of the term “former Indian reservations in Oklahoma,” see Notice 98-45 in Internal Revenue Bulletin 1998-35. Free efile federal Recovery Periods Under ADS The recovery periods for most property generally are longer under ADS than they are under GDS. Free efile federal The following table shows some of the ADS recovery periods. Free efile federal 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. Free efile federal 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 . Free efile federal Tax-exempt use property subject to a lease. Free efile federal   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. Free efile federal Additions and Improvements An addition or improvement you make to depreciable property is treated as separate depreciable property. Free efile federal See How Do You Treat Repairs and Improvements in chapter 1 for a definition of improvements. Free efile federal 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. Free efile federal The recovery period begins on the later of the following dates. Free efile federal The date you place the addition or improvement in service. Free efile federal The date you place in service the property to which you made the addition or improvement. Free efile federal 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). Free efile federal Example. Free efile federal You own a rental home that you have been renting out since 1981. Free efile federal 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. Free efile federal Under GDS, the property class for the addition is residential rental property and its recovery period is 27. Free efile federal 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. Free efile federal Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. Free efile federal 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. Free efile federal The mid-month convention. Free efile federal   Use this convention for nonresidential real property, residential rental property, and any railroad grading or tunnel bore. Free efile federal   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. Free efile federal This means that a one-half month of depreciation is allowed for the month the property is placed in service or disposed of. Free efile federal   Your use of the mid-month convention is indicated by the “MM” already shown under column (e) in Part III of Form 4562. Free efile federal The mid-quarter convention. Free efile federal   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. Free efile federal   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. Free efile federal This means that 1½ months of depreciation is allowed for the quarter the property is placed in service or disposed of. Free efile federal   If you use this convention, enter “MQ” under column (e) in Part III of Form 4562. Free efile federal    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. Free efile federal However, it does not reflect any reduction in basis for any special depreciation allowance. Free efile federal The half-year convention. Free efile federal   Use this convention if neither the mid-quarter convention nor the mid-month convention applies. Free efile federal   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. Free efile federal This means that a one-half year of depreciation is allowed for the year the property is placed in service or disposed of. Free efile federal   If you use this convention, enter “HY” under column (e) in Part III of Form 4562. Free efile federal Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. Free efile federal The 200% declining balance method over a GDS recovery period. Free efile federal The 150% declining balance method over a GDS recovery period. Free efile federal The straight line method over a GDS recovery period. Free efile federal The straight line method over an ADS recovery period. Free efile federal 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. Free efile federal If you made this election, continue to use the same method and recovery period for that property. Free efile federal Table 4–1 lists the types of property you can depreciate under each method. Free efile federal It also gives a brief explanation of the method, including any benefits that may apply. Free efile federal 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. Free efile federal You can depreciate real property using the straight line method under either GDS or ADS. Free efile federal Fruit or nut trees and vines. Free efile federal   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a recovery period of 10 years. Free efile federal ADS required for some farmers. Free efile federal   If you elect not to apply the uniform capitalization rules to any plant produced in your farming business, you must use ADS. Free efile federal You must use ADS for all property you place in service in any year the election is in effect. Free efile federal See the regulations under section 263A of the Internal Revenue Code for information on the uniform capitalization rules that apply to farm property. Free efile federal Electing a Different Method As shown in Table 4–1 , you can elect a different method for depreciation for certain types of property. Free efile federal You must make the election by the due date of the return (including extensions) for the year you placed the property in service. Free efile federal 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). Free efile federal Attach the election to the amended return and write “Filed pursuant to section 301. Free efile federal 9100-2” on the election statement. Free efile federal File the amended return at the same address you filed the original return. Free efile federal Once you make the election, you cannot change it. Free efile federal 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. Free efile federal However, you can make the election on a property-by-property basis for nonresidential real and residential rental property. Free efile federal 150% election. Free efile federal   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. Free efile federal Make the election by entering “150 DB” under column (f) in Part III of Form 4562. Free efile federal Straight line election. Free efile federal   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. Free efile federal Make the election by entering  “S/L” under column (f) in Part III of Form 4562. Free efile federal Election of ADS. Free efile federal   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. Free efile federal ADS uses the straight line method of depreciation over fixed ADS recovery periods. Free efile federal Most ADS recovery periods are listed in Appendix B, or see the table under Recovery Periods Under ADS , earlier. Free efile federal   Make the election by completing line 20 in Part III of Form 4562. Free efile federal Farm property. Free efile federal   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. Free efile federal The straight line method over a GDS recovery period. Free efile federal The straight line method over an ADS recovery period. Free efile federal Table 4-1. Free efile federal Depreciation Methods Note. Free efile federal The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. Free efile federal 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. Free efile federal S. Free efile federal  • 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. Free efile federal 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. Free efile federal Then, you are ready to figure your depreciation deduction. Free efile federal You can figure it using a percentage table provided by the IRS, or you can figure it yourself without using the table. Free efile federal 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. Free efile federal These percentage tables are in Appendix A near the end of this publication. Free efile federal Which table to use. Free efile federal    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. Free efile federal The percentage tables immediately follow the guide. Free efile federal Rules Covering the Use of the Tables The following rules cover the use of the percentage tables. Free efile federal You must apply the rates in the percentage tables to your property's unadjusted basis. Free efile federal You cannot use the percentage tables for a short tax year. Free efile federal See Figuring the Deduction for a Short Tax Year, later, for information on the short tax year rules. Free efile federal 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. Free efile federal 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. Free efile federal 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. Free efile federal Basis adjustment due to recapture of clean-fuel vehicle deduction or credit. Free efile federal   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. Free efile federal 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. Free efile federal See Figuring the Deduction Without Using the Tables, later. Free efile federal Basis adjustment due to casualty loss. Free efile federal   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. Free efile federal 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. Free efile federal See Figuring the Deduction Without Using the Tables, later. Free efile federal Example. Free efile federal 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. Free efile federal It cost $39,000 and she elected a section 179 deduction of $24,000. Free efile federal She also took a special depreciation allowance of $7,500 [50% of $15,000 ($39,000 − $24,000)]. Free efile federal Her unadjusted basis after the section 179 deduction and special depreciation allowance was $7,500 ($15,000 − $7,500). Free efile federal She figured her MACRS depreciation deduction using the percentage tables. Free efile federal For 2012, her MACRS depreciation deduction was $268. Free efile federal In July 2013, the property was vandalized and Sandra had a deductible casualty loss of $3,000. Free efile federal She must adjust the property's basis for the casualty loss, so she can no longer use the percentage tables. Free efile federal Her adjusted basis at the end of 2013, before figuring her 2013 depreciation, is $4,232. Free efile federal 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. Free efile federal She must now figure her depreciation for 2013 without using the percentage tables. Free efile federal 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. Free efile federal 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. Free efile federal However, you do reduce your original basis by other amounts, including the following. Free efile federal Any amortization taken on the property. Free efile federal Any section 179 deduction claimed. Free efile federal Any special depreciation allowance taken on the property. Free efile federal For business property you purchase during the year, the unadjusted basis is its cost minus these and other applicable adjustments. Free efile federal 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. Free efile federal MACRS Worksheet You can use this worksheet to help you figure your depreciation deduction using the percentage tables. Free efile federal Use a separate worksheet for each item of property. Free efile federal Then, use the information from this worksheet to prepare Form 4562. Free efile federal Do not use this worksheet for automobiles. Free efile federal Use the Depreciation Worksheet for Passenger Automobiles in chapter 5. Free efile federal MACRS Worksheet Part I   1. Free efile federal MACRS system (GDS or ADS)   2. Free efile federal Property class   3. Free efile federal Date placed in service   4. Free efile federal Recovery period   5. Free efile federal Method and convention   6. Free efile federal Depreciation rate (from tables)   Part II   7. Free efile federal Cost or other basis* $     8. Free efile federal Business/investment use   %   9. Free efile federal Multiply line 7 by line 8   $ 10. Free efile federal Total claimed for section 179 deduction and other items   $ 11. Free efile federal Subtract line 10 from line 9. Free efile federal This is your tentative basis for depreciation   $ 12. Free efile federal Multiply line 11 by . Free efile federal 50 if the 50% special depreciation allowance applies. Free efile federal This is your special depreciation allowance. Free efile federal 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. Free efile federal Subtract line 12 from line 11. Free efile federal This is your basis for depreciation     14. Free efile federal Depreciation rate (from line 6)     15. Free efile federal Multiply line 13 by line 14. Free efile federal This is your MACRS depreciation deduction   $ *If real estate, do not include cost (basis) of land. Free efile federal The following example shows how to figure your MACRS depreciation deduction using the percentage tables and the MACRS worksheet. Free efile federal Example. Free efile federal You bought office furniture (7-year property) for $10,000 and placed it in service on August 11, 2013. Free efile federal You use the furniture only for business. Free efile federal This is the only property you placed in service this year. Free efile federal 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. Free efile federal You use GDS and the half-year convention to figure your depreciation. Free efile federal You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-1. Free efile federal Multiply your property's unadjusted basis each year by the percentage for 7-year property given in Table A-1. Free efile federal You figure your depreciation deduction using the MACRS worksheet as follows. Free efile federal MACRS Worksheet Part I 1. Free efile federal MACRS system (GDS or ADS) GDS 2. Free efile federal Property class 7-year 3. Free efile federal Date placed in service 8/11/13 4. Free efile federal Recovery period 7-Year 5. Free efile federal Method and convention 200%DB/Half-Year 6. Free efile federal Depreciation rate (from tables) . Free efile federal 1429 Part II 7. Free efile federal Cost or other basis* $10,000     8. Free efile federal Business/investment use 100 %   9. Free efile federal Multiply line 7 by line 8   $10,000 10. Free efile federal Total claimed for section 179 deduction and other items   -0- 11. Free efile federal Subtract line 10 from line 9. Free efile federal This is your tentative basis for depreciation   $10,000 12. Free efile federal Multiply line 11 by . Free efile federal 50 if the 50% special depreciation allowance applies. Free efile federal This is your special depreciation allowance. Free efile federal 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. Free efile federal Subtract line 12 from line 11. Free efile federal This is your basis for depreciation   $10,000 14. Free efile federal Depreciation rate (from line 6)   . Free efile federal 1429 15. Free efile federal Multiply line 13 by line 14. Free efile federal This is your MACRS depreciation deduction   $1,429 *If real estate, do not include cost (basis) of land. Free efile federal 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. Free efile federal Year   Basis Percentage Deduction 2014 $ 10,000 24. Free efile federal 49%   $2,449   2015   10,000 17. Free efile federal 49   1,749   2016   10,000 12. Free efile federal 49   1,249   2017   10,000 8. Free efile federal 93   893   2018   10,000 8. Free efile federal 92   892   2019   10,000 8. Free efile federal 93   893   2020   10,000 4. Free efile federal 46   446   Examples The following examples are provided to show you how to use the percentage tables. Free efile federal In both examples, assume the following. Free efile federal You use the property only for business. Free efile federal You use the calendar year as your tax year. Free efile federal You use GDS for all the properties. Free efile federal Example 1. Free efile federal You bought a building and land for $120,000 and placed it in service on March 8. Free efile federal The sales contract showed that the building cost $100,000 and the land cost $20,000. Free efile federal It is nonresidential real property. Free efile federal The building's unadjusted basis is its original cost, $100,000. Free efile federal You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-7a. Free efile federal 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. Free efile federal Your depreciation deduction for each of the first 3 years is as follows: Year   Basis Percentage Deduction 1st $ 100,000 2. Free efile federal 033%   $2,033   2nd   100,000 2. Free efile federal 564   2,564   3rd   100,000 2. Free efile federal 564   2,564   Example 2. Free efile federal 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. Free efile federal You placed the machine in service in January, the furniture in September, and the computer in October. Free efile federal You do not elect a section 179 deduction and none of these items is qualified property for purposes of claiming a special depreciation allowance. Free efile federal 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. Free efile federal The total bases of all property you placed in service during the year is $10,000. Free efile federal 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. Free efile federal Therefore, you must use the mid-quarter convention for all three items. Free efile federal You refer to the MACRS Percentage Table Guide in Appendix A to determine which table you should use under the mid-quarter convention. Free efile federal The machine is 7-year property placed in service in the first quarter, so you use Table A-2. Free efile federal The furniture is 7-year property placed in service in the third quarter, so you use Table A-4. Free efile federal Finally, because the computer is 5-year property placed in service in the fourth quarter, you use Table A-6. Free efile federal Knowing what table to use for each property, you figure the depreciation for the first 2 years as follows. Free efile federal Year Property Basis Percentage Deduction 1st Machine $4,000 25. Free efile federal 00 $1,000   2nd Machine 4,000 21. Free efile federal 43 857   1st Furniture 1,000 10. Free efile federal 71 107   2nd Furniture 1,000 25. Free efile federal 51 255   1st Computer 5,000 5. Free efile federal 00 250   2nd Computer 5,000 38. Free efile federal 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. Free efile federal 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. Free efile federal After you figure the full-year depreciation amount, figure the deductible part using the convention that applies to the property. Free efile federal Half-year convention used. Free efile federal   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. Free efile federal Mid-quarter convention used. Free efile federal   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. Free efile federal Quarter Percentage First 12. Free efile federal 5% Second 37. Free efile federal 5 Third 62. Free efile federal 5 Fourth 87. Free efile federal 5 Example. Free efile federal On December 2, 2010, you placed in service an item of 5-year property costing $10,000. Free efile federal You did not claim a section 179 deduction and the property does not qualify for a special depreciation allowance. Free efile federal Your unadjusted basis for the property was $10,000. Free efile federal 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. Free efile federal Your property is in the 5-year property class, so you used Table A-5 to figure your depreciation deduction. Free efile federal Your deductions for 2010, 2011, and 2012 were $500 (5% of $10,000), $3,800 (38% of $10,000), and $2,280 (22. Free efile federal 80% of $10,000). Free efile federal You disposed of the property on April 6, 2013. Free efile federal To determine your depreciation deduction for 2013, first figure the deduction for the full year. Free efile federal This is $1,368 (13. Free efile federal 68% of $10,000). Free efile federal April is in the second quarter of the year, so you multiply $1,368 by 37. Free efile federal 5% to get your depreciation deduction of $513 for 2013. Free efile federal Mid-month convention used. Free efile federal   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. Free efile federal The numerator of the fraction is the number of months (including partial months) in the year that the property is considered in service. Free efile federal The denominator is 12. Free efile federal Example. Free efile federal On July 2, 2011, you purchased and placed in service residential rental property. Free efile federal The property cost $100,000, not including the cost of land. Free efile federal You used Table A-6 to figure your MACRS depreciation for this property. Free efile federal You sold the property on March 2, 2013. Free efile federal You file your tax return based on the calendar year. Free efile federal A full year of depreciation for 2013 is $3,636. Free efile federal This is $100,000 multiplied by . Free efile federal 03636 (the percentage for the seventh month of the third recovery year) from Table A-6 . Free efile federal You then apply the mid-month convention for the 2½ months of use in 2013. Free efile federal Treat the month of disposition as one-half month of use. Free efile federal Multiply $3,636 by the fraction, 2. Free efile federal 5 over 12, to get your 2013 depreciation deduction of $757. Free efile federal 50. Free efile federal 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. Free efile federal Before making the computation each year, you must reduce your adjusted basis in the property by the depreciation claimed the previous year. Free efile federal Figuring MACRS deductions without using the tables generally will result in a slightly different amount than using the tables. Free efile federal Declining Balance Method When using a declining balance method, you apply the same depreciation rate each year to the adjusted basis of your property. Free efile federal 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. Free efile federal The straight line method is explained later. Free efile federal You figure depreciation for the year you place property in service as follows. Free efile federal Multiply your adjusted basis in the property by the declining balance rate. Free efile federal Apply the applicable convention. Free efile federal You figure depreciation for all other years (before the year you switch to the straight line method) as follows. Free efile federal Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years. Free efile federal Multiply this new adjusted basis by the same declining balance rate used in earlier years. Free efile federal 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. Free efile federal Figuring depreciation under the declining balance method and switching to the straight line method is illustrated in Example 1 , later, under Examples. Free efile federal Declining balance rate. Free efile federal   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. Free efile federal For example, for 3-year property depreciated using the 200% declining balance method, divide 2. Free efile federal 00 (200%) by 3 to get 0. Free efile federal 6667, or a 66. Free efile federal 67% declining balance rate. Free efile federal For 15-year property depreciated using the 150% declining balance method, divide 1. Free efile federal 50 (150%) by 15 to get 0. Free efile federal 10, or a 10% declining balance rate. Free efile federal   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. Free efile federal Property Class Method Declining Balance Rate Year 3-year 200% DB 66. Free efile federal 667% 3rd 5-year 200% DB 40. Free efile federal 0 4th 7-year 200% DB 28. Free efile federal 571 5th 10-year 200% DB 20. Free efile federal 0 7th 15-year 150% DB 10. Free efile federal 0 7th 20-year 150% DB 7. Free efile federal 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. Free efile federal You must use the applicable convention in the year you place the property in service and the year you dispose of the property. Free efile federal You figure depreciation for the year you place property in service as follows. Free efile federal Multiply your adjusted basis in the property by the straight line rate. Free efile federal Apply the applicable convention. Free efile federal You figure depreciation for all other years (including the year you switch from the declining balance method to the straight line method) as follows. Free efile federal Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years (under any method). Free efile federal Determine the depreciation rate for the year. Free efile federal Multiply the adjusted basis figured in (1) by the depreciation rate figured in (2). Free efile federal 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. Free efile federal Straight line rate. Free efile federal   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. Free efile federal When figuring the number of years remaining, you must take into account the convention used in the year you placed the property in service. Free efile federal If the number of years remaining is less than 1, the depreciation rate for that tax year is 1. Free efile federal 0 (100%). Free efile federal 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. Free efile federal 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. Free efile federal See Straight line rate in the previous discussion. Free efile federal Use the applicable convention as explained in the following discussions. Free efile federal Half-year convention. Free efile federal   If this convention applies, you deduct a half-year of depreciation for the first year and the last year that you depreciate the property. Free efile federal You deduct a full year of depreciation for any other year during the recovery period. Free efile federal   Figure your depreciation deduction for the year you place the property in service by dividing the depreciation for a full year by 2. Free efile federal 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. Free efile federal 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. Free efile federal Mid-quarter convention. Free efile federal   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. Free efile federal   A quarter of a full 12-month tax year is a period of 3 months. Free efile federal The first quarter in a year begins on the first day of the tax year. Free efile federal The second quarter begins on the first day of the fourth month of the tax year. Free efile federal The third quarter begins on the first day of the seventh month of the tax year. Free efile federal The fourth quarter begins on the first day of the tenth month of the tax year. Free efile federal A calendar year is divided into the following quarters. Free efile federal 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. Free efile federal Quarter Percentage First 87. Free efile federal 5% Second 62. Free efile federal 5 Third 37. Free efile federal 5 Fourth 12. Free efile federal 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. Free efile federal Quarter Percentage First 12. Free efile federal 5% Second 37. Free efile federal 5 Third 62. Free efile federal 5 Fourth 87. Free efile federal 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. Free efile federal Mid-month convention. Free efile federal   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. Free efile federal Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by a fraction. Free efile federal The numerator of the fraction is the number of full months in the year that the property is in service plus ½ (or 0. Free efile federal 5). Free efile federal The denominator is 12. Free efile federal   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. Free efile federal 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. Free efile federal Example. Free efile federal You use the calendar year and place nonresidential real property in service in August. Free efile federal The property is in service 4 full months (September, October, November, and December). Free efile federal Your numerator is 4. Free efile federal 5 (4 full months plus 0. Free efile federal 5). Free efile federal You multiply the depreciation for a full year by 4. Free efile federal 5/12, or 0. Free efile federal 375. Free efile federal Examples The following examples show how to figure depreciation under MACRS without using the percentage tables. Free efile federal Figures are rounded for purposes of the examples. Free efile federal Assume for all the examples that you use a calendar year as your tax year. Free efile federal Example 1—200% DB method and half-year convention. Free efile federal In February, you placed in service depreciable property with a 5-year recovery period and a basis of $1,000. Free efile federal You do not elect to take the section 179 deduction and the property does not qualify for a special depreciation allowance. Free efile federal You use GDS and the 200% declining balance (DB) method to figure your depreciation. Free efile federal When the straight line (SL) method results in an equal or larger deduction, you switch to the SL method. Free efile federal You did not place any property in service in the last 3 months of the year, so you must use the half-year convention. Free efile federal First year. Free efile federal You figure the depreciation rate under the 200% DB method by dividing 2 (200%) by 5 (the number of years in the recovery period). Free efile federal The result is 40%. Free efile federal You multiply the adjusted basis of the property ($1,000) by the 40% DB rate. Free efile federal You apply the half-year convention by dividing the result ($400) by 2. Free efile federal Depreciation for the first year under the 200% DB method is $200. Free efile federal You figure the depreciation rate under the straight line (SL) method by dividing 1 by 5, the number of years in the recovery period. Free efile federal The result is 20%. Free efile federal You multiply the adjusted basis of the property ($1,000) by the 20% SL rate. Free efile federal You apply the half-year convention by dividing the result ($200) by 2. Free efile federal Depreciation for the first year under the SL method is $100. Free efile federal The DB method provides a larger deduction, so you deduct the $200 figured under the 200% DB method. Free efile federal Second year. Free efile federal You reduce the adjusted basis ($1,000) by the depreciation claimed in the first year ($200). Free efile federal You multiply the result ($800) by the DB rate (40%). Free efile federal Depreciation for the second year under the 200% DB method is $320. Free efile federal You figure the SL depreciation rate by dividing 1 by 4. Free efile federal 5, the number of years remaining in the recovery period. Free efile federal (Based on the half-year convention, you used only half a year of the recovery period in the first year. Free efile federal ) You multiply the reduced adjusted basis ($800) by the result (22. Free efile federal 22%). Free efile federal Depreciation under the SL method for the second year is $178. Free efile federal The DB method provides a larger deduction, so you deduct the $320 figured under the 200% DB method. Free efile federal Third year. Free efile federal You reduce the adjusted basis ($800) by the depreciation claimed in the second year ($320). Free efile federal You multiply the result ($480) by the DB rate (40%). Free efile federal Depreciation for the third year under the 200% DB method is $192. Free efile federal You figure the SL depreciation rate by dividing 1 by 3. Free efile federal 5. Free efile federal You multiply the reduced adjusted basis ($480) by the result (28. Free efile federal 57%). Free efile federal Depreciation under the SL method for the third year is $137. Free efile federal The DB method provides a larger deduction, so you deduct the $192 figured under the 200% DB method. Free efile federal Fourth year. Free efile federal You reduce the adjusted basis ($480) by the de
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The Free Efile Federal

Free efile federal 10. Free efile federal   Business Bad Debts Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Definition of Business Bad DebtAccrual method. Free efile federal Cash method. Free efile federal Debt acquired from a decedent. Free efile federal Liquidation. Free efile federal Types of Business Bad Debts When a Debt Becomes Worthless How To Claim a Business Bad DebtSpecific Charge-Off Method Nonaccrual-Experience Method Recovery of a Bad DebtNet operating loss (NOL) carryover. Free efile federal Introduction You have a bad debt if you cannot collect money owed to you. Free efile federal A bad debt is either a business bad debt or a nonbusiness bad debt. Free efile federal This chapter discusses only business bad debts. Free efile federal Generally, a business bad debt is one that comes from operating your trade or business. Free efile federal You can deduct business bad debts on Schedule C (Form 1040) or your applicable business income tax return. Free efile federal All other bad debts are nonbusiness bad debts and are deductible only as short-term capital losses. Free efile federal For more information on nonbusiness bad debts, see Publication 550. Free efile federal Topics - This chapter discusses: Definition of business bad debt When a debt becomes worthless How to claim a business bad debt Recovery of a bad debt Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 556 Examination of Returns, Appeal Rights, and Claims for Refund Form (and Instructions) Schedule C (Form 1040) Profit or Loss From Business 1040X Amended U. Free efile federal S. Free efile federal Individual Income Tax Return 1045 Application for Tentative Refund 1139 Corporation Application for Tentative Refund 3115 Application for Change in Accounting Method See chapter 12 for information about getting publications and forms. Free efile federal Definition of Business Bad Debt A business bad debt is a loss from the worthlessness of a debt that was either: Created or acquired in your trade or business, or Closely related to your trade or business when it became partly or totally worthless. Free efile federal A debt is closely related to your trade or business if your primary motive for incurring the debt is business related. Free efile federal Bad debts of a corporation (other than an S corporation) are always business bad debts. Free efile federal Credit sales. Free efile federal   Business bad debts are mainly the result of credit sales to customers. Free efile federal Goods that have been sold, but not yet paid for, and services that have been performed, but not yet paid for, are recorded in your books as either accounts receivable or notes receivable. Free efile federal After a reasonable period of time, if you have tried to collect the amount due, but are unable to do so, the uncollectible part becomes a business bad debt. Free efile federal   Accounts or notes receivable valued at fair market value (FMV) when received are deductible only at that value, even though the FMV may be less than the face value. Free efile federal If you purchased an account receivable for less than its face value, and the receivable subsequently becomes worthless, the most you are allowed to deduct is the amount you paid to acquire it. Free efile federal    You can claim a business bad debt deduction only if the amount owed to you was previously included in gross income. Free efile federal This applies to amounts owed to you from all sources of taxable income, including sales, services, rents, and interest. Free efile federal Accrual method. Free efile federal   If you use the accrual method of accounting, you generally report income as you earn it. Free efile federal You can only claim a bad debt deduction for an uncollectible receivable if you have previously included the uncollectible amount in income. Free efile federal   If you qualify, you can use the nonaccrual-experience method of accounting discussed later. Free efile federal Under this method, you do not have to accrue income that, based on your experience, you do not expect to collect. Free efile federal Cash method. Free efile federal   If you use the cash method of accounting, you generally report income when you receive payment. Free efile federal You cannot claim a bad debt deduction for amounts owed to you because you never included those amounts in income. Free efile federal For example, a cash basis architect cannot claim a bad debt deduction if a client fails to pay the bill because the architect's fee was never included in income. Free efile federal Debts from a former business. Free efile federal   If you sell your business but retain its receivables, these debts are business debts because they arose out of your trade or business. Free efile federal If any of these receivables subsequently become worthless, the loss is still a business bad debt. Free efile federal Debt acquired from a decedent. Free efile federal   The character of a loss from debts of a business acquired from a decedent is determined in the same way as debts acquired on the purchase of a business. Free efile federal The executor of the decedent's estate treats any loss from the debts as a business bad debt if the debts were closely related to the decedent's trade or business when they became worthless. Free efile federal Otherwise, a loss from these debts becomes a nonbusiness bad debt for the decedent's estate. Free efile federal Liquidation. Free efile federal   If you liquidate your business and some of the accounts receivable that you retain become worthless, they become business bad debts. Free efile federal Types of Business Bad Debts Business bad debts may result from the following. Free efile federal Loans to clients and suppliers. Free efile federal   If you loan money to a client, supplier, employee, or distributor for a business reason and you are unable to collect the loan after attempting to do so, you have a business bad debt. Free efile federal Debts owed by political parties. Free efile federal   If a political party (or other organization that accepts contributions or spends money to influence elections) owes you money and the debt becomes worthless, you can claim a bad debt deduction only if all of the following requirements are met. Free efile federal You use the accrual method of accounting. Free efile federal The debt arose from the sale of goods or services in the ordinary course of your trade or business. Free efile federal More than 30% of your receivables accrued in the year of the sale were from sales to political parties. Free efile federal You made substantial and continuing efforts to collect on the debt. Free efile federal Loan or capital contribution. Free efile federal   You cannot claim a bad debt deduction for a loan you made to a corporation if, based on the facts and circumstances, the loan is actually a contribution to capital. Free efile federal Debts of an insolvent partner. Free efile federal   If your business partnership breaks up and one of your former partners becomes insolvent, you may have to pay more than your pro rata share of the partnership's debts. Free efile federal If you pay any part of the insolvent partner's share of the debts, you can claim a bad debt deduction for the amount you paid that is attributable to the insolvent partner's share. Free efile federal Business loan guarantee. Free efile federal   If you guarantee a debt that subsequently becomes worthless, the debt can qualify as a business bad debt if all the following requirements are met. Free efile federal You made the guarantee in the course of your trade or business. Free efile federal You have a legal duty to pay the debt. Free efile federal You made the guarantee before the debt became worthless. Free efile federal You meet this requirement if you reasonably expected you would not have to pay the debt without full reimbursement from the borrower. Free efile federal You received reasonable consideration for making the guarantee. Free efile federal You meet this requirement if you made the guarantee in accord with normal business practice or for a good faith business purpose. Free efile federal Example. Free efile federal Jane Zayne owns the Zayne Dress Company. Free efile federal She guaranteed payment of a $20,000 note for Elegant Fashions, a dress outlet. Free efile federal Elegant Fashions is one of Zayne's largest clients. Free efile federal Elegant Fashions later defaulted on the loan. Free efile federal As a result, Ms. Free efile federal Zayne paid the remaining balance of the loan in full to the bank. Free efile federal She can claim a business bad debt deduction only for the amount she paid, since her guarantee was made in the course of her trade or business for a good faith business purpose. Free efile federal She was motivated by the desire to retain one of her better clients and keep a sales outlet. Free efile federal Deductible in the year paid. Free efile federal   If you make a payment on a loan you guaranteed, you can deduct it in the year paid, unless you have rights against the borrower. Free efile federal Rights against a borrower. Free efile federal   When you make payment on a loan you guaranteed, you may have the right to take the place of the lender. Free efile federal The debt is then owed to you. Free efile federal If you have this right, or some other right to demand payment from the borrower, you cannot claim a bad debt deduction until these rights become partly or totally worthless. Free efile federal Joint debtor. Free efile federal   If two or more debtors jointly owe you money, your inability to collect from one does not enable you to deduct a proportionate amount as a bad debt. Free efile federal Sale of mortgaged property. Free efile federal   If mortgaged or pledged property is sold for less than the debt, the unpaid, uncollectible balance of the debt is a bad debt. Free efile federal When a Debt Becomes Worthless A debt becomes worthless when there is no longer any chance the amount owed will be paid. Free efile federal This may occur when the debt is due or prior to that date. Free efile federal To demonstrate worthlessness, you must only show that you have taken reasonable steps to collect the debt but were unable to do so. Free efile federal It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. Free efile federal Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt. Free efile federal Property received for debt. Free efile federal   If you receive property in partial settlement of a debt, reduce the debt by the property's FMV, which becomes the property's basis. Free efile federal You can deduct the remaining debt as a bad debt if and when it becomes worthless. Free efile federal   If you later sell the property for more than its basis, any gain on the sale is due to the appreciation of the property. Free efile federal It is not a recovery of a bad debt. Free efile federal For information on the sale of an asset, see Publication 544. Free efile federal How To Claim a Business Bad Debt There are two methods to claim a business bad debt. Free efile federal The specific charge-off method. Free efile federal The nonaccrual-experience method. Free efile federal Generally, you must use the specific charge-off method. Free efile federal However, you may use the nonaccrual-experience method if you meet the requirements discussed later under Nonaccrual-Experience Method . Free efile federal Specific Charge-Off Method If you use the specific charge-off method, you can deduct specific business bad debts that become either partly or totally worthless during the tax year. Free efile federal However, with respect to partly worthless bad debts, your deduction is limited to the amount you charged off on your books during the year. Free efile federal Partly worthless debts. Free efile federal   You can deduct specific bad debts that become partly uncollectible during the tax year. Free efile federal Your tax deduction is limited to the amount you charge off on your books during the year. Free efile federal You do not have to charge off and deduct your partly worthless debts annually. Free efile federal You can delay the charge off until a later year. Free efile federal However, you cannot deduct any part of a debt after the year it becomes totally worthless. Free efile federal Significantly modified debt. Free efile federal   An exception to the charge-off rule exists for debt which has been significantly modified and on which the holder recognized gain. Free efile federal For more information, see Regulations section 1. Free efile federal 166-3(a)(3). Free efile federal Deduction disallowed. Free efile federal   Generally, you can claim a partial bad debt deduction only in the year you make the charge-off on your books. Free efile federal If, under audit, the IRS does not allow your deduction and the debt becomes partly worthless in a later tax year, you can deduct the amount you charged off in that year plus the disallowed amount charged off in the earlier year. Free efile federal The charge-off in the earlier year, unless reversed on your books, fulfills the charge-off requirement for the later year. Free efile federal Totally worthless debts. Free efile federal   If a debt becomes totally worthless in the current tax year, you can deduct the entire amount, less any amount deducted in an earlier tax year when the debt was only partly worthless. Free efile federal   You do not have to make an actual charge-off on your books to claim a bad debt deduction for a totally worthless debt. Free efile federal However, you may want to do so. Free efile federal If you do not and the IRS later rules the debt is only partly worthless, you will not be allowed a deduction for the debt in that tax year because a deduction of a partly worthless bad debt is limited to the amount actually charged off. Free efile federal See Partly worthless debts, earlier. Free efile federal Filing a claim for refund. Free efile federal   If you did not deduct a bad debt on your original return for the year it became worthless, you can file a claim for a credit or refund. Free efile federal If the bad debt was totally worthless, you must file the claim by the later of the following dates. Free efile federal 7 years from the date your original return was due (not including extensions). Free efile federal 2 years from the date you paid the tax. Free efile federal   If the claim is for a partly worthless bad debt, you must file the claim by the later of the following dates. Free efile federal 3 years from the date you filed your original return. Free efile federal 2 years from the date you paid the tax. Free efile federal You may have longer to file the claim if you were unable to manage your financial affairs due to a physical or mental impairment. Free efile federal Such an impairment requires proof of existence. Free efile federal   For details and more information about filing a claim, see Publication 556. Free efile federal Use one of the following forms to file a claim. Free efile federal For more information, see the instructions for the applicable form. Free efile federal Table 10-1. Free efile federal Forms Used To File a Claim IF you filed as a. Free efile federal . Free efile federal . Free efile federal THEN file. Free efile federal . Free efile federal . Free efile federal Sole proprietor or farmer Form 1040X Corporation Form 1120X S corporation Form 1120S and check box H(4) Partnership Form 1065X if filing on paper or  Form 1065 and check box G(5) if filing electronically Nonaccrual-Experience Method If you use an accrual method of accounting and qualify under the rules explained in this section, you can use the nonaccrual-experience method for bad debts. Free efile federal Under this method, you do not accrue service related income you expect to be uncollectible. Free efile federal Because the expected uncollectible amounts are not included in income, these amounts are not later deducted from income. Free efile federal Generally, you can use the nonaccrual-experience method for accounts receivable for services you performed only if: The services are provided in the fields of accounting, actuarial science, architecture, consulting, engineering, health, law, or the performing arts, or You meet the $5 million gross receipts test for all prior years. Free efile federal Service related income. Free efile federal   You can use the nonaccrual-experience method only for amounts earned by performing services. Free efile federal You cannot use this method for amounts owed to you from activities such as lending money, selling goods, or acquiring receivables or other rights to receive payment. Free efile federal Gross receipts test. Free efile federal   To find out if you meet the $5 million gross receipts test for all prior years, you must figure the average annual gross receipts for each prior year. Free efile federal If your average annual gross receipts for any year exceeds $5 million, you cannot use the non-accural experience method. Free efile federal   The average annual gross receipts for any year is the average of gross receipts from the year in question and the 2 previous years. Free efile federal For example, if you were figuring the average annual gross receipts for 2013, you would average your gross receipts for 2011, 2012, and 2013. Free efile federal Interest or penalty charged. Free efile federal   Generally, you cannot use the nonaccrual-experience method for amounts due on which you charge interest or a late payment penalty. Free efile federal However, do not treat a discount offered for early payment as the charging of interest or a penalty if both the following apply. Free efile federal You otherwise accrue the full amount due as gross income at the time you provide the services. Free efile federal You treat the discount allowed for early payment as an adjustment to gross income in the year of payment. Free efile federal Change in accounting method. Free efile federal   Generally, you must obtain consent to change to a nonaccrual-experience method (other than one of the safe harbor methods) or to change from one method to another. Free efile federal See Form 3115 and the Instructions for Form 3115 for more information. Free efile federal Recovery of a Bad Debt If you claim a deduction for a bad debt on your income tax return and later recover (collect) all or part of it, you may have to include all or part of the recovery in gross income. Free efile federal The amount you include is limited to the amount you actually deducted. Free efile federal However, you can exclude the amount deducted that did not reduce your tax. Free efile federal Report the recovery as “Other income” on the appropriate business form or schedule. Free efile federal See Recoveries in Publication 525 for more information. Free efile federal Net operating loss (NOL) carryover. Free efile federal   If a bad debt deduction increases an NOL carryover that has not expired before the beginning of the tax year in which the recovery takes place, you treat the deduction as having reduced your tax. Free efile federal A bad debt deduction that contributes to a NOL helps lower taxes in the year to which you carry the NOL. Free efile federal For more information about NOLs, see Publication 536. Free efile federal Also, see the Instructions for Form 1045, and the Instructions for Form 1139. Free efile federal Prev  Up  Next   Home   More Online Publications