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How to do your taxes 7. How to do your taxes   Depreciation, Depletion, and Amortization Table of Contents What's New for 2013 Introduction Topics - This chapter discusses: Useful Items - You may want to see: Overview of DepreciationWhat Property Can Be Depreciated? What Property Cannot Be Depreciated? When Does Depreciation Begin and End? Can You Use MACRS To Depreciate Your Property? What Is the Basis of Your Depreciable Property? How Do You Treat Repairs and Improvements? Do You Have To File Form 4562? How Do You Correct Depreciation Deductions? Section 179 Expense DeductionWhat Property Qualifies? What Property Does Not Qualify? How Much Can You Deduct? How Do You Elect the Deduction? When Must You Recapture the Deduction? Claiming the Special Depreciation AllowanceWhat is Qualified Property? How Can You Elect Not To Claim the Allowance? When Must You Recapture an Allowance Figuring Depreciation Under MACRSWhich Depreciation System (GDS or ADS) Applies? Which Property Class Applies Under GDS? What Is the Placed-in-Service Date? What Is the Basis for Depreciation? Which Recovery Period Applies? Which Convention Applies? Which Depreciation Method Applies? How Is the Depreciation Deduction Figured? How Do You Use General Asset Accounts? When Do You Recapture MACRS Depreciation? Additional Rules for Listed PropertyWhat Is Listed Property? What Is the Business-Use Requirement? Do the Passenger Automobile Limits Apply? Depletion Who Can Claim Depletion? Figuring Depletion AmortizationBusiness Start-Up Costs Reforestation Costs Section 197 Intangibles What's New for 2013 Increased section 179 expense deduction dollar limits. How to do your taxes  The maximum amount you can elect to deduct for most section 179 property you placed in service in 2013 is $500,000. How to do your taxes This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2 million. How to do your taxes See Dollar Limits under Section 179 Expense Deduction , later. How to do your taxes Extension of special depreciation allowance for certain qualified property acquired after December 31, 2007. How to do your taxes . How to do your taxes  You may be able to take a 50% special depreciation allowance for certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. How to do your taxes See Claiming the Special Depreciation Allowance , later. How to do your taxes Expiration of the 3- year recovery period for certain race horses. How to do your taxes  The 3-year recovery period for race horses two years old or younger will expire for such horses placed in service after December 31, 2013. How to do your taxes Introduction If you buy or make improvements to farm property such as machinery, equipment, livestock, or a structure with a useful life of more than a year, you generally cannot deduct its entire cost in one year. How to do your taxes Instead, you must spread the cost over the time you use the property and deduct part of it each year. How to do your taxes For most types of property, this is called depreciation. How to do your taxes This chapter gives information on depreciation methods that generally apply to property placed in service after 1986. How to do your taxes For information on depreciating pre-1987 property, see Publication 534, Depreciating Property Placed in Service Before 1987. How to do your taxes Topics - This chapter discusses: Overview of depreciation Section 179 expense deduction Special depreciation allowance Modified Accelerated Cost Recovery System (MACRS) Listed property Basic information on cost depletion (including timber depletion) and percentage depletion Amortization of the costs of going into business, reforestation costs, the costs of pollution control facilities, and the costs of section 197 intangibles Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) T (Timber), Forest Activities Schedule 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. How to do your taxes It is important to keep good records for property you depreciate. How to do your taxes Do not file these records with your return. How to do your taxes Instead, you should keep them as part of the permanent records of the depreciated property. How to do your taxes They will help you verify the accuracy of the depreciation of assets placed in service in the current and previous tax years. How to do your taxes For general information on recordkeeping, see Publication 583, Starting a Business and Keeping Records. How to do your taxes For specific information on keeping records for section 179 property and listed property, see Publication 946, How To Depreciate Property. How to do your taxes Overview of Depreciation This overview discusses basic information on the following. How to do your taxes What property can be depreciated. How to do your taxes What property cannot be depreciated. How to do your taxes When depreciation begins and ends. How to do your taxes Whether MACRS can be used to figure depreciation. How to do your taxes What is the basis of your depreciable property. How to do your taxes How to treat repairs and improvements. How to do your taxes When you must file Form 4562. How to do your taxes How you can correct depreciation claimed incorrectly. How to do your taxes What Property Can Be Depreciated? You can depreciate most types of tangible property (except land), such as buildings, machinery, equipment, vehicles, certain livestock, and furniture. How to do your taxes You can also depreciate certain intangible property, such as copyrights, patents, and computer software. How to do your taxes To be depreciable, the property must meet all the following requirements. How to do your taxes It must be property you own. How to do your taxes It must be used in your business or income-producing activity. How to do your taxes It must have a determinable useful life. How to do your taxes It must have a useful life that extends substantially beyond the year you place it in service. How to do your taxes Property You Own To claim depreciation, you usually must be the owner of the property. How to do your taxes You are considered as owning property even if it is subject to a debt. How to do your taxes Leased property. How to do your taxes   You can depreciate leased property only if you retain the incidents of ownership in the property. How to do your taxes This means you bear the burden of exhaustion of the capital investment in the property. How to do your taxes Therefore, if you lease property from someone to use in your trade or business or for the production of income, you generally cannot depreciate its cost because you do not retain the incidents of ownership. How to do your taxes You can, however, depreciate any capital improvements you make to the leased property. How to do your taxes See Additions and Improvements under Which Recovery Period Applies in chapter 4 of Publication 946. How to do your taxes   If you lease property to someone, you generally can depreciate its cost even if the lessee (the person leasing from you) has agreed to preserve, replace, renew, and maintain the property. How to do your taxes However, you cannot depreciate the cost of the property if the lease provides that the lessee is to maintain the property and return to you the same property or its equivalent in value at the expiration of the lease in as good condition and value as when leased. How to do your taxes Life tenant. How to do your taxes   Generally, if you hold business or investment property as a life tenant, you can depreciate it as if you were the absolute owner of the property. How to do your taxes See Certain term interests in property , later, for an exception. How to do your taxes Property Used in Your Business or Income-Producing Activity To claim depreciation on property, you must use it in your business or income-producing activity. How to do your taxes If you use property to produce income (investment use), the income must be taxable. How to do your taxes You cannot depreciate property that you use solely for personal activities. How to do your taxes However, if you use property for business or investment purposes and for personal purposes, you can deduct depreciation based only on the percentage of business or investment use. How to do your taxes Example 1. How to do your taxes   If you use your car for farm business, you can deduct depreciation based on its percentage of use in farming. How to do your taxes If you also use it for investment purposes, you can depreciate it based on its percentage of investment use. How to do your taxes Example 2. How to do your taxes   If you use part of your home for business, you may be able to deduct depreciation on that part based on its business use. How to do your taxes For more information, see Business Use of Your Home in chapter 4. How to do your taxes Inventory. How to do your taxes   You can never depreciate inventory because it is not held for use in your business. How to do your taxes Inventory is any property you hold primarily for sale to customers in the ordinary course of your business. How to do your taxes Livestock. How to do your taxes   Livestock purchased for draft, breeding, or dairy purposes can be depreciated only if they are not kept in an inventory account. How to do your taxes Livestock you raise usually has no depreciable basis because the costs of raising them are deducted and not added to their basis. How to do your taxes However, see Immature livestock under When Does Depreciation Begin and End , later, for a special rule. How to do your taxes Property Having a Determinable Useful Life To be depreciable, your property must have a determinable useful life. How to do your taxes This means it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. How to do your taxes Irrigation systems and water wells. How to do your taxes   Irrigation systems and wells used in a trade or business can be depreciated if their useful life can be determined. How to do your taxes You can depreciate irrigation systems and wells composed of masonry, concrete, tile, metal, or wood. How to do your taxes In addition, you can depreciate costs for moving dirt to construct irrigation systems and water wells composed of these materials. How to do your taxes However, land preparation costs for center pivot irrigation systems are not depreciable. How to do your taxes Dams, ponds, and terraces. How to do your taxes   In general, you cannot depreciate earthen dams, ponds, and terraces unless the structures have a determinable useful life. How to do your taxes What Property Cannot Be Depreciated? Certain property cannot be depreciated, even if the requirements explained earlier are met. How to do your taxes This includes the following. How to do your taxes Land. How to do your taxes You can never depreciate the cost of land because land does not wear out, become obsolete, or get used up. How to do your taxes The cost of land generally includes the cost of clearing, grading, planting, and landscaping. How to do your taxes Although you cannot depreciate land, you can depreciate certain costs incurred in preparing land for business use. How to do your taxes See chapter 1 of Publication 946. How to do your taxes Property placed in service and disposed of in the same year. How to do your taxes Determining when property is placed in service is explained later. How to do your taxes Equipment used to build capital improvements. How to do your taxes You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. How to do your taxes Intangible property such as section 197 intangibles. How to do your taxes This property does not have a determinable useful life and generally cannot be depreciated. How to do your taxes However, see Amortization , later. How to do your taxes Special rules apply to computer software (discussed below). How to do your taxes Certain term interests (discussed below). How to do your taxes Computer software. How to do your taxes   Computer software is generally not a section 197 intangible even if acquired in connection with the acquisition of a business, if it meets all of the following tests. How to do your taxes It is readily available for purchase by the general public. How to do your taxes It is subject to a nonexclusive license. How to do your taxes It has not been substantially modified. How to do your taxes   If the software meets the tests above, it can be depreciated and may qualify for the section 179 expense deduction and the special depreciation allowance (if applicable), discussed later. How to do your taxes Certain term interests in property. How to do your taxes   You cannot depreciate a term interest in property created or acquired after July 27, 1989, for any period during which the remainder interest is held, directly or indirectly, by a person related to you. How to do your taxes This rule does not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. How to do your taxes For more information, see chapter 1 of Publication 946. How to do your taxes When Does Depreciation Begin and End? You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income. How to do your taxes You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first. How to do your taxes Placed in Service Property is placed in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. How to do your taxes Even if you are not using the property, it is in service when it is ready and available for its specific use. How to do your taxes Example. How to do your taxes You bought a planter for use in your farm business. How to do your taxes The planter was delivered in December 2012 after harvest was over. How to do your taxes You begin to depreciate the planter for 2012 because it was ready and available for its specific use in 2012, even though it will not be used until the spring of 2013. How to do your taxes If your planter comes unassembled in December 2012 and is put together in February 2013, it is not placed in service until 2013. How to do your taxes You begin to depreciate it in 2013. How to do your taxes If your planter was delivered and assembled in February 2013 but not used until April 2013, it is placed in service in February 2013, because this is when the planter was ready for its specified use. How to do your taxes You begin to depreciate it in 2013. How to do your taxes Fruit or nut trees and vines. How to do your taxes   If you acquire an orchard, grove, or vineyard before the trees or vines have reached the income-producing stage, and they have a preproductive period of more than 2 years, you must capitalize the preproductive-period costs under the uniform capitalization rules (unless you elect not to use these rules). How to do your taxes See chapter 6 for information about the uniform capitalization rules. How to do your taxes Your depreciation begins when the trees and vines reach the income-producing stage (that is, when they bear fruit, nuts, or grapes in quantities sufficient to commercially warrant harvesting). How to do your taxes Immature livestock. How to do your taxes   Depreciation for livestock begins when the livestock reaches the age of maturity. How to do your taxes If you bought immature livestock for drafting purposes, depreciation begins when they can be worked. How to do your taxes If you bought immature livestock for dairy purposes, depreciation begins when they can be milked. How to do your taxes If you bought immature livestock for breeding purposes, depreciation begins when they can be bred. How to do your taxes Your basis for depreciation is your initial cost for the immature livestock. How to do your taxes Idle Property Continue to claim a deduction for depreciation on property used in your business or for the production of income even if it is temporarily idle. How to do your taxes For example, if you stop using a machine because there is a temporary lack of a market for a product made with that machine, continue to deduct depreciation on the machine. How to do your taxes Cost or Other Basis Fully Recovered You stop depreciating property when you have fully recovered your cost or other basis. How to do your taxes This happens when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property. How to do your taxes Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. How to do your taxes You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events. How to do your taxes You sell or exchange the property. How to do your taxes You convert the property to personal use. How to do your taxes You abandon the property. How to do your taxes You transfer the property to a supplies or scrap account. How to do your taxes The property is destroyed. How to do your taxes For information on abandonment of property, see chapter 8. How to do your taxes For information on destroyed property, see chapter 11 and Publication 547, Casualties, Disasters, and Thefts. How to do your taxes Can You Use MACRS To Depreciate Your Property? You must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most business and investment property placed in service after 1986. How to do your taxes MACRS is explained later under Figuring Depreciation Under MACRS . How to do your taxes You cannot use MACRS to depreciate the following property. How to do your taxes Property you placed in service before 1987. How to do your taxes Use the methods discussed in Publication 534. How to do your taxes Certain property owned or used in 1986. How to do your taxes See chapter 1 of Publication 946. How to do your taxes Intangible property. How to do your taxes Films, video tapes, and recordings. How to do your taxes Certain corporate or partnership property acquired in a nontaxable transfer. How to do your taxes Property you elected to exclude from MACRS. How to do your taxes For more information, see chapter 1 of Publication 946. How to do your taxes What Is the Basis of Your Depreciable Property? To figure your depreciation deduction, you must determine the basis of your property. How to do your taxes To determine basis, you need to know the cost or other basis of your property. How to do your taxes Cost or other basis. How to do your taxes   The basis of property you buy is usually its cost plus amounts you paid for items such as sales tax, freight charges, and installation and testing fees. How to do your taxes The cost includes the amount you pay in cash, debt obligations, other property, or services. How to do your taxes   There are times when you cannot use cost as basis. How to do your taxes In these situations, the fair market value (FMV) or the adjusted basis of the property may be used. How to do your taxes Adjusted basis. How to do your taxes   To find your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service. How to do your taxes Basis adjustment for depreciation allowed or allowable. How to do your taxes   After you place your property in service, you must reduce the basis of the property by the depreciation allowed or allowable, whichever is greater. How to do your taxes Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). How to do your taxes Depreciation allowable is depreciation you are entitled to deduct. How to do your taxes   If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the full amount of depreciation allowable. How to do your taxes   If you deduct more depreciation than you should, you must reduce your basis by any amount deducted from which you received a tax benefit (the depreciation allowed). How to do your taxes   For more information, see chapter 6. How to do your taxes How Do You Treat Repairs and Improvements? You generally deduct the cost of repairing business property in the same way as any other business expense. How to do your taxes However, if a repair or replacement increases the value of your property, makes it more useful, or lengthens its life, you must treat it as an improvement and depreciate it. How to do your taxes Treat improvements as separate depreciable property. How to do your taxes See chapter 1 of Publication 946 for more information. How to do your taxes Example. How to do your taxes You repair a small section on a corner of the roof of a barn that you rent to others. How to do your taxes You deduct the cost of the repair as a business expense. How to do your taxes However, if you replace the entire roof, the new roof is considered to be an improvement because it increases the value and lengthens the life for the property. How to do your taxes You depreciate the cost of the new roof. How to do your taxes Improvements to rented property. How to do your taxes   You can depreciate permanent improvements you make to business property you rent from someone else. How to do your taxes Do You Have To File Form 4562? Use Form 4562 to claim your deduction for depreciation and amortization. How to do your taxes You must complete and attach Form 4562 to your tax return if you are claiming any of the following. How to do your taxes A section 179 expense deduction for the current year or a section 179 carryover from a prior year. How to do your taxes Depreciation for property placed in service during the current year. How to do your taxes Depreciation on any vehicle or other listed property, regardless of when it was placed in service. How to do your taxes Amortization of costs that began in the current year. How to do your taxes For more information, see the Instructions for Form 4562. How to do your taxes How Do You Correct Depreciation Deductions? If you deducted an incorrect amount of depreciation in any year, you may be able to make a correction by filing an amended return for that year. How to do your taxes You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. How to do your taxes You claimed the incorrect amount because of a mathematical error made in any year. How to do your taxes You claimed the incorrect amount because of a posting error made in any year, for example, omitting an asset from the depreciation schedule. How to do your taxes You have not adopted a method of accounting for the property placed in service by you in tax years ending after December 29, 2003. How to do your taxes You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. How to do your taxes Note. How to do your taxes You have adopted a method of accounting if you used the same incorrect method of depreciation for two or more consecutively filed returns. How to do your taxes If you are not allowed to make the correction on an amended return, you may be able to change your accounting method to claim the correct amount of depreciation. How to do your taxes See the Instructions for Form 3115. How to do your taxes Section 179 Expense Deduction You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. How to do your taxes This is the section 179 expense deduction. How to do your taxes You can elect the section 179 expense deduction instead of recovering the cost by taking depreciation deductions. How to do your taxes This part of the chapter explains the rules for the section 179 expense deduction. How to do your taxes It explains what property qualifies for the deduction, what property does not qualify for the deduction, the limits that may apply, how to elect the deduction, and when you may have to recapture the deduction. How to do your taxes For more information, see chapter 2 of Publication 946. How to do your taxes What Property Qualifies? To qualify for the section 179 expense deduction, your property must meet all the following requirements. How to do your taxes It must be eligible property. How to do your taxes It must be acquired for business use. How to do your taxes It must have been acquired by purchase. How to do your taxes Eligible Property To qualify for the section 179 expense deduction, your property must be one of the following types of depreciable property. How to do your taxes Tangible personal property. How to do your taxes Qualified real property. How to do your taxes (Special rules apply to qualified real property that you elect to treat as qualified section 179 real property. How to do your taxes For more information, see chapter 2 of Publication 946 and section 179(f) of the Internal Revenue Code. How to do your taxes ) Other tangible property (except buildings and their structural components) used as: An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services; A research facility used in connection with any of the activities in (a) above; or A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities. How to do your taxes Single purpose agricultural (livestock) or horticultural structures. How to do your taxes Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum. How to do your taxes Off-the-shelf computer software that is readily available for purchase by the general public, is subject to a nonexclusive lease, and has not been substantially modified. How to do your taxes Tangible personal property. How to do your taxes   Tangible personal property is any tangible property that is not real property. How to do your taxes It includes the following property. How to do your taxes Machinery and equipment. How to do your taxes Property contained in or attached to a building (other than structural components), such as milk tanks, automatic feeders, barn cleaners, and office equipment. How to do your taxes Gasoline storage tanks and pumps at retail service stations. How to do your taxes Livestock, including horses, cattle, hogs, sheep, goats, and mink and other fur-bearing animals. How to do your taxes Facility used for the bulk storage of fungible commodities. How to do your taxes   A facility used for the bulk storage of fungible commodities is qualifying property for purposes of the section 179 expense deduction if it is used in connection with any of the activities listed earlier in item (3)(a). How to do your taxes Bulk storage means the storage of a commodity in a large mass before it is used. How to do your taxes Grain bins. How to do your taxes   A grain bin is an example of a storage facility that is qualifying section 179 property. How to do your taxes It is a facility used in connection with the production of grain or livestock for the bulk storage of fungible commodities. How to do your taxes Single purpose agricultural or horticultural structures. How to do your taxes   A single purpose agricultural (livestock) or horticultural structure is qualifying property for purposes of the section 179 expense deduction. How to do your taxes Agricultural structure. How to do your taxes   A single purpose agricultural (livestock) structure is any building or enclosure specifically designed, constructed, and used for both the following reasons. How to do your taxes To house, raise, and feed a particular type of livestock and its produce. How to do your taxes To house the equipment, including any replacements, needed to house, raise, or feed the livestock. How to do your taxes For this purpose, livestock includes poultry. How to do your taxes   Single purpose structures are qualifying property if used, for example, to breed chickens or hogs, produce milk from dairy cattle, or produce feeder cattle or pigs, broiler chickens, or eggs. How to do your taxes The facility must include, as an integral part of the structure or enclosure, equipment necessary to house, raise, and feed the livestock. How to do your taxes Horticultural structure. How to do your taxes   A single purpose horticultural structure is either of the following. How to do your taxes A greenhouse specifically designed, constructed, and used for the commercial production of plants. How to do your taxes A structure specifically designed, constructed, and used for the commercial production of mushrooms. How to do your taxes Use of structure. How to do your taxes   A structure must be used only for the purpose that qualified it. How to do your taxes For example, a hog barn will not be qualifying property if you use it to house poultry. How to do your taxes Similarly, using part of your greenhouse to sell plants will make the greenhouse nonqualifying property. How to do your taxes   If a structure includes work space, the work space can be used only for the following activities. How to do your taxes Stocking, caring for, or collecting livestock or plants or their produce. How to do your taxes Maintaining the enclosure or structure. How to do your taxes Maintaining or replacing the equipment or stock enclosed or housed in the structure. How to do your taxes Property Acquired by Purchase To qualify for the section 179 expense deduction, your property must have been acquired by purchase. How to do your taxes For example, property acquired by gift or inheritance does not qualify. How to do your taxes Property acquired from a related person (that is, your spouse, ancestors, or lineal descendants) is not considered acquired by purchase. How to do your taxes Example. How to do your taxes Ken is a farmer. How to do your taxes He purchased two tractors, one from his brother and one from his father. How to do your taxes He placed both tractors in service in the same year he bought them. How to do your taxes The tractor purchased from his father does not qualify for the section 179 expense deduction because he is a related person (as defined above). How to do your taxes The tractor purchased from his brother does qualify for the deduction because Ken is not a related person (as defined above). How to do your taxes What Property Does Not Qualify? Land and improvements. How to do your taxes   Land and land improvements, do not qualify as section 179 property. How to do your taxes Land improvements include nonagricultural fences, swimming pools, paved parking areas, wharves, docks, bridges, and fences. How to do your taxes However, agricultural fences do qualify as section 179 property. How to do your taxes Similarly, field drainage tile also qualifies as section 179 property. How to do your taxes Excepted property. How to do your taxes   Even if the requirements explained in the preceding discussions are met, farmers cannot elect the section 179 expense deduction for the following property. How to do your taxes Certain property you lease to others (if you are a noncorporate lessor). How to do your taxes Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging. How to do your taxes Property used by a tax-exempt organization (other than a tax-exempt farmers' cooperative) unless the property is used mainly in a taxable unrelated trade or business. How to do your taxes Property used by governmental units or foreign persons or entities (except property used under a lease with a term of less than 6 months). How to do your taxes How Much Can You Deduct? Your section 179 expense deduction is generally the cost of the qualifying property. How to do your taxes However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. How to do your taxes These limits apply to each taxpayer, not to each business. How to do your taxes However, see Married individuals under Dollar Limits , later. How to do your taxes See also the special rules for applying the limits for partnerships and S corporations under Partnerships and S Corporations , later. How to do your taxes If you deduct only part of the cost of qualifying property as a section 179 expense deduction, you can generally depreciate the cost you do not deduct. How to do your taxes Use Part I of Form 4562 to figure your section 179 expense deduction. How to do your taxes Partial business use. How to do your taxes   When you use property for business and nonbusiness purposes, you can elect the section 179 expense deduction only if you use it more than 50% for business in the year you place it in service. How to do your taxes If you used the property more than 50% for business, multiply the cost of the property by the percentage of business use. How to do your taxes Use the resulting business cost to figure your section 179 expense deduction. How to do your taxes Trade-in of other property. How to do your taxes   If you buy qualifying property with cash and a trade-in, its cost for purposes of the section 179 expense deduction includes only the cash you paid. How to do your taxes For example, if you buy (for cash and a trade-in) a new tractor for use in your business, your cost for the section 179 expense deduction is the cash you paid. How to do your taxes It does not include the adjusted basis of the old tractor you trade for the new tractor. How to do your taxes Example. How to do your taxes J-Bar Farms traded two cultivators having a total adjusted basis of $6,800 for a new cultivator costing $13,200. How to do your taxes They received an $8,000 trade-in allowance for the old cultivators and paid $5,200 cash for the new cultivator. How to do your taxes J-Bar also traded a used pickup truck with an adjusted basis of $8,000 for a new pickup truck costing $35,000. How to do your taxes They received a $5,000 trade-in allowance and paid $30,000 cash for the new pickup truck. How to do your taxes Only the cash paid by J-Bar qualifies for the section 179 expense deduction. How to do your taxes J-Bar's business costs that qualify for a section 179 expense deduction are $35,200 ($5,200 + $30,000). How to do your taxes Dollar Limits The total amount you can elect to deduct under section 179 for most property placed in service in 2013 is $500,000. How to do your taxes If you acquire and place in service more than one item of qualifying property during the year, you can allocate the section 179 expense deduction among the items in any way, as long as the total deduction is not more than $500,000. How to do your taxes Qualified real property that you elect to treat as section 179 property is limited to $250,000 of the maximum section 179 deduction of $500,000 for 2013. How to do your taxes You do not have to claim the full $500,000. How to do your taxes For specific information on the section 179 dollar limits, see chapter 2 of Publication 946. How to do your taxes Reduced dollar limit for cost exceeding $2 million. How to do your taxes   If the cost of your qualifying section 179 property placed in service in 2013 is over $2 million, you must reduce the dollar limit (but not below zero) by the amount of cost over $2 million. How to do your taxes If the cost of your section 179 property placed in service during 2013 is $2,500,000 or more, you cannot take a section 179 expense deduction and you cannot carry over the cost that is more than $2,500,000. How to do your taxes Example. How to do your taxes This year, James Smith placed in service machinery costing $2,050,000. How to do your taxes Because this cost is $50,000 more than $2 million, he must reduce his dollar limit to $450,000 ($500,000 − $50,000). How to do your taxes Limits for sport utility vehicles. How to do your taxes   The total amount you can elect to deduct for certain sport utility vehicles and certain other vehicles placed in service in 2013 is $25,000. How to do your taxes This rule applies to any 4-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, and highways that is rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight. How to do your taxes   For more information, see chapter 2 of Publication 946. How to do your taxes Limits for passenger automobiles. How to do your taxes   For a passenger automobile that is placed in service in 2013, the total section 179 and depreciation deduction is limited. How to do your taxes See Do the Passenger Automobile Limits Apply , later. How to do your taxes Married individuals. How to do your taxes   If you are married, how you figure your section 179 expense deduction depends on whether you file jointly or separately. How to do your taxes If you file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service. How to do your taxes If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit, including the reduction for costs over $2 million. How to do your taxes You must allocate the dollar limit (after any reduction) equally between you, unless you both elect a different allocation. How to do your taxes If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you. How to do your taxes Joint return after separate returns. How to do your taxes   If you and your spouse elect to amend your separate returns by filing a joint return after the due date for filing your return, the dollar limit on the joint return is the lesser of the following amounts. How to do your taxes The dollar limit (after reduction for any cost of section 179 property over $2 million). How to do your taxes The total cost of section 179 property you and your spouse elected to expense on your separate returns. How to do your taxes Business Income Limit The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. How to do your taxes Generally, you are considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business. How to do your taxes Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. How to do your taxes See Carryover of disallowed deduction , later. How to do your taxes Taxable income. How to do your taxes   In general, figure taxable income for this purpose by totaling the net income and losses from all trades and businesses you actively conducted during the year. How to do your taxes In addition to net income or loss from a sole proprietorship, partnership, or S corporation, net income or loss derived from a trade or business also includes the following items. How to do your taxes Section 1231 gains (or losses) as discussed in chapter 9. How to do your taxes Interest from working capital of your trade or business. How to do your taxes Wages, salaries, tips, or other pay earned by you (or your spouse if you file a joint return) as an employee of any employer. How to do your taxes   In addition, figure taxable income without regard to any of the following. How to do your taxes The section 179 expense deduction. How to do your taxes The self-employment tax deduction. How to do your taxes Any net operating loss carryback or carryforward. How to do your taxes Any unreimbursed employee business expenses. How to do your taxes Two different taxable income limits. How to do your taxes   In addition to the business income limit for your section 179 expense deduction, you may have a taxable income limit for some other deduction (for example, charitable contributions). How to do your taxes You may have to figure the limit for this other deduction taking into account the section 179 expense deduction. How to do your taxes If so, complete the following steps. How to do your taxes Step Action 1 Figure taxable income without the section 179 expense deduction or the other deduction. How to do your taxes 2 Figure a hypothetical section 179 expense deduction using the taxable income figured in Step 1. How to do your taxes 3 Subtract the hypothetical section 179 expense deduction figured in Step 2 from the taxable income figured in Step 1. How to do your taxes 4 Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income. How to do your taxes 5 Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in  Step 1. How to do your taxes 6 Figure your actual section 179 expense deduction using the taxable income figured in Step 5. How to do your taxes 7 Subtract your actual section 179 expense deduction figured in Step 6 from the taxable income figured in Step 1. How to do your taxes 8 Figure your actual other deduction using the taxable income figured in Step 7. How to do your taxes Example. How to do your taxes On February 1, 2013, the XYZ farm corporation purchased and placed in service qualifying section 179 property that cost $500,000. How to do your taxes It elects to expense the entire $500,000 cost under section 179. How to do your taxes In June, the corporation gave a charitable contribution of $10,000. How to do your taxes A corporation's limit on charitable contributions is figured after subtracting any section 179 expense deduction. How to do your taxes The business income limit for the section 179 expense deduction is figured after subtracting any allowable charitable contributions. How to do your taxes XYZ's taxable income figured without the section 179 expense deduction or the deduction for charitable contributions is $520,000. How to do your taxes XYZ figures its section 179 expense deduction and its deduction for charitable contributions as follows. How to do your taxes Step 1. How to do your taxes Taxable income figured without either deduction is $520,000. How to do your taxes Step 2. How to do your taxes Using $520,000 as taxable income, XYZ's hypothetical section 179 expense deduction is $500,000. How to do your taxes Step 3. How to do your taxes $20,000 ($520,000 − $500,000). How to do your taxes Step 4. How to do your taxes Using $20,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable income) is $2,000. How to do your taxes Step 5. How to do your taxes $518,000 ($520,000 − $2,000). How to do your taxes Step 6. How to do your taxes Using $518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 expense deduction. How to do your taxes Because the taxable income is at least $500,000, XYZ can take a $500,000 section 179 expense deduction. How to do your taxes Step 7. How to do your taxes $20,000 ($520,000 − $500,000). How to do your taxes Step 8. How to do your taxes Using $20,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable income) is $2,000. How to do your taxes Carryover of disallowed deduction. How to do your taxes   You can carry over for an unlimited number of years the cost of any section 179 property you elected to expense but were unable to because of the business income limit. How to do your taxes   The amount you carry over is used in determining your section 179 expense deduction in the next year. How to do your taxes However, it is subject to the limits in that year. How to do your taxes If you place more than one property in service in a year, you can select the properties for which all or a part of the cost will be carried forward. How to do your taxes Your selections must be shown in your books and records. How to do your taxes Example. How to do your taxes Last year, Joyce Jones placed in service a machine that cost $8,000 and elected to deduct all $8,000 under section 179. How to do your taxes The taxable income from her business (determined without regard to both a section 179 expense deduction for the cost of the machine and the self-employment tax deduction) was $6,000. How to do your taxes Her section 179 expense deduction was limited to $6,000. How to do your taxes The $2,000 cost that was not allowed as a section 179 expense deduction (because of the business income limit) is carried to this year. How to do your taxes This year, Joyce placed another machine in service that cost $9,000. How to do your taxes Her taxable income from business (determined without regard to both a section 179 expense deduction for the cost of the machine and the self-employment tax deduction) is $10,000. How to do your taxes Joyce can deduct the full cost of the machine ($9,000) but only $1,000 of the carryover from last year because of the business income limit. How to do your taxes She can carry over the balance of $1,000 to next year. How to do your taxes Partnerships and S Corporations The section 179 expense deduction limits apply both to the partnership or S corporation and to each partner or shareholder. How to do your taxes The partnership or S corporation determines its section 179 expense deduction subject to the limits. How to do your taxes It then allocates the deduction among its partners or shareholders. How to do your taxes If you are a partner in a partnership or shareholder of an S corporation, you add the amount allocated from the partnership or S corporation to any section 179 costs not related to the partnership or S corporation and then apply the dollar limit to this total. How to do your taxes To determine any reduction in the dollar limit for costs over $560,000, you do not include any of the cost of section 179 property placed in service by the partnership or S corporation. How to do your taxes After you apply the dollar limit, you apply the business income limit to any remaining section 179 costs. How to do your taxes For more information, see chapter 2 of Publication 946. How to do your taxes Example. How to do your taxes In 2013, Partnership P placed in service section 179 property with a total cost of $2,160,000. How to do your taxes P must reduce its dollar limit by $160,000 ($2,160,000 − $2,000,000). How to do your taxes Its maximum section 179 expense deduction is $340,000 ($500,000 − $160,000), and it elects to expense that amount. How to do your taxes Because P's taxable income from the active conduct of all its trades or businesses for the year was $400,000, it can deduct the full $340,000. How to do your taxes P allocates $100,000 of its section 179 expense deduction and $110,000 of its taxable income to John, one of its partners. How to do your taxes John also conducts a business as a sole proprietor and in 2013, placed in service in that business, section 179 property costing $28,000. How to do your taxes John's taxable income from that business was $10,000. How to do your taxes In addition to the $100,000 allocated from P, he elects to expense the $28,000 of his sole proprietorship's section 179 costs. How to do your taxes However, John's deduction is limited to his business taxable income of $120,000 ($110,000 from P plus $10,000 from his sole proprietorship). How to do your taxes He carries over $8,000 ($128,000 − $120,000) of the elected section 179 costs to 2014. How to do your taxes How Do You Elect the Deduction? You elect to take the section 179 expense deduction by completing Part I of Form 4562. How to do your taxes If you elect the deduction for listed property, complete Part V of  Form 4562 before completing Part I. How to do your taxes   File Form 4562 with either of the following: Your original tax return (whether or not you filed it timely), or An amended return filed within the time prescribed by law. How to do your taxes An election made on an amended return must specify the item of section 179 property to which the election applies and the part of the cost of each such item to be taken into account. How to do your taxes The amended return must also include any resulting adjustments to taxable income. How to do your taxes Revoking an election. How to do your taxes   An election (or any specification made in the election) to take a section 179 expense deduction for 2013 can be revoked without IRS approval by filing an amended return. How to do your taxes The amended return must be filed within the time prescribed by law. How to do your taxes The amended return must also include any resulting adjustments to taxable income (for example, allowable depreciation in that tax year for the item of section 179 property for which the election pertains. How to do your taxes ) Once made, the revocation is irrevocable. How to do your taxes When Must You Recapture the Deduction? You may have to recapture the section 179 expense deduction if, in any year during the property's recovery period, the percentage of business use drops to 50% or less. How to do your taxes In the year the business use drops to 50% or less, you include the recapture amount as ordinary income. How to do your taxes You also increase the basis of the property by the recapture amount. How to do your taxes Recovery periods for property are discussed later. How to do your taxes If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. How to do your taxes Instead, use the rules for recapturing depreciation explained in  chapter 9 under Section 1245 Property. How to do your taxes   If the property is listed property, do not figure the recapture amount under the rules explained in this discussion when the percentage of business use drops to 50% or less. How to do your taxes Instead, use the rules for recapturing depreciation explained in chapter 5 of Publication 946 under Recapture of Excess Depreciation. How to do your taxes Figuring the recapture amount. How to do your taxes   To figure the amount to recapture, take the following steps. How to do your taxes Figure the allowable depreciation for the section 179 expense deduction you claimed. How to do your taxes Begin with the year you placed the property in service and include the year of recapture. How to do your taxes Subtract the depreciation figured in (1) from the section 179 expense deduction you actually claimed. How to do your taxes The result is the amount you must recapture. How to do your taxes Example. How to do your taxes In January 2011, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. How to do your taxes The property is not listed property. How to do your taxes He elected a $5,000 section 179 expense deduction for the property and also elected not to claim a special depreciation allowance. How to do your taxes He used the property only for business in 2011 and 2012. How to do your taxes During 2013, he used the property 40% for business and 60% for personal use. How to do your taxes He figures his recapture amount as follows. How to do your taxes Section 179 expense deduction claimed (2011) $5,000 Minus: Allowable depreciation (instead of section 179 expense deduction):   2011 $1,250   2012 1,875   2013 ($1,250 × 40% (business)) 500 3,625 2013 — Recapture amount $1,375     Paul must include $1,375 in income for 2013. How to do your taxes Where to report recapture. How to do your taxes   Report any recapture of the section 179 expense deduction as ordinary income in Part IV of Form 4797 and include it in income on Schedule F (Form 1040). How to do your taxes Recapture for qualified section 179 GO Zone property. How to do your taxes   If any qualified section 179 GO Zone property ceases to be used in the GO Zone in a later year, you must recapture the benefit of the increased section 179 expense deduction as “other income. How to do your taxes ” Claiming the Special Depreciation Allowance For qualified property (defined below) placed in service in 2013, you can take an additional 50% special depreciation allowance. How to do your taxes The allowance is an additional deduction you can take after any section 179 expense deduction and before you figure regular depreciation under MACRS. How to do your taxes Figure the special depreciation allowance by multiplying the depreciable basis of the qualified property by 50%. How to do your taxes What is Qualified Property? For farmers, qualified property generally is certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. How to do your taxes Certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. How to do your taxes   Certain qualified property (defined below) acquired after December 31, 2007, and before January 1, 2014, is eligible for a 50% special depreciation allowance. How to do your taxes   Qualified property includes the following: Tangible property depreciated under the Modified Accelerated Cost Recovery System (MACRS) with a recovery period of 20 years or less. How to do your taxes Water utility property. How to do your taxes Off-the-shelf computer software. How to do your taxes Qualified leasehold improvement property. How to do your taxes   Qualified property must also meet all of the following tests: You must have acquired qualified property by purchase after December 31, 2007. How to do your taxes If a binding contract to acquire the property existed before January 1, 2008, the property does not qualify. How to do your taxes Qualified property must be placed in service after December 31, 2007 and placed in service before January 1, 2014 (before January 1, 2015 for certain property with a long production period and for certain aircraft). How to do your taxes The original use of the property must begin with you after December 31, 2007. How to do your taxes For more information, see chapter 3 of Publication 946. How to do your taxes How Can You Elect Not To Claim the Allowance? You can elect, for any class of property, not to deduct the special depreciation allowance for all property in such class placed in service during the tax year. How to do your taxes To make the election, attach a statement to your return indicating the class of property for which you are making the election. How to do your taxes Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service. How to do your taxes 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 original return (not including extensions). How to do your taxes Attach the election statement to the amended return. How to do your taxes On the amended return, write “Filed pursuant to section 301. How to do your taxes 9100-2. How to do your taxes ” Once made, the election may not be revoked without IRS consent. How to do your taxes If you elect not to have the special depreciation allowance apply, the property may be subject to an alternative minimum tax adjustment for depreciation. How to do your taxes When Must You Recapture an Allowance When you dispose of property for which you claimed a special depreciation allowance, any gain on the disposition is generally recaptured (included in income) as ordinary income up to the amount of the special depreciation allowance previously allowed or allowable. How to do your taxes For more information, see chapter 3 of Publication 946. How to do your taxes Figuring Depreciation Under MACRS The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. How to do your taxes MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). How to do your taxes Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. How to do your taxes To be sure you can use MACRS to figure depreciation for your property, see Can You Use MACRS To Depreciate Your Property, earlier. How to do your taxes This part explains how to determine which MACRS depreciation system applies to your property. How to do your taxes It also discusses the following information that you need to know before you can figure depreciation under MACRS. How to do your taxes Property's recovery class. How to do your taxes Placed-in-service date. How to do your taxes Basis for depreciation. How to do your taxes Recovery period. How to do your taxes Convention. How to do your taxes Depreciation method. How to do your taxes Finally, this part explains how to use this information to figure your depreciation deduction. How to do your taxes 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. How to do your taxes You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. How to do your taxes Required use of ADS. How to do your taxes   You must use ADS for the following property. How to do your taxes 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. How to do your taxes Listed property used 50% or less in a qualified business use. How to do your taxes See Additional Rules for Listed Property , later. How to do your taxes Any tax-exempt use property. How to do your taxes Any tax-exempt bond-financed property. How to do your taxes 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. How to do your taxes Any tangible property used predominantly outside the United States during the year. How to do your taxes If you are required to use ADS to depreciate your property, you cannot claim the special depreciation allowance. How to do your taxes Electing ADS. How to do your taxes   Although your property may qualify for GDS, you can elect to use ADS. How to do your taxes The election generally must cover all property in the same property class you placed in service during the year. How to do your taxes However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. How to do your taxes Once you make this election, you can never revoke it. How to do your taxes   You make the election by completing line 20 in Part III of Form 4562. How to do your taxes Which Property Class Applies Under GDS? The following is a list of the nine property classes under GDS. How to do your taxes 3-year property. How to do your taxes 5-year property. How to do your taxes 7-year property. How to do your taxes 10-year property. How to do your taxes 15-year property. How to do your taxes 20-year property. How to do your taxes 25-year property. How to do your taxes Residential rental property. How to do your taxes Nonresidential real property. How to do your taxes See Which Property Class Applies Under GDS in chapter 4 of Publication 946 for examples of the types of property included in each class. How to do your taxes What Is the Placed-in-Service Date? You begin to claim depreciation when your property is placed in service for use either in a trade or business or for the production of income. How to do your taxes The placed-in-service date for your property is the date the property is ready and available for a specific use. How to do your taxes It is therefore not necessarily the date it is first used. How to do your taxes 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. How to do your taxes See Placed in Service under When Does Depreciation Begin and End , earlier, for examples illustrating when property is placed in service. How to do your taxes 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. How to do your taxes Reduce that amount by any credits and deductions allocable to the property. How to do your taxes The following are examples of some of the credits and deductions that reduce basis. How to do your taxes Any deduction for section 179 property. How to do your taxes Any deduction for removal of barriers to the disabled and the elderly. How to do your taxes Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. How to do your taxes Any special depreciation allowance. How to do your taxes Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. How to do your taxes For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property , earlier. How to do your taxes Also, see chapter 6. How to do your taxes For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. How to do your taxes Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. How to do your taxes It is determined based on the depreciation system (GDS or ADS) used. How to do your taxes See Table 7-1 for recovery periods under both GDS and ADS for some commonly used assets. How to do your taxes For a complete list of recovery periods, see the Table of Class Lives and Recovery Periods in Appendix B of Publication 946. How to do your taxes House trailers for farm laborers. How to do your taxes   To depreciate a house trailer you supply as housing for those who work on your farm, use one of the following recovery periods if the house trailer is mobile (it has wheels and a history of movement). How to do your taxes A 7-year recovery period under GDS. How to do your taxes A 10-year recovery period under ADS. How to do your taxes   However, if the house trailer is not mobile (its wheels have been removed and permanent utilities and pipes attached to it), use one of the following recovery periods. How to do your taxes A 20-year recovery period under GDS. How to do your taxes A 25-year recovery period under ADS. How to do your taxes Water wells. How to do your taxes   Water wells used to provide water for raising poultry and livestock are land improvements. How to do your taxes If they are depreciable, use one of the following recovery periods. How to do your taxes A 15-year recovery period under GDS. How to do your taxes A 20-year recovery period under ADS. How to do your taxes   The types of water wells that can be depreciated were discussed earlier in Irrigation systems and water wells under Property Having a Determinable Useful Life . How to do your taxes Table 7-1. How to do your taxes Farm Property Recovery Periods   Recovery Period in Years Assets GDS ADS Agricultural structures (single purpose) 10 15 Automobiles 5 5 Calculators and copiers 5 6 Cattle (dairy or breeding) 5 7 Communication equipment1 7 10 Computer and peripheral equipment 5 5 Drainage facilities 15 20 Farm buildings2 20 25 Farm machinery and equipment 7 10 Fences (agricultural) 7 10 Goats and sheep (breeding) 5 5 Grain bin 7 10 Hogs (breeding) 3 3 Horses (age when placed in service)     Breeding and working (12 years or less) 7 10 Breeding and working (more than 12 years) 3 10 Racing horses 3 12 Horticultural structures (single purpose) 10 15 Logging machinery and equipment3 5 6 Nonresidential real property 394 40 Office furniture, fixtures, and equipment (not calculators, copiers, or typewriters) 7 10 Paved lots 15 20 Residential rental property 27. How to do your taxes 5 40 Tractor units (over-the-road) 3 4 Trees or vines bearing fruit or nuts 10 20 Truck (heavy duty, unloaded weight 13,000 lbs. How to do your taxes or more) 5 6 Truck (actual weight less than 13,000 lbs) 5 5 Water wells 15 20 1 Not including communication equipment listed in other classes. How to do your taxes 2 Not including single purpose agricultural or horticultural structures. How to do your taxes 3 Used by logging and sawmill operators for cutting of timber. How to do your taxes 4 For property placed in service after May 12, 1993; for property placed in service before May 13, 1993,  the recovery period is 31. How to do your taxes 5 years. How to do your taxes Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. How to do your taxes 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. How to do your taxes Use one of the following conventions. How to do your taxes The half-year convention. How to do your taxes The mid-month convention. How to do your taxes The mid-quarter convention. How to do your taxes For a detailed explanation of each convention, see Which Convention Applies in chapter 4 of Publication 946. How to do your taxes Also, see the Instructions for Form 4562. How to do your taxes Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. How to do your taxes The 200% declining balance method over a GDS recovery period. How to do your taxes The 150% declining balance method over a GDS recovery period. How to do your taxes The straight line method over a GDS recovery period. How to do your taxes The straight line method over an ADS recovery period. How to do your taxes Depreciation Table. How to do your taxes   The following table lists the types of property you can depreciate under each method. How to do your taxes The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. How to do your taxes Depreciation Table System/Method   Type of Property GDS using  150% DB • All property used in a farming business (except real property)   • All 15- and 20-year property   • Nonfarm 3-, 5-, 7-, and 10-year property1 GDS using SL • Nonresidential real property   • Residential rental property   • Trees or vines bearing fruit or nuts   • All 3-, 5-, 7-, 10-, 15-, and 20-year property1 ADS using SL • Property used predomi- nantly outside the United States   • Farm property used when an election not to apply the uniform capitalization rules is in effect   • Tax-exempt property   • Tax-exempt bond-financed property   • Imported property2   • Any property for which you elect to use this method1 GDS using  200% DB • Nonfarm 3-, 5-, 7-, and 10-year property 1Elective method 2See section 168(g)(6) of the Internal Revenue  Code Property used in farming business. How to do your taxes   For personal property placed in service after 1988 in a farming business, you must use the 150% declining balance method over a GDS recovery period or you can elect one of the following methods. How to do your taxes The straight line method over a GDS recovery period. How to do your taxes The straight line method over an ADS recovery period. How to do your taxes For property placed in service before 1999, you could have elected to use the 150% declining balance method using the ADS recovery periods for certain property classes. How to do your taxes If you made this election, continue to use the same method and recovery period for that property. How to do your taxes Real property. How to do your taxes   You can depreciate real property using the straight line method under either GDS or ADS. How to do your taxes Switching to straight line. How to do your taxes   If you use a declining balance method, you switch to the straight line method in the year it provides an equal or greater deduction. How to do your taxes If you use the MACRS percentage tables, discussed later under How Is the Depreciation Deduction Figured , you do not need to determine in which year your deduction is greater using the straight line method. How to do your taxes The tables have the switch to the straight line method built into their rates. How to do your taxes Fruit or nut trees and vines. How to do your taxes   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a 10-year recovery period. How to do your taxes ADS required for some farmers. How to do your taxes   If you elect not to apply the uniform capitalization rules to any plant shown in Table 6-1 of chapter 6 and produced in your farming business, you must use ADS for all property you place in service in any year the election is in effect. How to do your taxes See chapter 6 for a discussion of the application of the uniform capitalization rules to farm property. How to do your taxes Electing a different method. How to do your taxes   As shown in the Depreciation Table , you can elect a different method for depreciation for certain types of property. How to do your taxes You must make the election by the due date of the return (including extensions) for the year you placed the property in service. How to do your taxes However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). How to do your taxes Attach the election to the amended return and write “Filed pursuant to section 301. How to do your taxes 9100-2” on the election statement. How to do your taxes File the amended return at the same address you filed the original return. How to do your taxes Once you make the election, you cannot change it. How to do your taxes    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. How to do your taxes However, you can make the election on a property-by-property basis for residential rental and nonresidential real property. How to do your taxes Straight line election. How to do your taxes   Instead of using the declining balance method, you can elect to use the straight line method over the GDS recovery period. How to do your taxes Make the election by entering “S/L” under column (f) in Part III of Form 4562. How to do your taxes ADS election. How to do your taxes   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. How to do your taxes ADS uses the straight line method of depreciation over the ADS recovery periods, which are generally longer than the GDS recovery periods. How to do your taxes The ADS recovery periods for many assets used in the business of farming are listed in Table 7–1. How to do your taxes Additional ADS recovery periods for other classes of property may be found in the Table of Class Lives and Recovery Periods in Appendix B of Publication 946. How to do your taxes 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. How to do your taxes Then you are ready to figure your depreciation deduction. How to do your taxes You can figure it in one of two ways. How to do your taxes You can use the percentage tables provided by the IRS. How to do your taxes You can figure your own deduction without using the tables. How to do your taxes Figuring your own MACRS deduction will generally result in a slightly different amount than using the tables. How to do your taxes 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. How to do your taxes These percentage tables are in Appendix A of Publication 946. How to do your taxes Rules for using the tables. How to do your taxes   The following rules cover the use of the percentage tables. How to do your taxes You must apply the rates in the percentage tables to your property's unadjusted basis. How to do your taxes Unadjusted basis is the same basis amount you would use to figure gain on a sale but figured without reducing your original basis by any MACRS depreciation taken in earlier years. How to do your taxes You cannot use the percentage tables for a short tax year. How to do your taxes See chapter 4 of Publication 946 for information on how to figure the deduction for a short tax year. How to do your taxes You generally must continue to use them for the entire recovery period of the property. How to do your taxes 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 the property, which is depreciated as a separate property. How to do your taxes Basis adjustment due to casualty loss. How to do your taxes   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. How to do your taxes 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. How to do your taxes See Figuring the Deduction Without Using the Tables in chapter 4 of Publication 946. How to do your taxes Figuring depreciation using the 150% DB method and half-year convention. How to do your taxes    Table 7-2 has the percentages for 3-, 5-, 7-, and 20-year property. How to do your taxes The percentages are based on the 150% declining balance method with a change to the straight line method. How to do your taxes This table covers only the half-year convention and the first 8 years for 20-year property. How to do your taxes See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. How to do your taxes   The following examples show how to figure depreciation under MACRS using the percentages in Table 7-2 . How to do your taxes Example 1. How to do your taxes During the year, you bought an item of 7-year property for $10,000 and placed it in service. How to do your taxes You do not elect a section 179 expense deduction for this property. How to do your taxes In addition, the property is not qualified property for purposes of the special depreciation allowance. How to do your taxes The unadjusted basis of the property is $10,000. How to do your taxes You use the percentages in Table 7-2 to figure your deduction. How to do your taxes Since this is 7-year property, you multiply $10,000 by 10. How to do your taxes 71% to get this year's depreciation of $1,071. How to do your taxes For next year, your depreciation will be $1,913 ($10,000 × 19. How to do your taxes 13%). How to do your taxes Example 2. How to do your taxes You had a barn constructed on your farm at a cost of $20,000. How to do your taxes You placed the barn in service this year. How to do your taxes You elect not to claim the special depreciation allowance. How to do your taxes The barn is 20-year property and you use the table percentages to figure your deduction. How to do your taxes You figure this year's depreciation by multiplying $20,000 (unadjusted basis) by 3. How to do your taxes 75% to get $750. How to do your taxes For next year, your depreciation will be $1,443. How to do your taxes 80 ($20,000 × 7. How to do your taxes 219%). How to do your taxes Table 7-2. How to do your taxes 150% Declining Balance Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 25. How to do your taxes 0 % 15. How to do your taxes 00 % 10. How to do your taxes 71 % 3. How to do your taxes 750 % 2 37. How to do your taxes 5   25. How to do your taxes 50   19. How to do your taxes 13   7. How to do your taxes 219   3 25. How to do your taxes 0   17. How to do your taxes 85   15. How to do your taxes 03   6. How to do your taxes 677   4 12. How to do your taxes 5   16. How to do your taxes 66   12. How to do your taxes 25   6. How to do your taxes 177   5     16. How to do your taxes 66   12. How to do your taxes 25   5. How to do your taxes 713   6     8. How to do your taxes 33   12. How to do your taxes 25   5. How to do your taxes 285   7         12. How to do your taxes 25   4. How to do your taxes 888   8         6. How to do your taxes 13   4. How to do your taxes 522   Figuring depreciation using the straight line method and half-year convention. How to do your taxes   The following table has the straight line percentages for 3-, 5-, 7-, and 20-year property using the half-year convention. How to do your taxes The table covers only the first 8 years for 20-year property. How to do your taxes See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. How to do your taxes Table 7-3. How to do your taxes Straight Line Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 16. How to do your taxes 67 % 10 % 7. How to do your taxes 14 % 2. How to do your taxes 5 % 2 33. How to do your taxes 33   20   14. How to do your taxes 29   5. How to do your taxes 0   3 33. How to do your taxes 33   20   14. How to do your taxes 29   5. How to do your taxes 0   4 16. How to do your taxes 67   20   14. How to do your taxes 28   5. How to do your taxes 0   5     20   14. How to do your taxes 29   5. How to do your taxes 0   6     10   14. How to do your taxes 28   5. How to do your taxes 0   7         14. How to do your taxes 29   5. How to do your taxes 0   8         7. How to do your taxes 14   5. How to do your taxes 0    
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The How To Do Your Taxes

How to do your taxes 28. How to do your taxes   Miscellaneous Deductions Table of Contents What's New Introduction Useful Items - You may want to see: Deductions Subject to the 2% LimitUnreimbursed Employee Expenses (Line 21) Tax Preparation Fees (Line 22) Other Expenses (Line 23) Deductions Not Subject to the 2% LimitList of Deductions Nondeductible ExpensesList of Nondeductible Expenses What's New Standard mileage rate. How to do your taxes  The 2013 rate for business use of a vehicle is 56½ cents per mile. How to do your taxes Introduction This chapter explains which expenses you can claim as miscellaneous itemized deductions on Schedule A (Form 1040). How to do your taxes You must reduce the total of most miscellaneous itemized deductions by 2% of your adjusted gross income. How to do your taxes This chapter covers the following topics. How to do your taxes Deductions subject to the 2% limit. How to do your taxes Deductions not subject to the 2% limit. How to do your taxes Expenses you cannot deduct. How to do your taxes You must keep records to verify your deductions. How to do your taxes You should keep receipts, canceled checks, substitute checks, financial account statements, and other documentary evidence. How to do your taxes For more information on recordkeeping, get Publication 552, Record- keeping for Individuals. How to do your taxes Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 525 Taxable and Nontaxable Income 529 Miscellaneous Deductions 535 Business Expenses 587 Business Use of Your Home (Including Use by Daycare Providers) 946 How To Depreciate Property Form (and Instructions) Schedule A (Form 1040) Itemized Deductions 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses Deductions Subject to the 2% Limit You can deduct certain expenses as miscellaneous itemized deductions on Schedule A (Form 1040). How to do your taxes You can claim the amount of expenses that is more than 2% of your adjusted gross income. How to do your taxes You figure your deduction on Schedule A by subtracting 2% of your adjusted gross income from the total amount of these expenses. How to do your taxes Your adjusted gross income is the amount on Form 1040, line 38. How to do your taxes Generally, you apply the 2% limit after you apply any other deduction limit. How to do your taxes For example, you apply the 50% (or 80%) limit on business-related meals and entertainment (discussed in chapter 26) before you apply the 2% limit. How to do your taxes Deductions subject to the 2% limit are discussed in the three categories in which you report them on Schedule A (Form 1040). How to do your taxes Unreimbursed employee expenses (line 21). How to do your taxes Tax preparation fees (line 22). How to do your taxes Other expenses (line 23). How to do your taxes Unreimbursed Employee Expenses (Line 21) Generally, you can deduct on Schedule A (Form 1040), line 21, unreimbursed employee expenses that are: Paid or incurred during your tax year, For carrying on your trade or business of being an employee, and Ordinary and necessary. How to do your taxes An expense is ordinary if it is common and accepted in your trade, business, or profession. How to do your taxes An expense is necessary if it is appropriate and helpful to your business. How to do your taxes An expense does not have to be required to be considered necessary. How to do your taxes Examples of unreimbursed employee expenses are listed next. How to do your taxes The list is followed by discussions of additional unreimbursed employee expenses. How to do your taxes Business bad debt of an employee. How to do your taxes Education that is work related. How to do your taxes (See chapter 27. How to do your taxes ) Legal fees related to your job. How to do your taxes Licenses and regulatory fees. How to do your taxes Malpractice insurance premiums. How to do your taxes Medical examinations required by an employer. How to do your taxes Occupational taxes. How to do your taxes Passport for a business trip. How to do your taxes Subscriptions to professional journals and trade magazines related to your work. How to do your taxes Travel, transportation, entertainment, and gifts related to your work. How to do your taxes (See chapter 26. How to do your taxes ) Business Liability Insurance You can deduct insurance premiums you paid for protection against personal liability for wrongful acts on the job. How to do your taxes Damages for Breach of Employment Contract If you break an employment contract, you can deduct damages you pay your former employer that are attributable to the pay you received from that employer. How to do your taxes Depreciation on Computers You can claim a depreciation deduction for a computer that you use in your work as an employee if its use is: For the convenience of your employer, and Required as a condition of your employment. How to do your taxes For more information about the rules and exceptions to the rules affecting the allowable deductions for a home computer, see Publication 529. How to do your taxes Dues to Chambers of Commerce and Professional Societies You may be able to deduct dues paid to professional organizations (such as bar associations and medical associations) and to chambers of commerce and similar organizations, if membership helps you carry out the duties of your job. How to do your taxes Similar organizations include: Boards of trade, Business leagues, Civic or public service organizations, Real estate boards, and Trade associations. How to do your taxes Lobbying and political activities. How to do your taxes   You may not be able to deduct that part of your dues that is for certain lobbying and political activities. How to do your taxes See Dues used for lobbying under Nondeductible Expenses, later. How to do your taxes Educator Expenses If you were an eligible educator in 2013, you can deduct up to $250 of qualified expenses you paid in 2013 as an adjustment to gross income on Form 1040, line 23, rather than as a miscellaneous itemized deduction. How to do your taxes If you file Form 1040A, you can deduct these expenses on line 16. How to do your taxes If you and your spouse are filing jointly and both of you were eligible educators, the maximum deduction is $500. How to do your taxes However, neither spouse can deduct more than $250 of his or her qualified expenses. How to do your taxes Home Office If you use a part of your home regularly and exclusively for business purposes, you may be able to deduct a part of the operating expenses and depreciation of your home. How to do your taxes You can claim this deduction for the business use of a part of your home only if you use that part of your home regularly and exclusively: As your principal place of business for any trade or business, As a place to meet or deal with your patients, clients, or customers in the normal course of your trade or business, or In the case of a separate structure not attached to your home, in connection with your trade or business. How to do your taxes The regular and exclusive business use must be for the convenience of your employer and not just appropriate and helpful in your job. How to do your taxes See Publication 587 for more detailed information and a worksheet. How to do your taxes Job Search Expenses You can deduct certain expenses you have in looking for a new job in your present occupation, even if you do not get a new job. How to do your taxes You cannot deduct these expenses if: You are looking for a job in a new occupation, There was a substantial break between the ending of your last job and your looking for a new one, or You are looking for a job for the first time. How to do your taxes Employment and outplacement agency fees. How to do your taxes   You can deduct employment and outplacement agency fees you pay in looking for a new job in your present occupation. How to do your taxes Employer pays you back. How to do your taxes   If, in a later year, your employer pays you back for employment agency fees, you must include the amount you receive in your gross income up to the amount of your tax benefit in the earlier year. How to do your taxes (See Recoveries in chapter 12. How to do your taxes ) Employer pays the employment agency. How to do your taxes   If your employer pays the fees directly to the employment agency and you are not responsible for them, you do not include them in your gross income. How to do your taxes Résumé. How to do your taxes   You can deduct amounts you spend for preparing and mailing copies of a résumé to prospective employers if you are looking for a new job in your present occupation. How to do your taxes Travel and transportation expenses. How to do your taxes   If you travel to an area and, while there, you look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. How to do your taxes You can deduct the travel expenses if the trip is primarily to look for a new job. How to do your taxes The amount of time you spend on personal activity compared to the amount of time you spend in looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job. How to do your taxes   Even if you cannot deduct the travel expenses to and from an area, you can deduct the expenses of looking for a new job in your present occupation while in the area. How to do your taxes   You can choose to use the standard mileage rate to figure your car expenses. How to do your taxes The 2013 rate for business use of a vehicle is 56½ cents per mile. How to do your taxes See chapter 26 for more information. How to do your taxes Licenses and Regulatory Fees You can deduct the amount you pay each year to state or local governments for licenses and regulatory fees for your trade, business, or profession. How to do your taxes Occupational Taxes You can deduct an occupational tax charged at a flat rate by a locality for the privilege of working or conducting a business in the locality. How to do your taxes If you are an employee, you can claim occupational taxes only as a miscellaneous deduction subject to the 2% limit; you cannot claim them as a deduction for taxes elsewhere on your return. How to do your taxes Repayment of Income Aid Payment An “income aid payment” is one that is received under an employer's plan to aid employees who lose their jobs because of lack of work. How to do your taxes If you repay a lump-sum income aid payment that you received and included in income in an earlier year, you can deduct the repayment. How to do your taxes Research Expenses of a College Professor If you are a college professor, you can deduct research expenses, including travel expenses, for teaching, lecturing, or writing and publishing on subjects that relate directly to your teaching duties. How to do your taxes You must have undertaken the research as a means of carrying out the duties expected of a professor and without expectation of profit apart from salary. How to do your taxes However, you cannot deduct the cost of travel as a form of education. How to do your taxes Tools Used in Your Work Generally, you can deduct amounts you spend for tools used in your work if the tools wear out and are thrown away within 1 year from the date of purchase. How to do your taxes You can depreciate the cost of tools that have a useful life substantially beyond the tax year. How to do your taxes For more information about depreciation, see Publication 946. How to do your taxes Union Dues and Expenses You can deduct dues and initiation fees you pay for union membership. How to do your taxes You can also deduct assessments for benefit payments to unemployed union members. How to do your taxes However, you cannot deduct the part of the assessments or contributions that provides funds for the payment of sick, accident, or death benefits. How to do your taxes Also, you cannot deduct contributions to a pension fund, even if the union requires you to make the contributions. How to do your taxes You may not be able to deduct amounts you pay to the union that are related to certain lobbying and political activities. How to do your taxes See Lobbying Expenses under Nondeductible Expenses, later. How to do your taxes Work Clothes and Uniforms You can deduct the cost and upkeep of work clothes if the following two requirements are met. How to do your taxes You must wear them as a condition of your employment. How to do your taxes The clothes are not suitable for everyday wear. How to do your taxes It is not enough that you wear distinctive clothing. How to do your taxes The clothing must be specifically required by your employer. How to do your taxes Nor is it enough that you do not, in fact, wear your work clothes away from work. How to do your taxes The clothing must not be suitable for taking the place of your regular clothing. How to do your taxes Examples of workers who may be able to deduct the cost and upkeep of work clothes are: delivery workers, firefighters, health care workers, law enforcement officers, letter carriers, professional athletes, and transportation workers (air, rail, bus, etc. How to do your taxes ). How to do your taxes Musicians and entertainers can deduct the cost of theatrical clothing and accessories that are not suitable for everyday wear. How to do your taxes However, work clothing consisting of white cap, white shirt or white jacket, white bib overalls, and standard work shoes, which a painter is required by his union to wear on the job, is not distinctive in character or in the nature of a uniform. How to do your taxes Similarly, the costs of buying and maintaining blue work clothes worn by a welder at the request of a foreman are not deductible. How to do your taxes Protective clothing. How to do your taxes   You can deduct the cost of protective clothing required in your work, such as safety shoes or boots, safety glasses, hard hats, and work gloves. How to do your taxes   Examples of workers who may be required to wear safety items are: carpenters, cement workers, chemical workers, electricians, fishing boat crew members, machinists, oil field workers, pipe fitters, steamfitters, and truck drivers. How to do your taxes Military uniforms. How to do your taxes   You generally cannot deduct the cost of your uniforms if you are on full-time active duty in the armed forces. How to do your taxes However, if you are an armed forces reservist, you can deduct the unreimbursed cost of your uniform if military regulations restrict you from wearing it except while on duty as a reservist. How to do your taxes In figuring the deduction, you must reduce the cost by any nontaxable allowance you receive for these expenses. How to do your taxes   If local military rules do not allow you to wear fatigue uniforms when you are off duty, you can deduct the amount by which the cost of buying and keeping up these uniforms is more than the uniform allowance you receive. How to do your taxes   You can deduct the cost of your uniforms if you are a civilian faculty or staff member of a military school. How to do your taxes Tax Preparation Fees (Line 22) You can usually deduct tax preparation fees in the year you pay them. How to do your taxes Thus, on your 2013 return, you can deduct fees paid in 2013 for preparing your 2012 return. How to do your taxes These fees include the cost of tax preparation software programs and tax publications. How to do your taxes They also include any fee you paid for electronic filing of your return. How to do your taxes Other Expenses (Line 23) You can deduct certain other expenses as miscellaneous itemized deductions subject to the 2% limit. How to do your taxes On Schedule A (Form 1040), line 23, you can deduct expenses that you pay: To produce or collect income that must be included in your gross income, To manage, conserve, or maintain property held for producing such income, or To determine, contest, pay, or claim a refund of any tax. How to do your taxes You can deduct expenses you pay for the purposes in (1) and (2) above only if they are reasonably and closely related to these purposes. How to do your taxes Some of these other expenses are explained in the following discussions. How to do your taxes If the expenses you pay produce income that is only partially taxable, see Tax-Exempt Income Expenses , later, under Nondeductible Expenses. How to do your taxes Appraisal Fees You can deduct appraisal fees if you pay them to figure a casualty loss or the fair market value of donated property. How to do your taxes Casualty and Theft Losses You can deduct a casualty or theft loss as a miscellaneous itemized deduction subject to the 2% limit if you used the damaged or stolen property in performing services as an employee. How to do your taxes First report the loss in Section B of Form 4684, Casualties and Thefts. How to do your taxes You may also have to include the loss on Form 4797, Sales of Business Property, if you are otherwise required to file that form. How to do your taxes To figure your deduction, add all casualty or theft losses from this type of property included on Form 4684, lines 32 and 38b, or Form 4797, line 18a. How to do your taxes For other casualty and theft losses, see chapter 25. How to do your taxes Clerical Help and Office Rent You can deduct office expenses, such as rent and clerical help, that you have in connection with your investments and collecting the taxable income on them. How to do your taxes Credit or Debit Card Convenience Fees You can deduct the convenience fee charged by the card processor for paying your income tax (including estimated tax payments) by credit or debit card. How to do your taxes The fees are deductible in the year paid. How to do your taxes Depreciation on Home Computer You can deduct depreciation on your home computer if you use it to produce income (for example, to manage your investments that produce taxable income). How to do your taxes You generally must depreciate the computer using the straight line method over the Alternative Depreciation System (ADS) recovery period. How to do your taxes But if you work as an employee and also use the computer in that work, see Publication 946. How to do your taxes Excess Deductions of an Estate If an estate's total deductions in its last tax year are more than its gross income for that year, the beneficiaries succeeding to the estate's property can deduct the excess. How to do your taxes Do not include deductions for the estate's personal exemption and charitable contributions when figuring the estate's total deductions. How to do your taxes The beneficiaries can claim the deduction only for the tax year in which, or with which, the estate terminates, whether the year of termination is a normal year or a short tax year. How to do your taxes For more information, see Termination of Estate in Publication 559, Survivors, Executors, and Administrators. How to do your taxes Fees to Collect Interest and Dividends You can deduct fees you pay to a broker, bank, trustee, or similar agent to collect your taxable bond interest or dividends on shares of stock. How to do your taxes But you cannot deduct a fee you pay to a broker to buy investment property, such as stocks or bonds. How to do your taxes You must add the fee to the cost of the property. How to do your taxes You cannot deduct the fee you pay to a broker to sell securities. How to do your taxes You can use the fee only to figure gain or loss from the sale. How to do your taxes See the Instructions for Form 8949 for information on how to report the fee. How to do your taxes Hobby Expenses You can generally deduct hobby expenses, but only up to the amount of hobby income. How to do your taxes A hobby is not a business because it is not carried on to make a profit. How to do your taxes See Activity not for profit in chapter 12 under Other Income. How to do your taxes Indirect Deductions of Pass-Through Entities Pass-through entities include partnerships, S corporations, and mutual funds that are not publicly offered. How to do your taxes Deductions of pass-through entities are passed through to the partners or shareholders. How to do your taxes The partners or shareholders can deduct their share of passed-through deductions for investment expenses as miscellaneous itemized deductions subject to the 2% limit. How to do your taxes Example. How to do your taxes You are a member of an investment club that is formed solely to invest in securities. How to do your taxes The club is treated as a partnership. How to do your taxes The partnership's income is solely from taxable dividends, interest, and gains from sales of securities. How to do your taxes In this case, you can deduct your share of the partnership's operating expenses as miscellaneous itemized deductions subject to the 2% limit. How to do your taxes However, if the investment club partnership has investments that also produce nontaxable income, you cannot deduct your share of the partnership's expenses that produce the nontaxable income. How to do your taxes Publicly offered mutual funds. How to do your taxes   Publicly offered mutual funds do not pass deductions for investment expenses through to shareholders. How to do your taxes A mutual fund is “publicly offered” if it is: Continuously offered pursuant to a public offering, Regularly traded on an established securities market, or Held by or for at least 500 persons at all times during the tax year. How to do your taxes   A publicly offered mutual fund will send you a Form 1099-DIV, Dividends and Distributions, or a substitute form, showing the net amount of dividend income (gross dividends minus investment expenses). How to do your taxes This net figure is the amount you report on your return as income. How to do your taxes You cannot further deduct investment expenses related to publicly offered mutual funds because they are already included as part of the net income amount. How to do your taxes Information returns. How to do your taxes   You should receive information returns from pass-through entities. How to do your taxes Partnerships and S corporations. How to do your taxes   These entities issue Schedule K-1, which lists the items and amounts you must report and identifies the tax return schedules and lines to use. How to do your taxes Nonpublicly offered mutual funds. How to do your taxes   These funds will send you a Form 1099-DIV, Dividends and Distributions, or a substitute form, showing your share of gross income and investment expenses. How to do your taxes You can claim the expenses only as a miscellaneous itemized deduction subject to the 2% limit. How to do your taxes Investment Fees and Expenses You can deduct investment fees, custodial fees, trust administration fees, and other expenses you paid for managing your investments that produce taxable income. How to do your taxes Legal Expenses You can usually deduct legal expenses that you incur in attempting to produce or collect taxable income or that you pay in connection with the determination, collection, or refund of any tax. How to do your taxes You can also deduct legal expenses that are: Related to either doing or keeping your job, such as those you paid to defend yourself against criminal charges arising out of your trade or business, For tax advice related to a divorce, if the bill specifies how much is for tax advice and it is determined in a reasonable way, or To collect taxable alimony. How to do your taxes You can deduct expenses of resolving tax issues relating to profit or loss from business (Schedule C or C-EZ), rentals or royalties (Schedule E), or farm income and expenses (Schedule F), on the appropriate schedule. How to do your taxes You deduct expenses of resolving nonbusiness tax issues on Schedule A (Form 1040). How to do your taxes See Tax Preparation Fees , earlier. How to do your taxes Loss on Deposits For information on whether, and if so, how, you may deduct a loss on your deposit in a qualified financial institution, see Loss on Deposits in chapter 25. How to do your taxes Repayments of Income If you had to repay an amount that you included in income in an earlier year, you may be able to deduct the amount you repaid. How to do your taxes If the amount you had to repay was ordinary income of $3,000 or less, the deduction is subject to the 2% limit. How to do your taxes If it was more than $3,000, see Repayments Under Claim of Right under Deductions Not Subject to the 2% Limit, later. How to do your taxes Repayments of Social Security Benefits For information on how to deduct your repayments of certain social security benefits, see Repayments More Than Gross Benefits in chapter 11. How to do your taxes Safe Deposit Box Rent You can deduct safe deposit box rent if you use the box to store taxable income-producing stocks, bonds, or investment-related papers and documents. How to do your taxes You cannot deduct the rent if you use the box only for jewelry, other personal items, or tax-exempt securities. How to do your taxes Service Charges on Dividend Reinvestment Plans You can deduct service charges you pay as a subscriber in a dividend reinvestment plan. How to do your taxes These service charges include payments for: Holding shares acquired through a plan, Collecting and reinvesting cash dividends, and Keeping individual records and providing detailed statements of accounts. How to do your taxes Trustee's Administrative Fees for IRA Trustee's administrative fees that are billed separately and paid by you in connection with your individual retirement arrangement (IRA) are deductible (if they are ordinary and necessary) as a miscellaneous itemized deduction subject to the 2% limit. How to do your taxes For more information about IRAs, see chapter 17. How to do your taxes Deductions Not Subject to the 2% Limit You can deduct the items listed below as miscellaneous itemized deductions. How to do your taxes They are not subject to the 2% limit. How to do your taxes Report these items on Schedule A (Form 1040), line 28. How to do your taxes List of Deductions Each of the following items is discussed in detail after the list (except where indicated). How to do your taxes Amortizable premium on taxable bonds. How to do your taxes Casualty and theft losses from income- producing property. How to do your taxes Federal estate tax on income in respect of a decedent. How to do your taxes Gambling losses up to the amount of gambling winnings. How to do your taxes Impairment-related work expenses of persons with disabilities. How to do your taxes Loss from other activities from Schedule K-1 (Form 1065-B), box 2. How to do your taxes Losses from Ponzi-type investment schemes. How to do your taxes See Losses from Ponzi-type investment schemes under Theft in chapter 25. How to do your taxes Repayments of more than $3,000 under a claim of right. How to do your taxes Unrecovered investment in an annuity. How to do your taxes Amortizable Premium on Taxable Bonds In general, if the amount you pay for a bond is greater than its stated principal amount, the excess is bond premium. How to do your taxes You can elect to amortize the premium on taxable bonds. How to do your taxes The amortization of the premium is generally an offset to interest income on the bond rather than a separate deduction item. How to do your taxes Part of the premium on some bonds may be a miscellaneous deduction not subject to the 2% limit. How to do your taxes For more information, see Amortizable Premium on Taxable Bonds in Publication 529, and Bond Premium Amortization in chapter 3 of Publication 550, Investment Income and Expenses. How to do your taxes Casualty and Theft Losses of Income-Producing Property You can deduct a casualty or theft loss as a miscellaneous itemized deduction not subject to the 2% limit if the damaged or stolen property was income-producing property (property held for investment, such as stocks, notes, bonds, gold, silver, vacant lots, and works of art). How to do your taxes First, report the loss in Form 4684, Section B. How to do your taxes You may also have to include the loss on Form 4797, Sales of Business Property if you are otherwise required to file that form. How to do your taxes To figure your deduction, add all casualty or theft losses from this type of property included on Form 4684, lines 32 and 38b, or Form 4797, line 18a. How to do your taxes For more information on casualty and theft losses, see chapter 25. How to do your taxes Federal Estate Tax on Income in Respect of a Decedent You can deduct the federal estate tax attributable to income in respect of a decedent that you as a beneficiary include in your gross income. How to do your taxes Income in respect of the decedent is gross income that the decedent would have received had death not occurred and that was not properly includible in the decedent's final income tax return. How to do your taxes See Publication 559 for more information. How to do your taxes Gambling Losses Up to the Amount of Gambling Winnings You must report the full amount of your gambling winnings for the year on Form 1040, line 21. How to do your taxes You deduct your gambling losses for the year on Schedule A (Form 1040), line 28. How to do your taxes You cannot deduct gambling losses that are more than your winnings. How to do your taxes You cannot reduce your gambling winnings by your gambling losses and report the difference. How to do your taxes You must report the full amount of your winnings as income and claim your losses (up to the amount of winnings) as an itemized deduction. How to do your taxes Therefore, your records should show your winnings separately from your losses. How to do your taxes Diary of winnings and losses. How to do your taxes You must keep an accurate diary or similar record of your losses and winnings. How to do your taxes Your diary should contain at least the following information. How to do your taxes The date and type of your specific wager or wagering activity. How to do your taxes The name and address or location of the gambling establishment. How to do your taxes The names of other persons present with you at the gambling establishment. How to do your taxes The amount(s) you won or lost. How to do your taxes See Publication 529 for more information. How to do your taxes Impairment-Related Work Expenses If you have a physical or mental disability that limits your being employed, or substantially limits one or more of your major life activities, such as performing manual tasks, walking, speaking, breathing, learning, and working, you can deduct your impairment-related work expenses. How to do your taxes Impairment-related work expenses are ordinary and necessary business expenses for attendant care services at your place of work and for other expenses in connection with your place of work that are necessary for you to be able to work. How to do your taxes Self-employed. How to do your taxes   If you are self-employed, enter your impairment-related work expenses on the appropriate form (Schedule C, C-EZ, E, or F) used to report your business income and expenses. How to do your taxes Loss From Other Activities From Schedule K-1 (Form 1065-B), Box 2 If the amount reported in Schedule K-1 (Form 1065-B), box 2, is a loss, report it on Schedule A (Form 1040), line 28. How to do your taxes It is not subject to the passive activity limitations. How to do your taxes Repayments Under Claim of Right If you had to repay more than $3,000 that you included in your income in an earlier year because at the time you thought you had an unrestricted right to it, you may be able to deduct the amount you repaid or take a credit against your tax. How to do your taxes See Repayments in chapter 12 for more information. How to do your taxes Unrecovered Investment in Annuity A retiree who contributed to the cost of an annuity can exclude from income a part of each payment received as a tax-free return of the retiree's investment. How to do your taxes If the retiree dies before the entire investment is recovered tax free, any unrecovered investment can be deducted on the retiree's final income tax return. How to do your taxes See chapter 10 for more information about the tax treatment of pensions and annuities. How to do your taxes Nondeductible Expenses Examples of nondeductible expenses are listed next. How to do your taxes The list is followed by discussions of additional nondeductible expenses. How to do your taxes List of Nondeductible Expenses Broker's commissions that you paid in connection with your IRA or other investment property. How to do your taxes Burial or funeral expenses, including the cost of a cemetery lot. How to do your taxes Capital expenses. How to do your taxes Fees and licenses, such as car licenses, marriage licenses, and dog tags. How to do your taxes Hobby losses, but see Hobby Expenses , earlier. How to do your taxes Home repairs, insurance, and rent. How to do your taxes Illegal bribes and kickbacks. How to do your taxes See Bribes and kickbacks in chapter 11 of Publication 535. How to do your taxes Losses from the sale of your home, furniture, personal car, etc. How to do your taxes Personal disability insurance premiums. How to do your taxes Personal, living, or family expenses. How to do your taxes The value of wages never received or lost vacation time. How to do your taxes Adoption Expenses You cannot deduct the expenses of adopting a child, but you may be able to take a credit for those expenses. How to do your taxes See chapter 37. How to do your taxes Campaign Expenses You cannot deduct campaign expenses of a candidate for any office, even if the candidate is running for reelection to the office. How to do your taxes These include qualification and registration fees for primary elections. How to do your taxes Legal fees. How to do your taxes   You cannot deduct legal fees paid to defend charges that arise from participation in a political campaign. How to do your taxes Check-Writing Fees on Personal Account If you have a personal checking account, you cannot deduct fees charged by the bank for the privilege of writing checks, even if the account pays interest. How to do your taxes Club Dues Generally, you cannot deduct the cost of membership in any club organized for business, pleasure, recreation, or other social purpose. How to do your taxes This includes business, social, athletic, luncheon, sporting, airline, hotel, golf, and country clubs. How to do your taxes You cannot deduct dues paid to an organization if one of its main purposes is to: Conduct entertainment activities for members or their guests, or Provide members or their guests with access to entertainment facilities. How to do your taxes Dues paid to airline, hotel, and luncheon clubs are not deductible. How to do your taxes Commuting Expenses You cannot deduct commuting expenses (the cost of transportation between your home and your main or regular place of work). How to do your taxes If you haul tools, instruments, or other items, in your car to and from work, you can deduct only the additional cost of hauling the items such as the rent on a trailer to carry the items. How to do your taxes Fines or Penalties You cannot deduct fines or penalties you pay to a governmental unit for violating a law. How to do your taxes This includes an amount paid in settlement of your actual or potential liability for a fine or penalty (civil or criminal). How to do your taxes Fines or penalties include parking tickets, tax penalties, and penalties deducted from teachers' paychecks after an illegal strike. How to do your taxes Health Spa Expenses You cannot deduct health spa expenses, even if there is a job requirement to stay in excellent physical condition, such as might be required of a law enforcement officer. How to do your taxes Home Security System You cannot deduct the cost of a home security system as a miscellaneous deduction. How to do your taxes However, you may be able to claim a deduction for a home security system as a business expense if you have a home office. How to do your taxes See Home Office under Unreimbursed Employee Expenses, earlier, and Security System under Deducting Expenses in Publication 587. How to do your taxes Investment-Related Seminars You cannot deduct any expenses for attending a convention, seminar, or similar meeting for investment purposes. How to do your taxes Life Insurance Premiums You cannot deduct premiums you pay on your life insurance. How to do your taxes You may be able to deduct, as alimony, premiums you pay on life insurance policies assigned to your former spouse. How to do your taxes See chapter 18 for information on alimony. How to do your taxes Lobbying Expenses You generally cannot deduct amounts paid or incurred for lobbying expenses. How to do your taxes These include expenses to: Influence legislation, Participate or intervene in any political campaign for, or against, any candidate for public office, Attempt to influence the general public, or segments of the public, about elections, legislative matters, or referendums, or Communicate directly with covered executive branch officials in any attempt to influence the official actions or positions of those officials. How to do your taxes Lobbying expenses also include any amounts paid or incurred for research, preparation, planning, or coordination of any of these activities. How to do your taxes Dues used for lobbying. How to do your taxes   If a tax-exempt organization notifies you that part of the dues or other amounts you pay to the organization are used to pay nondeductible lobbying expenses, you cannot deduct that part. How to do your taxes See Lobbying Expenses in Publication 529 for information on exceptions. How to do your taxes Lost or Mislaid Cash or Property You cannot deduct a loss based on the mere disappearance of money or property. How to do your taxes However, an accidental loss or disappearance of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. How to do your taxes See chapter 25. How to do your taxes Example. How to do your taxes A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. How to do your taxes The diamond falls from the ring and is never found. How to do your taxes The loss of the diamond is a casualty. How to do your taxes Lunches with Co-workers You cannot deduct the expenses of lunches with co-workers, except while traveling away from home on business. How to do your taxes See chapter 26 for information on deductible expenses while traveling away from home. How to do your taxes Meals While Working Late You cannot deduct the cost of meals while working late. How to do your taxes However, you may be able to claim a deduction if the cost of meals is a deductible entertainment expense, or if you are traveling away from home. How to do your taxes See chapter 26 for information on deductible entertainment expenses and expenses while traveling away from home. How to do your taxes Personal Legal Expenses You cannot deduct personal legal expenses such as those for the following. How to do your taxes Custody of children. How to do your taxes Breach of promise to marry suit. How to do your taxes Civil or criminal charges resulting from a personal relationship. How to do your taxes Damages for personal injury, except for certain unlawful discrimination and whistleblower claims. How to do your taxes Preparation of a title (or defense or perfection of a title). How to do your taxes Preparation of a will. How to do your taxes Property claims or property settlement in a divorce. How to do your taxes You cannot deduct these expenses even if a result of the legal proceeding is the loss of income-producing property. How to do your taxes Political Contributions You cannot deduct contributions made to a political candidate, a campaign committee, or a newsletter fund. How to do your taxes Advertisements in convention bulletins and admissions to dinners or programs that benefit a political party or political candidate are not deductible. How to do your taxes Professional Accreditation Fees You cannot deduct professional accreditation fees such as the following. How to do your taxes Accounting certificate fees paid for the initial right to practice accounting. How to do your taxes Bar exam fees and incidental expenses in securing initial admission to the bar. How to do your taxes Medical and dental license fees paid to get initial licensing. How to do your taxes Professional Reputation You cannot deduct expenses of radio and TV appearances to increase your personal prestige or establish your professional reputation. How to do your taxes Relief Fund Contributions You cannot deduct contributions paid to a private plan that pays benefits to any covered employee who cannot work because of any injury or illness not related to the job. How to do your taxes Residential Telephone Service You cannot deduct any charge (including taxes) for basic local telephone service for the first telephone line to your residence, even if it is used in a trade or business. How to do your taxes Stockholders' Meetings You cannot deduct transportation and other expenses you pay to attend stockholders' meetings of companies in which you own stock but have no other interest. How to do your taxes You cannot deduct these expenses even if you are attending the meeting to get information that would be useful in making further investments. How to do your taxes Tax-Exempt Income Expenses You cannot deduct expenses to produce tax-exempt income. How to do your taxes You cannot deduct interest on a debt incurred or continued to buy or carry  tax-exempt securities. How to do your taxes If you have expenses to produce both taxable and tax-exempt income, but you cannot identify the expenses that produce each type of income, you must divide the expenses based on the amount of each type of income to determine the amount that you can deduct. How to do your taxes Example. How to do your taxes During the year, you received taxable interest of $4,800 and tax-exempt interest of $1,200. How to do your taxes In earning this income, you had total expenses of $500 during the year. How to do your taxes You cannot identify the amount of each expense item that is for each income item. How to do your taxes Therefore, 80% ($4,800/$6,000) of the expense is for the taxable interest and 20% ($1,200/$6,000) is for the tax-exempt interest. How to do your taxes You can deduct, subject to the 2% limit, expenses of $400 (80% of $500). How to do your taxes Travel Expenses for Another Individual You generally cannot deduct travel expenses you pay or incur for a spouse, dependent, or other individual who accompanies you (or your employee) on business or personal travel unless the spouse, dependent, or other individual is an employee of the taxpayer, the travel is for a bona fide business purpose, and such expenses would otherwise be deductible by the spouse, dependent, or other individual. How to do your taxes See chapter 26 for more information on deductible travel expenses. How to do your taxes Voluntary Unemployment Benefit Fund Contributions You cannot deduct voluntary unemployment benefit fund contributions you make to a union fund or a private fund. How to do your taxes However, you can deduct contributions as taxes if state law requires you to make them to a state unemployment fund that covers you for the loss of wages from unemployment caused by business conditions. How to do your taxes Wristwatches You cannot deduct the cost of a wristwatch, even if there is a job requirement that you know the correct time to properly perform your duties. How to do your taxes Prev  Up  Next   Home   More Online Publications