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Irs gov freefile 4. Irs gov freefile   Figuring Depreciation Under MACRS Table of Contents Introduction Useful Items - You may want to see: Which Depreciation System (GDS or ADS) Applies? Which Property Class Applies Under GDS?Rent-to-own dealer. Irs gov freefile Rent-to-own contract. Irs gov freefile What Is the Placed in Service Date? What Is the Basis for Depreciation? Which Recovery Period Applies?Recovery Periods Under GDS Recovery Periods Under ADS Additions and Improvements Which Convention Applies? Which Depreciation Method Applies?Depreciation Methods for Farm Property Electing a Different Method How Is the Depreciation Deduction Figured?Using the MACRS Percentage Tables Figuring the Deduction Without Using the Tables Figuring the Deduction for Property Acquired in a Nontaxable Exchange Figuring the Deduction for a Short Tax Year How Do You Use General Asset Accounts?Grouping Property Figuring Depreciation for a GAA Disposing of GAA Property Terminating GAA Treatment Electing To Use a GAA When Do You Recapture MACRS Depreciation? Introduction The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. Irs gov freefile MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Irs gov freefile Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. Irs gov freefile To be sure you can use MACRS to figure depreciation for your property, see What Method Can You Use To Depreciate Your Property in chapter 1. Irs gov freefile This chapter explains how to determine which MACRS depreciation system applies to your property. Irs gov freefile It also discusses other information you need to know before you can figure depreciation under MACRS. Irs gov freefile This information includes the property's recovery class, placed in service date, and basis, as well as the applicable recovery period, convention, and depreciation method. Irs gov freefile It explains how to use this information to figure your depreciation deduction and how to use a general asset account to depreciate a group of properties. Irs gov freefile Finally, it explains when and how to recapture MACRS depreciation. Irs gov freefile Useful Items - You may want to see: Publication 225 Farmer's Tax Guide 463 Travel, Entertainment, Gift, and Car  Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 587 Business Use of Your Home (Including Use by Daycare Providers) Form (and Instructions) 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 4562 Depreciation and Amortization See chapter 6 for information about getting publications and forms. Irs gov freefile 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. Irs gov freefile You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Irs gov freefile If you placed your property in service in 2013, complete Part III of Form 4562 to report depreciation using MACRS. Irs gov freefile Complete section B of Part III to report depreciation using GDS, and complete section C of Part III to report depreciation using ADS. Irs gov freefile If you placed your property in service before 2013 and are required to file Form 4562, report depreciation using either GDS or ADS on line 17 in Part III. Irs gov freefile Required use of ADS. Irs gov freefile   You must use ADS for the following property. Irs gov freefile Listed property used 50% or less in a qualified business use. Irs gov freefile See chapter 5 for information on listed property. Irs gov freefile Any tangible property used predominantly outside the United States during the year. Irs gov freefile Any tax-exempt use property. Irs gov freefile Any tax-exempt bond-financed property. Irs gov freefile 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. Irs gov freefile 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. Irs gov freefile If you are required to use ADS to depreciate your property, you cannot claim any special depreciation allowance (discussed in chapter 3) for the property. Irs gov freefile Electing ADS. Irs gov freefile   Although your property may qualify for GDS, you can elect to use ADS. Irs gov freefile The election generally must cover all property in the same property class that you placed in service during the year. Irs gov freefile However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. Irs gov freefile Once you make this election, you can never revoke it. Irs gov freefile   You make the election by completing line 20 in Part III of Form 4562. Irs gov freefile Which Property Class Applies Under GDS? The following is a list of the nine property classifications under GDS and examples of the types of property included in each class. Irs gov freefile These property classes are also listed under column (a) in section B, Part III, of Form 4562. Irs gov freefile For detailed information on property classes, see Appendix B, Table of Class Lives and Recovery Periods, in this publication. Irs gov freefile 3-year property. Irs gov freefile Tractor units for over-the-road use. Irs gov freefile Any race horse over 2 years old when placed in service. Irs gov freefile (All race horses placed in service after December 31, 2008, and before January 1, 2014, are deemed to be 3-year property, regardless of age. Irs gov freefile ) Any other horse (other than a race horse) over 12 years old when placed in service. Irs gov freefile Qualified rent-to-own property (defined later). Irs gov freefile 5-year property. Irs gov freefile Automobiles, taxis, buses, and trucks. Irs gov freefile Computers and peripheral equipment. Irs gov freefile Office machinery (such as typewriters, calculators, and copiers). Irs gov freefile Any property used in research and experimentation. Irs gov freefile Breeding cattle and dairy cattle. Irs gov freefile Appliances, carpets, furniture, etc. Irs gov freefile , used in a residential rental real estate activity. Irs gov freefile Certain geothermal, solar, and wind energy property. Irs gov freefile 7-year property. Irs gov freefile Office furniture and fixtures (such as desks, files, and safes). Irs gov freefile Agricultural machinery and equipment. Irs gov freefile Any property that does not have a class life and has not been designated by law as being in any other class. Irs gov freefile Certain motorsports entertainment complex property (defined later) placed in service before January 1, 2014. Irs gov freefile Any natural gas gathering line placed in service after April 11, 2005. Irs gov freefile See Natural gas gathering line and electric transmission property , later. Irs gov freefile 10-year property. Irs gov freefile Vessels, barges, tugs, and similar water transportation equipment. Irs gov freefile Any single purpose agricultural or horticultural structure. Irs gov freefile Any tree or vine bearing fruits or nuts. Irs gov freefile Qualified small electric meter and qualified smart electric grid system (defined later) placed in service on or after October 3, 2008. Irs gov freefile 15-year property. Irs gov freefile Certain improvements made directly to land or added to it (such as shrubbery, fences, roads, sidewalks, and bridges). Irs gov freefile Any retail motor fuels outlet (defined later), such as a convenience store. Irs gov freefile Any municipal wastewater treatment plant. Irs gov freefile Any qualified leasehold improvement property (defined later) placed in service before January 1, 2014. Irs gov freefile Any qualified restaurant property (defined later) placed in service before January 1, 2014. Irs gov freefile Initial clearing and grading land improvements for gas utility property. Irs gov freefile Electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity placed in service after April 11, 2005. Irs gov freefile See Natural gas gathering line and electric transmission property , later. Irs gov freefile Any natural gas distribution line placed in service after April 11, 2005 and before January 1, 2011. Irs gov freefile Any qualified retail improvement property placed in service before January 1, 2014. Irs gov freefile 20-year property. Irs gov freefile Farm buildings (other than single purpose agricultural or horticultural structures). Irs gov freefile Municipal sewers not classified as 25-year property. Irs gov freefile Initial clearing and grading land improvements for electric utility transmission and distribution plants. Irs gov freefile 25-year property. Irs gov freefile This class is water utility property, which is either of the following. Irs gov freefile Property that is an integral part of the gathering, treatment, or commercial distribution of water, and that, without regard to this provision, would be 20-year property. Irs gov freefile Municipal sewers other than property placed in service under a binding contract in effect at all times since June 9, 1996. Irs gov freefile Residential rental property. Irs gov freefile This is any building or structure, such as a rental home (including a mobile home), if 80% or more of its gross rental income for the tax year is from dwelling units. Irs gov freefile A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. Irs gov freefile It does not include a unit in a hotel, motel, or other establishment where more than half the units are used on a transient basis. Irs gov freefile If you occupy any part of the building or structure for personal use, its gross rental income includes the fair rental value of the part you occupy. Irs gov freefile Nonresidential real property. Irs gov freefile This is section 1250 property, such as an office building, store, or warehouse, that is neither residential rental property nor property with a class life of less than 27. Irs gov freefile 5 years. Irs gov freefile Qualified rent-to-own property. Irs gov freefile   Qualified rent-to-own property is property held by a rent-to-own dealer for purposes of being subject to a rent-to-own contract. Irs gov freefile It is tangible personal property generally used in the home for personal use. Irs gov freefile It includes computers and peripheral equipment, televisions, videocassette recorders, stereos, camcorders, appliances, furniture, washing machines and dryers, refrigerators, and other similar consumer durable property. Irs gov freefile Consumer durable property does not include real property, aircraft, boats, motor vehicles, or trailers. Irs gov freefile   If some of the property you rent to others under a rent-to-own agreement is of a type that may be used by the renters for either personal or business purposes, you still can treat this property as qualified property as long as it does not represent a significant portion of your leasing property. Irs gov freefile However, if this dual-use property does represent a significant portion of your leasing property, you must prove that this property is qualified rent-to-own property. Irs gov freefile Rent-to-own dealer. Irs gov freefile   You are a rent-to-own dealer if you meet all the following requirements. Irs gov freefile You regularly enter into rent-to-own contracts (defined below) in the ordinary course of your business for the use of consumer property. Irs gov freefile A substantial portion of these contracts end with the customer returning the property before making all the payments required to transfer ownership. Irs gov freefile The property is tangible personal property of a type generally used within the home for personal use. Irs gov freefile Rent-to-own contract. Irs gov freefile   This is any lease for the use of consumer property between a rent-to-own dealer and a customer who is an individual which— Is titled “Rent-to-Own Agreement,” “Lease Agreement with Ownership Option,” or other similar language. Irs gov freefile Provides a beginning date and a maximum period of time, not to exceed 156 weeks or 36 months from the beginning date, for which the contract can be in effect (including renewals or options to extend). Irs gov freefile Provides for regular periodic (weekly or monthly) payments that can be either level or decreasing. Irs gov freefile If the payments are decreasing, no payment can be less than 40% of the largest payment. Irs gov freefile Provides for total payments that generally exceed the normal retail price of the property plus interest. Irs gov freefile Provides for total payments that do not exceed $10,000 for each item of property. Irs gov freefile Provides that the customer has no legal obligation to make all payments outlined in the contract and that, at the end of each weekly or monthly payment period, the customer can either continue to use the property by making the next payment or return the property in good working order with no further obligations and no entitlement to a return of any prior payments. Irs gov freefile Provides that legal title to the property remains with the rent-to-own dealer until the customer makes either all the required payments or the early purchase payments required under the contract to acquire legal title. Irs gov freefile Provides that the customer has no right to sell, sublease, mortgage, pawn, pledge, or otherwise dispose of the property until all contract payments have been made. Irs gov freefile Motorsports entertainment complex. Irs gov freefile   This is a racing track facility permanently situated on land that hosts one or more racing events for automobiles, trucks, or motorcycles during the 36-month period after the first day of the month in which the facility is placed in service. Irs gov freefile The events must be open to the public for the price of admission. Irs gov freefile Qualified smart electric grid system. Irs gov freefile   A qualified smart electric grid system means any smart grid property used as part of a system for electric distribution grid communications, monitoring, and management placed in service after October 3, 2008, by a taxpayer who is a supplier of electrical energy or a provider of electrical energy services. Irs gov freefile Smart grid property includes electronics and related equipment that is capable of: Sensing, collecting, and monitoring data of or from all portions of a utility's electric distribution grid, Providing real-time, two-way communications to monitor or to manage the grid, and Providing real-time analysis of an event prediction based on collected data that can be used to provide electric distribution system reliability, quality, and performance. Irs gov freefile Retail motor fuels outlet. Irs gov freefile   Real property is a retail motor fuels outlet if it is used to a substantial extent in the retail marketing of petroleum or petroleum products (whether or not it is also used to sell food or other convenience items) and meets any one of the following three tests. Irs gov freefile It is not larger than 1,400 square feet. Irs gov freefile 50% or more of the gross revenues generated from the property are derived from petroleum sales. Irs gov freefile 50% or more of the floor space in the property is devoted to petroleum marketing sales. Irs gov freefile A retail motor fuels outlet does not include any facility related to petroleum and natural gas trunk pipelines. Irs gov freefile Qualified leasehold improvement property. Irs gov freefile    Generally, this is any improvement to an interior part of a building (placed in service before January 1, 2014) that is nonresidential real property, provided all of the requirements discussed in chapter 3 under Qualified leasehold improvement property are met. Irs gov freefile   In addition, an improvement made by the lessor does not qualify as qualified leasehold improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor's death or in any of the following types of transactions. Irs gov freefile A transaction to which section 381(a) applies, A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business, A like-kind exchange, involuntary conversion, or reacquisition of real property to the extent that the basis in the property represents the carryover basis, or Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor's or distributor's basis in the property. Irs gov freefile Examples include the following. Irs gov freefile A complete liquidation of a subsidiary. Irs gov freefile A transfer to a corporation controlled by the transferor. Irs gov freefile An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. Irs gov freefile Qualified restaurant property. Irs gov freefile   Qualified restaurant property is any section 1250 property that is a building placed in service after December 31, 2008, and before January 1, 2014. Irs gov freefile Also, more than 50% of the building's square footage must be devoted to preparation of meals and seating for on-premises consumption of prepared meals. Irs gov freefile Qualified smart electric meter. Irs gov freefile   A qualified smart electric meter is any time-based meter and related communication equipment which is placed in service by a supplier of electric energy or a provider of electric energy services and which is capable of being used by you as part of a system that: Measures and records electricity usage data on a time-differentiated basis in at least 24 separate time segments per day; Provides for the exchange of information between the supplier or provider and the customer's smart electric meter in support of time-based rates or other forms of demand response; Provides data to the supplier or provider so that the supplier or provider can provide energy usage information to customers electronically, and Provides all commercial and residential customers of such supplier or provider with net metering. Irs gov freefile Net metering means allowing a customer a credit, if any, as complies with applicable federal and state laws and regulations for providing electricity to the supplier or provider. Irs gov freefile Natural gas gathering line and electric transmission property. Irs gov freefile   Any natural gas gathering line placed in service after April 11, 2005, is treated as 7-year property, and electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity and any natural gas distribution line placed in service after April 11, 2005, are treated as 15-year property, if the following requirements are met. Irs gov freefile The original use of the property must have begun with you after April 11, 2005. Irs gov freefile Original use means the first use to which the property is put, whether or not by you. Irs gov freefile Therefore, property used by any person before April 12, 2005, is not original use. Irs gov freefile Original use includes additional capital expenditures you incurred to recondition or rebuild your property. Irs gov freefile However, original use does not include the cost of reconditioned or rebuilt property you acquired. Irs gov freefile Property containing used parts will not be treated as reconditioned or rebuilt if the cost of the used parts is not more than 20% of the total cost of the property. Irs gov freefile The property must not be placed in service under a binding contract in effect before April 12, 2005. Irs gov freefile The property must not be self-constructed property (property you manufacture, construct, or produce for your own use), if you began the manufacture, construction, or production of the property before April 12, 2005. Irs gov freefile Property that is manufactured, constructed, or produced for your use by another person under a written binding contract entered into by you or a related party before the manufacture, construction, or production of the property is considered to be manufactured, constructed, or produced by you. Irs gov freefile What Is the Placed in Service Date? You begin to claim depreciation when your property is placed in service for either use in a trade or business or the production of income. Irs gov freefile The placed in service date for your property is the date the property is ready and available for a specific use. Irs gov freefile It is therefore not necessarily the date it is first used. Irs gov freefile 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. Irs gov freefile See Placed in Service under When Does Depreciation Begin and End in chapter 1 for examples illustrating when property is placed in service. Irs gov freefile 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. Irs gov freefile For a discussion of business/investment use, see Partial business or investment use under Property Used in Your Business or Income-Producing Activity in chapter 1 . Irs gov freefile Reduce that amount by any credits and deductions allocable to the property. Irs gov freefile The following are examples of some credits and deductions that reduce basis. Irs gov freefile Any deduction for section 179 property. Irs gov freefile Any deduction under section 179B of the Internal Revenue Code for capital costs to comply with Environmental Protection Agency sulfur regulations. Irs gov freefile Any deduction under section 179C of the Internal Revenue Code for certain qualified refinery property placed in service after August 8, 2005, and before January 1, 2014. Irs gov freefile Any deduction under section 179D of the Internal Revenue Code for certain energy efficient commercial building property placed in service after December 31, 2005, and before January 1, 2014. Irs gov freefile Any deduction under section 179E of the Internal Revenue Code for qualified advanced mine safety equipment property placed in service after December 20, 2006, and before January 1, 2014 . Irs gov freefile Any deduction for removal of barriers to the disabled and the elderly. Irs gov freefile Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. Irs gov freefile Any special depreciation allowance. Irs gov freefile Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. Irs gov freefile For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. Irs gov freefile Enter the basis for depreciation under column (c) in Part III of Form 4562. Irs gov freefile For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property in chapter 1 . Irs gov freefile Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. Irs gov freefile It is determined based on the depreciation system (GDS or ADS) used. Irs gov freefile Recovery Periods Under GDS Under GDS, property that is not qualified Indian reservation property is depreciated over one of the following recovery periods. Irs gov freefile Property Class Recovery Period 3-year property   3 years 1   5-year property   5 years     7-year property   7 years     10-year property   10 years     15-year property   15 years 2   20-year property   20 years     25-year property   25 years 3   Residential rental property   27. Irs gov freefile 5 years     Nonresidential real property   39 years 4   15 years for qualified rent-to-own property placed in service before August 6, 1997. Irs gov freefile 239 years for property that is a retail motor fuels outlet placed in service before August 20, 1996 (31. Irs gov freefile 5 years if placed in service before May 13, 1993), unless you elected to depreciate it over 15 years. Irs gov freefile 320 years for property placed in service before June 13, 1996, or under a binding contract in effect before June 10, 1996. Irs gov freefile 431. Irs gov freefile 5 years for property placed in service before May 13, 1993 (or before January 1, 1994, if the purchase or construction of the property is under a binding contract in effect before May 13, 1993, or if construction began before May 13, 1993). Irs gov freefile The GDS recovery periods for property not listed above can be found in Appendix B, Table of Class Lives and Recovery Periods. Irs gov freefile Residential rental property and nonresidential real property are defined earlier under Which Depreciation System (GDS or ADS) Applies. Irs gov freefile Enter the appropriate recovery period on Form 4562 under column (d) in section B of Part III, unless already shown (for 25-year property, residential rental property, and nonresidential real property). Irs gov freefile Office in the home. Irs gov freefile   If your home is a personal-use single family residence and you begin to use part of your home as an office, depreciate that part of your home as nonresidential real property over 39 years (31. Irs gov freefile 5 years if you began using it for business before May 13, 1993). Irs gov freefile However, if your home is an apartment in an apartment building that you own and the building is residential rental property as defined earlier under Which Depreciation System (GDS or ADS) Applies , depreciate the part used as an office as residential rental property over 27. Irs gov freefile 5 years. Irs gov freefile See Publication 587 for a discussion of the tests you must meet to claim expenses, including depreciation, for the business use of your home. Irs gov freefile Home changed to rental use. Irs gov freefile   If you begin to rent a home that was your personal home before 1987, you depreciate it as residential rental property over 27. Irs gov freefile 5 years. Irs gov freefile Indian Reservation Property The recovery periods for qualified property you placed in service on an Indian reservation after 1993 and before 2014 are shorter than those listed earlier. Irs gov freefile The following table shows these shorter recovery periods. Irs gov freefile Property Class Recovery  Period 3-year property 2 years 5-year property 3 years 7-year property 4 years 10-year property 6 years 15-year property 9 years 20-year property 12 years Nonresidential real property 22 years Nonresidential real property is defined earlier under Which Property Class Applies Under GDS . Irs gov freefile Use this chart to find the correct percentage table to use for qualified Indian reservation property. Irs gov freefile IF your recovery period is: THEN use the following table in Appendix A: 2 years A-21 3 years A-1, A-2, A-3, A-4, or A-5 4 years A-22 6 years A-23 9 years A-14, A-15, A-16, A-17, or A-18 12 years A-14, A-15, A-16, A-17, or A-18 22 years A-24 Qualified property. Irs gov freefile   Property eligible for the shorter recovery periods are 3-, 5-, 7-, 10-, 15-, and 20-year property and nonresidential real property. Irs gov freefile You must use this property predominantly in the active conduct of a trade or business within an Indian reservation. Irs gov freefile The rental of real property that is located on an Indian reservation is treated as the active conduct of a trade or business within an Indian reservation. Irs gov freefile   The following property is not qualified property. Irs gov freefile Property used or located outside an Indian reservation on a regular basis, other than qualified infrastructure property. Irs gov freefile Property acquired directly or indirectly from a related person. Irs gov freefile Property placed in service for purposes of conducting or housing class I, II, or III gaming activities. Irs gov freefile These activities are defined in section 4 of the Indian Regulatory Act (25 U. Irs gov freefile S. Irs gov freefile C. Irs gov freefile 2703). Irs gov freefile Any property you must depreciate under ADS. Irs gov freefile Determine whether property is qualified without regard to the election to use ADS and after applying the special rules for listed property not used predominantly for qualified business use (discussed in chapter 5). Irs gov freefile Qualified infrastructure property. Irs gov freefile   Item (1) above does not apply to qualified infrastructure property located outside the reservation that is used to connect with qualified infrastructure property within the reservation. Irs gov freefile Qualified infrastructure property is property that meets all the following rules. Irs gov freefile It is qualified property, as defined earlier, except that it is outside the reservation. Irs gov freefile It benefits the tribal infrastructure. Irs gov freefile It is available to the general public. Irs gov freefile It is placed in service in connection with the active conduct of a trade or business within a reservation. Irs gov freefile Infrastructure property includes, but is not limited to, roads, power lines, water systems, railroad spurs, and communications facilities. Irs gov freefile Related person. Irs gov freefile   For purposes of item (2) above, see Related persons in the discussion on property owned or used in 1986 under What Method Can You Use To Depreciate Your Property in chapter 1 for a description of related persons. Irs gov freefile Indian reservation. Irs gov freefile   The term Indian reservation means a reservation as defined in section 3(d) of the Indian Financing Act of 1974 (25 U. Irs gov freefile S. Irs gov freefile C. Irs gov freefile 1452(d)) or section 4(10) of the Indian Child Welfare Act of 1978 (25 U. Irs gov freefile S. Irs gov freefile C. Irs gov freefile 1903(10)). Irs gov freefile Section 3(d) of the Indian Financing Act of 1974 defines reservation to include former Indian reservations in Oklahoma. Irs gov freefile For a definition of the term “former Indian reservations in Oklahoma,” see Notice 98-45 in Internal Revenue Bulletin 1998-35. Irs gov freefile Recovery Periods Under ADS The recovery periods for most property generally are longer under ADS than they are under GDS. Irs gov freefile The following table shows some of the ADS recovery periods. Irs gov freefile Property Recovery  Period Rent-to-own property 4 years Automobiles and light duty trucks 5 years Computers and peripheral equipment 5 years High technology telephone station equipment installed on customer premises 5 years High technology medical equipment 5 years Personal property with no class life 12 years Natural gas gathering lines 14 years Single purpose agricultural and horticultural structures 15 years Any tree or vine bearing fruit or nuts 20 years Initial clearing and grading land  improvements for gas utility property 20 years Initial clearing and grading land  improvements for electric utility  transmission and distribution plants 25 years Electric transmission property used in the transmission at 69 or more kilovolts of electricity 30 years Natural gas distribution lines 35 years Any qualified leasehold improvement property 39 years Any qualified restaurant property 39 years Nonresidential real property 40 years Residential rental property 40 years Section 1245 real property not listed in Appendix B 40 years Railroad grading and tunnel bore 50 years The ADS recovery periods for property not listed above can be found in the tables in Appendix B. Irs gov freefile Rent-to-own property, qualified leasehold improvement property, qualified restaurant property, residential rental property, and nonresidential real property are defined earlier under Which Property Class Applies Under GDS . Irs gov freefile Tax-exempt use property subject to a lease. Irs gov freefile   The ADS recovery period for any property leased under a lease agreement to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership) cannot be less than 125% of the lease term. Irs gov freefile Additions and Improvements An addition or improvement you make to depreciable property is treated as separate depreciable property. Irs gov freefile See How Do You Treat Repairs and Improvements in chapter 1 for a definition of improvements. Irs gov freefile Its property class and recovery period are the same as those that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. Irs gov freefile The recovery period begins on the later of the following dates. Irs gov freefile The date you place the addition or improvement in service. Irs gov freefile The date you place in service the property to which you made the addition or improvement. Irs gov freefile If the improvement you make is qualified leasehold improvement property, qualified restaurant property, or qualified retail improvement property, the GDS recovery period is 15 years (39 years under ADS). Irs gov freefile Example. Irs gov freefile You own a rental home that you have been renting out since 1981. Irs gov freefile If you put an addition on the home and place the addition in service this year, you would use MACRS to figure your depreciation deduction for the addition. Irs gov freefile Under GDS, the property class for the addition is residential rental property and its recovery period is 27. Irs gov freefile 5 years because the home to which the addition is made would be residential rental property if you had placed it in service this year. Irs gov freefile Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. Irs gov freefile 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. Irs gov freefile The mid-month convention. Irs gov freefile   Use this convention for nonresidential real property, residential rental property, and any railroad grading or tunnel bore. Irs gov freefile   Under this convention, you treat all property placed in service or disposed of during a month as placed in service or disposed of at the midpoint of the month. Irs gov freefile This means that a one-half month of depreciation is allowed for the month the property is placed in service or disposed of. Irs gov freefile   Your use of the mid-month convention is indicated by the “MM” already shown under column (e) in Part III of Form 4562. Irs gov freefile The mid-quarter convention. Irs gov freefile   Use this convention if the mid-month convention does not apply and the total depreciable bases of MACRS property you placed in service during the last 3 months of the tax year (excluding nonresidential real property, residential rental property, any railroad grading or tunnel bore, property placed in service and disposed of in the same year, and property that is being depreciated under a method other than MACRS) are more than 40% of the total depreciable bases of all MACRS property you placed in service during the entire year. Irs gov freefile   Under this convention, you treat all property placed in service or disposed of during any quarter of the tax year as placed in service or disposed of at the midpoint of that quarter. Irs gov freefile This means that 1½ months of depreciation is allowed for the quarter the property is placed in service or disposed of. Irs gov freefile   If you use this convention, enter “MQ” under column (e) in Part III of Form 4562. Irs gov freefile    For purposes of determining whether the mid-quarter convention applies, the depreciable basis of property you placed in service during the tax year reflects the reduction in basis for amounts expensed under section 179 and the part of the basis of property attributable to personal use. Irs gov freefile However, it does not reflect any reduction in basis for any special depreciation allowance. Irs gov freefile The half-year convention. Irs gov freefile   Use this convention if neither the mid-quarter convention nor the mid-month convention applies. Irs gov freefile   Under this convention, you treat all property placed in service or disposed of during a tax year as placed in service or disposed of at the midpoint of the year. Irs gov freefile This means that a one-half year of depreciation is allowed for the year the property is placed in service or disposed of. Irs gov freefile   If you use this convention, enter “HY” under column (e) in Part III of Form 4562. Irs gov freefile Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. Irs gov freefile The 200% declining balance method over a GDS recovery period. Irs gov freefile The 150% declining balance method over a GDS recovery period. Irs gov freefile The straight line method over a GDS recovery period. Irs gov freefile The straight line method over an ADS recovery period. Irs gov freefile For property placed in service before 1999, you could have elected the 150% declining balance method using the ADS recovery periods for certain property classes. Irs gov freefile If you made this election, continue to use the same method and recovery period for that property. Irs gov freefile Table 4–1 lists the types of property you can depreciate under each method. Irs gov freefile It also gives a brief explanation of the method, including any benefits that may apply. Irs gov freefile Depreciation Methods for Farm Property If you place personal property in service in a farming business after 1988, you generally must depreciate it under GDS using the 150% declining balance method unless you are a farmer who must depreciate the property under ADS using the straight line method or you elect to depreciate the property under GDS or ADS using the straight line method. Irs gov freefile You can depreciate real property using the straight line method under either GDS or ADS. Irs gov freefile Fruit or nut trees and vines. Irs gov freefile   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a recovery period of 10 years. Irs gov freefile ADS required for some farmers. Irs gov freefile   If you elect not to apply the uniform capitalization rules to any plant produced in your farming business, you must use ADS. Irs gov freefile You must use ADS for all property you place in service in any year the election is in effect. Irs gov freefile See the regulations under section 263A of the Internal Revenue Code for information on the uniform capitalization rules that apply to farm property. Irs gov freefile Electing a Different Method As shown in Table 4–1 , you can elect a different method for depreciation for certain types of property. Irs gov freefile You must make the election by the due date of the return (including extensions) for the year you placed the property in service. Irs gov freefile However, if you timely filed your return for the year without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Irs gov freefile Attach the election to the amended return and write “Filed pursuant to section 301. Irs gov freefile 9100-2” on the election statement. Irs gov freefile File the amended return at the same address you filed the original return. Irs gov freefile Once you make the election, you cannot change it. Irs gov freefile 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. Irs gov freefile However, you can make the election on a property-by-property basis for nonresidential real and residential rental property. Irs gov freefile 150% election. Irs gov freefile   Instead of using the 200% declining balance method over the GDS recovery period for nonfarm property in the 3-, 5-, 7-, and 10-year property classes, you can elect to use the 150% declining balance method. Irs gov freefile Make the election by entering “150 DB” under column (f) in Part III of Form 4562. Irs gov freefile Straight line election. Irs gov freefile   Instead of using either the 200% or 150% declining balance methods over the GDS recovery period, you can elect to use the straight line method over the GDS recovery period. Irs gov freefile Make the election by entering  “S/L” under column (f) in Part III of Form 4562. Irs gov freefile Election of ADS. Irs gov freefile   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. Irs gov freefile ADS uses the straight line method of depreciation over fixed ADS recovery periods. Irs gov freefile Most ADS recovery periods are listed in Appendix B, or see the table under Recovery Periods Under ADS , earlier. Irs gov freefile   Make the election by completing line 20 in Part III of Form 4562. Irs gov freefile Farm property. Irs gov freefile   Instead of using the 150% declining balance method over a GDS recovery period for property you use in a farming business (other than real property), you can elect to depreciate it using either of the following methods. Irs gov freefile The straight line method over a GDS recovery period. Irs gov freefile The straight line method over an ADS recovery period. Irs gov freefile Table 4-1. Irs gov freefile Depreciation Methods Note. Irs gov freefile The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. Irs gov freefile Method Type of Property Benefit GDS using 200% DB • Nonfarm 3-, 5-, 7-, and 10-year property • Provides a greater deduction during the earlier recovery years • Changes to SL when that method provides an equal or greater deduction GDS using 150% DB • All farm property (except real property) • All 15- and 20-year property (except qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property placed in service before January 1, 2014) • Nonfarm 3-, 5-, 7-, and 10-year property • Provides a greater deduction during the earlier recovery years • Changes to SL when that method provides an equal or greater deduction1 GDS using SL • Nonresidential real property • Qualified leasehold improvement property placed in service before January 1, 2014 • Qualified restaurant property placed in service before January 1, 2014 • Qualified retail improvement property placed in service before January 1, 2014 • Residential rental property • Trees or vines bearing fruit or nuts • Water utility property • All 3-, 5-, 7-, 10-, 15-, and 20-year property2 • Property for which you elected section 168(k)(4) • Provides for equal yearly deductions (except for the first and last years) ADS using SL • Listed property used 50% or less for business • Property used predominantly outside the U. Irs gov freefile S. Irs gov freefile  • Tax-exempt property • Tax-exempt bond-financed property • Farm property used when an election not to apply the uniform capitalization rules is in effect • Imported property3 • Any property for which you elect to use this method4 • Provides for equal yearly deductions (except for the first and last years) 1The MACRS percentage tables in Appendix A have the switch to the straight line method built into their rates 2See section 168(b)(5) of the Internal Revenue Code. Irs gov freefile 3See section 168(g)(6) of the Internal Revenue Code 4See section 168(g)(7) of the Internal Revenue Code How Is the Depreciation Deduction Figured? To figure your depreciation deduction under MACRS, you first determine the depreciation system, property class, placed in service date, basis amount, recovery period, convention, and depreciation method that applies to your property. Irs gov freefile Then, you are ready to figure your depreciation deduction. Irs gov freefile You can figure it using a percentage table provided by the IRS, or you can figure it yourself without using the table. Irs gov freefile 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. Irs gov freefile These percentage tables are in Appendix A near the end of this publication. Irs gov freefile Which table to use. Irs gov freefile    Appendix A contains the MACRS Percentage Table Guide, which is designed to help you locate the correct percentage table to use for depreciating your property. Irs gov freefile The percentage tables immediately follow the guide. Irs gov freefile Rules Covering the Use of the Tables The following rules cover the use of the percentage tables. Irs gov freefile You must apply the rates in the percentage tables to your property's unadjusted basis. Irs gov freefile You cannot use the percentage tables for a short tax year. Irs gov freefile See Figuring the Deduction for a Short Tax Year, later, for information on the short tax year rules. Irs gov freefile Once you start using the percentage tables for any item of property, you generally must continue to use them for the entire recovery period of the property. Irs gov freefile You must stop using the tables if you adjust the basis of the property for any reason other than— Depreciation allowed or allowable, or An addition or improvement to that property that is depreciated as a separate item of property. Irs gov freefile Basis adjustments other than those made due to the items listed in (4) include an increase in basis for the recapture of a clean-fuel deduction or credit and a reduction in basis for a casualty loss. Irs gov freefile Basis adjustment due to recapture of clean-fuel vehicle deduction or credit. Irs gov freefile   If you increase the basis of your property because of the recapture of part or all of a deduction for clean-fuel vehicles or the credit for clean-fuel vehicle refueling property placed in service before January 1, 2006, you cannot continue to use the percentage tables. Irs gov freefile For the year of the adjustment and the remaining recovery period, you must figure the depreciation deduction yourself using the property's adjusted basis at the end of the year. Irs gov freefile See Figuring the Deduction Without Using the Tables, later. Irs gov freefile Basis adjustment due to casualty loss. Irs gov freefile   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. Irs gov freefile 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. Irs gov freefile See Figuring the Deduction Without Using the Tables, later. Irs gov freefile Example. Irs gov freefile On October 26, 2012, Sandra Elm, a calendar year taxpayer, bought and placed in service in her business a new item of 7-year property. Irs gov freefile It cost $39,000 and she elected a section 179 deduction of $24,000. Irs gov freefile She also took a special depreciation allowance of $7,500 [50% of $15,000 ($39,000 − $24,000)]. Irs gov freefile Her unadjusted basis after the section 179 deduction and special depreciation allowance was $7,500 ($15,000 − $7,500). Irs gov freefile She figured her MACRS depreciation deduction using the percentage tables. Irs gov freefile For 2012, her MACRS depreciation deduction was $268. Irs gov freefile In July 2013, the property was vandalized and Sandra had a deductible casualty loss of $3,000. Irs gov freefile She must adjust the property's basis for the casualty loss, so she can no longer use the percentage tables. Irs gov freefile Her adjusted basis at the end of 2013, before figuring her 2013 depreciation, is $4,232. Irs gov freefile She figures that amount by subtracting the 2012 MACRS depreciation of $268 and the casualty loss of $3,000 from the unadjusted basis of $7,500. Irs gov freefile She must now figure her depreciation for 2013 without using the percentage tables. Irs gov freefile Figuring the Unadjusted Basis of Your Property You must apply the table rates to your property's unadjusted basis each year of the recovery period. Irs gov freefile Unadjusted basis is the same basis amount you would use to figure gain on a sale, but you figure it without reducing your original basis by any MACRS depreciation taken in earlier years. Irs gov freefile However, you do reduce your original basis by other amounts, including the following. Irs gov freefile Any amortization taken on the property. Irs gov freefile Any section 179 deduction claimed. Irs gov freefile Any special depreciation allowance taken on the property. Irs gov freefile For business property you purchase during the year, the unadjusted basis is its cost minus these and other applicable adjustments. Irs gov freefile If you trade property, your unadjusted basis in the property received is the cash paid plus the adjusted basis of the property traded minus these adjustments. Irs gov freefile MACRS Worksheet You can use this worksheet to help you figure your depreciation deduction using the percentage tables. Irs gov freefile Use a separate worksheet for each item of property. Irs gov freefile Then, use the information from this worksheet to prepare Form 4562. Irs gov freefile Do not use this worksheet for automobiles. Irs gov freefile Use the Depreciation Worksheet for Passenger Automobiles in chapter 5. Irs gov freefile MACRS Worksheet Part I   1. Irs gov freefile MACRS system (GDS or ADS)   2. Irs gov freefile Property class   3. Irs gov freefile Date placed in service   4. Irs gov freefile Recovery period   5. Irs gov freefile Method and convention   6. Irs gov freefile Depreciation rate (from tables)   Part II   7. Irs gov freefile Cost or other basis* $     8. Irs gov freefile Business/investment use   %   9. Irs gov freefile Multiply line 7 by line 8   $ 10. Irs gov freefile Total claimed for section 179 deduction and other items   $ 11. Irs gov freefile Subtract line 10 from line 9. Irs gov freefile This is your tentative basis for depreciation   $ 12. Irs gov freefile Multiply line 11 by . Irs gov freefile 50 if the 50% special depreciation allowance applies. Irs gov freefile This is your special depreciation allowance. Irs gov freefile Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance   $ 13. Irs gov freefile Subtract line 12 from line 11. Irs gov freefile This is your basis for depreciation     14. Irs gov freefile Depreciation rate (from line 6)     15. Irs gov freefile Multiply line 13 by line 14. Irs gov freefile This is your MACRS depreciation deduction   $ *If real estate, do not include cost (basis) of land. Irs gov freefile The following example shows how to figure your MACRS depreciation deduction using the percentage tables and the MACRS worksheet. Irs gov freefile Example. Irs gov freefile You bought office furniture (7-year property) for $10,000 and placed it in service on August 11, 2013. Irs gov freefile You use the furniture only for business. Irs gov freefile This is the only property you placed in service this year. Irs gov freefile You did not elect a section 179 deduction and the property is not qualified property for purposes of claiming a special depreciation allowance so your property's unadjusted basis is its cost, $10,000. Irs gov freefile You use GDS and the half-year convention to figure your depreciation. Irs gov freefile You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-1. Irs gov freefile Multiply your property's unadjusted basis each year by the percentage for 7-year property given in Table A-1. Irs gov freefile You figure your depreciation deduction using the MACRS worksheet as follows. Irs gov freefile MACRS Worksheet Part I 1. Irs gov freefile MACRS system (GDS or ADS) GDS 2. Irs gov freefile Property class 7-year 3. Irs gov freefile Date placed in service 8/11/13 4. Irs gov freefile Recovery period 7-Year 5. Irs gov freefile Method and convention 200%DB/Half-Year 6. Irs gov freefile Depreciation rate (from tables) . Irs gov freefile 1429 Part II 7. Irs gov freefile Cost or other basis* $10,000     8. Irs gov freefile Business/investment use 100 %   9. Irs gov freefile Multiply line 7 by line 8   $10,000 10. Irs gov freefile Total claimed for section 179 deduction and other items   -0- 11. Irs gov freefile Subtract line 10 from line 9. Irs gov freefile This is your tentative basis for depreciation   $10,000 12. Irs gov freefile Multiply line 11 by . Irs gov freefile 50 if the 50% special depreciation allowance applies. Irs gov freefile This is your special depreciation allowance. Irs gov freefile Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance   -0- 13. Irs gov freefile Subtract line 12 from line 11. Irs gov freefile This is your basis for depreciation   $10,000 14. Irs gov freefile Depreciation rate (from line 6)   . Irs gov freefile 1429 15. Irs gov freefile Multiply line 13 by line 14. Irs gov freefile This is your MACRS depreciation deduction   $1,429 *If real estate, do not include cost (basis) of land. Irs gov freefile If there are no adjustments to the basis of the property other than depreciation, your depreciation deduction for each subsequent year of the recovery period will be as follows. Irs gov freefile Year   Basis Percentage Deduction 2014 $ 10,000 24. Irs gov freefile 49%   $2,449   2015   10,000 17. Irs gov freefile 49   1,749   2016   10,000 12. Irs gov freefile 49   1,249   2017   10,000 8. Irs gov freefile 93   893   2018   10,000 8. Irs gov freefile 92   892   2019   10,000 8. Irs gov freefile 93   893   2020   10,000 4. Irs gov freefile 46   446   Examples The following examples are provided to show you how to use the percentage tables. Irs gov freefile In both examples, assume the following. Irs gov freefile You use the property only for business. Irs gov freefile You use the calendar year as your tax year. Irs gov freefile You use GDS for all the properties. Irs gov freefile Example 1. Irs gov freefile You bought a building and land for $120,000 and placed it in service on March 8. Irs gov freefile The sales contract showed that the building cost $100,000 and the land cost $20,000. Irs gov freefile It is nonresidential real property. Irs gov freefile The building's unadjusted basis is its original cost, $100,000. Irs gov freefile You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-7a. Irs gov freefile March is the third month of your tax year, so multiply the building's unadjusted basis, $100,000, by the percentages for the third month in Table A-7a. Irs gov freefile Your depreciation deduction for each of the first 3 years is as follows: Year   Basis Percentage Deduction 1st $ 100,000 2. Irs gov freefile 033%   $2,033   2nd   100,000 2. Irs gov freefile 564   2,564   3rd   100,000 2. Irs gov freefile 564   2,564   Example 2. Irs gov freefile During the year, you bought a machine (7-year property) for $4,000, office furniture (7-year property) for $1,000, and a computer (5-year property) for $5,000. Irs gov freefile You placed the machine in service in January, the furniture in September, and the computer in October. Irs gov freefile You do not elect a section 179 deduction and none of these items is qualified property for purposes of claiming a special depreciation allowance. Irs gov freefile You placed property in service during the last 3 months of the year, so you must first determine if you have to use the mid-quarter convention. Irs gov freefile The total bases of all property you placed in service during the year is $10,000. Irs gov freefile The $5,000 basis of the computer, which you placed in service during the last 3 months (the fourth quarter) of your tax year, is more than 40% of the total bases of all property ($10,000) you placed in service during the year. Irs gov freefile Therefore, you must use the mid-quarter convention for all three items. Irs gov freefile You refer to the MACRS Percentage Table Guide in Appendix A to determine which table you should use under the mid-quarter convention. Irs gov freefile The machine is 7-year property placed in service in the first quarter, so you use Table A-2. Irs gov freefile The furniture is 7-year property placed in service in the third quarter, so you use Table A-4. Irs gov freefile Finally, because the computer is 5-year property placed in service in the fourth quarter, you use Table A-6. Irs gov freefile Knowing what table to use for each property, you figure the depreciation for the first 2 years as follows. Irs gov freefile Year Property Basis Percentage Deduction 1st Machine $4,000 25. Irs gov freefile 00 $1,000   2nd Machine 4,000 21. Irs gov freefile 43 857   1st Furniture 1,000 10. Irs gov freefile 71 107   2nd Furniture 1,000 25. Irs gov freefile 51 255   1st Computer 5,000 5. Irs gov freefile 00 250   2nd Computer 5,000 38. Irs gov freefile 00 1,900   Sale or Other Disposition Before the Recovery Period Ends If you sell or otherwise dispose of your property before the end of its recovery period, your depreciation deduction for the year of the disposition will be only part of the depreciation amount for the full year. Irs gov freefile You have disposed of your property if you have permanently withdrawn it from use in your business or income-producing activity because of its sale, exchange, retirement, abandonment, involuntary conversion, or destruction. Irs gov freefile After you figure the full-year depreciation amount, figure the deductible part using the convention that applies to the property. Irs gov freefile Half-year convention used. Irs gov freefile   For property for which you used a half-year convention, the depreciation deduction for the year of the disposition is half the depreciation determined for the full year. Irs gov freefile Mid-quarter convention used. Irs gov freefile   For property for which you used the mid-quarter convention, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter in which you disposed of the property. Irs gov freefile Quarter Percentage First 12. Irs gov freefile 5% Second 37. Irs gov freefile 5 Third 62. Irs gov freefile 5 Fourth 87. Irs gov freefile 5 Example. Irs gov freefile On December 2, 2010, you placed in service an item of 5-year property costing $10,000. Irs gov freefile You did not claim a section 179 deduction and the property does not qualify for a special depreciation allowance. Irs gov freefile Your unadjusted basis for the property was $10,000. Irs gov freefile You used the mid-quarter convention because this was the only item of business property you placed in service in 2010 and it was placed in service during the last 3 months of your tax year. Irs gov freefile Your property is in the 5-year property class, so you used Table A-5 to figure your depreciation deduction. Irs gov freefile Your deductions for 2010, 2011, and 2012 were $500 (5% of $10,000), $3,800 (38% of $10,000), and $2,280 (22. Irs gov freefile 80% of $10,000). Irs gov freefile You disposed of the property on April 6, 2013. Irs gov freefile To determine your depreciation deduction for 2013, first figure the deduction for the full year. Irs gov freefile This is $1,368 (13. Irs gov freefile 68% of $10,000). Irs gov freefile April is in the second quarter of the year, so you multiply $1,368 by 37. Irs gov freefile 5% to get your depreciation deduction of $513 for 2013. Irs gov freefile Mid-month convention used. Irs gov freefile   If you dispose of residential rental or nonresidential real property, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by a fraction. Irs gov freefile The numerator of the fraction is the number of months (including partial months) in the year that the property is considered in service. Irs gov freefile The denominator is 12. Irs gov freefile Example. Irs gov freefile On July 2, 2011, you purchased and placed in service residential rental property. Irs gov freefile The property cost $100,000, not including the cost of land. Irs gov freefile You used Table A-6 to figure your MACRS depreciation for this property. Irs gov freefile You sold the property on March 2, 2013. Irs gov freefile You file your tax return based on the calendar year. Irs gov freefile A full year of depreciation for 2013 is $3,636. Irs gov freefile This is $100,000 multiplied by . Irs gov freefile 03636 (the percentage for the seventh month of the third recovery year) from Table A-6 . Irs gov freefile You then apply the mid-month convention for the 2½ months of use in 2013. Irs gov freefile Treat the month of disposition as one-half month of use. Irs gov freefile Multiply $3,636 by the fraction, 2. Irs gov freefile 5 over 12, to get your 2013 depreciation deduction of $757. Irs gov freefile 50. Irs gov freefile Figuring the Deduction Without Using the Tables Instead of using the rates in the percentage tables to figure your depreciation deduction, you can figure it yourself. Irs gov freefile Before making the computation each year, you must reduce your adjusted basis in the property by the depreciation claimed the previous year. Irs gov freefile Figuring MACRS deductions without using the tables generally will result in a slightly different amount than using the tables. Irs gov freefile Declining Balance Method When using a declining balance method, you apply the same depreciation rate each year to the adjusted basis of your property. Irs gov freefile You must use the applicable convention for the first tax year and you must switch to the straight line method beginning in the first year for which it will give an equal or greater deduction. Irs gov freefile The straight line method is explained later. Irs gov freefile You figure depreciation for the year you place property in service as follows. Irs gov freefile Multiply your adjusted basis in the property by the declining balance rate. Irs gov freefile Apply the applicable convention. Irs gov freefile You figure depreciation for all other years (before the year you switch to the straight line method) as follows. Irs gov freefile Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years. Irs gov freefile Multiply this new adjusted basis by the same declining balance rate used in earlier years. Irs gov freefile If you dispose of property before the end of its recovery period, see Using the Applicable Convention, later, for information on how to figure depreciation for the year you dispose of it. Irs gov freefile Figuring depreciation under the declining balance method and switching to the straight line method is illustrated in Example 1 , later, under Examples. Irs gov freefile Declining balance rate. Irs gov freefile   You figure your declining balance rate by dividing the specified declining balance percentage (150% or 200% changed to a decimal) by the number of years in the property's recovery period. Irs gov freefile For example, for 3-year property depreciated using the 200% declining balance method, divide 2. Irs gov freefile 00 (200%) by 3 to get 0. Irs gov freefile 6667, or a 66. Irs gov freefile 67% declining balance rate. Irs gov freefile For 15-year property depreciated using the 150% declining balance method, divide 1. Irs gov freefile 50 (150%) by 15 to get 0. Irs gov freefile 10, or a 10% declining balance rate. Irs gov freefile   The following table shows the declining balance rate for each property class and the first year for which the straight line method gives an equal or greater deduction. Irs gov freefile Property Class Method Declining Balance Rate Year 3-year 200% DB 66. Irs gov freefile 667% 3rd 5-year 200% DB 40. Irs gov freefile 0 4th 7-year 200% DB 28. Irs gov freefile 571 5th 10-year 200% DB 20. Irs gov freefile 0 7th 15-year 150% DB 10. Irs gov freefile 0 7th 20-year 150% DB 7. Irs gov freefile 5 9th Straight Line Method When using the straight line method, you apply a different depreciation rate each year to the adjusted basis of your property. Irs gov freefile You must use the applicable convention in the year you place the property in service and the year you dispose of the property. Irs gov freefile You figure depreciation for the year you place property in service as follows. Irs gov freefile Multiply your adjusted basis in the property by the straight line rate. Irs gov freefile Apply the applicable convention. Irs gov freefile You figure depreciation for all other years (including the year you switch from the declining balance method to the straight line method) as follows. Irs gov freefile Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years (under any method). Irs gov freefile Determine the depreciation rate for the year. Irs gov freefile Multiply the adjusted basis figured in (1) by the depreciation rate figured in (2). Irs gov freefile If you dispose of property before the end of its recovery period, see Using the Applicable Convention , later, for information on how to figure depreciation for the year you dispose of it. Irs gov freefile Straight line rate. Irs gov freefile   You determine the straight line depreciation rate for any tax year by dividing the number 1 by the years remaining in the recovery period at the beginning of that year. Irs gov freefile When figuring the number of years remaining, you must take into account the convention used in the year you placed the property in service. Irs gov freefile If the number of years remaining is less than 1, the depreciation rate for that tax year is 1. Irs gov freefile 0 (100%). Irs gov freefile Using the Applicable Convention The applicable convention (discussed earlier under Which Convention Applies ) affects how you figure your depreciation deduction for the year you place your property in service and for the year you dispose of it. Irs gov freefile It determines how much of the recovery period remains at the beginning of each year, so it also affects the depreciation rate for property you depreciate under the straight line method. Irs gov freefile See Straight line rate in the previous discussion. Irs gov freefile Use the applicable convention as explained in the following discussions. Irs gov freefile Half-year convention. Irs gov freefile   If this convention applies, you deduct a half-year of depreciation for the first year and the last year that you depreciate the property. Irs gov freefile You deduct a full year of depreciation for any other year during the recovery period. Irs gov freefile   Figure your depreciation deduction for the year you place the property in service by dividing the depreciation for a full year by 2. Irs gov freefile If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. Irs gov freefile If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final 6 months of the recovery period is the amount of your unrecovered basis in the property. Irs gov freefile Mid-quarter convention. Irs gov freefile   If this convention applies, the depreciation you can deduct for the first year you depreciate the property depends on the quarter in which you place the property in service. Irs gov freefile   A quarter of a full 12-month tax year is a period of 3 months. Irs gov freefile The first quarter in a year begins on the first day of the tax year. Irs gov freefile The second quarter begins on the first day of the fourth month of the tax year. Irs gov freefile The third quarter begins on the first day of the seventh month of the tax year. Irs gov freefile The fourth quarter begins on the first day of the tenth month of the tax year. Irs gov freefile A calendar year is divided into the following quarters. Irs gov freefile Quarter Months First January, February, March Second April, May, June Third July, August, September Fourth October, November, December   Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by the percentage listed below for the quarter you place the property in service. Irs gov freefile Quarter Percentage First 87. Irs gov freefile 5% Second 62. Irs gov freefile 5 Third 37. Irs gov freefile 5 Fourth 12. Irs gov freefile 5   If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter you dispose of the property. Irs gov freefile Quarter Percentage First 12. Irs gov freefile 5% Second 37. Irs gov freefile 5 Third 62. Irs gov freefile 5 Fourth 87. Irs gov freefile 5   If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final quarter of the recovery period is the amount of your unrecovered basis in the property. Irs gov freefile Mid-month convention. Irs gov freefile   If this convention applies, the depreciation you can deduct for the first year that you depreciate the property depends on the month in which you place the property in service. Irs gov freefile Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by a fraction. Irs gov freefile The numerator of the fraction is the number of full months in the year that the property is in service plus ½ (or 0. Irs gov freefile 5). Irs gov freefile The denominator is 12. Irs gov freefile   If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. Irs gov freefile If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final month of the recovery period is the amount of your unrecovered basis in the property. Irs gov freefile Example. Irs gov freefile You use the calendar year and place nonresidential real property in service in August. Irs gov freefile The property is in service 4 full months (September, October, November, and December). Irs gov freefile Your numerator is 4. Irs gov freefile 5 (4 full months plus 0. Irs gov freefile 5). Irs gov freefile You multiply the depreciation for a full year by 4. Irs gov freefile 5/12, or 0. Irs gov freefile 375. Irs gov freefile Examples The following examples show how to figure depreciation under MACRS without using the percentage tables. Irs gov freefile Figures are rounded for purposes of the examples. Irs gov freefile Assume for all the examples that you use a calendar year as your tax year. Irs gov freefile Example 1—200% DB method and half-year convention. Irs gov freefile In February, you placed in service depreciable property with a 5-year recovery period and a basis of $1,000. Irs gov freefile You do not elect to take the section 179 deduction and the property does not qualify for a special depreciation allowance. Irs gov freefile You use GDS and the 200% declining balance (DB) method to figure your depreciation. Irs gov freefile When the straight line (SL) method results in an equal or larger deduction, you switch to the SL method. Irs gov freefile You did not place any property in service in the last 3 months of the year, so you must use the half-year convention. Irs gov freefile First year. Irs gov freefile You figure the depreciation rate under the 200% DB method by dividing 2 (200%) by 5 (the number of years in the recovery period). Irs gov freefile The result is 40%. Irs gov freefile You multiply the adjusted basis of the property ($1,000) by the 40% DB rate. Irs gov freefile You apply the half-year convention by dividing the result ($400) by 2. Irs gov freefile Depreciation for the first year under the 200% DB method is $200. Irs gov freefile You figure the depreciation rate under the straight line (SL) method by dividing 1 by 5, the number of years in the recovery period. Irs gov freefile The result is 20%. Irs gov freefile You multiply the adjusted basis of the property ($1,000) by the 20% SL rate. Irs gov freefile You apply the half-year convention by dividing the result ($200) by 2. Irs gov freefile Depreciation for the first year under the SL method is $100. Irs gov freefile The DB method provides a larger deduction, so you deduct the $200 figured under the 200% DB method. Irs gov freefile Second year. Irs gov freefile You reduce the adjusted basis ($1,000) by the depreciation claimed in the first year ($200). Irs gov freefile You multiply the result ($800) by the DB rate (40%). Irs gov freefile Depreciation for the second year under the 200% DB method is $320. Irs gov freefile You figure the SL depreciation rate by dividing 1 by 4. Irs gov freefile 5, the number of years remaining in the recovery period. Irs gov freefile (Based on the half-year convention, you used only half a year of the recovery period in the first year. Irs gov freefile ) You multiply the reduced adjusted basis ($800) by the result (22. Irs gov freefile 22%). Irs gov freefile Depreciation under the SL method for the second year is $178. Irs gov freefile The DB method provides a larger deduction, so you deduct the $320 figured under the 200% DB method. Irs gov freefile Third year. Irs gov freefile You reduce the adjusted basis ($800) by the depreciation claimed in the second year ($320). Irs gov freefile You multiply the result ($480) by the DB rate (40%). Irs gov freefile Depreciation for the third year under the 200% DB method is $192. Irs gov freefile You figure the SL depreciation rate by dividing 1 by 3. Irs gov freefile 5. Irs gov freefile You multiply the reduced adjusted basis ($480) by the result (28. Irs gov freefile 57%). Irs gov freefile Depreciation under the SL method for the third year is $137. Irs gov freefile The DB method provides a larger deduction, so you deduct the $192 figured under the 200% DB method. Irs gov freefile Fourth year. Irs gov freefile You reduce the adjusted basis ($480) by the de
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Look for Warning Signs

Look for these warning signs to avoid fraud:

  • Someone you don't know asks you to send money or money orders to claim a prize, lottery, credit card, loan, or other valuable offer.
  • Someone you don't know offers you the chance to receive a credit card, loan, prize, lottery, or other valuable item, but asks you for personal data to claim it.
  • An unknown caller claiming to be a lawyer or in law enforcement offers to help you get your money back (for a fee).
  • The deal is only good "for today" or a short period of time.
  • The seller offers "free gifts" in return for a minimum effort or a fee.
  • A "repair person" suddenly finds a dangerous defect in your car or home.
  • You are given little or no time to read a contract.
  • A sale item is suddenly unavailable but a "much better item" is available for slightly more money.
  • Someone is trying to scare you into purchasing credit protection plans.
  • The solicitation looks like a government document and suggests contest winnings or unclaimed assets are yours for a small fee. (The government doesn't solicit money from citizens.)
  • You are asked for your bank account or credit card number.

Quick Tips for Avoiding Fraud

  • Don't give out personal information. Be suspicious of anyone you don't know who asks for your Social Security number, credit card and bank account details, date of birth, etc.
  • Don't be intimidated. Be suspicious of calls or e-mails that want you to provide or verify personal information immediately. Tell them you're not interested and hang up or don't reply to the e-mail.
  • Monitor your accounts. Review bank and credit card statements carefully. Report unauthorized transactions to your financial institution immediately.
  • Use a shredder. Tear or shred credit offers you receive in the mail, bank statements, insurance forms and other papers with personal information.

Fraud Alert

Be on the lookout for these common scams:

  • Fake Check Scams- You discover the check is worthless after you've deposited it and wired money back to the crook.
  • Sweetheart Swindles- Criminals befriend you in online chat rooms or dating sites, then request money as a favor or for accident or travel expenses.
  • Auctions- Beware of fraudulent sellers and bogus merchandise.
  • Lotteries- Don't fall for foreign lotteries; they're illegal to play and may be a scam.
  • Advance Fee Loans and Credit- It's illegal for telemarketers to charge a fee in advance for help getting a loan.

The Irs Gov Freefile

Irs gov freefile It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors. Irs gov freefile Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors. Irs gov freefile Select the Scenario that Applies to You: Irs gov freefile I am an independent contractor or in business for myself Irs gov freefile If you are a business owner or contractor who provides services to other businesses, then you are generally considered self-employed. For more information on your tax obligations if you are self-employed (an independent contractor), see our Self-Employed Tax Center. Irs gov freefile I hire or contract with individuals to provide services to my business Irs gov freefile If you are a business owner hiring or contracting with other individuals to provide services, you must determine whether the individuals providing services are employees or independent contractors. Follow the rest of this page to find out more about this topic and what your responsibilities are. Irs gov freefile Determining Whether the Individuals Providing Services are Employees or Independent Contractors Irs gov freefile Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the services may be - Irs gov freefile An independent contractor Irs gov freefile An employee (common-law employee) Irs gov freefile A statutory employee Irs gov freefile A statutory nonemployee Irs gov freefile In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered. Irs gov freefile Common Law Rules Irs gov freefile Facts that provide evidence of the degree of control and independence fall into three categories: Irs gov freefile Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? Irs gov freefile Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.) Irs gov freefile Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business? Irs gov freefile Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another. Irs gov freefile The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination. Irs gov freefile Form SS-8 Irs gov freefile If, after reviewing the three categories of evidence, it is still unclear whether a worker is an employee or an independent contractor, Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (PDF) can be filed with the IRS. The form may be filed by either the business or the worker. The IRS will review the facts and circumstances and officially determine the worker’s status. Irs gov freefile Be aware that it can take at least six months to get a determination, but a business that continually hires the same types of workers to perform particular services may want to consider filing the Form SS-8 (PDF).