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Going Green- Be a Green Consumer

"Going Green" means practicing an environmentally friendly and ecologically responsible lifestyle as well as making decisions to help protect the environment and sustain natural resources. There are lots of reasons to consider going green—too much trash, greenhouse gases, air and water pollution, damage to the ozone layer, and saving money. For example, switching all the light bulbs in a home from conventional incandescent light bulbs to compact fluorescent light (CFL) bulbs could save about $40 over the life of the bulb. Other examples include:

  • Turning your thermostat down two degrees in winter and up two degrees in summer.
  • Making sure your walls and ceilings are well insulated.
  • Replacing bathroom and kitchen faucets with low-flow models.

Make Greener Product Choices

Buying only what you need is the first step to go green, but when you buy, looking for greener products and using products in ways that respect the environment can have a big impact — on the health of your family, pets and the planet. 

The U.S. Environmental Protection Agency (EPA) has a green products web portal to help you navigate the complex world of green products. You can use this portal to find links and information related to greener products from EPA and other sources.  

The EPA has a number of eco-labeling partnership programs to help you identify greener, safer, and more efficient products. The standards behind these labels are based on scientific expertise and use the best available data. Look for these EPA program labels when buying:

  • EnergyStar - for energy efficient electronics and appliances
  • WaterSense - water efficient products
  • Design for the Environment (DfE) - safer household cleaners and other products. DfE allows products that have been determined to be safer for human health and the environment and effective to carry the DfE label.
  • SmartWay Certified Vehicle - cleaner, more fuel efficient cars and trucks

By making greener product choices you are saving money on utilities and fuel, supporting companies that are driving change and most importantly — you are joining millions of people helping to protect public health and the environment.

You can also choose to buy organic or locally produced food and eco-friendly clothing. For more information about national standards covering organic food, contact the U.S. Department of Agriculture’s Agricultural Marketing Service. There are no national standards for organic clothing, but some fabrics to consider include organic cotton, bark cloth, bamboo, and organic wool.

Beware: Verify Green Marketing Claims

The number of eco-label products,  claiming that they are "eco-friendly" or "all-natural", has increased due to a growing demand for "green products. While this is a positive trend, you may have concerns about "greenwashing" and uncertainty about which environmental standards and labels can be trusted. The Federal Trade Commission's Green Guides provide guidance for companies that make marketing claims regarding the environmental attributes of their products. Here are some tips to help you sort through eco-label marketing:

  • Look for specific (ex. "contains 75% post-consumer recycled materials") rather than vague statements about environmental impact.
  • Determine whether the green marketing claims apply to the packaging, the product, or both.
  • Beware of fake third-party certification. Visit Consumer Reports' website to find reliable environmental labels.

For more information about environmental advertising, contact the FTC.

Reusing and Recycling

Along with buying greener products, you can make a big impact by using the products you buy in ways that respect the environment by: using fewer products and following instructions for product use; conserving energy, water, and materials; recycling items made of materials such as glass, metal, plastic, or paper or disposing of products properly. 

Many utility companies now offer curbside recycling programs that provide U.S. households with a responsible and convenient way to recycle materials. To locate information on recycling services and efforts in your area, call the Earth 911 toll free hotline, 1-800-CLEANUP (253-2687). 

It is easy to safely dispose of many products. Others, such as car batteries, cell phones, televisions, paints, oils, and solvents, require special handling. You can responsibly dispose of these products through your local household hazardous wasters (HHW) collection facility or at your local government's annual HHW collection day. Some items may be given to charitable organizations or even dropped off at electronics retailers. Contact the Environmental Protection Agency (EPA) to help you make the right decisions about the best way to dispose of waste.

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Www onlinetaxes h&rblock com 1. Www onlinetaxes h&rblock com   Overview of Depreciation Table of Contents Introduction Useful Items - You may want to see: What Property Can Be Depreciated?Property You Own Property Used in Your Business or Income-Producing Activity Property Having a Determinable Useful Life Property Lasting More Than One Year What Property Cannot Be Depreciated?Land Excepted Property When Does Depreciation Begin and End?Placed in Service Idle Property Cost or Other Basis Fully Recovered Retired From Service What Method Can You Use To Depreciate Your Property?Property You Placed in Service Before 1987 Property Owned or Used in 1986 Intangible Property Corporate or Partnership Property Acquired in a Nontaxable Transfer Election To Exclude Property From MACRS What Is the Basis of Your Depreciable Property?Cost as Basis Other Basis Adjusted Basis How Do You Treat Repairs and Improvements? Do You Have To File Form 4562? How Do You Correct Depreciation Deductions?Filing an Amended Return Changing Your Accounting Method Introduction Depreciation is an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property. Www onlinetaxes h&rblock com It is an allowance for the wear and tear, deterioration, or obsolescence of the property. Www onlinetaxes h&rblock com This chapter discusses the general rules for depreciating property and answers the following questions. Www onlinetaxes h&rblock com What property can be depreciated? What property cannot be depreciated? When does depreciation begin and end? What method can you use 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? Useful Items - You may want to see: Publication 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 538 Accounting Periods and Methods 551 Basis of Assets Form (and Instructions) Sch C (Form 1040) Profit or Loss From Business Sch C-EZ (Form 1040) Net Profit From Business 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization See chapter 6 for information about getting publications and forms. Www onlinetaxes h&rblock com What Property Can Be Depreciated? You can depreciate most types of tangible property (except land), such as buildings, machinery, vehicles, furniture, and equipment. Www onlinetaxes h&rblock com You also can depreciate certain intangible property, such as patents, copyrights, and computer software. Www onlinetaxes h&rblock com To be depreciable, the property must meet all the following requirements. Www onlinetaxes h&rblock com It must be property you own. Www onlinetaxes h&rblock com It must be used in your business or income-producing activity. Www onlinetaxes h&rblock com It must have a determinable useful life. Www onlinetaxes h&rblock com It must be expected to last more than one year. Www onlinetaxes h&rblock com The following discussions provide information about these requirements. Www onlinetaxes h&rblock com Property You Own To claim depreciation, you usually must be the owner of the property. Www onlinetaxes h&rblock com You are considered as owning property even if it is subject to a debt. Www onlinetaxes h&rblock com Example 1. Www onlinetaxes h&rblock com You made a down payment to purchase rental property and assumed the previous owner's mortgage. Www onlinetaxes h&rblock com You own the property and you can depreciate it. Www onlinetaxes h&rblock com Example 2. Www onlinetaxes h&rblock com You bought a new van that you will use only for your courier business. Www onlinetaxes h&rblock com You will be making payments on the van over the next 5 years. Www onlinetaxes h&rblock com You own the van and you can depreciate it. Www onlinetaxes h&rblock com Leased property. Www onlinetaxes h&rblock com   You can depreciate leased property only if you retain the incidents of ownership in the property (explained below). Www onlinetaxes h&rblock com This means you bear the burden of exhaustion of the capital investment in the property. Www onlinetaxes h&rblock com 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. Www onlinetaxes h&rblock com You can, however, depreciate any capital improvements you make to the property. Www onlinetaxes h&rblock com See How Do You Treat Repairs and Improvements later in this chapter and Additions and Improvements under Which Recovery Period Applies in chapter 4. Www onlinetaxes h&rblock com   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. Www onlinetaxes h&rblock com However, 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, you cannot depreciate the cost of the property. Www onlinetaxes h&rblock com Incidents of ownership. Www onlinetaxes h&rblock com   Incidents of ownership in property include the following. Www onlinetaxes h&rblock com The legal title to the property. Www onlinetaxes h&rblock com The legal obligation to pay for the property. Www onlinetaxes h&rblock com The responsibility to pay maintenance and operating expenses. Www onlinetaxes h&rblock com The duty to pay any taxes on the property. Www onlinetaxes h&rblock com The risk of loss if the property is destroyed, condemned, or diminished in value through obsolescence or exhaustion. Www onlinetaxes h&rblock com Life tenant. Www onlinetaxes h&rblock com   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. Www onlinetaxes h&rblock com However, see Certain term interests in property under Excepted Property, later. Www onlinetaxes h&rblock com Cooperative apartments. Www onlinetaxes h&rblock com   If you are a tenant-stockholder in a cooperative housing corporation and use your cooperative apartment in your business or for the production of income, you can depreciate your stock in the corporation, even though the corporation owns the apartment. Www onlinetaxes h&rblock com   Figure your depreciation deduction as follows. Www onlinetaxes h&rblock com Figure the depreciation for all the depreciable real property owned by the corporation in which you have a proprietary lease or right of tenancy. Www onlinetaxes h&rblock com If you bought your cooperative stock after its first offering, figure the depreciable basis of this property as follows. Www onlinetaxes h&rblock com Multiply your cost per share by the total number of outstanding shares, including any shares held by the corporation. Www onlinetaxes h&rblock com Add to the amount figured in (a) any mortgage debt on the property on the date you bought the stock. Www onlinetaxes h&rblock com Subtract from the amount figured in (b) any mortgage debt that is not for the depreciable real property, such as the part for the land. Www onlinetaxes h&rblock com Subtract from the amount figured in (1) any depreciation for space owned by the corporation that can be rented but cannot be lived in by tenant-stockholders. Www onlinetaxes h&rblock com Divide the number of your shares of stock by the total number of outstanding shares, including any shares held by the corporation. Www onlinetaxes h&rblock com Multiply the result of (2) by the percentage you figured in (3). Www onlinetaxes h&rblock com This is your depreciation on the stock. Www onlinetaxes h&rblock com   Your depreciation deduction for the year cannot be more than the part of your adjusted basis in the stock of the corporation that is allocable to your business or income-producing property. Www onlinetaxes h&rblock com You must also reduce your depreciation deduction if only a portion of the property is used in a business or for the production of income. Www onlinetaxes h&rblock com Example. Www onlinetaxes h&rblock com You figure your share of the cooperative housing corporation's depreciation to be $30,000. Www onlinetaxes h&rblock com Your adjusted basis in the stock of the corporation is $50,000. Www onlinetaxes h&rblock com You use one half of your apartment solely for business purposes. Www onlinetaxes h&rblock com Your depreciation deduction for the stock for the year cannot be more than $25,000 (½ of $50,000). Www onlinetaxes h&rblock com Change to business use. Www onlinetaxes h&rblock com   If you change your cooperative apartment to business use, figure your allowable depreciation as explained earlier. Www onlinetaxes h&rblock com The basis of all the depreciable real property owned by the cooperative housing corporation is the smaller of the following amounts. Www onlinetaxes h&rblock com The fair market value of the property on the date you change your apartment to business use. Www onlinetaxes h&rblock com This is considered to be the same as the corporation's adjusted basis minus straight line depreciation, unless this value is unrealistic. Www onlinetaxes h&rblock com The corporation's adjusted basis in the property on that date. Www onlinetaxes h&rblock com Do not subtract depreciation when figuring the corporation's adjusted basis. Www onlinetaxes h&rblock com   If you bought the stock after its first offering, the corporation's adjusted basis in the property is the amount figured in (1), above. Www onlinetaxes h&rblock com The fair market value of the property is considered to be the same as the corporation's adjusted basis figured in this way minus straight line depreciation, unless the value is unrealistic. Www onlinetaxes h&rblock com   For a discussion of fair market value and adjusted basis, see Publication 551. Www onlinetaxes h&rblock com 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. Www onlinetaxes h&rblock com If you use property to produce income (investment use), the income must be taxable. Www onlinetaxes h&rblock com You cannot depreciate property that you use solely for personal activities. Www onlinetaxes h&rblock com Partial business or investment use. Www onlinetaxes h&rblock com   If you use property for business or investment purposes and for personal purposes, you can deduct depreciation based only on the business or investment use. Www onlinetaxes h&rblock com For example, you cannot deduct depreciation on a car used only for commuting, personal shopping trips, family vacations, driving children to and from school, or similar activities. Www onlinetaxes h&rblock com    You must keep records showing the business, investment, and personal use of your property. Www onlinetaxes h&rblock com For more information on the records you must keep for listed property, such as a car, see What Records Must Be Kept in chapter 5. Www onlinetaxes h&rblock com    Although you can combine business and investment use of property when figuring depreciation deductions, do not treat investment use as qualified business use when determining whether the business-use requirement for listed property is met. Www onlinetaxes h&rblock com For information about qualified business use of listed property, see What Is the Business-Use Requirement in chapter 5. Www onlinetaxes h&rblock com Office in the home. Www onlinetaxes h&rblock com   If you use part of your home as an office, you may be able to deduct depreciation on that part based on its business use. Www onlinetaxes h&rblock com For information about depreciating your home office, see Publication 587. Www onlinetaxes h&rblock com Inventory. Www onlinetaxes h&rblock com   You cannot depreciate inventory because it is not held for use in your business. Www onlinetaxes h&rblock com Inventory is any property you hold primarily for sale to customers in the ordinary course of your business. Www onlinetaxes h&rblock com   If you are a rent-to-own dealer, you may be able to treat certain property held in your business as depreciable property rather than as inventory. Www onlinetaxes h&rblock com See Rent-to-own dealer under Which Property Class Applies Under GDS in chapter 4. Www onlinetaxes h&rblock com   In some cases, it is not clear whether property is held for sale (inventory) or for use in your business. Www onlinetaxes h&rblock com If it is unclear, examine carefully all the facts in the operation of the particular business. Www onlinetaxes h&rblock com The following example shows how a careful examination of the facts in two similar situations results in different conclusions. Www onlinetaxes h&rblock com Example. Www onlinetaxes h&rblock com Maple Corporation is in the business of leasing cars. Www onlinetaxes h&rblock com At the end of their useful lives, when the cars are no longer profitable to lease, Maple sells them. Www onlinetaxes h&rblock com Maple does not have a showroom, used car lot, or individuals to sell the cars. Www onlinetaxes h&rblock com Instead, it sells them through wholesalers or by similar arrangements in which a dealer's profit is not intended or considered. Www onlinetaxes h&rblock com Maple can depreciate the leased cars because the cars are not held primarily for sale to customers in the ordinary course of business, but are leased. Www onlinetaxes h&rblock com If Maple buys cars at wholesale prices, leases them for a short time, and then sells them at retail prices or in sales in which a dealer's profit is intended, the cars are treated as inventory and are not depreciable property. Www onlinetaxes h&rblock com In this situation, the cars are held primarily for sale to customers in the ordinary course of business. Www onlinetaxes h&rblock com Containers. Www onlinetaxes h&rblock com   Generally, containers for the products you sell are part of inventory and you cannot depreciate them. Www onlinetaxes h&rblock com However, you can depreciate containers used to ship your products if they have a life longer than one year and meet the following requirements. Www onlinetaxes h&rblock com They qualify as property used in your business. Www onlinetaxes h&rblock com Title to the containers does not pass to the buyer. Www onlinetaxes h&rblock com   To determine if these requirements are met, consider the following questions. Www onlinetaxes h&rblock com Does your sales contract, sales invoice, or other type of order acknowledgment indicate whether you have retained title? Does your invoice treat the containers as separate items? Do any of your records state your basis in the containers? Property Having a Determinable Useful Life To be depreciable, your property must have a determinable useful life. Www onlinetaxes h&rblock com This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Www onlinetaxes h&rblock com Property Lasting More Than One Year To be depreciable, property must have a useful life that extends substantially beyond the year you place it in service. Www onlinetaxes h&rblock com Example. Www onlinetaxes h&rblock com You maintain a library for use in your profession. Www onlinetaxes h&rblock com You can depreciate it. Www onlinetaxes h&rblock com However, if you buy technical books, journals, or information services for use in your business that have a useful life of one year or less, you cannot depreciate them. Www onlinetaxes h&rblock com Instead, you deduct their cost as a business expense. Www onlinetaxes h&rblock com What Property Cannot Be Depreciated? Certain property cannot be depreciated. Www onlinetaxes h&rblock com This includes land and certain excepted property. Www onlinetaxes h&rblock com Land You cannot depreciate the cost of land because land does not wear out, become obsolete, or get used up. Www onlinetaxes h&rblock com The cost of land generally includes the cost of clearing, grading, planting, and landscaping. Www onlinetaxes h&rblock com Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. Www onlinetaxes h&rblock com These costs must be so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property. Www onlinetaxes h&rblock com Example. Www onlinetaxes h&rblock com You constructed a new building for use in your business and paid for grading, clearing, seeding, and planting bushes and trees. Www onlinetaxes h&rblock com Some of the bushes and trees were planted right next to the building, while others were planted around the outer border of the lot. Www onlinetaxes h&rblock com If you replace the building, you would have to destroy the bushes and trees right next to it. Www onlinetaxes h&rblock com These bushes and trees are closely associated with the building, so they have a determinable useful life. Www onlinetaxes h&rblock com Therefore, you can depreciate them. Www onlinetaxes h&rblock com Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. Www onlinetaxes h&rblock com Excepted Property Even if the requirements explained in the preceding discussions are met, you cannot depreciate the following property. Www onlinetaxes h&rblock com Property placed in service and disposed of in the same year. Www onlinetaxes h&rblock com Determining when property is placed in service is explained later. Www onlinetaxes h&rblock com Equipment used to build capital improvements. Www onlinetaxes h&rblock com You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Www onlinetaxes h&rblock com See Uniform Capitalization Rules in Publication 551. Www onlinetaxes h&rblock com Section 197 intangibles. Www onlinetaxes h&rblock com You must amortize these costs. Www onlinetaxes h&rblock com Section 197 intangibles are discussed in detail in Chapter 8 of Publication 535. Www onlinetaxes h&rblock com Intangible property, such as certain computer software, that is not section 197 intangible property, can be depreciated if it meets certain requirements. Www onlinetaxes h&rblock com See Intangible Property , later. Www onlinetaxes h&rblock com Certain term interests. Www onlinetaxes h&rblock com Certain term interests in property. Www onlinetaxes h&rblock com   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. Www onlinetaxes h&rblock com A term interest in property means a life interest in property, an interest in property for a term of years, or an income interest in a trust. Www onlinetaxes h&rblock com Related persons. Www onlinetaxes h&rblock com   For a description of related persons, see Related Persons, later. Www onlinetaxes h&rblock com For this purpose, however, treat as related persons only the relationships listed in items (1) through (10) of that discussion and substitute “50%” for “10%” each place it appears. Www onlinetaxes h&rblock com Basis adjustments. Www onlinetaxes h&rblock com   If you would be allowed a depreciation deduction for a term interest in property except that the holder of the remainder interest is related to you, you generally must reduce your basis in the term interest by any depreciation or amortization not allowed. Www onlinetaxes h&rblock com   If you hold the remainder interest, you generally must increase your basis in that interest by the depreciation not allowed to the term interest holder. Www onlinetaxes h&rblock com However, do not increase your basis for depreciation not allowed for periods during which either of the following situations applies. Www onlinetaxes h&rblock com The term interest is held by an organization exempt from tax. Www onlinetaxes h&rblock com The term interest is held by a nonresident alien individual or foreign corporation, and the income from the term interest is not effectively connected with the conduct of a trade or business in the United States. Www onlinetaxes h&rblock com Exceptions. Www onlinetaxes h&rblock com   The above rules do not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. Www onlinetaxes h&rblock com They also do not apply to the holder of dividend rights that were separated from any stripped preferred stock if the rights were purchased after April 30, 1993, or to a person whose basis in the stock is determined by reference to the basis in the hands of the purchaser. Www onlinetaxes h&rblock com 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. Www onlinetaxes h&rblock com 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. Www onlinetaxes h&rblock com Placed in Service You place property 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. Www onlinetaxes h&rblock com Even if you are not using the property, it is in service when it is ready and available for its specific use. Www onlinetaxes h&rblock com Example 1. Www onlinetaxes h&rblock com Donald Steep bought a machine for his business. Www onlinetaxes h&rblock com The machine was delivered last year. Www onlinetaxes h&rblock com However, it was not installed and operational until this year. Www onlinetaxes h&rblock com It is considered placed in service this year. Www onlinetaxes h&rblock com If the machine had been ready and available for use when it was delivered, it would be considered placed in service last year even if it was not actually used until this year. Www onlinetaxes h&rblock com Example 2. Www onlinetaxes h&rblock com On April 6, Sue Thorn bought a house to use as residential rental property. Www onlinetaxes h&rblock com She made several repairs and had it ready for rent on July 5. Www onlinetaxes h&rblock com At that time, she began to advertise it for rent in the local newspaper. Www onlinetaxes h&rblock com The house is considered placed in service in July when it was ready and available for rent. Www onlinetaxes h&rblock com She can begin to depreciate it in July. Www onlinetaxes h&rblock com Example 3. Www onlinetaxes h&rblock com James Elm is a building contractor who specializes in constructing office buildings. Www onlinetaxes h&rblock com He bought a truck last year that had to be modified to lift materials to second-story levels. Www onlinetaxes h&rblock com The installation of the lifting equipment was completed and James accepted delivery of the modified truck on January 10 of this year. Www onlinetaxes h&rblock com The truck was placed in service on January 10, the date it was ready and available to perform the function for which it was bought. Www onlinetaxes h&rblock com Conversion to business use. Www onlinetaxes h&rblock com   If you place property in service in a personal activity, you cannot claim depreciation. Www onlinetaxes h&rblock com However, if you change the property's use to use in a business or income-producing activity, then you can begin to depreciate it at the time of the change. Www onlinetaxes h&rblock com You place the property in service in the business or income-producing activity on the date of the change. Www onlinetaxes h&rblock com Example. Www onlinetaxes h&rblock com You bought a home and used it as your personal home several years before you converted it to rental property. Www onlinetaxes h&rblock com Although its specific use was personal and no depreciation was allowable, you placed the home in service when you began using it as your home. Www onlinetaxes h&rblock com You can begin to claim depreciation in the year you converted it to rental property because its use changed to an income-producing use at that time. Www onlinetaxes h&rblock com 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 (not in use). Www onlinetaxes h&rblock com 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. Www onlinetaxes h&rblock com Cost or Other Basis Fully Recovered You stop depreciating property when you have fully recovered your cost or other basis. Www onlinetaxes h&rblock com You recover your basis when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property. Www onlinetaxes h&rblock com See What Is the Basis of Your Depreciable Property , later. Www onlinetaxes h&rblock com 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. Www onlinetaxes h&rblock com 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. Www onlinetaxes h&rblock com You sell or exchange the property. Www onlinetaxes h&rblock com You convert the property to personal use. Www onlinetaxes h&rblock com You abandon the property. Www onlinetaxes h&rblock com You transfer the property to a supplies or scrap account. Www onlinetaxes h&rblock com The property is destroyed. Www onlinetaxes h&rblock com If you included the property in a general asset account, see How Do You Use General Asset Accounts in chapter 4 for the rules that apply when you dispose of that property. Www onlinetaxes h&rblock com What Method Can You Use To Depreciate Your Property? You must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most property. Www onlinetaxes h&rblock com MACRS is discussed in chapter 4. Www onlinetaxes h&rblock com You cannot use MACRS to depreciate the following property. Www onlinetaxes h&rblock com Property you placed in service before 1987. Www onlinetaxes h&rblock com Certain property owned or used in 1986. Www onlinetaxes h&rblock com Intangible property. Www onlinetaxes h&rblock com Films, video tapes, and recordings. Www onlinetaxes h&rblock com Certain corporate or partnership property acquired in a nontaxable transfer. Www onlinetaxes h&rblock com Property you elected to exclude from MACRS. Www onlinetaxes h&rblock com The following discussions describe the property listed above and explain what depreciation method should be used. Www onlinetaxes h&rblock com Property You Placed in Service Before 1987 You cannot use MACRS for property you placed in service before 1987 (except property you placed in service after July 31, 1986, if MACRS was elected). Www onlinetaxes h&rblock com Property placed in service before 1987 must be depreciated under the methods discussed in Publication 534. Www onlinetaxes h&rblock com For a discussion of when property is placed in service, see When Does Depreciation Begin and End , earlier. Www onlinetaxes h&rblock com Use of real property changed. Www onlinetaxes h&rblock com   You generally must use MACRS to depreciate real property that you acquired for personal use before 1987 and changed to business or income-producing use after 1986. Www onlinetaxes h&rblock com Improvements made after 1986. Www onlinetaxes h&rblock com   You must treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. Www onlinetaxes h&rblock com Therefore, you can depreciate that improvement as separate property under MACRS if it is the type of property that otherwise qualifies for MACRS depreciation. Www onlinetaxes h&rblock com For more information about improvements, see How Do You Treat Repairs and Improvements , later and Additions and Improvements under Which Recovery Period Applies in chapter 4. Www onlinetaxes h&rblock com Property Owned or Used in 1986 You may not be able to use MACRS for property you acquired and placed in service after 1986 if any of the situations described below apply. Www onlinetaxes h&rblock com If you cannot use MACRS, the property must be depreciated under the methods discussed in Publication 534. Www onlinetaxes h&rblock com For the following discussions, do not treat property as owned before you placed it in service. Www onlinetaxes h&rblock com If you owned property in 1986 but did not place it in service until 1987, you do not treat it as owned in 1986. Www onlinetaxes h&rblock com Personal property. Www onlinetaxes h&rblock com   You cannot use MACRS for personal property (section 1245 property) in any of the following situations. Www onlinetaxes h&rblock com You or someone related to you owned or used the property in 1986. Www onlinetaxes h&rblock com You acquired the property from a person who owned it in 1986 and as part of the transaction the user of the property did not change. Www onlinetaxes h&rblock com You lease the property to a person (or someone related to this person) who owned or used the property in 1986. Www onlinetaxes h&rblock com You acquired the property in a transaction in which: The user of the property did not change, and The property was not MACRS property in the hands of the person from whom you acquired it because of (2) or (3) above. Www onlinetaxes h&rblock com Real property. Www onlinetaxes h&rblock com   You generally cannot use MACRS for real property (section 1250 property) in any of the following situations. Www onlinetaxes h&rblock com You or someone related to you owned the property in 1986. Www onlinetaxes h&rblock com You lease the property to a person who owned the property in 1986 (or someone related to that person). Www onlinetaxes h&rblock com You acquired the property in a like-kind exchange, involuntary conversion, or repossession of property you or someone related to you owned in 1986. Www onlinetaxes h&rblock com MACRS applies only to that part of your basis in the acquired property that represents cash paid or unlike property given up. Www onlinetaxes h&rblock com It does not apply to the carried-over part of the basis. Www onlinetaxes h&rblock com Exceptions. Www onlinetaxes h&rblock com   The rules above do not apply to the following. Www onlinetaxes h&rblock com Residential rental property or nonresidential real property. Www onlinetaxes h&rblock com Any property if, in the first tax year it is placed in service, the deduction under the Accelerated Cost Recovery System (ACRS) is more than the deduction under MACRS using the half-year convention. Www onlinetaxes h&rblock com For information on how to figure depreciation under ACRS, see Publication 534. Www onlinetaxes h&rblock com Property that was MACRS property in the hands of the person from whom you acquired it because of (2) above. Www onlinetaxes h&rblock com Related persons. Www onlinetaxes h&rblock com   For this purpose, the following are related persons. Www onlinetaxes h&rblock com An individual and a member of his or her family, including only a spouse, child, parent, brother, sister, half-brother, half-sister, ancestor, and lineal descendant. Www onlinetaxes h&rblock com A corporation and an individual who directly or indirectly owns more than 10% of the value of the outstanding stock of that corporation. Www onlinetaxes h&rblock com Two corporations that are members of the same controlled group. Www onlinetaxes h&rblock com A trust fiduciary and a corporation if more than 10% of the value of the outstanding stock is directly or indirectly owned by or for the trust or grantor of the trust. Www onlinetaxes h&rblock com The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Www onlinetaxes h&rblock com The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of both trusts. Www onlinetaxes h&rblock com A tax-exempt educational or charitable organization and any person (or, if that person is an individual, a member of that person's family) who directly or indirectly controls the organization. Www onlinetaxes h&rblock com Two S corporations, and an S corporation and a regular corporation, if the same persons own more than 10% of the value of the outstanding stock of each corporation. Www onlinetaxes h&rblock com A corporation and a partnership if the same persons own both of the following. Www onlinetaxes h&rblock com More than 10% of the value of the outstanding stock of the corporation. Www onlinetaxes h&rblock com More than 10% of the capital or profits interest in the partnership. Www onlinetaxes h&rblock com The executor and beneficiary of any estate. Www onlinetaxes h&rblock com A partnership and a person who directly or indirectly owns more than 10% of the capital or profits interest in the partnership. Www onlinetaxes h&rblock com Two partnerships, if the same persons directly or indirectly own more than 10% of the capital or profits interest in each. Www onlinetaxes h&rblock com The related person and a person who is engaged in trades or businesses under common control. Www onlinetaxes h&rblock com See section 52(a) and 52(b) of the Internal Revenue Code. Www onlinetaxes h&rblock com When to determine relationship. Www onlinetaxes h&rblock com   You must determine whether you are related to another person at the time you acquire the property. Www onlinetaxes h&rblock com   A partnership acquiring property from a terminating partnership must determine whether it is related to the terminating partnership immediately before the event causing the termination. Www onlinetaxes h&rblock com For this rule, a terminating partnership is one that sells or exchanges, within 12 months, 50% or more of its total interest in partnership capital or profits. Www onlinetaxes h&rblock com Constructive ownership of stock or partnership interest. Www onlinetaxes h&rblock com   To determine whether a person directly or indirectly owns any of the outstanding stock of a corporation or an interest in a partnership, apply the following rules. Www onlinetaxes h&rblock com Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Www onlinetaxes h&rblock com However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more of the value of the stock of the corporation. Www onlinetaxes h&rblock com An individual is considered to own the stock or partnership interest directly or indirectly owned by or for the individual's family. Www onlinetaxes h&rblock com An individual who owns, except by applying rule (2), any stock in a corporation is considered to own the stock directly or indirectly owned by or for the individual's partner. Www onlinetaxes h&rblock com For purposes of rules (1), (2), or (3), stock or a partnership interest considered to be owned by a person under rule (1) is treated as actually owned by that person. Www onlinetaxes h&rblock com However, stock or a partnership interest considered to be owned by an individual under rule (2) or (3) is not treated as owned by that individual for reapplying either rule (2) or (3) to make another person considered to be the owner of the same stock or partnership interest. Www onlinetaxes h&rblock com Intangible Property Generally, if you can depreciate intangible property, you usually use the straight line method of depreciation. Www onlinetaxes h&rblock com However, you can choose to depreciate certain intangible property under the income forecast method (discussed later). Www onlinetaxes h&rblock com You cannot depreciate intangible property that is a section 197 intangible or that otherwise does not meet all the requirements discussed earlier under What Property Can Be Depreciated. Www onlinetaxes h&rblock com Straight Line Method This method lets you deduct the same amount of depreciation each year over the useful life of the property. Www onlinetaxes h&rblock com To figure your deduction, first determine the adjusted basis, salvage value, and estimated useful life of your property. Www onlinetaxes h&rblock com Subtract the salvage value, if any, from the adjusted basis. Www onlinetaxes h&rblock com The balance is the total depreciation you can take over the useful life of the property. Www onlinetaxes h&rblock com Divide the balance by the number of years in the useful life. Www onlinetaxes h&rblock com This gives you your yearly depreciation deduction. Www onlinetaxes h&rblock com Unless there is a big change in adjusted basis or useful life, this amount will stay the same throughout the time you depreciate the property. Www onlinetaxes h&rblock com If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use. Www onlinetaxes h&rblock com Example. Www onlinetaxes h&rblock com In April, Frank bought a patent for $5,100 that is not a section 197 intangible. Www onlinetaxes h&rblock com He depreciates the patent under the straight line method, using a 17-year useful life and no salvage value. Www onlinetaxes h&rblock com He divides the $5,100 basis by 17 years to get his $300 yearly depreciation deduction. Www onlinetaxes h&rblock com He only used the patent for 9 months during the first year, so he multiplies $300 by 9/12 to get his deduction of $225 for the first year. Www onlinetaxes h&rblock com Next year, Frank can deduct $300 for the full year. Www onlinetaxes h&rblock com Patents and copyrights. Www onlinetaxes h&rblock com   If you can depreciate the cost of a patent or copyright, use the straight line method over the useful life. Www onlinetaxes h&rblock com The useful life of a patent or copyright is the lesser of the life granted to it by the government or the remaining life when you acquire it. Www onlinetaxes h&rblock com However, if the patent or copyright becomes valueless before the end of its useful life, you can deduct in that year any of its remaining cost or other basis. Www onlinetaxes h&rblock com Computer software. Www onlinetaxes h&rblock com   Computer software is generally a section 197 intangible and cannot be depreciated if you acquired it in connection with the acquisition of assets constituting a business or a substantial part of a business. Www onlinetaxes h&rblock com   However, computer software is not a section 197 intangible and can be depreciated, even if acquired in connection with the acquisition of a business, if it meets all of the following tests. Www onlinetaxes h&rblock com It is readily available for purchase by the general public. Www onlinetaxes h&rblock com It is subject to a nonexclusive license. Www onlinetaxes h&rblock com It has not been substantially modified. Www onlinetaxes h&rblock com   If the software meets the tests above, it may also qualify for the section 179 deduction and the special depreciation allowance, discussed later. Www onlinetaxes h&rblock com If you can depreciate the cost of computer software, use the straight line method over a useful life of 36 months. Www onlinetaxes h&rblock com    Tax-exempt use property subject to a lease. Www onlinetaxes h&rblock com   The useful life of computer software leased under a lease agreement entered into after March 12, 2004, 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. Www onlinetaxes h&rblock com Certain created intangibles. Www onlinetaxes h&rblock com   You can amortize certain intangibles created on or after December 31, 2003, over a 15-year period using the straight line method and no salvage value, even though they have a useful life that cannot be estimated with reasonable accuracy. Www onlinetaxes h&rblock com For example, amounts paid to acquire memberships or privileges of indefinite duration, such as a trade association membership, are eligible costs. Www onlinetaxes h&rblock com   The following are not eligible. Www onlinetaxes h&rblock com Any intangible asset acquired from another person. Www onlinetaxes h&rblock com Created financial interests. Www onlinetaxes h&rblock com Any intangible asset that has a useful life that can be estimated with reasonable accuracy. Www onlinetaxes h&rblock com Any intangible asset that has an amortization period or limited useful life that is specifically prescribed or prohibited by the Code, regulations, or other published IRS guidance. Www onlinetaxes h&rblock com Any amount paid to facilitate an acquisition of a trade or business, a change in the capital structure of a business entity, and certain other transactions. Www onlinetaxes h&rblock com   You must also increase the 15-year safe harbor amortization period to a 25-year period for certain intangibles related to benefits arising from the provision, production, or improvement of real property. Www onlinetaxes h&rblock com For this purpose, real property includes property that will remain attached to the real property for an indefinite period of time, such as roads, bridges, tunnels, pavements, and pollution control facilities. Www onlinetaxes h&rblock com Income Forecast Method You can choose to use the income forecast method instead of the straight line method to depreciate the following depreciable intangibles. Www onlinetaxes h&rblock com Motion picture films or video tapes. Www onlinetaxes h&rblock com Sound recordings. Www onlinetaxes h&rblock com Copyrights. Www onlinetaxes h&rblock com Books. Www onlinetaxes h&rblock com Patents. Www onlinetaxes h&rblock com Under the income forecast method, each year's depreciation deduction is equal to the cost of the property, multiplied by a fraction. Www onlinetaxes h&rblock com The numerator of the fraction is the current year's net income from the property, and the denominator is the total income anticipated from the property through the end of the 10th taxable year following the taxable year the property is placed in service. Www onlinetaxes h&rblock com For more information, see section 167(g) of the Internal Revenue Code. Www onlinetaxes h&rblock com Films, video tapes, and recordings. Www onlinetaxes h&rblock com   You cannot use MACRS for motion picture films, video tapes, and sound recordings. Www onlinetaxes h&rblock com For this purpose, sound recordings are discs, tapes, or other phonorecordings resulting from the fixation of a series of sounds. Www onlinetaxes h&rblock com You can depreciate this property using either the straight line method or the income forecast method. Www onlinetaxes h&rblock com Participations and residuals. Www onlinetaxes h&rblock com   You can include participations and residuals in the adjusted basis of the property for purposes of computing your depreciation deduction under the income forecast method. Www onlinetaxes h&rblock com The participations and residuals must relate to income to be derived from the property before the end of the 10th taxable year after the property is placed in service. Www onlinetaxes h&rblock com For this purpose, participations and residuals are defined as costs which by contract vary with the amount of income earned in connection with the property. Www onlinetaxes h&rblock com   Instead of including these amounts in the adjusted basis of the property, you can deduct the costs in the taxable year that they are paid. Www onlinetaxes h&rblock com Videocassettes. Www onlinetaxes h&rblock com   If you are in the business of renting videocassettes, you can depreciate only those videocassettes bought for rental. Www onlinetaxes h&rblock com If the videocassette has a useful life of one year or less, you can currently deduct the cost as a business expense. Www onlinetaxes h&rblock com Corporate or Partnership Property Acquired in a Nontaxable Transfer MACRS does not apply to property used before 1987 and transferred after 1986 to a corporation or partnership (except property the transferor placed in service after July 31, 1986, if MACRS was elected) to the extent its basis is carried over from the property's adjusted basis in the transferor's hands. Www onlinetaxes h&rblock com You must continue to use the same depreciation method as the transferor and figure depreciation as if the transfer had not occurred. Www onlinetaxes h&rblock com However, if MACRS would otherwise apply, you can use it to depreciate the part of the property's basis that exceeds the carried-over basis. Www onlinetaxes h&rblock com The nontaxable transfers covered by this rule include the following. Www onlinetaxes h&rblock com A distribution in complete liquidation of a subsidiary. Www onlinetaxes h&rblock com A transfer to a corporation controlled by the transferor. Www onlinetaxes h&rblock com An exchange of property solely for corporate stock or securities in a reorganization. Www onlinetaxes h&rblock com A contribution of property to a partnership in exchange for a partnership interest. Www onlinetaxes h&rblock com A partnership distribution of property to a partner. Www onlinetaxes h&rblock com Election To Exclude Property From MACRS If you can properly depreciate any property under a method not based on a term of years, such as the unit-of-production method, you can elect to exclude that property from MACRS. Www onlinetaxes h&rblock com You make the election by reporting your depreciation for the property on line 15 in Part II of Form 4562 and attaching a statement as described in the instructions for Form 4562. Www onlinetaxes h&rblock com You must make this election by the return due date (including extensions) for the tax year you place your property in service. Www onlinetaxes h&rblock com 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 six months of the due date of the return (excluding extensions). Www onlinetaxes h&rblock com Attach the election to the amended return and write “Filed pursuant to section 301. Www onlinetaxes h&rblock com 9100-2” on the election statement. Www onlinetaxes h&rblock com File the amended return at the same address you filed the original return. Www onlinetaxes h&rblock com Use of standard mileage rate. Www onlinetaxes h&rblock com   If you use the standard mileage rate to figure your tax deduction for your business automobile, you are treated as having made an election to exclude the automobile from MACRS. Www onlinetaxes h&rblock com See Publication 463 for a discussion of the standard mileage rate. Www onlinetaxes h&rblock com What Is the Basis of Your Depreciable Property? To figure your depreciation deduction, you must determine the basis of your property. Www onlinetaxes h&rblock com To determine basis, you need to know the cost or other basis of your property. Www onlinetaxes h&rblock com Cost as Basis The basis of property you buy is its cost plus amounts you paid for items such as sales tax (see Exception , below), freight charges, and installation and testing fees. Www onlinetaxes h&rblock com The cost includes the amount you pay in cash, debt obligations, other property, or services. Www onlinetaxes h&rblock com Exception. Www onlinetaxes h&rblock com   You can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). Www onlinetaxes h&rblock com If you make that choice, you cannot include those sales taxes as part of your cost basis. Www onlinetaxes h&rblock com Assumed debt. Www onlinetaxes h&rblock com   If you buy property and assume (or buy subject to) an existing mortgage or other debt on the property, your basis includes the amount you pay for the property plus the amount of the assumed debt. Www onlinetaxes h&rblock com Example. Www onlinetaxes h&rblock com You make a $20,000 down payment on property and assume the seller's mortgage of $120,000. Www onlinetaxes h&rblock com Your total cost is $140,000, the cash you paid plus the mortgage you assumed. Www onlinetaxes h&rblock com Settlement costs. Www onlinetaxes h&rblock com   The basis of real property also includes certain fees and charges you pay in addition to the purchase price. Www onlinetaxes h&rblock com These generally are shown on your settlement statement and include the following. Www onlinetaxes h&rblock com Legal and recording fees. Www onlinetaxes h&rblock com Abstract fees. Www onlinetaxes h&rblock com Survey charges. Www onlinetaxes h&rblock com Owner's title insurance. Www onlinetaxes h&rblock com Amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. Www onlinetaxes h&rblock com   For fees and charges you cannot include in the basis of property, see Real Property in Publication 551. Www onlinetaxes h&rblock com Property you construct or build. Www onlinetaxes h&rblock com   If you construct, build, or otherwise produce property for use in your business, you may have to use the uniform capitalization rules to determine the basis of your property. Www onlinetaxes h&rblock com For information about the uniform capitalization rules, see Publication 551 and the regulations under section 263A of the Internal Revenue Code. Www onlinetaxes h&rblock com Other Basis Other basis usually refers to basis that is determined by the way you received the property. Www onlinetaxes h&rblock com For example, your basis is other than cost if you acquired the property in exchange for other property, as payment for services you performed, as a gift, or as an inheritance. Www onlinetaxes h&rblock com If you acquired property in this or some other way, see Publication 551 to determine your basis. Www onlinetaxes h&rblock com Property changed from personal use. Www onlinetaxes h&rblock com   If you held property for personal use and later use it in your business or income-producing activity, your depreciable basis is the lesser of the following. Www onlinetaxes h&rblock com The fair market value (FMV) of the property on the date of the change in use. Www onlinetaxes h&rblock com Your original cost or other basis adjusted as follows. Www onlinetaxes h&rblock com Increased by the cost of any permanent improvements or additions and other costs that must be added to basis. Www onlinetaxes h&rblock com Decreased by any deductions you claimed for casualty and theft losses and other items that reduced your basis. Www onlinetaxes h&rblock com Example. Www onlinetaxes h&rblock com Several years ago, Nia paid $160,000 to have her home built on a lot that cost her $25,000. Www onlinetaxes h&rblock com Before changing the property to rental use last year, she paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house. Www onlinetaxes h&rblock com Land is not depreciable, so she includes only the cost of the house when figuring the basis for depreciation. Www onlinetaxes h&rblock com Nia's adjusted basis in the house when she changed its use was $178,000 ($160,000 + $20,000 − $2,000). Www onlinetaxes h&rblock com On the same date, her property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. Www onlinetaxes h&rblock com The basis for depreciation on the house is the FMV on the date of change ($165,000), because it is less than her adjusted basis ($178,000). Www onlinetaxes h&rblock com Property acquired in a nontaxable transaction. Www onlinetaxes h&rblock com   Generally, if you receive property in a nontaxable exchange, the basis of the property you receive is the same as the adjusted basis of the property you gave up. Www onlinetaxes h&rblock com Special rules apply in determining the basis and figuring the MACRS depreciation deduction and special depreciation allowance for property acquired in a like-kind exchange or involuntary conversion. Www onlinetaxes h&rblock com See Like-kind exchanges and involuntary conversions. Www onlinetaxes h&rblock com under How Much Can You Deduct? in chapter 3 and Figuring the Deduction for Property Acquired in a Nontaxable Exchange in chapter 4. Www onlinetaxes h&rblock com   There are also special rules for determining the basis of MACRS property involved in a like-kind exchange or involuntary conversion when the property is contained in a general asset account. Www onlinetaxes h&rblock com See How Do You Use General Asset Accounts in chapter 4. Www onlinetaxes h&rblock com Adjusted Basis 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. Www onlinetaxes h&rblock com These events could include the following. Www onlinetaxes h&rblock com Installing utility lines. Www onlinetaxes h&rblock com Paying legal fees for perfecting the title. Www onlinetaxes h&rblock com Settling zoning issues. Www onlinetaxes h&rblock com Receiving rebates. Www onlinetaxes h&rblock com Incurring a casualty or theft loss. Www onlinetaxes h&rblock com For a discussion of adjustments to the basis of your property, see Adjusted Basis in Publication 551. Www onlinetaxes h&rblock com If you depreciate your property under MACRS, you also may have to reduce your basis by certain deductions and credits with respect to the property. Www onlinetaxes h&rblock com For more information, see What Is the Basis for Depreciation in chapter 4. Www onlinetaxes h&rblock com . Www onlinetaxes h&rblock com Basis adjustment for depreciation allowed or allowable. Www onlinetaxes h&rblock com   You must reduce the basis of property by the depreciation allowed or allowable, whichever is greater. Www onlinetaxes h&rblock com Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). Www onlinetaxes h&rblock com Depreciation allowable is depreciation you are entitled to deduct. Www onlinetaxes h&rblock com   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. Www onlinetaxes h&rblock com   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). Www onlinetaxes h&rblock com How Do You Treat Repairs and Improvements? If you improve depreciable property, you must treat the improvement as separate depreciable property. Www onlinetaxes h&rblock com Improvement means an addition to or partial replacement of property that adds to its value, appreciably lengthens the time you can use it, or adapts it to a different use. Www onlinetaxes h&rblock com You generally deduct the cost of repairing business property in the same way as any other business expense. Www onlinetaxes h&rblock com 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. Www onlinetaxes h&rblock com Example. Www onlinetaxes h&rblock com You repair a small section on one corner of the roof of a rental house. Www onlinetaxes h&rblock com You deduct the cost of the repair as a rental expense. Www onlinetaxes h&rblock com However, if you completely replace the roof, the new roof is an improvement because it increases the value and lengthens the life of the property. Www onlinetaxes h&rblock com You depreciate the cost of the new roof. Www onlinetaxes h&rblock com Improvements to rented property. Www onlinetaxes h&rblock com   You can depreciate permanent improvements you make to business property you rent from someone else. Www onlinetaxes h&rblock com Do You Have To File Form 4562? Use Form 4562 to figure your deduction for depreciation and amortization. Www onlinetaxes h&rblock com Attach Form 4562 to your tax return for the current tax year if you are claiming any of the following items. Www onlinetaxes h&rblock com A section 179 deduction for the current year or a section 179 carryover from a prior year. Www onlinetaxes h&rblock com See chapter 2 for information on the section 179 deduction. Www onlinetaxes h&rblock com Depreciation for property placed in service during the current year. Www onlinetaxes h&rblock com Depreciation on any vehicle or other listed property, regardless of when it was placed in service. Www onlinetaxes h&rblock com See chapter 5 for information on listed property. Www onlinetaxes h&rblock com A deduction for any vehicle if the deduction is reported on a form other than Schedule C (Form 1040) or Schedule C-EZ (Form 1040). Www onlinetaxes h&rblock com Amortization of costs if the current year is the first year of the amortization period. Www onlinetaxes h&rblock com Depreciation or amortization on any asset on a corporate income tax return (other than Form 1120S, U. Www onlinetaxes h&rblock com S. Www onlinetaxes h&rblock com Income Tax Return for an S Corporation) regardless of when it was placed in service. Www onlinetaxes h&rblock com You must submit a separate Form 4562 for each business or activity on your return for which a Form 4562 is required. Www onlinetaxes h&rblock com Table 1-1 presents an overview of the purpose of the various parts of Form 4562. Www onlinetaxes h&rblock com Employee. Www onlinetaxes h&rblock com   Do not use Form 4562 if you are an employee and you deduct job-related vehicle expenses using either actual expenses (including depreciation) or the standard mileage rate. Www onlinetaxes h&rblock com Instead, use either Form 2106 or Form 2106-EZ. Www onlinetaxes h&rblock com Use Form 2106-EZ if you are claiming the standard mileage rate and you are not reimbursed by your employer for any expenses. Www onlinetaxes h&rblock com 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. Www onlinetaxes h&rblock com See Filing an Amended Return , next. Www onlinetaxes h&rblock com 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. Www onlinetaxes h&rblock com See Changing Your Accounting Method , later. Www onlinetaxes h&rblock com Filing an Amended Return You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. Www onlinetaxes h&rblock com You claimed the incorrect amount because of a mathematical error made in any year. Www onlinetaxes h&rblock com You claimed the incorrect amount because of a posting error made in any year. Www onlinetaxes h&rblock com You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. Www onlinetaxes h&rblock com You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. Www onlinetaxes h&rblock com Adoption of accounting method defined. Www onlinetaxes h&rblock com   Generally, you adopt a method of accounting for depreciation by using a permissible method of determining depreciation when you file your first tax return, or by using the same impermissible method of determining depreciation in two or more consecutively filed tax returns. Www onlinetaxes h&rblock com   For an exception to this 2-year rule, see Revenue Procedure 2011-14 on page 330 of the Internal Revenue Bulletin 2011-4, available at www. Www onlinetaxes h&rblock com irs. Www onlinetaxes h&rblock com gov/pub/irs-irbs/irb11-04. Www onlinetaxes h&rblock com pdf. Www onlinetaxes h&rblock com (Note. Www onlinetaxes h&rblock com Revenue Procedure 2011-14 is clarified and modified by Revenue Procedure 2012-20. Www onlinetaxes h&rblock com For more information, see Revenue Procedure 2012-20 on page 700 of the Internal Revenue Bulletin 2012-14, available at www. Www onlinetaxes h&rblock com irs. Www onlinetaxes h&rblock com gov/pub/irs-irbs/irb12-14. Www onlinetaxes h&rblock com pdf. Www onlinetaxes h&rblock com )   For a safe harbor method of accounting to treat rotable spare parts as depreciable assets and procedures to obtain automatic consent to change to the safe harbor method of accounting, see Revenue Procedure 2007-48 on page 110 of Internal Revenue Bulletin 2007-29, available at www. Www onlinetaxes h&rblock com irs. Www onlinetaxes h&rblock com gov/pub/irs-irbs/irb07-29. Www onlinetaxes h&rblock com pdf. Www onlinetaxes h&rblock com When to file. Www onlinetaxes h&rblock com   If an amended return is allowed, you must file it by the later of the following. Www onlinetaxes h&rblock com 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. Www onlinetaxes h&rblock com A return filed before an unextended due date is considered filed on that due date. Www onlinetaxes h&rblock com 2 years from the time you paid your tax for that year. Www onlinetaxes h&rblock com Changing Your Accounting Method Generally, you must get IRS approval to change your method of accounting. Www onlinetaxes h&rblock com You generally must file Form 3115, Application for Change in Accounting Method, to request a change in your method of accounting for depreciation. Www onlinetaxes h&rblock com The following are examples of a change in method of accounting for depreciation. Www onlinetaxes h&rblock com A change from an impermissible method of determining depreciation for depreciable property, if the impermissible method was used in two or more consecutively filed tax returns. Www onlinetaxes h&rblock com A change in the treatment of an asset from nondepreciable to depreciable or vice versa. Www onlinetaxes h&rblock com A change in the depreciation method, period of recovery, or convention of a depreciable asset. Www onlinetaxes h&rblock com A change from not claiming to claiming the special depreciation allowance if you did not make the election to not claim any special allowance. Www onlinetaxes h&rblock com A change from claiming a 50% special depreciation allowance to claiming a 30% special depreciation allowance for qualified property (including property that is included in a class of property for which you elected a 30% special allowance instead of a 50% special allowance). Www onlinetaxes h&rblock com Changes in depreciation that are not a change in method of accounting (and may only be made on an amended return) include the following. Www onlinetaxes h&rblock com An adjustment in the useful life of a depreciable asset for which depreciation is determined under section 167. Www onlinetaxes h&rblock com A change in use of an asset in the hands of the same taxpayer. Www onlinetaxes h&rblock com Making a late depreciation election or revoking a timely valid depreciation election (including the election not to deduct the special depreciation allowance). Www onlinetaxes h&rblock com If you elected not to claim any special allowance, a change from not claiming to claiming the special allowance is a revocation of the election and is not an accounting method change. Www onlinetaxes h&rblock com Generally, you must get IRS approval to make a late depreciation election or revoke a depreciation election. Www onlinetaxes h&rblock com You must submit a request for a letter ruling to make a late election or revoke an election. Www onlinetaxes h&rblock com Any change in the placed in service date of a depreciable asset. Www onlinetaxes h&rblock com See section 1. Www onlinetaxes h&rblock com 446-1(e)(2)(ii)(d) of the regulations for more information and examples. Www onlinetaxes h&rblock com IRS approval. Www onlinetaxes h&rblock com   In some instances, you may be able to get approval from the IRS to change your method of accounting for depreciation under the automatic change request procedures generally covered in Revenue Procedure 2011-14. Www onlinetaxes h&rblock com If you do not qualify to use the automatic procedures to get approval, you must use the advance consent request procedures generally covered in Revenue Procedure 97-27, 1997-1 C. Www onlinetaxes h&rblock com B. Www onlinetaxes h&rblock com 680. Www onlinetaxes h&rblock com Also see the Instructions for Form 3115 for more information on getting approval, including lists of scope limitations and automatic accounting method changes. Www onlinetaxes h&rblock com Additional guidance. Www onlinetaxes h&rblock com    For additional guidance and special procedures for changing your accounting method, automatic change procedures, amending your return, and filing Form 3115, see Revenue Procedure 2011-14 on page 330 of the Internal Revenue Bulletin 2011-4, available at www. Www onlinetaxes h&rblock com irs. Www onlinetaxes h&rblock com gov/pub/irs-irbs/irb11-04. Www onlinetaxes h&rblock com pdf. Www onlinetaxes h&rblock com (Note. Www onlinetaxes h&rblock com Revenue Procedure 2011-14 is clarified and modified by Revenue Procedure 2012-20. Www onlinetaxes h&rblock com For more information, see Revenue Procedure 2012-20 on page 700 of the Internal Revenue Bulletin 2012-14, available at www. Www onlinetaxes h&rblock com irs. Www onlinetaxes h&rblock com gov/pub/irs-irbs/irb12-14. Www onlinetaxes h&rblock com pdf. Www onlinetaxes h&rblock com )   For a safe harbor method of accounting to treat rotable spare parts as depreciable assets, see Revenue Procedure 2007-48 on page 110 of Internal Revenue Bulletin 2007-29, available at www. Www onlinetaxes h&rblock com irs. Www onlinetaxes h&rblock com gov/pub/irs-irbs/irb07-29. Www onlinetaxes h&rblock com pdf. Www onlinetaxes h&rblock com Table 1-1. Www onlinetaxes h&rblock com Purpose of Form 4562 This table describes the purpose of the various parts of Form 4562. Www onlinetaxes h&rblock com For more information, see Form 4562 and its instructions. Www onlinetaxes h&rblock com Part Purpose I • Electing the section 179 deduction • Figuring the maximum section 179 deduction for the current year • Figuring any section 179 deduction carryover to the next year II • Reporting the special depreciation allowance for property (other than listed property) placed in service during the tax year • Reporting depreciation deductions on property being depreciated under any method other than Modified Accelerated Cost Recovery System (MACRS) III • Reporting MACRS depreciation deductions for property placed in service before this year • Reporting MACRS depreciation deductions for property (other than listed property) placed in service during the current year IV • Summarizing other parts V • Reporting the special depreciation allowance for automobiles and other listed property • Reporting MACRS depreciation on automobiles and other listed property • Reporting the section 179 cost elected for automobiles and other listed property • Reporting information on the use of automobiles and other transportation vehicles VI • Reporting amortization deductions Section 481(a) adjustment. Www onlinetaxes h&rblock com   If you file Form 3115 and change from an impermissible method to a permissible method of accounting for depreciation, you can make a section 481(a) adjustment for any unclaimed or excess amount of allowable depreciation. Www onlinetaxes h&rblock com The adjustment is the difference between the total depreciation actually deducted for the property and the total amount allowable prior to the year of change. Www onlinetaxes h&rblock com If no depreciation was deducted, the adjustment is the total depreciation allowable prior to the year of change. Www onlinetaxes h&rblock com A negative section 481(a) adjustment results in a decrease in taxable income. Www onlinetaxes h&rblock com It is taken into account in the year of change and is reported on your business tax returns as “other expenses. Www onlinetaxes h&rblock com ” A positive section 481(a) adjustment results in an increase in taxable income. Www onlinetaxes h&rblock com It is generally taken into account over 4 tax years and is reported on your business tax returns as “other income. Www onlinetaxes h&rblock com ” However, you can elect to use a one-year adjustment period and report the adjustment in the year of change if the total adjustment is less than $25,000. Www onlinetaxes h&rblock com Make the election by completing the appropriate line on Form 3115. Www onlinetaxes h&rblock com   If you file a Form 3115 and change from one permissible method to another permissible method, the section 481(a) adjustment is zero. Www onlinetaxes h&rblock com Prev  Up  Next   Home   More Online Publications