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

Face-to-face Tax Help

IRS Taxpayer Assistance Centers (TACs) are your source for personal tax help when you believe your tax issue can only be handled face-to-face. No appointment is necessary.

Keep in mind, many questions can be resolved online without waiting in line. Through IRS.gov you can:
• Set up a payment plan.
• Get a transcript of your tax return.
• Make a payment.
• Check on your refund.
• Find answers to many of your tax questions.

We are now referring all requests for tax return preparation services to other available resources. You can take advantage of free tax preparation through Free File, Free File Fillable Forms or through a volunteer site in your community. To find the nearest volunteer site location or to get more information about Free File, go to the top of the page and enter “Free Tax Help” in the Search box.

If you have a tax account issues and feel that it requires talking with someone face-to-face, visit your local TAC.

Caution:  Many of our offices are located in Federal Office Buildings. These buildings may not allow visitors to bring in cell phones with camera capabilities.

Multilingual assistance is available in every office. Hours of operation are subject to change.

Before visiting your local office click on "Services Provided" in the chart below to see what services are available. Services are limited and not all services are available at every TAC office and may vary from site to site. You can get these services on a walk-in basis.

City Street Address Days/Hours of Service Telephone*
Bloomington 301 S. Prospect Rd.
Bloomington, IL 61704

Monday-Friday - 8:30 a.m.-4:30 p.m.
(Closed for lunch 11:30 a.m.-12:30 p.m.)

 

Services Provided

(309) 661-0032
Champaign 310 W. Church St.
Champaign, IL 61820

Monday-Friday - 8:30 a.m.-4:30 p.m.
(Closed for lunch 11:30 a.m.-12:30 p.m.)

 

Services Provided

(217) 398-5210
Chicago 230 S. Dearborn St.
Chicago, IL 60604

Monday-Friday - 8:30 a.m.-4:30 p.m.

 

**This office will be open until 6:00 p.m. on 4/14 & 4/15**


Services Provided

(312) 292-4912
Decatur 306 W. Eldorado
Decatur, IL 62522

Monday-Friday - 8:30 a.m.-4:30 p.m.
(Closed for lunch 11:30 a.m.-12:30 p.m.)
 

Services Provided

(217) 862-6015
Downers Grove 2001 Butterfield Rd.
Downers Grove, IL 60515

Monday-Friday - 8:30 a.m.-4:30 p.m.

 

**This office will be open until 6:00 p.m. on 4/14 & 4/15**

 

Services Provided

(630) 493-5291
Fairview Heights 380 Fountain Office Court
Fairview Heights, IL 62208

Monday-Friday - 8:30 a.m.-4:30 p.m.
(Closed for lunch 11:30 a.m.-12:30 p.m.)

 

**This office will be open until 6:00 p.m. on 4/14 & 4/15**

 

Services Provided

(618) 632-2567
Galesburg 2066 Windish Dr.
Galesburg, IL 61401 

Monday-Friday - 8:30 a.m.-4:30 p.m.
(Closed for lunch 11:30 a.m.-12:30 p.m.)

 

Services Provided

(309) 345-4158 
Mt. Vernon  105 S. Sixth St.
Mt. Vernon, IL 62864 

Monday-Friday - 8:30 a.m.-4:30 p.m.
(Closed for lunch 11:30 a.m.-12:30 p.m.) 

 

**This office will be closed on 3/31**

 

Services Provided

(618) 632-2567 
Orland Park  14479 John Humphrey Drive,
Orland Park, IL 60462 

Monday-Friday - 8:30 a.m. - 4:30 p.m.

 

**This office will be open until 6:00 p.m. on 4/14 & 4/15**

 

Services Provided

(708) 873-8310 
Peoria  2415 West Cornerstone Ct.
Peoria, IL 61614 

Monday-Friday - 8:30 a.m.-4:30 p.m.
(Closed for lunch 11:30 a.m.-12:30 p.m.)

 

**This office will be open until 6:00 p.m. on 4/14 & 4/15**

 

Services Provided

(309) 671-7264 
Quincy  3701 East Lake Centre Drive,
Quincy, IL 62305 

Monday-Friday - 8:30 a.m.-4:30 p.m.
(Closed for lunch 11:30 a.m.-12:30 p.m.) 

 

Services Provided

(217) 224-8208 
Rockford  211 S. Court St.
Rockford, IL 61101 

Monday-Friday - 8:30 a.m.-4:30 p.m.
(Closed for lunch 12:00 noon - 1:00 p.m.) 

 

Services Provided

(815) 334-7026 
Schiller Park  5100 River Road
Schiller Park, IL 60176 

Monday-Friday - 8:30 a.m.-4:30 p.m.

 

**This office will be open until 6:00 p.m. on 4/14 & 4/15**
 

Services Provided

(847) 671-7541 
Springfield  3101 Constitution Drive
Springfield, IL 62704 

Monday-Friday - 8:30 a.m.-4:30 p.m. 
 

Services Provided

(217) 862-6015 

* Note: The phone numbers in the chart above are not toll-free for all locations. When you call, you will reach a recorded business message with information about office hours, locations and services provided in that office. If face-to-face assistance is not a priority for you, you may also get help with IRS letters or resolve tax account issues by phone, toll free at 1-800-829-1040 (individuals) or 1-800-829-4933 (businesses).

For information on where to file your tax return please see Where to File Addresses.

The Taxpayer Advocate Service: Call 312-292-3800 in Chicago or (217) 862-6382 in Springfield, or 1-877-777-4778 elsewhere, or see Publication 1546, The Taxpayer Advocate Service of the IRS. For further information, see  Tax Topic 104.

Partnerships

IRS and organizations all over the country are partnering to assist taxpayers. Through these partnerships, organizations are also achieving their own goals. These mutually beneficial partnerships are strengthening outreach efforts and bringing education and assistance to millions.

For more information about these programs for individuals and families, contact the Stakeholder Partnerships, Education and Communication Office at:

Internal Revenue Service
230 S. Dearborn St.
Room 2400, Stop 6604-CHI
Chicago, IL 60604

For more information about these programs for businesses, your local Stakeholder Liaison office establishes relationships with organizations representing small business and self-employed taxpayers. They provide information about the policies, practices and procedures the IRS uses to ensure compliance with the tax laws. To establish a relationship with us, use this list to find a contact in your state:

Stakeholder Liaison (SL) Phone Numbers for Organizations Representing Small Businesses and Self-employed Taxpayers.

Page Last Reviewed or Updated: 28-Mar-2014

The 1040 Easy Form

1040 easy form 8. 1040 easy form   Qualified Tuition Program (QTP) Table of Contents Introduction What Is a Qualified Tuition ProgramDesignated beneficiary. 1040 easy form Half-time student. 1040 easy form How Much Can You Contribute Are Distributions TaxableFiguring the Taxable Portion of a Distribution Additional Tax on Taxable Distributions Rollovers and Other TransfersRollovers Changing the Designated Beneficiary Introduction Qualified tuition programs (QTPs) are also called “529 plans. 1040 easy form ” States may establish and maintain programs that allow you to either prepay or contribute to an account for paying a student's qualified education expenses at a postsecondary institution. 1040 easy form Eligible educational institutions may establish and maintain programs that allow you to prepay a student's qualified education expenses. 1040 easy form If you prepay tuition, the student (designated beneficiary) will be entitled to a waiver or a payment of qualified education expenses. 1040 easy form You cannot deduct either payments or contributions to a QTP. 1040 easy form For information on a specific QTP, you will need to contact the state agency or eligible educational institution that established and maintains it. 1040 easy form What is the tax benefit of a QTP. 1040 easy form   No tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses. 1040 easy form See Are Distributions Taxable , later, for more information. 1040 easy form    Even if a QTP is used to finance a student's education, the student or the student's parents still may be eligible to claim the American opportunity credit or the lifetime learning credit. 1040 easy form See Coordination With American Opportunity and Lifetime Learning Credits, later. 1040 easy form What Is a Qualified Tuition Program A qualified tuition program is a program set up to allow you to either prepay, or contribute to an account established for paying, a student's qualified education expenses at an eligible educational institution. 1040 easy form QTPs can be established and maintained by states (or agencies or instrumentalities of a state) and eligible educational institutions. 1040 easy form The program must meet certain requirements. 1040 easy form Your state government or the eligible educational institution in which you are interested can tell you whether or not they participate in a QTP. 1040 easy form Qualified education expenses. 1040 easy form   These are expenses related to enrollment or attendance at an Eligible educational institution (defined later). 1040 easy form As shown in the following list, to be qualified, some of the expenses must be required by the institution and some must be incurred by students who are enrolled at least half-time. 1040 easy form See Half-time student , later. 1040 easy form The following expenses must be required for enrollment or attendance of a Designated beneficiary (defined later) at an eligible educational institution. 1040 easy form Tuition and fees. 1040 easy form Books, supplies, and equipment. 1040 easy form Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible educational institution. 1040 easy form Expenses for room and board must be incurred by students who are enrolled at least half-time. 1040 easy form The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. 1040 easy form The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. 1040 easy form The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. 1040 easy form You will need to contact the eligible educational institution for qualified room and board costs. 1040 easy form    For tax years after 2010, the purchase of computer technology or equipment is only a qualified education expense if the computer technology or equipment is required for enrollment or attendance at an eligible institution. 1040 easy form Designated beneficiary. 1040 easy form   The designated beneficiary is generally the student (or future student) for whom the QTP is intended to provide benefits. 1040 easy form The designated beneficiary can be changed after participation in the QTP begins. 1040 easy form If a state or local government or certain tax-exempt organizations purchase an interest in a QTP as part of a scholarship program, the designated beneficiary is the person who receives the interest as a scholarship. 1040 easy form Half-time student. 1040 easy form   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic workload for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled. 1040 easy form Eligible educational institution. 1040 easy form   For purposes of a QTP, this is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. 1040 easy form S. 1040 easy form Department of Education. 1040 easy form It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. 1040 easy form The educational institution should be able to tell you if it is an eligible educational institution. 1040 easy form   Certain educational institutions located outside the United States also participate in the U. 1040 easy form S. 1040 easy form Department of Education's Federal Student Aid (FSA) programs. 1040 easy form   How Much Can You Contribute Contributions to a QTP on behalf of any beneficiary cannot be more than the amount necessary to provide for the qualified education expenses of the beneficiary. 1040 easy form There are no income restrictions on the individual contributors. 1040 easy form You can contribute to both a QTP and a Coverdell ESA in the same year for the same designated beneficiary. 1040 easy form   Are Distributions Taxable The part of a distribution representing the amount paid or contributed to a QTP does not have to be included in income. 1040 easy form This is a return of the investment in the plan. 1040 easy form The designated beneficiary generally does not have to include in income any earnings distributed from a QTP if the total distribution is less than or equal to adjusted qualified education expenses (defined under Figuring the Taxable Portion of a Distribution , later). 1040 easy form Earnings and return of investment. 1040 easy form    You will receive a Form 1099-Q, from each of the programs from which you received a QTP distribution in 2013. 1040 easy form The amount of your gross distribution (box 1) shown on each form will be divided between your earnings (box 2) and your basis, or return of investment (box 3). 1040 easy form Form 1099-Q should be sent to you by January 31, 2014. 1040 easy form Figuring the Taxable Portion of a Distribution To determine if total distributions for the year are more or less than the amount of qualified education expenses, you must compare the total of all QTP distributions for the tax year to the adjusted qualified education expenses. 1040 easy form Adjusted qualified education expenses. 1040 easy form   This amount is the total qualified education expenses reduced by any tax-free educational assistance. 1040 easy form Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. 1040 easy form Taxable earnings. 1040 easy form   Use the following steps to figure the taxable part. 1040 easy form Multiply the total distributed earnings shown in box 2 of Form 1099-Q by a fraction. 1040 easy form The numerator is the adjusted qualified education expenses paid during the year and the denominator is the total amount distributed during the year. 1040 easy form Subtract the amount figured in (1) from the total distributed earnings. 1040 easy form The result is the amount the beneficiary must include in income. 1040 easy form Report it on Form 1040 or Form 1040NR, line 21. 1040 easy form Example 1. 1040 easy form In 2007, Sara Clarke's parents opened a savings account for her with a QTP maintained by their state government. 1040 easy form Over the years they contributed $18,000 to the account. 1040 easy form The total balance in the account was $27,000 on the date the distribution was made. 1040 easy form In the summer of 2013, Sara enrolled in college and had $8,300 of qualified education expenses for the rest of the year. 1040 easy form She paid her college expenses from the following sources. 1040 easy form   Gift from parents $1,600     Partial tuition scholarship (tax-free) 3,100     QTP distribution 5,300           Before Sara can determine the taxable part of her QTP distribution, she must reduce her total qualified education expenses by any tax-free educational assistance. 1040 easy form   Total qualified education expenses $8,300     Minus: Tax-free educational assistance −3,100     Equals: Adjusted qualified  education expenses (AQEE) $5,200   Since the remaining expenses ($5,200) are less than the QTP distribution, part of the earnings will be taxable. 1040 easy form Sara's Form 1099-Q shows that $950 of the QTP distribution is earnings. 1040 easy form Sara figures the taxable part of the distributed earnings as follows. 1040 easy form   1. 1040 easy form $950 (earnings) × $5,200 AQEE  $5,300 distribution           =$932 (tax-free earnings)     2. 1040 easy form $950 (earnings)−$932 (tax-free earnings)     =$18 (taxable earnings)  Sara must include $18 in income (Form 1040, line 21) as distributed QTP earnings not used for adjusted qualified education expenses. 1040 easy form Coordination With American Opportunity and Lifetime Learning Credits An American opportunity or lifetime learning credit (education credit) can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses are not used for both benefits. 1040 easy form This means that after the beneficiary reduces qualified education expenses by tax-free educational assistance, he or she must further reduce them by the expenses taken into account in determining the credit. 1040 easy form Example 2. 1040 easy form Assume the same facts as in Example 1 , except that Sara's parents claimed an American opportunity credit of $2,500 (based on $4,000 expenses). 1040 easy form   Total qualified education expenses $8,300     Minus: Tax-free educational assistance −3,100     Minus: Expenses taken into account  in figuring American opportunity credit −4,000     Equals: Adjusted qualified  education expenses (AQEE) $1,200           The taxable part of the distribution is figured as follows. 1040 easy form   1. 1040 easy form $950 (earnings) × $1,200 AQEE  $5,300 distribution           =$215 (tax-free earnings)     2. 1040 easy form $950 (earnings)−$215 (tax-free earnings)     =$735 (taxable earnings)       Sara must include $735 in income (Form 1040, line 21). 1040 easy form This represents distributed earnings not used for adjusted qualified education expenses. 1040 easy form Coordination With Coverdell ESA Distributions If a designated beneficiary receives distributions from both a QTP and a Coverdell ESA in the same year, and the total of these distributions is more than the beneficiary's adjusted qualified higher education expenses, the expenses must be allocated between the distributions. 1040 easy form For purposes of this allocation, disregard any qualified elementary and secondary education expenses. 1040 easy form Example 3. 1040 easy form Assume the same facts as in Example 2 , except that instead of receiving a $5,300 distribution from her QTP, Sara received $4,600 from that account and $700 from her Coverdell ESA. 1040 easy form In this case, Sara must allocate her $1,200 of adjusted qualified higher education expenses (AQHEE) between the two distributions. 1040 easy form   $1,200 AQHEE × $700 ESA distribution  $5,300 total distribution = $158 AQHEE (ESA)     $1,200 AQHEE × $4,600 QTP distribution  $5,300 total distribution = $1,042 AQHEE (QTP)   Sara then figures the taxable portion of her Coverdell ESA distribution based on qualified higher education expenses of $158, and the taxable portion of her QTP distribution based on the other $1,042. 1040 easy form Note. 1040 easy form If you are required to allocate your expenses between Coverdell ESA and QTP distributions, and you have adjusted qualified elementary and secondary education expenses, see the examples in chapter 7, Coverdell Education Savings Account under Coordination With Qualified Tuition Program (QTP) Distributions . 1040 easy form Coordination With Tuition and Fees Deduction. 1040 easy form   A tuition and fees deduction can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses are not used for both benefits. 1040 easy form Losses on QTP Investments If you have a loss on your investment in a QTP account, you may be able to take the loss on your income tax return. 1040 easy form You can take the loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. 1040 easy form Your basis is the total amount of contributions to that QTP account. 1040 easy form You claim the loss as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23 (Schedule A (Form 1040NR), line 9), subject to the 2%-of-adjusted-gross-income limit. 1040 easy form If you have distributions from more than one QTP account during a year, you must combine the information (amount of distribution, basis, etc. 1040 easy form ) from all such accounts in order to determine your taxable earnings for the year. 1040 easy form By doing this, the loss from one QTP account reduces the distributed earnings (if any) from any other QTP accounts. 1040 easy form Example 1. 1040 easy form In 2013, Taylor received a final distribution of $1,000 from QTP #1. 1040 easy form His unrecovered basis in that account before the distribution was $3,000. 1040 easy form If Taylor itemizes his deductions, he can claim the $2,000 loss on Schedule A (Form 1040). 1040 easy form Example 2. 1040 easy form Assume the same facts as in Example 1 , except that Taylor also had a distribution of $9,000 from QTP #2, giving him total distributions for 2013 of $10,000. 1040 easy form His total basis in these distributions was $4,500 ($3,000 for QTP #1 and $1,500 for QTP #2). 1040 easy form Taylor's adjusted qualified education expenses for 2013 totaled $6,000. 1040 easy form In order to figure his taxable earnings, Taylor combines the two accounts and determines his taxable earnings as follows. 1040 easy form   1. 1040 easy form $10,000 (total distribution)−$4,500 (basis portion of distribution)     = $5,500 (earnings included in distribution)   2. 1040 easy form $5,500 (earnings) x $6,000 AQEE  $10,000 distribution           =$3,300 (tax-free earnings)     3. 1040 easy form $5,500 (earnings)−$3,300 (tax-free earnings)     =$2,200 (taxable earnings)                 Taylor must include $2,200 in income on Form 1040, line 21. 1040 easy form Because Taylor's accounts must be combined, he cannot deduct his $2,000 loss (QTP #1) on Schedule A (Form 1040). 1040 easy form Instead, the $2,000 loss reduces the total earnings that were distributed, thereby reducing his taxable earnings. 1040 easy form Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income. 1040 easy form Exceptions. 1040 easy form   The 10% additional tax does not apply to distributions: Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. 1040 easy form Made because the designated beneficiary is disabled. 1040 easy form A person is considered to be disabled if he or she shows proof that he or she cannot do any substantial gainful activity because of his or her physical or mental condition. 1040 easy form A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration. 1040 easy form Included in income because the designated beneficiary received: A tax-free scholarship or fellowship (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), or Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. 1040 easy form Made on account of the attendance of the designated beneficiary at a U. 1040 easy form S. 1040 easy form military academy (such as the USNA at Annapolis). 1040 easy form This exception applies only to the extent that the amount of the distribution does not exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U. 1040 easy form S. 1040 easy form Code) attributable to such attendance. 1040 easy form Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits , earlier. 1040 easy form ) Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. 1040 easy form Figuring the additional tax. 1040 easy form    Use Part II of Form 5329, to figure any additional tax. 1040 easy form Report the amount on Form 1040, line 58, or Form 1040NR, line 56. 1040 easy form Rollovers and Other Transfers Assets can be rolled over or transferred from one QTP to another. 1040 easy form In addition, the designated beneficiary can be changed without transferring accounts. 1040 easy form Rollovers Any amount distributed from a QTP is not taxable if it is rolled over to another QTP for the benefit of the same beneficiary or for the benefit of a member of the beneficiary's family (including the beneficiary's spouse). 1040 easy form An amount is rolled over if it is paid to another QTP within 60 days after the date of the distribution. 1040 easy form Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. 1040 easy form These are not taxable distributions. 1040 easy form Members of the beneficiary's family. 1040 easy form   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. 1040 easy form Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. 1040 easy form Brother, sister, stepbrother, or stepsister. 1040 easy form Father or mother or ancestor of either. 1040 easy form Stepfather or stepmother. 1040 easy form Son or daughter of a brother or sister. 1040 easy form Brother or sister of father or mother. 1040 easy form Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. 1040 easy form The spouse of any individual listed above. 1040 easy form First cousin. 1040 easy form Example. 1040 easy form When Aaron graduated from college last year he had $5,000 left in his QTP. 1040 easy form He wanted to give this money to his younger brother, who was in junior high school. 1040 easy form In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his brother's QTP within 60 days of the distribution. 1040 easy form If the rollover is to another QTP for the same beneficiary, only one rollover is allowed within 12 months of a previous transfer to any QTP for that designated beneficiary. 1040 easy form Changing the Designated Beneficiary There are no income tax consequences if the designated beneficiary of an account is changed to a member of the beneficiary's family. 1040 easy form See Members of the beneficiary's family , earlier. 1040 easy form Example. 1040 easy form Assume the same situation as in the last example. 1040 easy form Instead of closing his QTP and paying the distribution into his brother's QTP, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his brother. 1040 easy form Prev  Up  Next   Home   More Online Publications