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1040ez Instructions

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1040ez Instructions

1040ez instructions 3. 1040ez instructions   Ordinary or Capital Gain or Loss for Business Property Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. 1040ez instructions Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sales Gifts Transfers at Death Like-Kind Exchanges and Involuntary Conversions Multiple Properties Introduction When you dispose of business property, your taxable gain or loss is usually a section 1231 gain or loss. 1040ez instructions Its treatment as ordinary or capital is determined under rules for section 1231 transactions. 1040ez instructions When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. 1040ez instructions Any remaining gain is a section 1231 gain. 1040ez instructions Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Useful Items - You may want to see: Publication 534 Depreciating Property Placed in Service Before 1987 537 Installment Sales 547 Casualties, Disasters and Thefts 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) 4797 Sales of Business Property See chapter 5 for information about getting publications and forms. 1040ez instructions Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (discussed below). 1040ez instructions Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your section 1231 transactions. 1040ez instructions If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). 1040ez instructions Do not take that gain into account as section 1231 gain. 1040ez instructions Section 1231 transactions. 1040ez instructions   The following transactions result in gain or loss subject to section 1231 treatment. 1040ez instructions Sales or exchanges of real property or depreciable personal property. 1040ez instructions This property must be used in a trade or business and held longer than 1 year. 1040ez instructions Generally, property held for the production of rents or royalties is considered to be used in a trade or business. 1040ez instructions Depreciable personal property includes amortizable section 197 intangibles (described in chapter 2 under Other Dispositions). 1040ez instructions Sales or exchanges of leaseholds. 1040ez instructions The leasehold must be used in a trade or business and held longer than 1 year. 1040ez instructions Sales or exchanges of cattle and horses. 1040ez instructions The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 2 years or longer. 1040ez instructions Sales or exchanges of other livestock. 1040ez instructions This livestock does not include poultry. 1040ez instructions It must be held for draft, breeding, dairy, or sporting purposes and held for 1 year or longer. 1040ez instructions Sales or exchanges of unharvested crops. 1040ez instructions The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person and the land must be held longer than 1 year. 1040ez instructions You cannot keep any right or option to directly or indirectly reacquire the land (other than a right customarily incident to a mortgage or other security transaction). 1040ez instructions Growing crops sold with a lease on the land, though sold to the same person in the same transaction, are not included. 1040ez instructions Cutting of timber or disposal of timber, coal, or iron ore. 1040ez instructions The cutting or disposal must be treated as a sale, as described in chapter 2 under Timber and Coal and Iron Ore. 1040ez instructions Condemnations. 1040ez instructions The condemned property must have been held longer than 1 year. 1040ez instructions It must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property. 1040ez instructions It cannot be property held for personal use. 1040ez instructions Casualties and thefts. 1040ez instructions The casualty or theft must have affected business property, property held for the production of rents and royalties, or investment property (such as notes and bonds). 1040ez instructions You must have held the property longer than 1 year. 1040ez instructions However, if your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation. 1040ez instructions For more information on casualties and thefts, see Publication 547. 1040ez instructions Property for sale to customers. 1040ez instructions   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. 1040ez instructions If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers. 1040ez instructions Example. 1040ez instructions You manufacture and sell steel cable, which you deliver on returnable reels that are depreciable property. 1040ez instructions Customers make deposits on the reels, which you refund if the reels are returned within a year. 1040ez instructions If they are not returned, you keep each deposit as the agreed-upon sales price. 1040ez instructions Most reels are returned within the 1-year period. 1040ez instructions You keep adequate records showing depreciation and other charges to the capitalized cost of the reels. 1040ez instructions Under these conditions, the reels are not property held for sale to customers in the ordinary course of your business. 1040ez instructions Any gain or loss resulting from their not being returned may be capital or ordinary, depending on your section 1231 transactions. 1040ez instructions Copyrights. 1040ez instructions    The sale of a copyright, a literary, musical, or artistic composition, or similar property is not a section 1231 transaction if your personal efforts created the property, or if you acquired the property in a way that entitled you to the basis of the previous owner whose personal efforts created it (for example, if you receive the property as a gift). 1040ez instructions The sale of such property results in ordinary income and generally is reported in Part II of Form 4797. 1040ez instructions Treatment as ordinary or capital. 1040ez instructions   To determine the treatment of section 1231 gains and losses, combine all your section 1231 gains and losses for the year. 1040ez instructions If you have a net section 1231 loss, it is ordinary loss. 1040ez instructions If you have a net section 1231 gain, it is ordinary income up to the amount of your nonrecaptured section 1231 losses from previous years. 1040ez instructions The rest, if any, is long-term capital gain. 1040ez instructions Nonrecaptured section 1231 losses. 1040ez instructions   Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain. 1040ez instructions Therefore, if in any of your five preceding tax years you had section 1231 losses, a net gain for the current year from the sale of section 1231 assets is ordinary gain to the extent of your prior losses. 1040ez instructions These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. 1040ez instructions Example. 1040ez instructions In 2013, Ben has a $2,000 net section 1231 gain. 1040ez instructions To figure how much he has to report as ordinary income and long-term capital gain, he must first determine his section 1231 gains and losses from the previous 5-year period. 1040ez instructions From 2008 through 2012 he had the following section 1231 gains and losses. 1040ez instructions Year Amount 2008 -0- 2009 -0- 2010 ($2,500) 2011 -0- 2012 $1,800 Ben uses this information to figure how to report his net section 1231 gain for 2013 as shown below. 1040ez instructions 1) Net section 1231 gain (2013) $2,000 2) Net section 1231 loss (2010) ($2,500)   3) Net section 1231 gain (2012) 1,800   4) Remaining net section 1231 loss from prior 5 years ($700)   5) Gain treated as  ordinary income $700 6) Gain treated as long-term  capital gain $1,300 Depreciation Recapture If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if otherwise nontaxable) as ordinary income. 1040ez instructions To figure any gain that must be reported as ordinary income, you must keep permanent records of the facts necessary to figure the depreciation or amortization allowed or allowable on your property. 1040ez instructions This includes the date and manner of acquisition, cost or other basis, depreciation or amortization, and all other adjustments that affect basis. 1040ez instructions On property you acquired in a nontaxable exchange or as a gift, your records also must indicate the following information. 1040ez instructions Whether the adjusted basis was figured using depreciation or amortization you claimed on other property. 1040ez instructions Whether the adjusted basis was figured using depreciation or amortization another person claimed. 1040ez instructions Corporate distributions. 1040ez instructions   For information on property distributed by corporations, see Distributions to Shareholders in Publication 542, Corporations. 1040ez instructions General asset accounts. 1040ez instructions   Different rules apply to dispositions of property you depreciated using a general asset account. 1040ez instructions For information on these rules, see Publication 946. 1040ez instructions Section 1245 Property A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable on the property. 1040ez instructions See Gain Treated as Ordinary Income, later. 1040ez instructions Any gain recognized that is more than the part that is ordinary income from depreciation is a section 1231 gain. 1040ez instructions See Treatment as ordinary or capital under Section 1231 Gains and Losses, earlier. 1040ez instructions Section 1245 property defined. 1040ez instructions   Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of the following types of property. 1040ez instructions Personal property (either tangible or intangible). 1040ez instructions Other tangible property (except buildings and their structural components) used as any of the following. 1040ez instructions See Buildings and structural components below. 1040ez instructions An integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services. 1040ez instructions A research facility in any of the activities in (a). 1040ez instructions A facility in any of the activities in (a) for the bulk storage of fungible commodities (discussed on the next page). 1040ez instructions That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. 1040ez instructions Amortization of certified pollution control facilities. 1040ez instructions The section 179 expense deduction. 1040ez instructions Deduction for clean-fuel vehicles and certain refueling property. 1040ez instructions Deduction for capital costs incurred in complying with Environmental Protection Agency sulfur regulations. 1040ez instructions Deduction for certain qualified refinery property. 1040ez instructions Deduction for qualified energy efficient commercial building property. 1040ez instructions Amortization of railroad grading and tunnel bores, if in effect before the repeal by the Revenue Reconciliation Act of 1990. 1040ez instructions (Repealed by Public Law 99-514, Tax Reform Act of 1986, section 242(a). 1040ez instructions ) Certain expenditures for child care facilities if in effect before repeal by Public Law 101-58, Omnibus Budget Reconciliation Act of 1990, section 11801(a)(13) (except with regards to deductions made prior to November 5, 1990). 1040ez instructions Expenditures to remove architectural and transportation barriers to the handicapped and elderly. 1040ez instructions Deduction for qualified tertiary injectant expenses. 1040ez instructions Certain reforestation expenditures. 1040ez instructions Deduction for election to expense qualified advanced mine safety equipment property. 1040ez instructions Single purpose agricultural (livestock) or horticultural structures. 1040ez instructions Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. 1040ez instructions Any railroad grading or tunnel bore. 1040ez instructions Buildings and structural components. 1040ez instructions   Section 1245 property does not include buildings and structural components. 1040ez instructions The term building includes a house, barn, warehouse, or garage. 1040ez instructions The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. 1040ez instructions   Do not treat a structure that is essentially machinery or equipment as a building or structural component. 1040ez instructions Also, do not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure's use is so closely related to the property's use that the structure can be expected to be replaced when the property it initially houses is replaced. 1040ez instructions   The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. 1040ez instructions Structures such as oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen furnaces, coke ovens, brick kilns, and coal tipples are not treated as buildings, but as section 1245 property. 1040ez instructions Facility for bulk storage of fungible commodities. 1040ez instructions   This term includes oil or gas storage tanks and grain storage bins. 1040ez instructions Bulk storage means the storage of a commodity in a large mass before it is used. 1040ez instructions For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. 1040ez instructions To be fungible, a commodity must be such that one part may be used in place of another. 1040ez instructions   Stored materials that vary in composition, size, and weight are not fungible. 1040ez instructions Materials are not fungible if one part cannot be used in place of another part and the materials cannot be estimated and replaced by simple reference to weight, measure, and number. 1040ez instructions For example, the storage of different grades and forms of aluminum scrap is not storage of fungible commodities. 1040ez instructions Gain Treated as Ordinary Income The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts. 1040ez instructions The depreciation and amortization allowed or allowable on the property. 1040ez instructions The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). 1040ez instructions A limit on this amount for gain on like-kind exchanges and involuntary conversions is explained later. 1040ez instructions For any other disposition of section 1245 property, ordinary income is the lesser of (1) earlier or the amount by which its fair market value is more than its adjusted basis. 1040ez instructions See Gifts and Transfers at Death, later. 1040ez instructions Use Part III of Form 4797 to figure the ordinary income part of the gain. 1040ez instructions Depreciation taken on other property or taken by other taxpayers. 1040ez instructions   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. 1040ez instructions Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. 1040ez instructions Amounts a previous owner of the section 1245 property claimed if your basis is determined with reference to that person's adjusted basis (for example, the donor's depreciation deductions on property you received as a gift). 1040ez instructions Depreciation and amortization. 1040ez instructions   Depreciation and amortization that must be recaptured as ordinary income include (but are not limited to) the following items. 1040ez instructions Ordinary depreciation deductions. 1040ez instructions Any special depreciation allowance you claimed. 1040ez instructions Amortization deductions for all the following costs. 1040ez instructions Acquiring a lease. 1040ez instructions Lessee improvements. 1040ez instructions Certified pollution control facilities. 1040ez instructions Certain reforestation expenses. 1040ez instructions Section 197 intangibles. 1040ez instructions Childcare facility expenses made before 1982, if in effect before the repeal of IRC 188. 1040ez instructions Franchises, trademarks, and trade names acquired before August 11, 1993. 1040ez instructions The section 179 deduction. 1040ez instructions Deductions for all the following costs. 1040ez instructions Removing barriers to the disabled and the elderly. 1040ez instructions Tertiary injectant expenses. 1040ez instructions Depreciable clean-fuel vehicles and refueling property (minus the amount of any recaptured deduction). 1040ez instructions Environmental cleanup costs. 1040ez instructions Certain reforestation expenses. 1040ez instructions Qualified disaster expenses. 1040ez instructions Any basis reduction for the investment credit (minus any basis increase for credit recapture). 1040ez instructions Any basis reduction for the qualified electric vehicle credit (minus any basis increase for credit recapture). 1040ez instructions Example. 1040ez instructions You file your returns on a calendar year basis. 1040ez instructions In February 2011, you bought and placed in service for 100% use in your business a light-duty truck (5-year property) that cost $10,000. 1040ez instructions You used the half-year convention and your MACRS deductions for the truck were $2,000 in 2011 and $3,200 in 2012. 1040ez instructions You did not take the section 179 deduction. 1040ez instructions You sold the truck in May 2013 for $7,000. 1040ez instructions The MACRS deduction in 2013, the year of sale, is $960 (½ of $1,920). 1040ez instructions Figure the gain treated as ordinary income as follows. 1040ez instructions 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $2,000 + $3,200 + $960) 6,160   4) Adjusted basis (subtract line 3 from line 2) $3,840 5) Gain realized (subtract line 4 from line 1) $3,160 6) Gain treated as ordinary income (lesser of line 3 or line 5) $3,160 Depreciation on other tangible property. 1040ez instructions   You must take into account depreciation during periods when the property was not used as an integral part of an activity or did not constitute a research or storage facility, as described earlier under Section 1245 property. 1040ez instructions   For example, if depreciation deductions taken on certain storage facilities amounted to $10,000, of which $6,000 is from the periods before their use in a prescribed business activity, you must use the entire $10,000 in determining ordinary income from depreciation. 1040ez instructions Depreciation allowed or allowable. 1040ez instructions   The greater of the depreciation allowed or allowable is generally the amount to use in figuring the part of gain to report as ordinary income. 1040ez instructions However, if in prior years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased even though a greater amount would have been allowed under another proper method. 1040ez instructions If you did not take any deduction at all for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight line method. 1040ez instructions   This treatment applies only when figuring what part of gain is treated as ordinary income under the rules for section 1245 depreciation recapture. 1040ez instructions Multiple asset accounts. 1040ez instructions   In figuring ordinary income from depreciation, you can treat any number of units of section 1245 property in a single depreciation account as one item if the total ordinary income from depreciation figured by using this method is not less than it would be if depreciation on each unit were figured separately. 1040ez instructions Example. 1040ez instructions In one transaction you sold 50 machines, 25 trucks, and certain other property that is not section 1245 property. 1040ez instructions All of the depreciation was recorded in a single depreciation account. 1040ez instructions After dividing the total received among the various assets sold, you figured that each unit of section 1245 property was sold at a gain. 1040ez instructions You can figure the ordinary income from depreciation as if the 50 machines and 25 trucks were one item. 1040ez instructions However, if five of the trucks had been sold at a loss, only the 50 machines and 20 of the trucks could be treated as one item in determining the ordinary income from depreciation. 1040ez instructions Normal retirement. 1040ez instructions   The normal retirement of section 1245 property in multiple asset accounts does not require recognition of gain as ordinary income from depreciation if your method of accounting for asset retirements does not require recognition of that gain. 1040ez instructions Section 1250 Property Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property. 1040ez instructions To determine the additional depreciation on section 1250 property, see Additional Depreciation, below. 1040ez instructions Section 1250 property defined. 1040ez instructions   This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. 1040ez instructions It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. 1040ez instructions A fee simple interest in land is not included because it is not depreciable. 1040ez instructions   If your section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property. 1040ez instructions Additional Depreciation If you hold section 1250 property longer than 1 year, the additional depreciation is the actual depreciation adjustments that are more than the depreciation figured using the straight line method. 1040ez instructions For a list of items treated as depreciation adjustments, see Depreciation and amortization under Gain Treated as Ordinary Income, earlier. 1040ez instructions For the treatment of unrecaptured section 1250 gain, see Capital Gains Tax Rate, later. 1040ez instructions If you hold section 1250 property for 1 year or less, all the depreciation is additional depreciation. 1040ez instructions You will not have additional depreciation if any of the following conditions apply to the property disposed of. 1040ez instructions You figured depreciation for the property using the straight line method or any other method that does not result in depreciation that is more than the amount figured by the straight line method; you held the property longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. 1040ez instructions In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction for property placed in service before January 1, 2010. 1040ez instructions The property was residential low-income rental property you held for 162/3 years or longer. 1040ez instructions For low-income rental housing on which the special 60-month depreciation for rehabilitation expenses was allowed, the 162/3 years start when the rehabilitated property is placed in service. 1040ez instructions You chose the alternate ACRS method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. 1040ez instructions The property was residential rental property or nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made); you held it longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. 1040ez instructions These properties are depreciated using the straight line method. 1040ez instructions In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction. 1040ez instructions Depreciation taken by other taxpayers or on other property. 1040ez instructions   Additional depreciation includes all depreciation adjustments to the basis of section 1250 property whether allowed to you or another person (as carryover basis property). 1040ez instructions Example. 1040ez instructions Larry Johnson gives his son section 1250 property on which he took $2,000 in depreciation deductions, of which $500 is additional depreciation. 1040ez instructions Immediately after the gift, the son's adjusted basis in the property is the same as his father's and reflects the $500 additional depreciation. 1040ez instructions On January 1 of the next year, after taking depreciation deductions of $1,000 on the property, of which $200 is additional depreciation, the son sells the property. 1040ez instructions At the time of sale, the additional depreciation is $700 ($500 allowed the father plus $200 allowed the son). 1040ez instructions Depreciation allowed or allowable. 1040ez instructions   The greater of depreciation allowed or allowable (to any person who held the property if the depreciation was used in figuring its adjusted basis in your hands) generally is the amount to use in figuring the part of the gain to be reported as ordinary income. 1040ez instructions If you can show that the deduction allowed for any tax year was less than the amount allowable, the lesser figure will be the depreciation adjustment for figuring additional depreciation. 1040ez instructions Retired or demolished property. 1040ez instructions   The adjustments reflected in adjusted basis generally do not include deductions for depreciation on retired or demolished parts of section 1250 property unless these deductions are reflected in the basis of replacement property that is section 1250 property. 1040ez instructions Example. 1040ez instructions A wing of your building is totally destroyed by fire. 1040ez instructions The depreciation adjustments figured in the adjusted basis of the building after the wing is destroyed do not include any deductions for depreciation on the destroyed wing unless it is replaced and the adjustments for depreciation on it are reflected in the basis of the replacement property. 1040ez instructions Figuring straight line depreciation. 1040ez instructions   The useful life and salvage value you would have used to figure straight line depreciation are the same as those used under the depreciation method you actually used. 1040ez instructions If you did not use a useful life under the depreciation method actually used (such as with the units-of-production method) or if you did not take salvage value into account (such as with the declining balance method), the useful life or salvage value for figuring what would have been the straight line depreciation is the useful life and salvage value you would have used under the straight line method. 1040ez instructions   Salvage value and useful life are not used for the ACRS method of depreciation. 1040ez instructions Figure straight line depreciation for ACRS real property by using its 15-, 18-, or 19-year recovery period as the property's useful life. 1040ez instructions   The straight line method is applied without any basis reduction for the investment credit. 1040ez instructions Property held by lessee. 1040ez instructions   If a lessee makes a leasehold improvement, the lease period for figuring what would have been the straight line depreciation adjustments includes all renewal periods. 1040ez instructions This inclusion of the renewal periods cannot extend the lease period taken into account to a period that is longer than the remaining useful life of the improvement. 1040ez instructions The same rule applies to the cost of acquiring a lease. 1040ez instructions   The term renewal period means any period for which the lease may be renewed, extended, or continued under an option exercisable by the lessee. 1040ez instructions However, the inclusion of renewal periods cannot extend the lease by more than two-thirds of the period that was the basis on which the actual depreciation adjustments were allowed. 1040ez instructions Applicable Percentage The applicable percentage used to figure the ordinary income because of additional depreciation depends on whether the real property you disposed of is nonresidential real property, residential rental property, or low-income housing. 1040ez instructions The percentages for these types of real property are as follows. 1040ez instructions Nonresidential real property. 1040ez instructions   For real property that is not residential rental property, the applicable percentage for periods after 1969 is 100%. 1040ez instructions For periods before 1970, the percentage is zero and no ordinary income because of additional depreciation before 1970 will result from its disposition. 1040ez instructions Residential rental property. 1040ez instructions   For residential rental property (80% or more of the gross income is from dwelling units) other than low-income housing, the applicable percentage for periods after 1975 is 100%. 1040ez instructions The percentage for periods before 1976 is zero. 1040ez instructions Therefore, no ordinary income because of additional depreciation before 1976 will result from a disposition of residential rental property. 1040ez instructions Low-income housing. 1040ez instructions    Low-income housing includes all the following types of residential rental property. 1040ez instructions Federally assisted housing projects if the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act or housing financed or assisted by direct loan or tax abatement under similar provisions of state or local laws. 1040ez instructions Low-income rental housing for which a depreciation deduction for rehabilitation expenses was allowed. 1040ez instructions Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under provisions of state or local laws that authorize similar subsidies for low-income families. 1040ez instructions Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. 1040ez instructions   The applicable percentage for low-income housing is 100% minus 1% for each full month the property was held over 100 full months. 1040ez instructions If you have held low-income housing at least 16 years and 8 months, the percentage is zero and no ordinary income will result from its disposition. 1040ez instructions Foreclosure. 1040ez instructions   If low-income housing is disposed of because of foreclosure or similar proceedings, the monthly applicable percentage reduction is figured as if you disposed of the property on the starting date of the proceedings. 1040ez instructions Example. 1040ez instructions On June 1, 2001, you acquired low-income housing property. 1040ez instructions On April 3, 2012 (130 months after the property was acquired), foreclosure proceedings were started on the property and on December 3, 2013 (150 months after the property was acquired), the property was disposed of as a result of the foreclosure proceedings. 1040ez instructions The property qualifies for a reduced applicable percentage because it was held more than 100 full months. 1040ez instructions The applicable percentage reduction is 30% (130 months minus 100 months) rather than 50% (150 months minus 100 months) because it does not apply after April 3, 2012, the starting date of the foreclosure proceedings. 1040ez instructions Therefore, 70% of the additional depreciation is treated as ordinary income. 1040ez instructions Holding period. 1040ez instructions   The holding period used to figure the applicable percentage for low-income housing generally starts on the day after you acquired it. 1040ez instructions For example, if you bought low-income housing on January 1, 1997, the holding period starts on January 2, 1997. 1040ez instructions If you sold it on January 2, 2013, the holding period is exactly 192 full months. 1040ez instructions The applicable percentage for additional depreciation is 8%, or 100% minus 1% for each full month the property was held over 100 full months. 1040ez instructions Holding period for constructed, reconstructed, or erected property. 1040ez instructions   The holding period used to figure the applicable percentage for low-income housing you constructed, reconstructed, or erected starts on the first day of the month it is placed in service in a trade or business, in an activity for the production of income, or in a personal activity. 1040ez instructions Property acquired by gift or received in a tax-free transfer. 1040ez instructions   For low-income housing you acquired by gift or in a tax-free transfer the basis of which is figured by reference to the basis in the hands of the transferor, the holding period for the applicable percentage includes the holding period of the transferor. 1040ez instructions   If the adjusted basis of the property in your hands just after acquiring it is more than its adjusted basis to the transferor just before transferring it, the holding period of the difference is figured as if it were a separate improvement. 1040ez instructions See Low-Income Housing With Two or More Elements, next. 1040ez instructions Low-Income Housing With Two or More Elements If you dispose of low-income housing property that has two or more separate elements, the applicable percentage used to figure ordinary income because of additional depreciation may be different for each element. 1040ez instructions The gain to be reported as ordinary income is the sum of the ordinary income figured for each element. 1040ez instructions The following are the types of separate elements. 1040ez instructions A separate improvement (defined below). 1040ez instructions The basic section 1250 property plus improvements not qualifying as separate improvements. 1040ez instructions The units placed in service at different times before all the section 1250 property is finished. 1040ez instructions For example, this happens when a taxpayer builds an apartment building of 100 units and places 30 units in service (available for renting) on January 4, 2011, 50 on July 18, 2011, and the remaining 20 on January 18, 2012. 1040ez instructions As a result, the apartment house consists of three separate elements. 1040ez instructions The 36-month test for separate improvements. 1040ez instructions   A separate improvement is any improvement (qualifying under The 1-year test, below) added to the capital account of the property, but only if the total of the improvements during the 36-month period ending on the last day of any tax year is more than the greatest of the following amounts. 1040ez instructions Twenty-five percent of the adjusted basis of the property at the start of the first day of the 36-month period, or the first day of the holding period of the property, whichever is later. 1040ez instructions Ten percent of the unadjusted basis (adjusted basis plus depreciation and amortization adjustments) of the property at the start of the period determined in (1). 1040ez instructions $5,000. 1040ez instructions The 1-year test. 1040ez instructions   An addition to the capital account for any tax year (including a short tax year) is treated as an improvement only if the sum of all additions for the year is more than the greater of $2,000 or 1% of the unadjusted basis of the property. 1040ez instructions The unadjusted basis is figured as of the start of that tax year or the holding period of the property, whichever is later. 1040ez instructions In applying the 36-month test, improvements in any one of the 3 years are omitted entirely if the total improvements in that year do not qualify under the 1-year test. 1040ez instructions Example. 1040ez instructions The unadjusted basis of a calendar year taxpayer's property was $300,000 on January 1 of this year. 1040ez instructions During the year, the taxpayer made improvements A, B, and C, which cost $1,000, $600, and $700, respectively. 1040ez instructions The sum of the improvements, $2,300, is less than 1% of the unadjusted basis ($3,000), so the improvements do not satisfy the 1-year test and are not treated as improvements for the 36-month test. 1040ez instructions However, if improvement C had cost $1,500, the sum of these improvements would have been $3,100. 1040ez instructions Then, it would be necessary to apply the 36-month test to figure if the improvements must be treated as separate improvements. 1040ez instructions Addition to the capital account. 1040ez instructions   Any addition to the capital account made after the initial acquisition or completion of the property by you or any person who held the property during a period included in your holding period is to be considered when figuring the total amount of separate improvements. 1040ez instructions   The addition to the capital account of depreciable real property is the gross addition not reduced by amounts attributable to replaced property. 1040ez instructions For example, if a roof with an adjusted basis of $20,000 is replaced by a new roof costing $50,000, the improvement is the gross addition to the account, $50,000, and not the net addition of $30,000. 1040ez instructions The $20,000 adjusted basis of the old roof is no longer reflected in the basis of the property. 1040ez instructions The status of an addition to the capital account is not affected by whether it is treated as a separate property for determining depreciation deductions. 1040ez instructions   Whether an expense is treated as an addition to the capital account may depend on the final disposition of the entire property. 1040ez instructions If the expense item property and the basic property are sold in two separate transactions, the entire section 1250 property is treated as consisting of two distinct properties. 1040ez instructions Unadjusted basis. 1040ez instructions   In figuring the unadjusted basis as of a certain date, include the actual cost of all previous additions to the capital account plus those that did not qualify as separate improvements. 1040ez instructions However, the cost of components retired before that date is not included in the unadjusted basis. 1040ez instructions Holding period. 1040ez instructions   Use the following guidelines for figuring the applicable percentage for property with two or more elements. 1040ez instructions The holding period of a separate element placed in service before the entire section 1250 property is finished starts on the first day of the month that the separate element is placed in service. 1040ez instructions The holding period for each separate improvement qualifying as a separate element starts on the day after the improvement is acquired or, for improvements constructed, reconstructed, or erected, the first day of the month that the improvement is placed in service. 1040ez instructions The holding period for each improvement not qualifying as a separate element takes the holding period of the basic property. 1040ez instructions   If an improvement by itself does not meet the 1-year test (greater of $2,000 or 1% of the unadjusted basis), but it does qualify as a separate improvement that is a separate element (when grouped with other improvements made during the tax year), determine the start of its holding period as follows. 1040ez instructions Use the first day of a calendar month that is closest to the middle of the tax year. 1040ez instructions If there are two first days of a month that are equally close to the middle of the year, use the earlier date. 1040ez instructions Figuring ordinary income attributable to each separate element. 1040ez instructions   Figure ordinary income attributable to each separate element as follows. 1040ez instructions   Step 1. 1040ez instructions Divide the element's additional depreciation after 1975 by the sum of all the elements' additional depreciation after 1975 to determine the percentage used in Step 2. 1040ez instructions   Step 2. 1040ez instructions Multiply the percentage figured in Step 1 by the lesser of the additional depreciation after 1975 for the entire property or the gain from disposition of the entire property (the difference between the fair market value or amount realized and the adjusted basis). 1040ez instructions   Step 3. 1040ez instructions Multiply the result in Step 2 by the applicable percentage for the element. 1040ez instructions Example. 1040ez instructions You sold at a gain of $25,000 low-income housing property subject to the ordinary income rules of section 1250. 1040ez instructions The property consisted of four elements (W, X, Y, and Z). 1040ez instructions Step 1. 1040ez instructions The additional depreciation for each element is: W-$12,000; X-None; Y-$6,000; and Z-$6,000. 1040ez instructions The sum of the additional depreciation for all the elements is $24,000. 1040ez instructions Step 2. 1040ez instructions The depreciation deducted on element X was $4,000 less than it would have been under the straight line method. 1040ez instructions Additional depreciation on the property as a whole is $20,000 ($24,000 − $4,000). 1040ez instructions $20,000 is lower than the $25,000 gain on the sale, so $20,000 is used in Step 2. 1040ez instructions Step 3. 1040ez instructions The applicable percentages to be used in Step 3 for the elements are: W-68%; X-85%; Y-92%; and Z-100%. 1040ez instructions From these facts, the sum of the ordinary income for each element is figured as follows. 1040ez instructions   Step 1 Step 2 Step 3 Ordinary Income W . 1040ez instructions 50 $10,000 68% $ 6,800 X -0- -0- 85% -0- Y . 1040ez instructions 25 5,000 92% 4,600 Z . 1040ez instructions 25 5,000 100% 5,000 Sum of ordinary income of separate elements $16,400 Gain Treated as Ordinary Income To find what part of the gain from the disposition of section 1250 property is treated as ordinary income, follow these steps. 1040ez instructions In a sale, exchange, or involuntary conversion of the property, figure the amount realized that is more than the adjusted basis of the property. 1040ez instructions In any other disposition of the property, figure the fair market value that is more than the adjusted basis. 1040ez instructions Figure the additional depreciation for the periods after 1975. 1040ez instructions Multiply the lesser of (1) or (2) by the applicable percentage, discussed earlier under Applicable Percentage. 1040ez instructions Stop here if this is residential rental property or if (2) is equal to or more than (1). 1040ez instructions This is the gain treated as ordinary income because of additional depreciation. 1040ez instructions Subtract (2) from (1). 1040ez instructions Figure the additional depreciation for periods after 1969 but before 1976. 1040ez instructions Add the lesser of (4) or (5) to the result in (3). 1040ez instructions This is the gain treated as ordinary income because of additional depreciation. 1040ez instructions A limit on the amount treated as ordinary income for gain on like-kind exchanges and involuntary conversions is explained later. 1040ez instructions Use Form 4797, Part III, to figure the ordinary income part of the gain. 1040ez instructions Corporations. 1040ez instructions   Corporations, other than S corporations, must recognize an additional amount as ordinary income on the sale or other disposition of section 1250 property. 1040ez instructions The additional amount treated as ordinary income is 20% of the excess of the amount that would have been ordinary income if the property were section 1245 property over the amount treated as ordinary income under section 1250. 1040ez instructions Report this additional ordinary income on Form 4797, Part III, line 26 (f). 1040ez instructions Installment Sales If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. 1040ez instructions This applies even if no payments are received in that year. 1040ez instructions If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. 1040ez instructions For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. 1040ez instructions If you dispose of more than one asset in a single transaction, you must figure the gain on each asset separately so that it may be properly reported. 1040ez instructions To do this, allocate the selling price and the payments you receive in the year of sale to each asset. 1040ez instructions Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. 1040ez instructions For a detailed discussion of installment sales, see Publication 537. 1040ez instructions Gifts If you make a gift of depreciable personal property or real property, you do not have to report income on the transaction. 1040ez instructions However, if the person who receives it (donee) sells or otherwise disposes of the property in a disposition subject to recapture, the donee must take into account the depreciation you deducted in figuring the gain to be reported as ordinary income. 1040ez instructions For low-income housing, the donee must take into account the donor's holding period to figure the applicable percentage. 1040ez instructions See Applicable Percentage and its discussion Holding period under Section 1250 Property, earlier. 1040ez instructions Part gift and part sale or exchange. 1040ez instructions   If you transfer depreciable personal property or real property for less than its fair market value in a transaction considered to be partly a gift and partly a sale or exchange and you have a gain because the amount realized is more than your adjusted basis, you must report ordinary income (up to the amount of gain) to recapture depreciation. 1040ez instructions If the depreciation (additional depreciation, if section 1250 property) is more than the gain, the balance is carried over to the transferee to be taken into account on any later disposition of the property. 1040ez instructions However, see Bargain sale to charity, later. 1040ez instructions Example. 1040ez instructions You transferred depreciable personal property to your son for $20,000. 1040ez instructions When transferred, the property had an adjusted basis to you of $10,000 and a fair market value of $40,000. 1040ez instructions You took depreciation of $30,000. 1040ez instructions You are considered to have made a gift of $20,000, the difference between the $40,000 fair market value and the $20,000 sale price to your son. 1040ez instructions You have a taxable gain on the transfer of $10,000 ($20,000 sale price minus $10,000 adjusted basis) that must be reported as ordinary income from depreciation. 1040ez instructions You report $10,000 of your $30,000 depreciation as ordinary income on the transfer of the property, so the remaining $20,000 depreciation is carried over to your son for him to take into account on any later disposition of the property. 1040ez instructions Gift to charitable organization. 1040ez instructions   If you give property to a charitable organization, you figure your deduction for your charitable contribution by reducing the fair market value of the property by the ordinary income and short-term capital gain that would have resulted had you sold the property at its fair market value at the time of the contribution. 1040ez instructions Thus, your deduction for depreciable real or personal property given to a charitable organization does not include the potential ordinary gain from depreciation. 1040ez instructions   You also may have to reduce the fair market value of the contributed property by the long-term capital gain (including any section 1231 gain) that would have resulted had the property been sold. 1040ez instructions For more information, see Giving Property That Has Increased in Value in Publication 526. 1040ez instructions Bargain sale to charity. 1040ez instructions   If you transfer section 1245 or section 1250 property to a charitable organization for less than its fair market value and a deduction for the contribution part of the transfer is allowable, your ordinary income from depreciation is figured under different rules. 1040ez instructions First, figure the ordinary income as if you had sold the property at its fair market value. 1040ez instructions Then, allocate that amount between the sale and the contribution parts of the transfer in the same proportion that you allocated your adjusted basis in the property to figure your gain. 1040ez instructions See Bargain Sale under Gain or Loss From Sales and Exchanges in chapter 1. 1040ez instructions Report as ordinary income the lesser of the ordinary income allocated to the sale or your gain from the sale. 1040ez instructions Example. 1040ez instructions You sold section 1245 property in a bargain sale to a charitable organization and are allowed a deduction for your contribution. 1040ez instructions Your gain on the sale was $1,200, figured by allocating 20% of your adjusted basis in the property to the part sold. 1040ez instructions If you had sold the property at its fair market value, your ordinary income would have been $5,000. 1040ez instructions Your ordinary income is $1,000 ($5,000 × 20%) and your section 1231 gain is $200 ($1,200 – $1,000). 1040ez instructions Transfers at Death When a taxpayer dies, no gain is reported on depreciable personal property or real property transferred to his or her estate or beneficiary. 1040ez instructions For information on the tax liability of a decedent, see Publication 559, Survivors, Executors, and Administrators. 1040ez instructions However, if the decedent disposed of the property while alive and, because of his or her method of accounting or for any other reason, the gain from the disposition is reportable by the estate or beneficiary, it must be reported in the same way the decedent would have had to report it if he or she were still alive. 1040ez instructions Ordinary income due to depreciation must be reported on a transfer from an executor, administrator, or trustee to an heir, beneficiary, or other individual if the transfer is a sale or exchange on which gain is realized. 1040ez instructions Example 1. 1040ez instructions Janet Smith owned depreciable property that, upon her death, was inherited by her son. 1040ez instructions No ordinary income from depreciation is reportable on the transfer, even though the value used for estate tax purposes is more than the adjusted basis of the property to Janet when she died. 1040ez instructions However, if she sold the property before her death and realized a gain and if, because of her method of accounting, the proceeds from the sale are income in respect of a decedent reportable by her son, he must report ordinary income from depreciation. 1040ez instructions Example 2. 1040ez instructions The trustee of a trust created by a will transfers depreciable property to a beneficiary in satisfaction of a specific bequest of $10,000. 1040ez instructions If the property had a value of $9,000 at the date used for estate tax valuation purposes, the $1,000 increase in value to the date of distribution is a gain realized by the trust. 1040ez instructions Ordinary income from depreciation must be reported by the trust on the transfer. 1040ez instructions Like-Kind Exchanges and Involuntary Conversions A like-kind exchange of your depreciable property or an involuntary conversion of the property into similar or related property will not result in your having to report ordinary income from depreciation unless money or property other than like-kind, similar, or related property is also received in the transaction. 1040ez instructions For information on like-kind exchanges and involuntary conversions, see chapter 1. 1040ez instructions Depreciable personal property. 1040ez instructions   If you have a gain from either a like-kind exchange or an involuntary conversion of your depreciable personal property, the amount to be reported as ordinary income from depreciation is the amount figured under the rules explained earlier (see Section 1245 Property), limited to the sum of the following amounts. 1040ez instructions The gain that must be included in income under the rules for like-kind exchanges or involuntary conversions. 1040ez instructions The fair market value of the like-kind, similar, or related property other than depreciable personal property acquired in the transaction. 1040ez instructions Example 1. 1040ez instructions You bought a new machine for $4,300 cash plus your old machine for which you were allowed a $1,360 trade-in. 1040ez instructions The old machine cost you $5,000 two years ago. 1040ez instructions You took depreciation deductions of $3,950. 1040ez instructions Even though you deducted depreciation of $3,950, the $310 gain ($1,360 trade-in allowance minus $1,050 adjusted basis) is not reported because it is postponed under the rules for like-kind exchanges and you received only depreciable personal property in the exchange. 1040ez instructions Example 2. 1040ez instructions You bought office machinery for $1,500 two years ago and deducted $780 depreciation. 1040ez instructions This year a fire destroyed the machinery and you received $1,200 from your fire insurance, realizing a gain of $480 ($1,200 − $720 adjusted basis). 1040ez instructions You choose to postpone reporting gain, but replacement machinery cost you only $1,000. 1040ez instructions Your taxable gain under the rules for involuntary conversions is limited to the remaining $200 insurance payment. 1040ez instructions All your replacement property is depreciable personal property, so your ordinary income from depreciation is limited to $200. 1040ez instructions Example 3. 1040ez instructions A fire destroyed office machinery you bought for $116,000. 1040ez instructions The depreciation deductions were $91,640 and the machinery had an adjusted basis of $24,360. 1040ez instructions You received a $117,000 insurance payment, realizing a gain of $92,640. 1040ez instructions You immediately spent $105,000 of the insurance payment for replacement machinery and $9,000 for stock that qualifies as replacement property and you choose to postpone reporting the gain. 1040ez instructions $114,000 of the $117,000 insurance payment was used to buy replacement property, so the gain that must be included in income under the rules for involuntary conversions is the part not spent, or $3,000. 1040ez instructions The part of the insurance payment ($9,000) used to buy the nondepreciable property (the stock) also must be included in figuring the gain from depreciation. 1040ez instructions The amount you must report as ordinary income on the transaction is $12,000, figured as follows. 1040ez instructions 1) Gain realized on the transaction ($92,640) limited to depreciation ($91,640) $91,640 2) Gain includible in income (amount not spent) 3,000     Plus: fair market value of property other than depreciable personal property (the stock) 9,000 12,000 Amount reportable as ordinary income (lesser of (1) or (2)) $12,000   If, instead of buying $9,000 in stock, you bought $9,000 worth of depreciable personal property similar or related in use to the destroyed property, you would only report $3,000 as ordinary income. 1040ez instructions Depreciable real property. 1040ez instructions   If you have a gain from either a like-kind exchange or involuntary conversion of your depreciable real property, ordinary income from additional depreciation is figured under the rules explained earlier (see Section 1250 Property), limited to the greater of the following amounts. 1040ez instructions The gain that must be reported under the rules for like-kind exchanges or involuntary conversions plus the fair market value of stock bought as replacement property in acquiring control of a corporation. 1040ez instructions The gain you would have had to report as ordinary income from additional depreciation had the transaction been a cash sale minus the cost (or fair market value in an exchange) of the depreciable real property acquired. 1040ez instructions   The ordinary income not reported for the year of the disposition is carried over to the depreciable real property acquired in the like-kind exchange or involuntary conversion as additional depreciation from the property disposed of. 1040ez instructions Further, to figure the applicable percentage of additional depreciation to be treated as ordinary income, the holding period starts over for the new property. 1040ez instructions Example. 1040ez instructions The state paid you $116,000 when it condemned your depreciable real property for public use. 1040ez instructions You bought other real property similar in use to the property condemned for $110,000 ($15,000 for depreciable real property and $95,000 for land). 1040ez instructions You also bought stock for $5,000 to get control of a corporation owning property similar in use to the property condemned. 1040ez instructions You choose to postpone reporting the gain. 1040ez instructions If the transaction had been a sale for cash only, under the rules described earlier, $20,000 would have been reportable as ordinary income because of additional depreciation. 1040ez instructions The ordinary income to be reported is $6,000, which is the greater of the following amounts. 1040ez instructions The gain that must be reported under the rules for involuntary conversions, $1,000 ($116,000 − $115,000) plus the fair market value of stock bought as qualified replacement property, $5,000, for a total of $6,000. 1040ez instructions The gain you would have had to report as ordinary income from additional depreciation ($20,000) had this transaction been a cash sale minus the cost of the depreciable real property bought ($15,000), or $5,000. 1040ez instructions   The ordinary income not reported, $14,000 ($20,000 − $6,000), is carried over to the depreciable real property you bought as additional depreciation. 1040ez instructions Basis of property acquired. 1040ez instructions   If the ordinary income you have to report because of additional depreciation is limited, the total basis of the property you acquired is its fair market value (its cost, if bought to replace property involuntarily converted into money) minus the gain postponed. 1040ez instructions   If you acquired more than one item of property, allocate the total basis among the properties in proportion to their fair market value (their cost, in an involuntary conversion into money). 1040ez instructions However, if you acquired both depreciable real property and other property, allocate the total basis as follows. 1040ez instructions Subtract the ordinary income because of additional depreciation that you do not have to report from the fair market value (or cost) of the depreciable real property acquired. 1040ez instructions Add the fair market value (or cost) of the other property acquired to the result in (1). 1040ez instructions Divide the result in (1) by the result in (2). 1040ez instructions Multiply the total basis by the result in (3). 1040ez instructions This is the basis of the depreciable real property acquired. 1040ez instructions If you acquired more than one item of depreciable real property, allocate this basis amount among the properties in proportion to their fair market value (or cost). 1040ez instructions Subtract the result in (4) from the total basis. 1040ez instructions This is the basis of the other property acquired. 1040ez instructions If you acquired more than one item of other property, allocate this basis amount among the properties in proportion to their fair market value (or cost). 1040ez instructions Example 1. 1040ez instructions In 1988, low-income housing property that you acquired and placed in service in 1983 was destroyed by fire and you received a $90,000 insurance payment. 1040ez instructions The property's adjusted basis was $38,400, with additional depreciation of $14,932. 1040ez instructions On December 1, 1988, you used the insurance payment to acquire and place in service replacement low-income housing property. 1040ez instructions Your realized gain from the involuntary conversion was $51,600 ($90,000 − $38,400). 1040ez instructions You chose to postpone reporting the gain under the involuntary conversion rules. 1040ez instructions Under the rules for depreciation recapture on real property, the ordinary gain was $14,932, but you did not have to report any of it because of the limit for involuntary conversions. 1040ez instructions The basis of the replacement low-income housing property was its $90,000 cost minus the $51,600 gain you postponed, or $38,400. 1040ez instructions The $14,932 ordinary gain you did not report is treated as additional depreciation on the replacement property. 1040ez instructions If you sold the property in 2013, your holding period for figuring the applicable percentage of additional depreciation to report as ordinary income will have begun December 2, 1988, the day after you acquired the property. 1040ez instructions Example 2. 1040ez instructions John Adams received a $90,000 fire insurance payment for depreciable real property (office building) with an adjusted basis of $30,000. 1040ez instructions He uses the whole payment to buy property similar in use, spending $42,000 for depreciable real property and $48,000 for land. 1040ez instructions He chooses to postpone reporting the $60,000 gain realized on the involuntary conversion. 1040ez instructions Of this gain, $10,000 is ordinary income from additional depreciation but is not reported because of the limit for involuntary conversions of depreciable real property. 1040ez instructions The basis of the property bought is $30,000 ($90,000 − $60,000), allocated as follows. 1040ez instructions The $42,000 cost of depreciable real property minus $10,000 ordinary income not reported is $32,000. 1040ez instructions The $48,000 cost of other property (land) plus the $32,000 figured in (1) is $80,000. 1040ez instructions The $32,000 figured in (1) divided by the $80,000 figured in (2) is 0. 1040ez instructions 4. 1040ez instructions The basis of the depreciable real property is $12,000. 1040ez instructions This is the $30,000 total basis multiplied by the 0. 1040ez instructions 4 figured in (3). 1040ez instructions The basis of the other property (land) is $18,000. 1040ez instructions This is the $30,000 total basis minus the $12,000 figured in (4). 1040ez instructions The ordinary income that is not reported ($10,000) is carried over as additional depreciation to the depreciable real property that was bought and may be taxed as ordinary income on a later disposition. 1040ez instructions Multiple Properties If you dispose of depreciable property and other property in one transaction and realize a gain, you must allocate the amount realized between the two types of property in proportion to their respective fair market values to figure the part of your gain to be reported as ordinary income from depreciation. 1040ez instructions Different rules may apply to the allocation of the amount realized on the sale of a business that includes a group of assets. 1040ez instructions See chapter 2. 1040ez instructions In general, if a buyer and seller have adverse interests as to the allocation of the amount realized between the depreciable property and other property, any arm's length agreement between them will establish the allocation. 1040ez instructions In the absence of an agreement, the allocation should be made by taking into account the appropriate facts and circumstances. 1040ez instructions These include, but are not limited to, a comparison between the depreciable property and all the other property being disposed of in the transaction. 1040ez instructions The comparison should take into account all the following facts and circumstances. 1040ez instructions The original cost and reproduction cost of construction, erection, or production. 1040ez instructions The remaining economic useful life. 1040ez instructions The state of obsolescence. 1040ez instructions The anticipated expenditures required to maintain, renovate, or modernize the properties. 1040ez instructions Like-kind exchanges and involuntary conversions. 1040ez instructions   If you dispose of and acquire depreciable personal property and other property (other than depreciable real property) in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. 1040ez instructions The amount allocated to the depreciable personal property disposed of is treated as consisting of, first, the fair market value of the depreciable personal property acquired and, second (to the extent of any remaining balance), the fair market value of the other property acquired. 1040ez instructions The amount allocated to the other property disposed of is treated as consisting of the fair market value of all property acquired that has not already been taken into account. 1040ez instructions   If you dispose of and acquire depreciable real property and other property in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. 1040ez instructions The amount allocated to each of the three types of property (depreciable real property, depreciable personal property, or other property) disposed of is treated as consisting of, first, the fair market value of that type of property acquired and, second (to the extent of any remaining balance), any excess fair market value of the other types of property acquired. 1040ez instructions If the excess fair market value is more than the remaining balance of the amount realized and is from both of the other two types of property, you can apply the unallocated amount in any manner you choose. 1040ez instructions Example. 1040ez instructions A fire destroyed your property with a total fair market value of $50,000. 1040ez instructions It consisted of machinery worth $30,000 and nondepreciable property worth $20,000. 1040ez instructions You received an insurance payment of $40,000 and immediately used it with $10,000 of your own funds (for a total of $50,000) to buy machinery with a fair market value of $15,000 and nondepreciable property with a fair market value of $35,000. 1040ez instructions The adjusted basis of the destroyed machinery was $5,000 and your depreciation on it was $35,000. 1040ez instructions You choose to postpone reporting your gain from the involuntary conversion. 1040ez instructions You must report $9,000 as ordinary income from depreciation arising from this transaction, figured as follows. 1040ez instructions The $40,000 insurance payment must be allocated between the machinery and the other property destroyed in proportion to the fair market value of each. 1040ez instructions The amount allocated to the machinery is 30,000/50,000 × $40,000, or $24,000. 1040ez instructions The amount allocated to the other property is 20,000/50,000 × $40,000, or $16,000. 1040ez instructions Your gain on the involuntary conversion of the machinery is $24,000 minus $5,000 adjusted basis, or $19,000. 1040ez instructions The $24,000 allocated to the machinery disposed of is treated as consisting of the $15,000 fair market value of the replacement machinery bought and $9,000 of the fair market value of other property bought in the transaction. 1040ez instructions All $16,000 allocated to the other property disposed of is treated as consisting of the fair market value of the other property that was bought. 1040ez instructions Your potential ordinary income from depreciation is $19,000, the gain on the machinery, because it is less than the $35,000 depreciation. 1040ez instructions However, the amount you must report as ordinary income is limited to the $9,000 included in the amount realized for the machinery that represents the fair market value of property other than the depreciable property you bought. 1040ez instructions Prev  Up  Next   Home   More Online Publications
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Closing a Business

There is more involved in closing your business than just locking the doors. This section provides procedures for getting out of business, including what forms to file and how to handle additional revenue received or expenses you may incur.

Page Last Reviewed or Updated: 04-Sep-2013

The 1040ez Instructions

1040ez instructions 4. 1040ez instructions   Figuring Depreciation Under MACRS Table of Contents Introduction Useful Items - You may want to see: Which Depreciation System (GDS or ADS) Applies? Which Property Class Applies Under GDS?Rent-to-own dealer. 1040ez instructions Rent-to-own contract. 1040ez instructions What Is the Placed in Service Date? What Is the Basis for Depreciation? Which Recovery Period Applies?Recovery Periods Under GDS Recovery Periods Under ADS Additions and Improvements Which Convention Applies? Which Depreciation Method Applies?Depreciation Methods for Farm Property Electing a Different Method How Is the Depreciation Deduction Figured?Using the MACRS Percentage Tables Figuring the Deduction Without Using the Tables Figuring the Deduction for Property Acquired in a Nontaxable Exchange Figuring the Deduction for a Short Tax Year How Do You Use General Asset Accounts?Grouping Property Figuring Depreciation for a GAA Disposing of GAA Property Terminating GAA Treatment Electing To Use a GAA When Do You Recapture MACRS Depreciation? Introduction The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. 1040ez instructions MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). 1040ez instructions Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. 1040ez instructions To be sure you can use MACRS to figure depreciation for your property, see What Method Can You Use To Depreciate Your Property in chapter 1. 1040ez instructions This chapter explains how to determine which MACRS depreciation system applies to your property. 1040ez instructions It also discusses other information you need to know before you can figure depreciation under MACRS. 1040ez instructions This information includes the property's recovery class, placed in service date, and basis, as well as the applicable recovery period, convention, and depreciation method. 1040ez instructions It explains how to use this information to figure your depreciation deduction and how to use a general asset account to depreciate a group of properties. 1040ez instructions Finally, it explains when and how to recapture MACRS depreciation. 1040ez instructions Useful Items - You may want to see: Publication 225 Farmer's Tax Guide 463 Travel, Entertainment, Gift, and Car  Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 587 Business Use of Your Home (Including Use by Daycare Providers) Form (and Instructions) 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 4562 Depreciation and Amortization See chapter 6 for information about getting publications and forms. 1040ez instructions 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. 1040ez instructions You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. 1040ez instructions If you placed your property in service in 2013, complete Part III of Form 4562 to report depreciation using MACRS. 1040ez instructions Complete section B of Part III to report depreciation using GDS, and complete section C of Part III to report depreciation using ADS. 1040ez instructions If you placed your property in service before 2013 and are required to file Form 4562, report depreciation using either GDS or ADS on line 17 in Part III. 1040ez instructions Required use of ADS. 1040ez instructions   You must use ADS for the following property. 1040ez instructions Listed property used 50% or less in a qualified business use. 1040ez instructions See chapter 5 for information on listed property. 1040ez instructions Any tangible property used predominantly outside the United States during the year. 1040ez instructions Any tax-exempt use property. 1040ez instructions Any tax-exempt bond-financed property. 1040ez instructions 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. 1040ez instructions 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. 1040ez instructions If you are required to use ADS to depreciate your property, you cannot claim any special depreciation allowance (discussed in chapter 3) for the property. 1040ez instructions Electing ADS. 1040ez instructions   Although your property may qualify for GDS, you can elect to use ADS. 1040ez instructions The election generally must cover all property in the same property class that you placed in service during the year. 1040ez instructions However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. 1040ez instructions Once you make this election, you can never revoke it. 1040ez instructions   You make the election by completing line 20 in Part III of Form 4562. 1040ez instructions Which Property Class Applies Under GDS? The following is a list of the nine property classifications under GDS and examples of the types of property included in each class. 1040ez instructions These property classes are also listed under column (a) in section B, Part III, of Form 4562. 1040ez instructions For detailed information on property classes, see Appendix B, Table of Class Lives and Recovery Periods, in this publication. 1040ez instructions 3-year property. 1040ez instructions Tractor units for over-the-road use. 1040ez instructions Any race horse over 2 years old when placed in service. 1040ez instructions (All race horses placed in service after December 31, 2008, and before January 1, 2014, are deemed to be 3-year property, regardless of age. 1040ez instructions ) Any other horse (other than a race horse) over 12 years old when placed in service. 1040ez instructions Qualified rent-to-own property (defined later). 1040ez instructions 5-year property. 1040ez instructions Automobiles, taxis, buses, and trucks. 1040ez instructions Computers and peripheral equipment. 1040ez instructions Office machinery (such as typewriters, calculators, and copiers). 1040ez instructions Any property used in research and experimentation. 1040ez instructions Breeding cattle and dairy cattle. 1040ez instructions Appliances, carpets, furniture, etc. 1040ez instructions , used in a residential rental real estate activity. 1040ez instructions Certain geothermal, solar, and wind energy property. 1040ez instructions 7-year property. 1040ez instructions Office furniture and fixtures (such as desks, files, and safes). 1040ez instructions Agricultural machinery and equipment. 1040ez instructions Any property that does not have a class life and has not been designated by law as being in any other class. 1040ez instructions Certain motorsports entertainment complex property (defined later) placed in service before January 1, 2014. 1040ez instructions Any natural gas gathering line placed in service after April 11, 2005. 1040ez instructions See Natural gas gathering line and electric transmission property , later. 1040ez instructions 10-year property. 1040ez instructions Vessels, barges, tugs, and similar water transportation equipment. 1040ez instructions Any single purpose agricultural or horticultural structure. 1040ez instructions Any tree or vine bearing fruits or nuts. 1040ez instructions Qualified small electric meter and qualified smart electric grid system (defined later) placed in service on or after October 3, 2008. 1040ez instructions 15-year property. 1040ez instructions Certain improvements made directly to land or added to it (such as shrubbery, fences, roads, sidewalks, and bridges). 1040ez instructions Any retail motor fuels outlet (defined later), such as a convenience store. 1040ez instructions Any municipal wastewater treatment plant. 1040ez instructions Any qualified leasehold improvement property (defined later) placed in service before January 1, 2014. 1040ez instructions Any qualified restaurant property (defined later) placed in service before January 1, 2014. 1040ez instructions Initial clearing and grading land improvements for gas utility property. 1040ez instructions Electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity placed in service after April 11, 2005. 1040ez instructions See Natural gas gathering line and electric transmission property , later. 1040ez instructions Any natural gas distribution line placed in service after April 11, 2005 and before January 1, 2011. 1040ez instructions Any qualified retail improvement property placed in service before January 1, 2014. 1040ez instructions 20-year property. 1040ez instructions Farm buildings (other than single purpose agricultural or horticultural structures). 1040ez instructions Municipal sewers not classified as 25-year property. 1040ez instructions Initial clearing and grading land improvements for electric utility transmission and distribution plants. 1040ez instructions 25-year property. 1040ez instructions This class is water utility property, which is either of the following. 1040ez instructions Property that is an integral part of the gathering, treatment, or commercial distribution of water, and that, without regard to this provision, would be 20-year property. 1040ez instructions Municipal sewers other than property placed in service under a binding contract in effect at all times since June 9, 1996. 1040ez instructions Residential rental property. 1040ez instructions This is any building or structure, such as a rental home (including a mobile home), if 80% or more of its gross rental income for the tax year is from dwelling units. 1040ez instructions A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. 1040ez instructions It does not include a unit in a hotel, motel, or other establishment where more than half the units are used on a transient basis. 1040ez instructions If you occupy any part of the building or structure for personal use, its gross rental income includes the fair rental value of the part you occupy. 1040ez instructions Nonresidential real property. 1040ez instructions This is section 1250 property, such as an office building, store, or warehouse, that is neither residential rental property nor property with a class life of less than 27. 1040ez instructions 5 years. 1040ez instructions Qualified rent-to-own property. 1040ez instructions   Qualified rent-to-own property is property held by a rent-to-own dealer for purposes of being subject to a rent-to-own contract. 1040ez instructions It is tangible personal property generally used in the home for personal use. 1040ez instructions It includes computers and peripheral equipment, televisions, videocassette recorders, stereos, camcorders, appliances, furniture, washing machines and dryers, refrigerators, and other similar consumer durable property. 1040ez instructions Consumer durable property does not include real property, aircraft, boats, motor vehicles, or trailers. 1040ez instructions   If some of the property you rent to others under a rent-to-own agreement is of a type that may be used by the renters for either personal or business purposes, you still can treat this property as qualified property as long as it does not represent a significant portion of your leasing property. 1040ez instructions However, if this dual-use property does represent a significant portion of your leasing property, you must prove that this property is qualified rent-to-own property. 1040ez instructions Rent-to-own dealer. 1040ez instructions   You are a rent-to-own dealer if you meet all the following requirements. 1040ez instructions You regularly enter into rent-to-own contracts (defined below) in the ordinary course of your business for the use of consumer property. 1040ez instructions A substantial portion of these contracts end with the customer returning the property before making all the payments required to transfer ownership. 1040ez instructions The property is tangible personal property of a type generally used within the home for personal use. 1040ez instructions Rent-to-own contract. 1040ez instructions   This is any lease for the use of consumer property between a rent-to-own dealer and a customer who is an individual which— Is titled “Rent-to-Own Agreement,” “Lease Agreement with Ownership Option,” or other similar language. 1040ez instructions Provides a beginning date and a maximum period of time, not to exceed 156 weeks or 36 months from the beginning date, for which the contract can be in effect (including renewals or options to extend). 1040ez instructions Provides for regular periodic (weekly or monthly) payments that can be either level or decreasing. 1040ez instructions If the payments are decreasing, no payment can be less than 40% of the largest payment. 1040ez instructions Provides for total payments that generally exceed the normal retail price of the property plus interest. 1040ez instructions Provides for total payments that do not exceed $10,000 for each item of property. 1040ez instructions Provides that the customer has no legal obligation to make all payments outlined in the contract and that, at the end of each weekly or monthly payment period, the customer can either continue to use the property by making the next payment or return the property in good working order with no further obligations and no entitlement to a return of any prior payments. 1040ez instructions Provides that legal title to the property remains with the rent-to-own dealer until the customer makes either all the required payments or the early purchase payments required under the contract to acquire legal title. 1040ez instructions Provides that the customer has no right to sell, sublease, mortgage, pawn, pledge, or otherwise dispose of the property until all contract payments have been made. 1040ez instructions Motorsports entertainment complex. 1040ez instructions   This is a racing track facility permanently situated on land that hosts one or more racing events for automobiles, trucks, or motorcycles during the 36-month period after the first day of the month in which the facility is placed in service. 1040ez instructions The events must be open to the public for the price of admission. 1040ez instructions Qualified smart electric grid system. 1040ez instructions   A qualified smart electric grid system means any smart grid property used as part of a system for electric distribution grid communications, monitoring, and management placed in service after October 3, 2008, by a taxpayer who is a supplier of electrical energy or a provider of electrical energy services. 1040ez instructions Smart grid property includes electronics and related equipment that is capable of: Sensing, collecting, and monitoring data of or from all portions of a utility's electric distribution grid, Providing real-time, two-way communications to monitor or to manage the grid, and Providing real-time analysis of an event prediction based on collected data that can be used to provide electric distribution system reliability, quality, and performance. 1040ez instructions Retail motor fuels outlet. 1040ez instructions   Real property is a retail motor fuels outlet if it is used to a substantial extent in the retail marketing of petroleum or petroleum products (whether or not it is also used to sell food or other convenience items) and meets any one of the following three tests. 1040ez instructions It is not larger than 1,400 square feet. 1040ez instructions 50% or more of the gross revenues generated from the property are derived from petroleum sales. 1040ez instructions 50% or more of the floor space in the property is devoted to petroleum marketing sales. 1040ez instructions A retail motor fuels outlet does not include any facility related to petroleum and natural gas trunk pipelines. 1040ez instructions Qualified leasehold improvement property. 1040ez instructions    Generally, this is any improvement to an interior part of a building (placed in service before January 1, 2014) that is nonresidential real property, provided all of the requirements discussed in chapter 3 under Qualified leasehold improvement property are met. 1040ez instructions   In addition, an improvement made by the lessor does not qualify as qualified leasehold improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor's death or in any of the following types of transactions. 1040ez instructions A transaction to which section 381(a) applies, A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business, A like-kind exchange, involuntary conversion, or reacquisition of real property to the extent that the basis in the property represents the carryover basis, or Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor's or distributor's basis in the property. 1040ez instructions Examples include the following. 1040ez instructions A complete liquidation of a subsidiary. 1040ez instructions A transfer to a corporation controlled by the transferor. 1040ez instructions An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. 1040ez instructions Qualified restaurant property. 1040ez instructions   Qualified restaurant property is any section 1250 property that is a building placed in service after December 31, 2008, and before January 1, 2014. 1040ez instructions Also, more than 50% of the building's square footage must be devoted to preparation of meals and seating for on-premises consumption of prepared meals. 1040ez instructions Qualified smart electric meter. 1040ez instructions   A qualified smart electric meter is any time-based meter and related communication equipment which is placed in service by a supplier of electric energy or a provider of electric energy services and which is capable of being used by you as part of a system that: Measures and records electricity usage data on a time-differentiated basis in at least 24 separate time segments per day; Provides for the exchange of information between the supplier or provider and the customer's smart electric meter in support of time-based rates or other forms of demand response; Provides data to the supplier or provider so that the supplier or provider can provide energy usage information to customers electronically, and Provides all commercial and residential customers of such supplier or provider with net metering. 1040ez instructions Net metering means allowing a customer a credit, if any, as complies with applicable federal and state laws and regulations for providing electricity to the supplier or provider. 1040ez instructions Natural gas gathering line and electric transmission property. 1040ez instructions   Any natural gas gathering line placed in service after April 11, 2005, is treated as 7-year property, and electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity and any natural gas distribution line placed in service after April 11, 2005, are treated as 15-year property, if the following requirements are met. 1040ez instructions The original use of the property must have begun with you after April 11, 2005. 1040ez instructions Original use means the first use to which the property is put, whether or not by you. 1040ez instructions Therefore, property used by any person before April 12, 2005, is not original use. 1040ez instructions Original use includes additional capital expenditures you incurred to recondition or rebuild your property. 1040ez instructions However, original use does not include the cost of reconditioned or rebuilt property you acquired. 1040ez instructions Property containing used parts will not be treated as reconditioned or rebuilt if the cost of the used parts is not more than 20% of the total cost of the property. 1040ez instructions The property must not be placed in service under a binding contract in effect before April 12, 2005. 1040ez instructions The property must not be self-constructed property (property you manufacture, construct, or produce for your own use), if you began the manufacture, construction, or production of the property before April 12, 2005. 1040ez instructions Property that is manufactured, constructed, or produced for your use by another person under a written binding contract entered into by you or a related party before the manufacture, construction, or production of the property is considered to be manufactured, constructed, or produced by you. 1040ez instructions What Is the Placed in Service Date? You begin to claim depreciation when your property is placed in service for either use in a trade or business or the production of income. 1040ez instructions The placed in service date for your property is the date the property is ready and available for a specific use. 1040ez instructions It is therefore not necessarily the date it is first used. 1040ez instructions 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. 1040ez instructions See Placed in Service under When Does Depreciation Begin and End in chapter 1 for examples illustrating when property is placed in service. 1040ez instructions 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. 1040ez instructions For a discussion of business/investment use, see Partial business or investment use under Property Used in Your Business or Income-Producing Activity in chapter 1 . 1040ez instructions Reduce that amount by any credits and deductions allocable to the property. 1040ez instructions The following are examples of some credits and deductions that reduce basis. 1040ez instructions Any deduction for section 179 property. 1040ez instructions Any deduction under section 179B of the Internal Revenue Code for capital costs to comply with Environmental Protection Agency sulfur regulations. 1040ez instructions Any deduction under section 179C of the Internal Revenue Code for certain qualified refinery property placed in service after August 8, 2005, and before January 1, 2014. 1040ez instructions Any deduction under section 179D of the Internal Revenue Code for certain energy efficient commercial building property placed in service after December 31, 2005, and before January 1, 2014. 1040ez instructions Any deduction under section 179E of the Internal Revenue Code for qualified advanced mine safety equipment property placed in service after December 20, 2006, and before January 1, 2014 . 1040ez instructions Any deduction for removal of barriers to the disabled and the elderly. 1040ez instructions Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. 1040ez instructions Any special depreciation allowance. 1040ez instructions Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. 1040ez instructions For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. 1040ez instructions Enter the basis for depreciation under column (c) in Part III of Form 4562. 1040ez instructions For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property in chapter 1 . 1040ez instructions Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. 1040ez instructions It is determined based on the depreciation system (GDS or ADS) used. 1040ez instructions Recovery Periods Under GDS Under GDS, property that is not qualified Indian reservation property is depreciated over one of the following recovery periods. 1040ez instructions Property Class Recovery Period 3-year property   3 years 1   5-year property   5 years     7-year property   7 years     10-year property   10 years     15-year property   15 years 2   20-year property   20 years     25-year property   25 years 3   Residential rental property   27. 1040ez instructions 5 years     Nonresidential real property   39 years 4   15 years for qualified rent-to-own property placed in service before August 6, 1997. 1040ez instructions 239 years for property that is a retail motor fuels outlet placed in service before August 20, 1996 (31. 1040ez instructions 5 years if placed in service before May 13, 1993), unless you elected to depreciate it over 15 years. 1040ez instructions 320 years for property placed in service before June 13, 1996, or under a binding contract in effect before June 10, 1996. 1040ez instructions 431. 1040ez instructions 5 years for property placed in service before May 13, 1993 (or before January 1, 1994, if the purchase or construction of the property is under a binding contract in effect before May 13, 1993, or if construction began before May 13, 1993). 1040ez instructions The GDS recovery periods for property not listed above can be found in Appendix B, Table of Class Lives and Recovery Periods. 1040ez instructions Residential rental property and nonresidential real property are defined earlier under Which Depreciation System (GDS or ADS) Applies. 1040ez instructions Enter the appropriate recovery period on Form 4562 under column (d) in section B of Part III, unless already shown (for 25-year property, residential rental property, and nonresidential real property). 1040ez instructions Office in the home. 1040ez instructions   If your home is a personal-use single family residence and you begin to use part of your home as an office, depreciate that part of your home as nonresidential real property over 39 years (31. 1040ez instructions 5 years if you began using it for business before May 13, 1993). 1040ez instructions However, if your home is an apartment in an apartment building that you own and the building is residential rental property as defined earlier under Which Depreciation System (GDS or ADS) Applies , depreciate the part used as an office as residential rental property over 27. 1040ez instructions 5 years. 1040ez instructions See Publication 587 for a discussion of the tests you must meet to claim expenses, including depreciation, for the business use of your home. 1040ez instructions Home changed to rental use. 1040ez instructions   If you begin to rent a home that was your personal home before 1987, you depreciate it as residential rental property over 27. 1040ez instructions 5 years. 1040ez instructions Indian Reservation Property The recovery periods for qualified property you placed in service on an Indian reservation after 1993 and before 2014 are shorter than those listed earlier. 1040ez instructions The following table shows these shorter recovery periods. 1040ez instructions Property Class Recovery  Period 3-year property 2 years 5-year property 3 years 7-year property 4 years 10-year property 6 years 15-year property 9 years 20-year property 12 years Nonresidential real property 22 years Nonresidential real property is defined earlier under Which Property Class Applies Under GDS . 1040ez instructions Use this chart to find the correct percentage table to use for qualified Indian reservation property. 1040ez instructions IF your recovery period is: THEN use the following table in Appendix A: 2 years A-21 3 years A-1, A-2, A-3, A-4, or A-5 4 years A-22 6 years A-23 9 years A-14, A-15, A-16, A-17, or A-18 12 years A-14, A-15, A-16, A-17, or A-18 22 years A-24 Qualified property. 1040ez instructions   Property eligible for the shorter recovery periods are 3-, 5-, 7-, 10-, 15-, and 20-year property and nonresidential real property. 1040ez instructions You must use this property predominantly in the active conduct of a trade or business within an Indian reservation. 1040ez instructions The rental of real property that is located on an Indian reservation is treated as the active conduct of a trade or business within an Indian reservation. 1040ez instructions   The following property is not qualified property. 1040ez instructions Property used or located outside an Indian reservation on a regular basis, other than qualified infrastructure property. 1040ez instructions Property acquired directly or indirectly from a related person. 1040ez instructions Property placed in service for purposes of conducting or housing class I, II, or III gaming activities. 1040ez instructions These activities are defined in section 4 of the Indian Regulatory Act (25 U. 1040ez instructions S. 1040ez instructions C. 1040ez instructions 2703). 1040ez instructions Any property you must depreciate under ADS. 1040ez instructions Determine whether property is qualified without regard to the election to use ADS and after applying the special rules for listed property not used predominantly for qualified business use (discussed in chapter 5). 1040ez instructions Qualified infrastructure property. 1040ez instructions   Item (1) above does not apply to qualified infrastructure property located outside the reservation that is used to connect with qualified infrastructure property within the reservation. 1040ez instructions Qualified infrastructure property is property that meets all the following rules. 1040ez instructions It is qualified property, as defined earlier, except that it is outside the reservation. 1040ez instructions It benefits the tribal infrastructure. 1040ez instructions It is available to the general public. 1040ez instructions It is placed in service in connection with the active conduct of a trade or business within a reservation. 1040ez instructions Infrastructure property includes, but is not limited to, roads, power lines, water systems, railroad spurs, and communications facilities. 1040ez instructions Related person. 1040ez instructions   For purposes of item (2) above, see Related persons in the discussion on property owned or used in 1986 under What Method Can You Use To Depreciate Your Property in chapter 1 for a description of related persons. 1040ez instructions Indian reservation. 1040ez instructions   The term Indian reservation means a reservation as defined in section 3(d) of the Indian Financing Act of 1974 (25 U. 1040ez instructions S. 1040ez instructions C. 1040ez instructions 1452(d)) or section 4(10) of the Indian Child Welfare Act of 1978 (25 U. 1040ez instructions S. 1040ez instructions C. 1040ez instructions 1903(10)). 1040ez instructions Section 3(d) of the Indian Financing Act of 1974 defines reservation to include former Indian reservations in Oklahoma. 1040ez instructions For a definition of the term “former Indian reservations in Oklahoma,” see Notice 98-45 in Internal Revenue Bulletin 1998-35. 1040ez instructions Recovery Periods Under ADS The recovery periods for most property generally are longer under ADS than they are under GDS. 1040ez instructions The following table shows some of the ADS recovery periods. 1040ez instructions Property Recovery  Period Rent-to-own property 4 years Automobiles and light duty trucks 5 years Computers and peripheral equipment 5 years High technology telephone station equipment installed on customer premises 5 years High technology medical equipment 5 years Personal property with no class life 12 years Natural gas gathering lines 14 years Single purpose agricultural and horticultural structures 15 years Any tree or vine bearing fruit or nuts 20 years Initial clearing and grading land  improvements for gas utility property 20 years Initial clearing and grading land  improvements for electric utility  transmission and distribution plants 25 years Electric transmission property used in the transmission at 69 or more kilovolts of electricity 30 years Natural gas distribution lines 35 years Any qualified leasehold improvement property 39 years Any qualified restaurant property 39 years Nonresidential real property 40 years Residential rental property 40 years Section 1245 real property not listed in Appendix B 40 years Railroad grading and tunnel bore 50 years The ADS recovery periods for property not listed above can be found in the tables in Appendix B. 1040ez instructions Rent-to-own property, qualified leasehold improvement property, qualified restaurant property, residential rental property, and nonresidential real property are defined earlier under Which Property Class Applies Under GDS . 1040ez instructions Tax-exempt use property subject to a lease. 1040ez instructions   The ADS recovery period for any property leased under a lease agreement to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership) cannot be less than 125% of the lease term. 1040ez instructions Additions and Improvements An addition or improvement you make to depreciable property is treated as separate depreciable property. 1040ez instructions See How Do You Treat Repairs and Improvements in chapter 1 for a definition of improvements. 1040ez instructions Its property class and recovery period are the same as those that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. 1040ez instructions The recovery period begins on the later of the following dates. 1040ez instructions The date you place the addition or improvement in service. 1040ez instructions The date you place in service the property to which you made the addition or improvement. 1040ez instructions If the improvement you make is qualified leasehold improvement property, qualified restaurant property, or qualified retail improvement property, the GDS recovery period is 15 years (39 years under ADS). 1040ez instructions Example. 1040ez instructions You own a rental home that you have been renting out since 1981. 1040ez instructions If you put an addition on the home and place the addition in service this year, you would use MACRS to figure your depreciation deduction for the addition. 1040ez instructions Under GDS, the property class for the addition is residential rental property and its recovery period is 27. 1040ez instructions 5 years because the home to which the addition is made would be residential rental property if you had placed it in service this year. 1040ez instructions Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. 1040ez instructions 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. 1040ez instructions The mid-month convention. 1040ez instructions   Use this convention for nonresidential real property, residential rental property, and any railroad grading or tunnel bore. 1040ez instructions   Under this convention, you treat all property placed in service or disposed of during a month as placed in service or disposed of at the midpoint of the month. 1040ez instructions This means that a one-half month of depreciation is allowed for the month the property is placed in service or disposed of. 1040ez instructions   Your use of the mid-month convention is indicated by the “MM” already shown under column (e) in Part III of Form 4562. 1040ez instructions The mid-quarter convention. 1040ez instructions   Use this convention if the mid-month convention does not apply and the total depreciable bases of MACRS property you placed in service during the last 3 months of the tax year (excluding nonresidential real property, residential rental property, any railroad grading or tunnel bore, property placed in service and disposed of in the same year, and property that is being depreciated under a method other than MACRS) are more than 40% of the total depreciable bases of all MACRS property you placed in service during the entire year. 1040ez instructions   Under this convention, you treat all property placed in service or disposed of during any quarter of the tax year as placed in service or disposed of at the midpoint of that quarter. 1040ez instructions This means that 1½ months of depreciation is allowed for the quarter the property is placed in service or disposed of. 1040ez instructions   If you use this convention, enter “MQ” under column (e) in Part III of Form 4562. 1040ez instructions    For purposes of determining whether the mid-quarter convention applies, the depreciable basis of property you placed in service during the tax year reflects the reduction in basis for amounts expensed under section 179 and the part of the basis of property attributable to personal use. 1040ez instructions However, it does not reflect any reduction in basis for any special depreciation allowance. 1040ez instructions The half-year convention. 1040ez instructions   Use this convention if neither the mid-quarter convention nor the mid-month convention applies. 1040ez instructions   Under this convention, you treat all property placed in service or disposed of during a tax year as placed in service or disposed of at the midpoint of the year. 1040ez instructions This means that a one-half year of depreciation is allowed for the year the property is placed in service or disposed of. 1040ez instructions   If you use this convention, enter “HY” under column (e) in Part III of Form 4562. 1040ez instructions Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. 1040ez instructions The 200% declining balance method over a GDS recovery period. 1040ez instructions The 150% declining balance method over a GDS recovery period. 1040ez instructions The straight line method over a GDS recovery period. 1040ez instructions The straight line method over an ADS recovery period. 1040ez instructions For property placed in service before 1999, you could have elected the 150% declining balance method using the ADS recovery periods for certain property classes. 1040ez instructions If you made this election, continue to use the same method and recovery period for that property. 1040ez instructions Table 4–1 lists the types of property you can depreciate under each method. 1040ez instructions It also gives a brief explanation of the method, including any benefits that may apply. 1040ez instructions Depreciation Methods for Farm Property If you place personal property in service in a farming business after 1988, you generally must depreciate it under GDS using the 150% declining balance method unless you are a farmer who must depreciate the property under ADS using the straight line method or you elect to depreciate the property under GDS or ADS using the straight line method. 1040ez instructions You can depreciate real property using the straight line method under either GDS or ADS. 1040ez instructions Fruit or nut trees and vines. 1040ez instructions   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a recovery period of 10 years. 1040ez instructions ADS required for some farmers. 1040ez instructions   If you elect not to apply the uniform capitalization rules to any plant produced in your farming business, you must use ADS. 1040ez instructions You must use ADS for all property you place in service in any year the election is in effect. 1040ez instructions See the regulations under section 263A of the Internal Revenue Code for information on the uniform capitalization rules that apply to farm property. 1040ez instructions Electing a Different Method As shown in Table 4–1 , you can elect a different method for depreciation for certain types of property. 1040ez instructions You must make the election by the due date of the return (including extensions) for the year you placed the property in service. 1040ez instructions However, if you timely filed your return for the year without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 1040ez instructions Attach the election to the amended return and write “Filed pursuant to section 301. 1040ez instructions 9100-2” on the election statement. 1040ez instructions File the amended return at the same address you filed the original return. 1040ez instructions Once you make the election, you cannot change it. 1040ez instructions 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. 1040ez instructions However, you can make the election on a property-by-property basis for nonresidential real and residential rental property. 1040ez instructions 150% election. 1040ez instructions   Instead of using the 200% declining balance method over the GDS recovery period for nonfarm property in the 3-, 5-, 7-, and 10-year property classes, you can elect to use the 150% declining balance method. 1040ez instructions Make the election by entering “150 DB” under column (f) in Part III of Form 4562. 1040ez instructions Straight line election. 1040ez instructions   Instead of using either the 200% or 150% declining balance methods over the GDS recovery period, you can elect to use the straight line method over the GDS recovery period. 1040ez instructions Make the election by entering  “S/L” under column (f) in Part III of Form 4562. 1040ez instructions Election of ADS. 1040ez instructions   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. 1040ez instructions ADS uses the straight line method of depreciation over fixed ADS recovery periods. 1040ez instructions Most ADS recovery periods are listed in Appendix B, or see the table under Recovery Periods Under ADS , earlier. 1040ez instructions   Make the election by completing line 20 in Part III of Form 4562. 1040ez instructions Farm property. 1040ez instructions   Instead of using the 150% declining balance method over a GDS recovery period for property you use in a farming business (other than real property), you can elect to depreciate it using either of the following methods. 1040ez instructions The straight line method over a GDS recovery period. 1040ez instructions The straight line method over an ADS recovery period. 1040ez instructions Table 4-1. 1040ez instructions Depreciation Methods Note. 1040ez instructions The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. 1040ez instructions Method Type of Property Benefit GDS using 200% DB • Nonfarm 3-, 5-, 7-, and 10-year property • Provides a greater deduction during the earlier recovery years • Changes to SL when that method provides an equal or greater deduction GDS using 150% DB • All farm property (except real property) • All 15- and 20-year property (except qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property placed in service before January 1, 2014) • Nonfarm 3-, 5-, 7-, and 10-year property • Provides a greater deduction during the earlier recovery years • Changes to SL when that method provides an equal or greater deduction1 GDS using SL • Nonresidential real property • Qualified leasehold improvement property placed in service before January 1, 2014 • Qualified restaurant property placed in service before January 1, 2014 • Qualified retail improvement property placed in service before January 1, 2014 • Residential rental property • Trees or vines bearing fruit or nuts • Water utility property • All 3-, 5-, 7-, 10-, 15-, and 20-year property2 • Property for which you elected section 168(k)(4) • Provides for equal yearly deductions (except for the first and last years) ADS using SL • Listed property used 50% or less for business • Property used predominantly outside the U. 1040ez instructions S. 1040ez instructions  • Tax-exempt property • Tax-exempt bond-financed property • Farm property used when an election not to apply the uniform capitalization rules is in effect • Imported property3 • Any property for which you elect to use this method4 • Provides for equal yearly deductions (except for the first and last years) 1The MACRS percentage tables in Appendix A have the switch to the straight line method built into their rates 2See section 168(b)(5) of the Internal Revenue Code. 1040ez instructions 3See section 168(g)(6) of the Internal Revenue Code 4See section 168(g)(7) of the Internal Revenue Code How Is the Depreciation Deduction Figured? To figure your depreciation deduction under MACRS, you first determine the depreciation system, property class, placed in service date, basis amount, recovery period, convention, and depreciation method that applies to your property. 1040ez instructions Then, you are ready to figure your depreciation deduction. 1040ez instructions You can figure it using a percentage table provided by the IRS, or you can figure it yourself without using the table. 1040ez instructions 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. 1040ez instructions These percentage tables are in Appendix A near the end of this publication. 1040ez instructions Which table to use. 1040ez instructions    Appendix A contains the MACRS Percentage Table Guide, which is designed to help you locate the correct percentage table to use for depreciating your property. 1040ez instructions The percentage tables immediately follow the guide. 1040ez instructions Rules Covering the Use of the Tables The following rules cover the use of the percentage tables. 1040ez instructions You must apply the rates in the percentage tables to your property's unadjusted basis. 1040ez instructions You cannot use the percentage tables for a short tax year. 1040ez instructions See Figuring the Deduction for a Short Tax Year, later, for information on the short tax year rules. 1040ez instructions Once you start using the percentage tables for any item of property, you generally must continue to use them for the entire recovery period of the property. 1040ez instructions You must stop using the tables if you adjust the basis of the property for any reason other than— Depreciation allowed or allowable, or An addition or improvement to that property that is depreciated as a separate item of property. 1040ez instructions Basis adjustments other than those made due to the items listed in (4) include an increase in basis for the recapture of a clean-fuel deduction or credit and a reduction in basis for a casualty loss. 1040ez instructions Basis adjustment due to recapture of clean-fuel vehicle deduction or credit. 1040ez instructions   If you increase the basis of your property because of the recapture of part or all of a deduction for clean-fuel vehicles or the credit for clean-fuel vehicle refueling property placed in service before January 1, 2006, you cannot continue to use the percentage tables. 1040ez instructions For the year of the adjustment and the remaining recovery period, you must figure the depreciation deduction yourself using the property's adjusted basis at the end of the year. 1040ez instructions See Figuring the Deduction Without Using the Tables, later. 1040ez instructions Basis adjustment due to casualty loss. 1040ez instructions   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. 1040ez instructions 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. 1040ez instructions See Figuring the Deduction Without Using the Tables, later. 1040ez instructions Example. 1040ez instructions On October 26, 2012, Sandra Elm, a calendar year taxpayer, bought and placed in service in her business a new item of 7-year property. 1040ez instructions It cost $39,000 and she elected a section 179 deduction of $24,000. 1040ez instructions She also took a special depreciation allowance of $7,500 [50% of $15,000 ($39,000 − $24,000)]. 1040ez instructions Her unadjusted basis after the section 179 deduction and special depreciation allowance was $7,500 ($15,000 − $7,500). 1040ez instructions She figured her MACRS depreciation deduction using the percentage tables. 1040ez instructions For 2012, her MACRS depreciation deduction was $268. 1040ez instructions In July 2013, the property was vandalized and Sandra had a deductible casualty loss of $3,000. 1040ez instructions She must adjust the property's basis for the casualty loss, so she can no longer use the percentage tables. 1040ez instructions Her adjusted basis at the end of 2013, before figuring her 2013 depreciation, is $4,232. 1040ez instructions She figures that amount by subtracting the 2012 MACRS depreciation of $268 and the casualty loss of $3,000 from the unadjusted basis of $7,500. 1040ez instructions She must now figure her depreciation for 2013 without using the percentage tables. 1040ez instructions Figuring the Unadjusted Basis of Your Property You must apply the table rates to your property's unadjusted basis each year of the recovery period. 1040ez instructions Unadjusted basis is the same basis amount you would use to figure gain on a sale, but you figure it without reducing your original basis by any MACRS depreciation taken in earlier years. 1040ez instructions However, you do reduce your original basis by other amounts, including the following. 1040ez instructions Any amortization taken on the property. 1040ez instructions Any section 179 deduction claimed. 1040ez instructions Any special depreciation allowance taken on the property. 1040ez instructions For business property you purchase during the year, the unadjusted basis is its cost minus these and other applicable adjustments. 1040ez instructions If you trade property, your unadjusted basis in the property received is the cash paid plus the adjusted basis of the property traded minus these adjustments. 1040ez instructions MACRS Worksheet You can use this worksheet to help you figure your depreciation deduction using the percentage tables. 1040ez instructions Use a separate worksheet for each item of property. 1040ez instructions Then, use the information from this worksheet to prepare Form 4562. 1040ez instructions Do not use this worksheet for automobiles. 1040ez instructions Use the Depreciation Worksheet for Passenger Automobiles in chapter 5. 1040ez instructions MACRS Worksheet Part I   1. 1040ez instructions MACRS system (GDS or ADS)   2. 1040ez instructions Property class   3. 1040ez instructions Date placed in service   4. 1040ez instructions Recovery period   5. 1040ez instructions Method and convention   6. 1040ez instructions Depreciation rate (from tables)   Part II   7. 1040ez instructions Cost or other basis* $     8. 1040ez instructions Business/investment use   %   9. 1040ez instructions Multiply line 7 by line 8   $ 10. 1040ez instructions Total claimed for section 179 deduction and other items   $ 11. 1040ez instructions Subtract line 10 from line 9. 1040ez instructions This is your tentative basis for depreciation   $ 12. 1040ez instructions Multiply line 11 by . 1040ez instructions 50 if the 50% special depreciation allowance applies. 1040ez instructions This is your special depreciation allowance. 1040ez instructions Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance   $ 13. 1040ez instructions Subtract line 12 from line 11. 1040ez instructions This is your basis for depreciation     14. 1040ez instructions Depreciation rate (from line 6)     15. 1040ez instructions Multiply line 13 by line 14. 1040ez instructions This is your MACRS depreciation deduction   $ *If real estate, do not include cost (basis) of land. 1040ez instructions The following example shows how to figure your MACRS depreciation deduction using the percentage tables and the MACRS worksheet. 1040ez instructions Example. 1040ez instructions You bought office furniture (7-year property) for $10,000 and placed it in service on August 11, 2013. 1040ez instructions You use the furniture only for business. 1040ez instructions This is the only property you placed in service this year. 1040ez instructions You did not elect a section 179 deduction and the property is not qualified property for purposes of claiming a special depreciation allowance so your property's unadjusted basis is its cost, $10,000. 1040ez instructions You use GDS and the half-year convention to figure your depreciation. 1040ez instructions You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-1. 1040ez instructions Multiply your property's unadjusted basis each year by the percentage for 7-year property given in Table A-1. 1040ez instructions You figure your depreciation deduction using the MACRS worksheet as follows. 1040ez instructions MACRS Worksheet Part I 1. 1040ez instructions MACRS system (GDS or ADS) GDS 2. 1040ez instructions Property class 7-year 3. 1040ez instructions Date placed in service 8/11/13 4. 1040ez instructions Recovery period 7-Year 5. 1040ez instructions Method and convention 200%DB/Half-Year 6. 1040ez instructions Depreciation rate (from tables) . 1040ez instructions 1429 Part II 7. 1040ez instructions Cost or other basis* $10,000     8. 1040ez instructions Business/investment use 100 %   9. 1040ez instructions Multiply line 7 by line 8   $10,000 10. 1040ez instructions Total claimed for section 179 deduction and other items   -0- 11. 1040ez instructions Subtract line 10 from line 9. 1040ez instructions This is your tentative basis for depreciation   $10,000 12. 1040ez instructions Multiply line 11 by . 1040ez instructions 50 if the 50% special depreciation allowance applies. 1040ez instructions This is your special depreciation allowance. 1040ez instructions Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance   -0- 13. 1040ez instructions Subtract line 12 from line 11. 1040ez instructions This is your basis for depreciation   $10,000 14. 1040ez instructions Depreciation rate (from line 6)   . 1040ez instructions 1429 15. 1040ez instructions Multiply line 13 by line 14. 1040ez instructions This is your MACRS depreciation deduction   $1,429 *If real estate, do not include cost (basis) of land. 1040ez instructions If there are no adjustments to the basis of the property other than depreciation, your depreciation deduction for each subsequent year of the recovery period will be as follows. 1040ez instructions Year   Basis Percentage Deduction 2014 $ 10,000 24. 1040ez instructions 49%   $2,449   2015   10,000 17. 1040ez instructions 49   1,749   2016   10,000 12. 1040ez instructions 49   1,249   2017   10,000 8. 1040ez instructions 93   893   2018   10,000 8. 1040ez instructions 92   892   2019   10,000 8. 1040ez instructions 93   893   2020   10,000 4. 1040ez instructions 46   446   Examples The following examples are provided to show you how to use the percentage tables. 1040ez instructions In both examples, assume the following. 1040ez instructions You use the property only for business. 1040ez instructions You use the calendar year as your tax year. 1040ez instructions You use GDS for all the properties. 1040ez instructions Example 1. 1040ez instructions You bought a building and land for $120,000 and placed it in service on March 8. 1040ez instructions The sales contract showed that the building cost $100,000 and the land cost $20,000. 1040ez instructions It is nonresidential real property. 1040ez instructions The building's unadjusted basis is its original cost, $100,000. 1040ez instructions You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-7a. 1040ez instructions March is the third month of your tax year, so multiply the building's unadjusted basis, $100,000, by the percentages for the third month in Table A-7a. 1040ez instructions Your depreciation deduction for each of the first 3 years is as follows: Year   Basis Percentage Deduction 1st $ 100,000 2. 1040ez instructions 033%   $2,033   2nd   100,000 2. 1040ez instructions 564   2,564   3rd   100,000 2. 1040ez instructions 564   2,564   Example 2. 1040ez instructions During the year, you bought a machine (7-year property) for $4,000, office furniture (7-year property) for $1,000, and a computer (5-year property) for $5,000. 1040ez instructions You placed the machine in service in January, the furniture in September, and the computer in October. 1040ez instructions You do not elect a section 179 deduction and none of these items is qualified property for purposes of claiming a special depreciation allowance. 1040ez instructions You placed property in service during the last 3 months of the year, so you must first determine if you have to use the mid-quarter convention. 1040ez instructions The total bases of all property you placed in service during the year is $10,000. 1040ez instructions The $5,000 basis of the computer, which you placed in service during the last 3 months (the fourth quarter) of your tax year, is more than 40% of the total bases of all property ($10,000) you placed in service during the year. 1040ez instructions Therefore, you must use the mid-quarter convention for all three items. 1040ez instructions You refer to the MACRS Percentage Table Guide in Appendix A to determine which table you should use under the mid-quarter convention. 1040ez instructions The machine is 7-year property placed in service in the first quarter, so you use Table A-2. 1040ez instructions The furniture is 7-year property placed in service in the third quarter, so you use Table A-4. 1040ez instructions Finally, because the computer is 5-year property placed in service in the fourth quarter, you use Table A-6. 1040ez instructions Knowing what table to use for each property, you figure the depreciation for the first 2 years as follows. 1040ez instructions Year Property Basis Percentage Deduction 1st Machine $4,000 25. 1040ez instructions 00 $1,000   2nd Machine 4,000 21. 1040ez instructions 43 857   1st Furniture 1,000 10. 1040ez instructions 71 107   2nd Furniture 1,000 25. 1040ez instructions 51 255   1st Computer 5,000 5. 1040ez instructions 00 250   2nd Computer 5,000 38. 1040ez instructions 00 1,900   Sale or Other Disposition Before the Recovery Period Ends If you sell or otherwise dispose of your property before the end of its recovery period, your depreciation deduction for the year of the disposition will be only part of the depreciation amount for the full year. 1040ez instructions You have disposed of your property if you have permanently withdrawn it from use in your business or income-producing activity because of its sale, exchange, retirement, abandonment, involuntary conversion, or destruction. 1040ez instructions After you figure the full-year depreciation amount, figure the deductible part using the convention that applies to the property. 1040ez instructions Half-year convention used. 1040ez instructions   For property for which you used a half-year convention, the depreciation deduction for the year of the disposition is half the depreciation determined for the full year. 1040ez instructions Mid-quarter convention used. 1040ez instructions   For property for which you used the mid-quarter convention, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter in which you disposed of the property. 1040ez instructions Quarter Percentage First 12. 1040ez instructions 5% Second 37. 1040ez instructions 5 Third 62. 1040ez instructions 5 Fourth 87. 1040ez instructions 5 Example. 1040ez instructions On December 2, 2010, you placed in service an item of 5-year property costing $10,000. 1040ez instructions You did not claim a section 179 deduction and the property does not qualify for a special depreciation allowance. 1040ez instructions Your unadjusted basis for the property was $10,000. 1040ez instructions You used the mid-quarter convention because this was the only item of business property you placed in service in 2010 and it was placed in service during the last 3 months of your tax year. 1040ez instructions Your property is in the 5-year property class, so you used Table A-5 to figure your depreciation deduction. 1040ez instructions Your deductions for 2010, 2011, and 2012 were $500 (5% of $10,000), $3,800 (38% of $10,000), and $2,280 (22. 1040ez instructions 80% of $10,000). 1040ez instructions You disposed of the property on April 6, 2013. 1040ez instructions To determine your depreciation deduction for 2013, first figure the deduction for the full year. 1040ez instructions This is $1,368 (13. 1040ez instructions 68% of $10,000). 1040ez instructions April is in the second quarter of the year, so you multiply $1,368 by 37. 1040ez instructions 5% to get your depreciation deduction of $513 for 2013. 1040ez instructions Mid-month convention used. 1040ez instructions   If you dispose of residential rental or nonresidential real property, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by a fraction. 1040ez instructions The numerator of the fraction is the number of months (including partial months) in the year that the property is considered in service. 1040ez instructions The denominator is 12. 1040ez instructions Example. 1040ez instructions On July 2, 2011, you purchased and placed in service residential rental property. 1040ez instructions The property cost $100,000, not including the cost of land. 1040ez instructions You used Table A-6 to figure your MACRS depreciation for this property. 1040ez instructions You sold the property on March 2, 2013. 1040ez instructions You file your tax return based on the calendar year. 1040ez instructions A full year of depreciation for 2013 is $3,636. 1040ez instructions This is $100,000 multiplied by . 1040ez instructions 03636 (the percentage for the seventh month of the third recovery year) from Table A-6 . 1040ez instructions You then apply the mid-month convention for the 2½ months of use in 2013. 1040ez instructions Treat the month of disposition as one-half month of use. 1040ez instructions Multiply $3,636 by the fraction, 2. 1040ez instructions 5 over 12, to get your 2013 depreciation deduction of $757. 1040ez instructions 50. 1040ez instructions Figuring the Deduction Without Using the Tables Instead of using the rates in the percentage tables to figure your depreciation deduction, you can figure it yourself. 1040ez instructions Before making the computation each year, you must reduce your adjusted basis in the property by the depreciation claimed the previous year. 1040ez instructions Figuring MACRS deductions without using the tables generally will result in a slightly different amount than using the tables. 1040ez instructions Declining Balance Method When using a declining balance method, you apply the same depreciation rate each year to the adjusted basis of your property. 1040ez instructions You must use the applicable convention for the first tax year and you must switch to the straight line method beginning in the first year for which it will give an equal or greater deduction. 1040ez instructions The straight line method is explained later. 1040ez instructions You figure depreciation for the year you place property in service as follows. 1040ez instructions Multiply your adjusted basis in the property by the declining balance rate. 1040ez instructions Apply the applicable convention. 1040ez instructions You figure depreciation for all other years (before the year you switch to the straight line method) as follows. 1040ez instructions Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years. 1040ez instructions Multiply this new adjusted basis by the same declining balance rate used in earlier years. 1040ez instructions If you dispose of property before the end of its recovery period, see Using the Applicable Convention, later, for information on how to figure depreciation for the year you dispose of it. 1040ez instructions Figuring depreciation under the declining balance method and switching to the straight line method is illustrated in Example 1 , later, under Examples. 1040ez instructions Declining balance rate. 1040ez instructions   You figure your declining balance rate by dividing the specified declining balance percentage (150% or 200% changed to a decimal) by the number of years in the property's recovery period. 1040ez instructions For example, for 3-year property depreciated using the 200% declining balance method, divide 2. 1040ez instructions 00 (200%) by 3 to get 0. 1040ez instructions 6667, or a 66. 1040ez instructions 67% declining balance rate. 1040ez instructions For 15-year property depreciated using the 150% declining balance method, divide 1. 1040ez instructions 50 (150%) by 15 to get 0. 1040ez instructions 10, or a 10% declining balance rate. 1040ez instructions   The following table shows the declining balance rate for each property class and the first year for which the straight line method gives an equal or greater deduction. 1040ez instructions Property Class Method Declining Balance Rate Year 3-year 200% DB 66. 1040ez instructions 667% 3rd 5-year 200% DB 40. 1040ez instructions 0 4th 7-year 200% DB 28. 1040ez instructions 571 5th 10-year 200% DB 20. 1040ez instructions 0 7th 15-year 150% DB 10. 1040ez instructions 0 7th 20-year 150% DB 7. 1040ez instructions 5 9th Straight Line Method When using the straight line method, you apply a different depreciation rate each year to the adjusted basis of your property. 1040ez instructions You must use the applicable convention in the year you place the property in service and the year you dispose of the property. 1040ez instructions You figure depreciation for the year you place property in service as follows. 1040ez instructions Multiply your adjusted basis in the property by the straight line rate. 1040ez instructions Apply the applicable convention. 1040ez instructions You figure depreciation for all other years (including the year you switch from the declining balance method to the straight line method) as follows. 1040ez instructions Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years (under any method). 1040ez instructions Determine the depreciation rate for the year. 1040ez instructions Multiply the adjusted basis figured in (1) by the depreciation rate figured in (2). 1040ez instructions If you dispose of property before the end of its recovery period, see Using the Applicable Convention , later, for information on how to figure depreciation for the year you dispose of it. 1040ez instructions Straight line rate. 1040ez instructions   You determine the straight line depreciation rate for any tax year by dividing the number 1 by the years remaining in the recovery period at the beginning of that year. 1040ez instructions When figuring the number of years remaining, you must take into account the convention used in the year you placed the property in service. 1040ez instructions If the number of years remaining is less than 1, the depreciation rate for that tax year is 1. 1040ez instructions 0 (100%). 1040ez instructions Using the Applicable Convention The applicable convention (discussed earlier under Which Convention Applies ) affects how you figure your depreciation deduction for the year you place your property in service and for the year you dispose of it. 1040ez instructions It determines how much of the recovery period remains at the beginning of each year, so it also affects the depreciation rate for property you depreciate under the straight line method. 1040ez instructions See Straight line rate in the previous discussion. 1040ez instructions Use the applicable convention as explained in the following discussions. 1040ez instructions Half-year convention. 1040ez instructions   If this convention applies, you deduct a half-year of depreciation for the first year and the last year that you depreciate the property. 1040ez instructions You deduct a full year of depreciation for any other year during the recovery period. 1040ez instructions   Figure your depreciation deduction for the year you place the property in service by dividing the depreciation for a full year by 2. 1040ez instructions If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. 1040ez instructions If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final 6 months of the recovery period is the amount of your unrecovered basis in the property. 1040ez instructions Mid-quarter convention. 1040ez instructions   If this convention applies, the depreciation you can deduct for the first year you depreciate the property depends on the quarter in which you place the property in service. 1040ez instructions   A quarter of a full 12-month tax year is a period of 3 months. 1040ez instructions The first quarter in a year begins on the first day of the tax year. 1040ez instructions The second quarter begins on the first day of the fourth month of the tax year. 1040ez instructions The third quarter begins on the first day of the seventh month of the tax year. 1040ez instructions The fourth quarter begins on the first day of the tenth month of the tax year. 1040ez instructions A calendar year is divided into the following quarters. 1040ez instructions Quarter Months First January, February, March Second April, May, June Third July, August, September Fourth October, November, December   Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by the percentage listed below for the quarter you place the property in service. 1040ez instructions Quarter Percentage First 87. 1040ez instructions 5% Second 62. 1040ez instructions 5 Third 37. 1040ez instructions 5 Fourth 12. 1040ez instructions 5   If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter you dispose of the property. 1040ez instructions Quarter Percentage First 12. 1040ez instructions 5% Second 37. 1040ez instructions 5 Third 62. 1040ez instructions 5 Fourth 87. 1040ez instructions 5   If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final quarter of the recovery period is the amount of your unrecovered basis in the property. 1040ez instructions Mid-month convention. 1040ez instructions   If this convention applies, the depreciation you can deduct for the first year that you depreciate the property depends on the month in which you place the property in service. 1040ez instructions Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by a fraction. 1040ez instructions The numerator of the fraction is the number of full months in the year that the property is in service plus ½ (or 0. 1040ez instructions 5). 1040ez instructions The denominator is 12. 1040ez instructions   If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. 1040ez instructions If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final month of the recovery period is the amount of your unrecovered basis in the property. 1040ez instructions Example. 1040ez instructions You use the calendar year and place nonresidential real property in service in August. 1040ez instructions The property is in service 4 full months (September, October, November, and December). 1040ez instructions Your numerator is 4. 1040ez instructions 5 (4 full months plus 0. 1040ez instructions 5). 1040ez instructions You multiply the depreciation for a full year by 4. 1040ez instructions 5/12, or 0. 1040ez instructions 375. 1040ez instructions Examples The following examples show how to figure depreciation under MACRS without using the percentage tables. 1040ez instructions Figures are rounded for purposes of the examples. 1040ez instructions Assume for all the examples that you use a calendar year as your tax year. 1040ez instructions Example 1—200% DB method and half-year convention. 1040ez instructions In February, you placed in service depreciable property with a 5-year recovery period and a basis of $1,000. 1040ez instructions You do not elect to take the section 179 deduction and the property does not qualify for a special depreciation allowance. 1040ez instructions You use GDS and the 200% declining balance (DB) method to figure your depreciation. 1040ez instructions When the straight line (SL) method results in an equal or larger deduction, you switch to the SL method. 1040ez instructions You did not place any property in service in the last 3 months of the year, so you must use the half-year convention. 1040ez instructions First year. 1040ez instructions You figure the depreciation rate under the 200% DB method by dividing 2 (200%) by 5 (the number of years in the recovery period). 1040ez instructions The result is 40%. 1040ez instructions You multiply the adjusted basis of the property ($1,000) by the 40% DB rate. 1040ez instructions You apply the half-year convention by dividing the result ($400) by 2. 1040ez instructions Depreciation for the first year under the 200% DB method is $200. 1040ez instructions You figure the depreciation rate under the straight line (SL) method by dividing 1 by 5, the number of years in the recovery period. 1040ez instructions The result is 20%. 1040ez instructions You multiply the adjusted basis of the property ($1,000) by the 20% SL rate. 1040ez instructions You apply the half-year convention by dividing the result ($200) by 2. 1040ez instructions Depreciation for the first year under the SL method is $100. 1040ez instructions The DB method provides a larger deduction, so you deduct the $200 figured under the 200% DB method. 1040ez instructions Second year. 1040ez instructions You reduce the adjusted basis ($1,000) by the depreciation claimed in the first year ($200). 1040ez instructions You multiply the result ($800) by the DB rate (40%). 1040ez instructions Depreciation for the second year under the 200% DB method is $320. 1040ez instructions You figure the SL depreciation rate by dividing 1 by 4. 1040ez instructions 5, the number of years remaining in the recovery period. 1040ez instructions (Based on the half-year convention, you used only half a year of the recovery period in the first year. 1040ez instructions ) You multiply the reduced adjusted basis ($800) by the result (22. 1040ez instructions 22%). 1040ez instructions Depreciation under the SL method for the second year is $178. 1040ez instructions The DB method provides a larger deduction, so you deduct the $320 figured under the 200% DB method. 1040ez instructions Third year. 1040ez instructions You reduce the adjusted basis ($800) by the depreciation claimed in the second year ($320). 1040ez instructions You multiply the result ($480) by the DB rate (40%). 1040ez instructions Depreciation for the third year under the 200% DB method is $192. 1040ez instructions You figure the SL depreciation rate by dividing 1 by 3. 1040ez instructions 5. 1040ez instructions You multiply the reduced adjusted basis ($480) by the result (28. 1040ez instructions 57%). 1040ez instructions Depreciation under the SL method for the third year is $137. 1040ez instructions The DB method provides a larger deduction, so you deduct the $192 figured under the 200% DB method. 1040ez instructions Fourth year. 1040ez instructions You reduce the adjusted basis ($480) by the de