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Amended Tax Returns More:label_amended_20tax_20returns More:taxes

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Amended Tax Returns More:label_amended_20tax_20returns More:taxes

Amended tax returns more:label_amended_20tax_20returns more:taxes 4. Amended tax returns more:label_amended_20tax_20returns more:taxes   Student Loan Interest Deduction Table of Contents Introduction Student Loan Interest DefinedQualified Student Loan Qualified Education Expenses Include As Interest Do Not Include As Interest When Must Interest Be Paid Can You Claim the DeductionNo Double Benefit Allowed Figuring the DeductionEffect of the Amount of Your Income on the Amount of Your Deduction Which Worksheet To Use Claiming the Deduction Introduction Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. Amended tax returns more:label_amended_20tax_20returns more:taxes However, if your modified adjusted gross income (MAGI) is less than $75,000 ($155,000 if filing a joint return) there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. Amended tax returns more:label_amended_20tax_20returns more:taxes For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. Amended tax returns more:label_amended_20tax_20returns more:taxes This deduction can reduce the amount of your income subject to tax by up to $2,500 in 2013. Amended tax returns more:label_amended_20tax_20returns more:taxes The student loan interest deduction is taken as an adjustment to income. Amended tax returns more:label_amended_20tax_20returns more:taxes This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040). Amended tax returns more:label_amended_20tax_20returns more:taxes This chapter explains: What type of loan interest you can deduct, Whether you can claim the deduction, What expenses you must have paid with the student loan, Who is an eligible student, How to figure the deduction, and How to claim the deduction. Amended tax returns more:label_amended_20tax_20returns more:taxes Table 4-1. Amended tax returns more:label_amended_20tax_20returns more:taxes Student Loan Interest Deduction at a Glance This table summarizes the features of the student loan interest deduction. Amended tax returns more:label_amended_20tax_20returns more:taxes Do not rely on this table alone. Amended tax returns more:label_amended_20tax_20returns more:taxes Refer to the text for complete details. Amended tax returns more:label_amended_20tax_20returns more:taxes Feature   Description Maximum benefit   You can reduce your income subject to tax by up to $2,500. Amended tax returns more:label_amended_20tax_20returns more:taxes Loan qualifications   Your student loan: •must have been taken out solely to pay qualified education expenses, and •cannot be from a related person or made under a qualified employer plan. Amended tax returns more:label_amended_20tax_20returns more:taxes Student qualifications   The student must be: •you, your spouse, or your dependent, and  •enrolled at least half-time in a degree program. Amended tax returns more:label_amended_20tax_20returns more:taxes Time limit on deduction   You can deduct interest paid during the remaining period of your student loan. Amended tax returns more:label_amended_20tax_20returns more:taxes Limit on modified adjusted gross income (MAGI)   $155,000 if married filing a joint return; $75,000 if single, head of household, or qualifying widow(er). Amended tax returns more:label_amended_20tax_20returns more:taxes Student Loan Interest Defined Student loan interest is interest you paid during the year on a qualified student loan. Amended tax returns more:label_amended_20tax_20returns more:taxes It includes both required and voluntary interest payments. Amended tax returns more:label_amended_20tax_20returns more:taxes Qualified Student Loan This is a loan you took out solely to pay qualified education expenses (defined later) that were: For you, your spouse, or a person who was your dependent when you took out the loan, Paid or incurred within a reasonable period of time before or after you took out the loan, and For education provided during an academic period for an eligible student. Amended tax returns more:label_amended_20tax_20returns more:taxes Loans from the following sources are not qualified student loans. Amended tax returns more:label_amended_20tax_20returns more:taxes A related person. Amended tax returns more:label_amended_20tax_20returns more:taxes A qualified employer plan. Amended tax returns more:label_amended_20tax_20returns more:taxes Your dependent. Amended tax returns more:label_amended_20tax_20returns more:taxes   Generally, your dependent is someone who is either a: Qualifying child, or Qualifying relative. Amended tax returns more:label_amended_20tax_20returns more:taxes You can find more information about dependents in Publication 501. Amended tax returns more:label_amended_20tax_20returns more:taxes Exceptions. Amended tax returns more:label_amended_20tax_20returns more:taxes   For purposes of the student loan interest deduction, there are the following exceptions to the general rules for dependents. Amended tax returns more:label_amended_20tax_20returns more:taxes An individual can be your dependent even if you are the dependent of another taxpayer. Amended tax returns more:label_amended_20tax_20returns more:taxes An individual can be your dependent even if the individual files a joint return with a spouse. Amended tax returns more:label_amended_20tax_20returns more:taxes An individual can be your dependent even if the individual had gross income for the year that was equal to or more than the exemption amount for the year ($3,900 for 2013). Amended tax returns more:label_amended_20tax_20returns more:taxes Reasonable period of time. Amended tax returns more:label_amended_20tax_20returns more:taxes   Qualified education expenses are treated as paid or incurred within a reasonable period of time before or after you take out the loan if they are paid with the proceeds of student loans that are part of a federal postsecondary education loan program. Amended tax returns more:label_amended_20tax_20returns more:taxes   Even if not paid with the proceeds of that type of loan, the expenses are treated as paid or incurred within a reasonable period of time if both of the following requirements are met. Amended tax returns more:label_amended_20tax_20returns more:taxes The expenses relate to a specific academic period, and The loan proceeds are disbursed within a period that begins 90 days before the start of that academic period and ends 90 days after the end of that academic period. Amended tax returns more:label_amended_20tax_20returns more:taxes   If neither of the above situations applies, the reasonable period of time usually is determined based on all the relevant facts and circumstances. Amended tax returns more:label_amended_20tax_20returns more:taxes Academic period. Amended tax returns more:label_amended_20tax_20returns more:taxes   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. Amended tax returns more:label_amended_20tax_20returns more:taxes In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period. Amended tax returns more:label_amended_20tax_20returns more:taxes Eligible student. Amended tax returns more:label_amended_20tax_20returns more:taxes   This is a student who was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential. Amended tax returns more:label_amended_20tax_20returns more:taxes Enrolled at least half-time. Amended tax returns more:label_amended_20tax_20returns more:taxes   A student was enrolled at least half-time if the student was taking at least half the normal full-time work load for his or her course of study. Amended tax returns more:label_amended_20tax_20returns more:taxes   The standard for what is half of the normal full-time work load is determined by each eligible educational institution. Amended tax returns more:label_amended_20tax_20returns more:taxes However, the standard may not be lower than any of those established by the U. Amended tax returns more:label_amended_20tax_20returns more:taxes S. Amended tax returns more:label_amended_20tax_20returns more:taxes Department of Education under the Higher Education Act of 1965. Amended tax returns more:label_amended_20tax_20returns more:taxes Related person. Amended tax returns more:label_amended_20tax_20returns more:taxes   You cannot deduct interest on a loan you get from a related person. Amended tax returns more:label_amended_20tax_20returns more:taxes Related persons include: Your spouse, Your brothers and sisters, Your half brothers and half sisters, Your ancestors (parents, grandparents, etc. Amended tax returns more:label_amended_20tax_20returns more:taxes ), Your lineal descendants (children, grandchildren, etc. Amended tax returns more:label_amended_20tax_20returns more:taxes ), and Certain corporations, partnerships, trusts, and exempt organizations. Amended tax returns more:label_amended_20tax_20returns more:taxes Qualified employer plan. Amended tax returns more:label_amended_20tax_20returns more:taxes   You cannot deduct interest on a loan made under a qualified employer plan or under a contract purchased under such a plan. Amended tax returns more:label_amended_20tax_20returns more:taxes Qualified Education Expenses For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. Amended tax returns more:label_amended_20tax_20returns more:taxes They include amounts paid for the following items. Amended tax returns more:label_amended_20tax_20returns more:taxes Tuition and fees. Amended tax returns more:label_amended_20tax_20returns more:taxes Room and board. Amended tax returns more:label_amended_20tax_20returns more:taxes Books, supplies, and equipment. Amended tax returns more:label_amended_20tax_20returns more:taxes Other necessary expenses (such as transportation). Amended tax returns more:label_amended_20tax_20returns more:taxes The cost of room and board qualifies only to the extent that it is not more than the greater of: The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student, or The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. Amended tax returns more:label_amended_20tax_20returns more:taxes Eligible educational institution. Amended tax returns more:label_amended_20tax_20returns more:taxes   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Amended tax returns more:label_amended_20tax_20returns more:taxes S. Amended tax returns more:label_amended_20tax_20returns more:taxes Department of Education. Amended tax returns more:label_amended_20tax_20returns more:taxes It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Amended tax returns more:label_amended_20tax_20returns more:taxes   Certain educational institutions located outside the United States also participate in the U. Amended tax returns more:label_amended_20tax_20returns more:taxes S. Amended tax returns more:label_amended_20tax_20returns more:taxes Department of Education's Federal Student Aid (FSA) programs. Amended tax returns more:label_amended_20tax_20returns more:taxes   For purposes of the student loan interest deduction, an eligible educational institution also includes an institution conducting an internship or residency program leading to a degree or certificate from an institution of higher education, a hospital, or a health care facility that offers postgraduate training. Amended tax returns more:label_amended_20tax_20returns more:taxes   An educational institution must meet the above criteria only during the academic period(s) for which the student loan was incurred. Amended tax returns more:label_amended_20tax_20returns more:taxes The deductibility of interest on the loan is not affected by the institution's subsequent loss of eligibility. Amended tax returns more:label_amended_20tax_20returns more:taxes    The educational institution should be able to tell you if it is an eligible educational institution. Amended tax returns more:label_amended_20tax_20returns more:taxes Adjustments to Qualified Education Expenses You must reduce your qualified education expenses by the total amount paid for them with the following tax-free items. Amended tax returns more:label_amended_20tax_20returns more:taxes Employer-provided educational assistance. Amended tax returns more:label_amended_20tax_20returns more:taxes See chapter 11, Employer-Provided Educational Assistance . Amended tax returns more:label_amended_20tax_20returns more:taxes Tax-free distribution of earnings from a Coverdell education savings account (ESA). Amended tax returns more:label_amended_20tax_20returns more:taxes See Tax-Free Distributions in chapter 7, Coverdell Education Savings Account. Amended tax returns more:label_amended_20tax_20returns more:taxes Tax-free distribution of earnings from a qualified tuition program (QTP). Amended tax returns more:label_amended_20tax_20returns more:taxes See Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program. Amended tax returns more:label_amended_20tax_20returns more:taxes U. Amended tax returns more:label_amended_20tax_20returns more:taxes S. Amended tax returns more:label_amended_20tax_20returns more:taxes savings bond interest that you exclude from income because it is used to pay qualified education expenses. Amended tax returns more:label_amended_20tax_20returns more:taxes See chapter 10, Education Savings Bond Program . Amended tax returns more:label_amended_20tax_20returns more:taxes The tax-free part of scholarships and fellowships. Amended tax returns more:label_amended_20tax_20returns more:taxes See Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Amended tax returns more:label_amended_20tax_20returns more:taxes Veterans' educational assistance. Amended tax returns more:label_amended_20tax_20returns more:taxes See Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Amended tax returns more:label_amended_20tax_20returns more:taxes Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Amended tax returns more:label_amended_20tax_20returns more:taxes Include As Interest In addition to simple interest on the loan, if all other requirements are met, the items discussed below can be student loan interest. Amended tax returns more:label_amended_20tax_20returns more:taxes Loan origination fee. Amended tax returns more:label_amended_20tax_20returns more:taxes   In general, this is a one-time fee charged by the lender when a loan is made. Amended tax returns more:label_amended_20tax_20returns more:taxes To be deductible as interest, a loan origination fee must be for the use of money rather than for property or services (such as commitment fees or processing costs) provided by the lender. Amended tax returns more:label_amended_20tax_20returns more:taxes A loan origination fee treated as interest accrues over the term of the loan. Amended tax returns more:label_amended_20tax_20returns more:taxes   Loan origination fees were not required to be reported on Form 1098-E, Student Loan Interest Statement, for loans made before September 1, 2004. Amended tax returns more:label_amended_20tax_20returns more:taxes If loan origination fees are not included in the amount reported on your Form 1098-E, you can use any reasonable method to allocate the loan origination fees over the term of the loan. Amended tax returns more:label_amended_20tax_20returns more:taxes The method shown in the example below allocates equal portions of the loan origination fee to each payment required under the terms of the loan. Amended tax returns more:label_amended_20tax_20returns more:taxes A method that results in the double deduction of the same portion of a loan origination fee would not be reasonable. Amended tax returns more:label_amended_20tax_20returns more:taxes Example. Amended tax returns more:label_amended_20tax_20returns more:taxes In August 2004, Bill took out a student loan for $16,000 to pay the tuition for his senior year of college. Amended tax returns more:label_amended_20tax_20returns more:taxes The lender charged a 3% loan origination fee ($480) that was withheld from the funds Bill received. Amended tax returns more:label_amended_20tax_20returns more:taxes Bill began making payments on his student loan in 2013. Amended tax returns more:label_amended_20tax_20returns more:taxes Because the loan origination fee was not included in his 2013 Form 1098-E, Bill can use any reasonable method to allocate that fee over the term of the loan. Amended tax returns more:label_amended_20tax_20returns more:taxes Bill's loan is payable in 120 equal monthly payments. Amended tax returns more:label_amended_20tax_20returns more:taxes He allocates the $480 fee equally over the total number of payments ($480 ÷ 120 months = $4 per month). Amended tax returns more:label_amended_20tax_20returns more:taxes Bill made 7 payments in 2013, so he paid $28 ($4 × 7) of interest attributable to the loan origination fee. Amended tax returns more:label_amended_20tax_20returns more:taxes To determine his student loan interest deduction, he will add the $28 to the amount of other interest reported to him on Form 1098-E. Amended tax returns more:label_amended_20tax_20returns more:taxes Capitalized interest. Amended tax returns more:label_amended_20tax_20returns more:taxes   This is unpaid interest on a student loan that is added by the lender to the outstanding principal balance of the loan. Amended tax returns more:label_amended_20tax_20returns more:taxes Capitalized interest is treated as interest for tax purposes and is deductible as payments of principal are made on the loan. Amended tax returns more:label_amended_20tax_20returns more:taxes No deduction for capitalized interest is allowed in a year in which no loan payments were made. Amended tax returns more:label_amended_20tax_20returns more:taxes Interest on revolving lines of credit. Amended tax returns more:label_amended_20tax_20returns more:taxes   This interest, which includes interest on credit card debt, is student loan interest if the borrower uses the line of credit (credit card) only to pay qualified education expenses. Amended tax returns more:label_amended_20tax_20returns more:taxes See Qualified Education Expenses , earlier. Amended tax returns more:label_amended_20tax_20returns more:taxes Interest on refinanced student loans. Amended tax returns more:label_amended_20tax_20returns more:taxes   This includes interest on both: Consolidated loans—loans used to refinance more than one student loan of the same borrower, and Collapsed loans—two or more loans of the same borrower that are treated by both the lender and the borrower as one loan. Amended tax returns more:label_amended_20tax_20returns more:taxes    If you refinance a qualified student loan for more than your original loan and you use the additional amount for any purpose other than qualified education expenses, you cannot deduct any interest paid on the refinanced loan. Amended tax returns more:label_amended_20tax_20returns more:taxes Voluntary interest payments. Amended tax returns more:label_amended_20tax_20returns more:taxes   These are payments made on a qualified student loan during a period when interest payments are not required, such as when the borrower has been granted a deferment or the loan has not yet entered repayment status. Amended tax returns more:label_amended_20tax_20returns more:taxes Example. Amended tax returns more:label_amended_20tax_20returns more:taxes The payments on Roger's student loan were scheduled to begin in June 2012, 6 months after he graduated from college. Amended tax returns more:label_amended_20tax_20returns more:taxes He began making payments as required. Amended tax returns more:label_amended_20tax_20returns more:taxes In September 2013, Roger enrolled in graduate school on a full-time basis. Amended tax returns more:label_amended_20tax_20returns more:taxes He applied for and was granted deferment of his loan payments while in graduate school. Amended tax returns more:label_amended_20tax_20returns more:taxes Wanting to pay down his student loan as much as possible, he made loan payments in October and November 2013. Amended tax returns more:label_amended_20tax_20returns more:taxes Even though these were voluntary (not required) payments, Roger can deduct the interest paid in October and November. Amended tax returns more:label_amended_20tax_20returns more:taxes Allocating Payments Between Interest and Principal The allocation of payments between interest and principal for tax purposes might not be the same as the allocation shown on the Form 1098-E or other statement you receive from the lender or loan servicer. Amended tax returns more:label_amended_20tax_20returns more:taxes To make the allocation for tax purposes, a payment generally applies first to stated interest that remains unpaid as of the date the payment is due, second to any loan origination fees allocable to the payment, third to any capitalized interest that remains unpaid as of the date the payment is due, and fourth to the outstanding principal. Amended tax returns more:label_amended_20tax_20returns more:taxes Example. Amended tax returns more:label_amended_20tax_20returns more:taxes In August 2012, Peg took out a $10,000 student loan to pay the tuition for her senior year of college. Amended tax returns more:label_amended_20tax_20returns more:taxes The lender charged a 3% loan origination fee ($300) that was withheld from the funds Peg received. Amended tax returns more:label_amended_20tax_20returns more:taxes The interest (5% simple) on this loan accrued while she completed her senior year and for 6 months after she graduated. Amended tax returns more:label_amended_20tax_20returns more:taxes At the end of that period, the lender determined the amount to be repaid by capitalizing all accrued but unpaid interest ($625 interest accrued from August 2012 through October 2013) and adding it to the outstanding principal balance of the loan. Amended tax returns more:label_amended_20tax_20returns more:taxes The loan is payable over 60 months, with a payment of $200. Amended tax returns more:label_amended_20tax_20returns more:taxes 51 due on the first of each month, beginning November 2013. Amended tax returns more:label_amended_20tax_20returns more:taxes Peg did not receive a Form 1098-E for 2013 from her lender because the amount of interest she paid did not require the lender to issue an information return. Amended tax returns more:label_amended_20tax_20returns more:taxes However, she did receive an account statement from the lender that showed the following 2013 payments on her outstanding loan of $10,625 ($10,000 principal + $625 accrued but unpaid interest). Amended tax returns more:label_amended_20tax_20returns more:taxes Payment Date   Payment   Stated Interest   Principal November 2013   $200. Amended tax returns more:label_amended_20tax_20returns more:taxes 51   $44. Amended tax returns more:label_amended_20tax_20returns more:taxes 27   $156. Amended tax returns more:label_amended_20tax_20returns more:taxes 24 December 2013   $200. Amended tax returns more:label_amended_20tax_20returns more:taxes 51   $43. Amended tax returns more:label_amended_20tax_20returns more:taxes 62   $156. Amended tax returns more:label_amended_20tax_20returns more:taxes 89 Totals   $401. Amended tax returns more:label_amended_20tax_20returns more:taxes 02   $87. Amended tax returns more:label_amended_20tax_20returns more:taxes 89   $313. Amended tax returns more:label_amended_20tax_20returns more:taxes 13 To determine the amount of interest that could be deducted on the loan for 2013, Peg starts with the total amount of stated interest she paid, $87. Amended tax returns more:label_amended_20tax_20returns more:taxes 89. Amended tax returns more:label_amended_20tax_20returns more:taxes Next, she allocates the loan origination fee over the term of the loan ($300 ÷ 60 months = $5 per month). Amended tax returns more:label_amended_20tax_20returns more:taxes A total of $10 ($5 of each of the two principal payments) should be treated as interest for tax purposes. Amended tax returns more:label_amended_20tax_20returns more:taxes Peg then applies the unpaid capitalized interest ($625) to the two principal payments in the order in which they were made, and determines that the remaining amount of principal of both payments is treated as interest for tax purposes. Amended tax returns more:label_amended_20tax_20returns more:taxes Assuming that Peg qualifies to take the student loan interest deduction, she can deduct $401. Amended tax returns more:label_amended_20tax_20returns more:taxes 02 ($87. Amended tax returns more:label_amended_20tax_20returns more:taxes 89 + $10 + $303. Amended tax returns more:label_amended_20tax_20returns more:taxes 13). Amended tax returns more:label_amended_20tax_20returns more:taxes For 2014, Peg will continue to allocate $5 of the loan origination fee to the principal portion of each monthly payment she makes and treat that amount as interest for tax purposes. Amended tax returns more:label_amended_20tax_20returns more:taxes She also will apply the remaining amount of capitalized interest ($625 − $303. Amended tax returns more:label_amended_20tax_20returns more:taxes 13 = $321. Amended tax returns more:label_amended_20tax_20returns more:taxes 87) to the principal payments in the order in which they are made until the balance is zero, and treat those amounts as interest for tax purposes. Amended tax returns more:label_amended_20tax_20returns more:taxes Do Not Include As Interest You cannot claim a student loan interest deduction for any of the following items. Amended tax returns more:label_amended_20tax_20returns more:taxes Interest you paid on a loan if, under the terms of the loan, you are not legally obligated to make interest payments. Amended tax returns more:label_amended_20tax_20returns more:taxes Loan origination fees that are payments for property or services provided by the lender, such as commitment fees or processing costs. Amended tax returns more:label_amended_20tax_20returns more:taxes Interest you paid on a loan to the extent payments were made through your participation in the National Health Service Corps Loan Repayment Program (the “NHSC Loan Repayment Program”) or certain other loan repayment assistance programs. Amended tax returns more:label_amended_20tax_20returns more:taxes For more information, see Student Loan Repayment Assistance in chapter 5, Student Loan Cancellations and Repayment Assistance. Amended tax returns more:label_amended_20tax_20returns more:taxes When Must Interest Be Paid You can deduct all interest you paid during the year on your student loan, including voluntary payments, until the loan is paid off. Amended tax returns more:label_amended_20tax_20returns more:taxes Can You Claim the Deduction Generally, you can claim the deduction if all of the following requirements are met. Amended tax returns more:label_amended_20tax_20returns more:taxes Your filing status is any filing status except married filing separately. Amended tax returns more:label_amended_20tax_20returns more:taxes No one else is claiming an exemption for you on his or her tax return. Amended tax returns more:label_amended_20tax_20returns more:taxes You are legally obligated to pay interest on a qualified student loan. Amended tax returns more:label_amended_20tax_20returns more:taxes You paid interest on a qualified student loan. Amended tax returns more:label_amended_20tax_20returns more:taxes Claiming an exemption for you. Amended tax returns more:label_amended_20tax_20returns more:taxes   Another taxpayer is claiming an exemption for you if he or she lists your name and other required information on his or her Form 1040 (or Form 1040A), line 6c, or Form 1040NR, line 7c. Amended tax returns more:label_amended_20tax_20returns more:taxes Example 1. Amended tax returns more:label_amended_20tax_20returns more:taxes During 2013, Josh paid $600 interest on his qualified student loan. Amended tax returns more:label_amended_20tax_20returns more:taxes Only he is legally obligated to make the payments. Amended tax returns more:label_amended_20tax_20returns more:taxes No one claimed an exemption for Josh for 2013. Amended tax returns more:label_amended_20tax_20returns more:taxes Assuming all other requirements are met, Josh can deduct the $600 of interest he paid on his 2013 Form 1040 or 1040A. Amended tax returns more:label_amended_20tax_20returns more:taxes Example 2. Amended tax returns more:label_amended_20tax_20returns more:taxes During 2013, Jo paid $1,100 interest on her qualified student loan. Amended tax returns more:label_amended_20tax_20returns more:taxes Only she is legally obligated to make the payments. Amended tax returns more:label_amended_20tax_20returns more:taxes Jo's parents claimed an exemption for her on their 2013 tax return. Amended tax returns more:label_amended_20tax_20returns more:taxes In this case, neither Jo nor her parents may deduct the student loan interest Jo paid in 2013. Amended tax returns more:label_amended_20tax_20returns more:taxes Interest paid by others. Amended tax returns more:label_amended_20tax_20returns more:taxes   If you are the person legally obligated to make interest payments and someone else makes a payment of interest on your behalf, you are treated as receiving the payments from the other person and, in turn, paying the interest. Amended tax returns more:label_amended_20tax_20returns more:taxes Example 1. Amended tax returns more:label_amended_20tax_20returns more:taxes Darla obtained a qualified student loan to attend college. Amended tax returns more:label_amended_20tax_20returns more:taxes After Darla's graduation from college, she worked as an intern for a nonprofit organization. Amended tax returns more:label_amended_20tax_20returns more:taxes As part of the internship program, the nonprofit organization made an interest payment on behalf of Darla. Amended tax returns more:label_amended_20tax_20returns more:taxes This payment was treated as additional compensation and reported in box 1 of her Form W-2. Amended tax returns more:label_amended_20tax_20returns more:taxes Assuming all other qualifications are met, Darla can deduct this payment of interest on her tax return. Amended tax returns more:label_amended_20tax_20returns more:taxes Example 2. Amended tax returns more:label_amended_20tax_20returns more:taxes Ethan obtained a qualified student loan to attend college. Amended tax returns more:label_amended_20tax_20returns more:taxes After graduating from college, the first monthly payment on his loan was due in December. Amended tax returns more:label_amended_20tax_20returns more:taxes As a gift, Ethan's mother made this payment for him. Amended tax returns more:label_amended_20tax_20returns more:taxes No one is claiming a dependency exemption for Ethan on his or her tax return. Amended tax returns more:label_amended_20tax_20returns more:taxes Assuming all other qualifications are met, Ethan can deduct this payment of interest on his tax return. Amended tax returns more:label_amended_20tax_20returns more:taxes No Double Benefit Allowed You cannot deduct as interest on a student loan any amount that is an allowable deduction under any other provision of the tax law (for example, as home mortgage interest). Amended tax returns more:label_amended_20tax_20returns more:taxes Figuring the Deduction Your student loan interest deduction for 2013 is generally the smaller of: $2,500, or The interest you paid in 2013. Amended tax returns more:label_amended_20tax_20returns more:taxes However, the amount determined above may be gradually reduced (phased out) or eliminated based on your filing status and MAGI as explained below. Amended tax returns more:label_amended_20tax_20returns more:taxes You can use Worksheet 4-1. Amended tax returns more:label_amended_20tax_20returns more:taxes Student Loan Interest Deduction Worksheet (at the end of this chapter) to figure both your MAGI and your deduction. Amended tax returns more:label_amended_20tax_20returns more:taxes Form 1098-E. Amended tax returns more:label_amended_20tax_20returns more:taxes   To help you figure your student loan interest deduction, you should receive Form 1098-E. Amended tax returns more:label_amended_20tax_20returns more:taxes Generally, an institution (such as a bank or governmental agency) that received interest payments of $600 or more during 2013 on one or more qualified student loans must send Form 1098-E (or acceptable substitute) to each borrower by January 31, 2014. Amended tax returns more:label_amended_20tax_20returns more:taxes   For qualified student loans taken out before September 1, 2004, the institution is required to include on Form 1098-E only payments of stated interest. Amended tax returns more:label_amended_20tax_20returns more:taxes Other interest payments, such as certain loan origination fees and capitalized interest, may not appear on the form you receive. Amended tax returns more:label_amended_20tax_20returns more:taxes However, if you pay qualifying interest that is not included on Form 1098-E, you can also deduct those amounts. Amended tax returns more:label_amended_20tax_20returns more:taxes See Allocating Payments Between Interest and Principal , earlier. Amended tax returns more:label_amended_20tax_20returns more:taxes    The lender may ask for a completed Form W-9S, or similar statement to obtain the borrower's name, address, and taxpayer identification number. Amended tax returns more:label_amended_20tax_20returns more:taxes The form may also be used by the borrower to certify that the student loan was incurred solely to pay for qualified education expenses. Amended tax returns more:label_amended_20tax_20returns more:taxes Effect of the Amount of Your Income on the Amount of Your Deduction The amount of your student loan interest deduction is phased out (gradually reduced) if your MAGI is between $60,000 and $75,000 ($125,000 and $155,000 if you file a joint return). Amended tax returns more:label_amended_20tax_20returns more:taxes You cannot take a student loan interest deduction if your MAGI is $75,000 or more ($155,000 or more if you file a joint return). Amended tax returns more:label_amended_20tax_20returns more:taxes Modified adjusted gross income (MAGI). Amended tax returns more:label_amended_20tax_20returns more:taxes   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return before subtracting any deduction for student loan interest. Amended tax returns more:label_amended_20tax_20returns more:taxes However, as discussed below, there may be other modifications. Amended tax returns more:label_amended_20tax_20returns more:taxes Table 4-2 shows how the amount of your MAGI can affect your student loan interest deduction. Amended tax returns more:label_amended_20tax_20returns more:taxes Table 4-2. Amended tax returns more:label_amended_20tax_20returns more:taxes Effect of MAGI on Student Loan Interest Deduction IF your filing status is. Amended tax returns more:label_amended_20tax_20returns more:taxes . Amended tax returns more:label_amended_20tax_20returns more:taxes . Amended tax returns more:label_amended_20tax_20returns more:taxes AND your MAGI is. Amended tax returns more:label_amended_20tax_20returns more:taxes . Amended tax returns more:label_amended_20tax_20returns more:taxes . Amended tax returns more:label_amended_20tax_20returns more:taxes THEN your student loan interest deduction is. Amended tax returns more:label_amended_20tax_20returns more:taxes . Amended tax returns more:label_amended_20tax_20returns more:taxes . Amended tax returns more:label_amended_20tax_20returns more:taxes single,  head of household, or qualifying widow(er) not more than $60,000 not affected by the phaseout. Amended tax returns more:label_amended_20tax_20returns more:taxes more than $60,000  but less than $75,000 reduced because of the phaseout. Amended tax returns more:label_amended_20tax_20returns more:taxes $75,000 or more eliminated by the phaseout. Amended tax returns more:label_amended_20tax_20returns more:taxes married filing joint return not more than $125,000 not affected by the phaseout. Amended tax returns more:label_amended_20tax_20returns more:taxes more than $125,000 but less than $155,000 reduced because of the phaseout. Amended tax returns more:label_amended_20tax_20returns more:taxes $155,000 or more eliminated by the phaseout. Amended tax returns more:label_amended_20tax_20returns more:taxes MAGI when using Form 1040A. Amended tax returns more:label_amended_20tax_20returns more:taxes   If you file Form 1040A, your MAGI is the AGI on line 22 of that form figured without taking into account any amount on line 18 (student loan interest deduction) and line 19 (tuition and fees deduction). Amended tax returns more:label_amended_20tax_20returns more:taxes MAGI when using Form 1040. Amended tax returns more:label_amended_20tax_20returns more:taxes   If you file Form 1040, your MAGI is the AGI on line 38 of that form figured without taking into account any amount on line 33 (student loan interest deduction), line 34 (tuition and fees deduction), or line 35 (domestic production activities deduction), and modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. Amended tax returns more:label_amended_20tax_20returns more:taxes MAGI when using Form 1040NR. Amended tax returns more:label_amended_20tax_20returns more:taxes   If you file Form 1040NR, your MAGI is the AGI on line 36 of that form figured without taking into account any amount on line 33 (student loan interest deduction) and line 34 (domestic production activities deduction). Amended tax returns more:label_amended_20tax_20returns more:taxes MAGI when using Form 1040NR-EZ. Amended tax returns more:label_amended_20tax_20returns more:taxes   If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form figured without taking into account any amount on line 9 (student loan interest deduction). Amended tax returns more:label_amended_20tax_20returns more:taxes Phaseout. Amended tax returns more:label_amended_20tax_20returns more:taxes   If your MAGI is within the range of incomes where the credit must be reduced, you must figure your reduced deduction. Amended tax returns more:label_amended_20tax_20returns more:taxes To figure the phaseout, multiply your interest deduction (before the phaseout) by a fraction. Amended tax returns more:label_amended_20tax_20returns more:taxes The numerator is your MAGI minus $60,000 ($125,000 in the case of a joint return). Amended tax returns more:label_amended_20tax_20returns more:taxes The denominator is $15,000 ($30,000 in the case of a joint return). Amended tax returns more:label_amended_20tax_20returns more:taxes Subtract the result from your deduction (before the phaseout) to give you the amount you can deduct. Amended tax returns more:label_amended_20tax_20returns more:taxes Example 1. Amended tax returns more:label_amended_20tax_20returns more:taxes During 2013 you paid $800 interest on a qualified student loan. Amended tax returns more:label_amended_20tax_20returns more:taxes Your 2013 MAGI is $145,000 and you are filing a joint return. Amended tax returns more:label_amended_20tax_20returns more:taxes You must reduce your deduction by $533, figured as follows. Amended tax returns more:label_amended_20tax_20returns more:taxes   $800 × $145,000 − $125,000  $30,000 = $533   Your reduced student loan interest deduction is $267 ($800 − $533). Amended tax returns more:label_amended_20tax_20returns more:taxes Example 2. Amended tax returns more:label_amended_20tax_20returns more:taxes The facts are the same as in Example 1 except that you paid $2,750 interest. Amended tax returns more:label_amended_20tax_20returns more:taxes Your maximum deduction for 2013 is $2,500. Amended tax returns more:label_amended_20tax_20returns more:taxes You must reduce your maximum deduction by $1,667, figured as follows. Amended tax returns more:label_amended_20tax_20returns more:taxes   $2,500 × $145,000 − $125,000  $30,000 = $1,667   In this example, your reduced student loan interest deduction is $833 ($2,500 − $1,667). Amended tax returns more:label_amended_20tax_20returns more:taxes Which Worksheet To Use Generally, you figure the deduction using the Student Loan Interest Deduction Worksheet in the instructions for Form 1040, Form 1040A, or Form 1040NR. Amended tax returns more:label_amended_20tax_20returns more:taxes However, if you are filing Form 2555, Foreign Earned Income, Form 2555-EZ, Foreign Earned Income Exclusion, or Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa, or you are excluding income from sources within Puerto Rico, you must complete Worksheet 4-1. Amended tax returns more:label_amended_20tax_20returns more:taxes Student Loan Interest Deduction Worksheet at the end of this chapter. Amended tax returns more:label_amended_20tax_20returns more:taxes Claiming the Deduction The student loan interest deduction is an adjustment to income. Amended tax returns more:label_amended_20tax_20returns more:taxes To claim the deduction, enter the allowable amount on line 33 (Form 1040), line 18 (Form 1040A), line 33 (Form 1040NR), or line 9 (Form 1040NR-EZ). Amended tax returns more:label_amended_20tax_20returns more:taxes Worksheet 4-1. Amended tax returns more:label_amended_20tax_20returns more:taxes Student Loan Interest Deduction Worksheet Use this worksheet instead of the worksheet in the Form 1040 instructions if you are filing Form 2555, 2555-EZ, or 4563, or you are excluding income from sources within Puerto Rico. Amended tax returns more:label_amended_20tax_20returns more:taxes Before using this worksheet, you must complete Form 1040, lines 7 through 32, plus any amount to be entered on the dotted line next to line 36. Amended tax returns more:label_amended_20tax_20returns more:taxes 1. Amended tax returns more:label_amended_20tax_20returns more:taxes Enter the total interest you paid in 2013 on qualified student loans. Amended tax returns more:label_amended_20tax_20returns more:taxes Do not enter  more than $2,500 1. Amended tax returns more:label_amended_20tax_20returns more:taxes   2. Amended tax returns more:label_amended_20tax_20returns more:taxes Enter the amount from Form 1040, line 22 2. Amended tax returns more:label_amended_20tax_20returns more:taxes       3. Amended tax returns more:label_amended_20tax_20returns more:taxes Enter the total of the amounts from Form 1040,  lines 23 through 32 3. Amended tax returns more:label_amended_20tax_20returns more:taxes           4. Amended tax returns more:label_amended_20tax_20returns more:taxes Enter the total of any amounts entered on the dotted line next to Form 1040, line 36 4. Amended tax returns more:label_amended_20tax_20returns more:taxes           5. Amended tax returns more:label_amended_20tax_20returns more:taxes Add lines 3 and 4 5. Amended tax returns more:label_amended_20tax_20returns more:taxes       6. Amended tax returns more:label_amended_20tax_20returns more:taxes Subtract line 5 from line 2 6. Amended tax returns more:label_amended_20tax_20returns more:taxes       7. Amended tax returns more:label_amended_20tax_20returns more:taxes Enter any foreign earned income exclusion and/or housing  exclusion (Form 2555, line 45, or Form 2555-EZ, line 18) 7. Amended tax returns more:label_amended_20tax_20returns more:taxes       8. Amended tax returns more:label_amended_20tax_20returns more:taxes Enter any foreign housing deduction (Form 2555, line 50) 8. Amended tax returns more:label_amended_20tax_20returns more:taxes       9. Amended tax returns more:label_amended_20tax_20returns more:taxes Enter the amount of income from Puerto Rico you are excluding 9. Amended tax returns more:label_amended_20tax_20returns more:taxes       10. Amended tax returns more:label_amended_20tax_20returns more:taxes Enter the amount of income from American Samoa  you are excluding (Form 4563, line 15) 10. Amended tax returns more:label_amended_20tax_20returns more:taxes       11. Amended tax returns more:label_amended_20tax_20returns more:taxes Add lines 6 through 10. Amended tax returns more:label_amended_20tax_20returns more:taxes This is your modified adjusted gross income 11. Amended tax returns more:label_amended_20tax_20returns more:taxes   12. Amended tax returns more:label_amended_20tax_20returns more:taxes Enter the amount shown below for your filing status 12. Amended tax returns more:label_amended_20tax_20returns more:taxes     •Single, head of household, or qualifying widow(er)—$60,000       •Married filing jointly—$125,000     13. Amended tax returns more:label_amended_20tax_20returns more:taxes Is the amount on line 11 more than the amount on line 12?       □ No. Amended tax returns more:label_amended_20tax_20returns more:taxes Skip lines 13 and 14, enter -0- on line 15, and go to line 16. Amended tax returns more:label_amended_20tax_20returns more:taxes       □ Yes. Amended tax returns more:label_amended_20tax_20returns more:taxes Subtract line 12 from line 11 13. Amended tax returns more:label_amended_20tax_20returns more:taxes   14. Amended tax returns more:label_amended_20tax_20returns more:taxes Divide line 13 by $15,000 ($30,000 if married filing jointly). Amended tax returns more:label_amended_20tax_20returns more:taxes Enter the result as a decimal  (rounded to at least three places). Amended tax returns more:label_amended_20tax_20returns more:taxes If the result is 1. Amended tax returns more:label_amended_20tax_20returns more:taxes 000 or more, enter 1. Amended tax returns more:label_amended_20tax_20returns more:taxes 000 14. Amended tax returns more:label_amended_20tax_20returns more:taxes . Amended tax returns more:label_amended_20tax_20returns more:taxes 15. Amended tax returns more:label_amended_20tax_20returns more:taxes Multiply line 1 by line 14 15. Amended tax returns more:label_amended_20tax_20returns more:taxes   16. Amended tax returns more:label_amended_20tax_20returns more:taxes Student loan interest deduction. Amended tax returns more:label_amended_20tax_20returns more:taxes Subtract line 15 from line 1. Amended tax returns more:label_amended_20tax_20returns more:taxes Enter the result here  and on Form 1040, line 33. Amended tax returns more:label_amended_20tax_20returns more:taxes Do not include this amount in figuring any other  deduction on your return (such as on Schedule A, C, E, etc. Amended tax returns more:label_amended_20tax_20returns more:taxes ) 16. Amended tax returns more:label_amended_20tax_20returns more:taxes   Prev  Up  Next   Home   More Online Publications
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Minority Business Development Agency

By providing techincal assistance and access to capital, contract opportunities, and new markets, the Minority Business Development Agency promotes the growth of businesses owned and operated by members of the minority and Diaspora communities.

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The Amended Tax Returns More:label_amended_20tax_20returns More:taxes

Amended tax returns more:label_amended_20tax_20returns more:taxes 1. Amended tax returns more:label_amended_20tax_20returns more:taxes   Overview of Depreciation Table of Contents Introduction Useful Items - You may want to see: What Property Can Be Depreciated?Property You Own Property Used in Your Business or Income-Producing Activity Property Having a Determinable Useful Life Property Lasting More Than One Year What Property Cannot Be Depreciated?Land Excepted Property When Does Depreciation Begin and End?Placed in Service Idle Property Cost or Other Basis Fully Recovered Retired From Service What Method Can You Use To Depreciate Your Property?Property You Placed in Service Before 1987 Property Owned or Used in 1986 Intangible Property Corporate or Partnership Property Acquired in a Nontaxable Transfer Election To Exclude Property From MACRS What Is the Basis of Your Depreciable Property?Cost as Basis Other Basis Adjusted Basis How Do You Treat Repairs and Improvements? Do You Have To File Form 4562? How Do You Correct Depreciation Deductions?Filing an Amended Return Changing Your Accounting Method Introduction Depreciation is an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property. Amended tax returns more:label_amended_20tax_20returns more:taxes It is an allowance for the wear and tear, deterioration, or obsolescence of the property. Amended tax returns more:label_amended_20tax_20returns more:taxes This chapter discusses the general rules for depreciating property and answers the following questions. Amended tax returns more:label_amended_20tax_20returns more:taxes What property can be depreciated? What property cannot be depreciated? When does depreciation begin and end? What method can you use to depreciate your property? What is the basis of your depreciable property? How do you treat repairs and improvements? Do you have to file Form 4562? How do you correct depreciation deductions? Useful Items - You may want to see: Publication 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 538 Accounting Periods and Methods 551 Basis of Assets Form (and Instructions) Sch C (Form 1040) Profit or Loss From Business Sch C-EZ (Form 1040) Net Profit From Business 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization See chapter 6 for information about getting publications and forms. Amended tax returns more:label_amended_20tax_20returns more:taxes What Property Can Be Depreciated? You can depreciate most types of tangible property (except land), such as buildings, machinery, vehicles, furniture, and equipment. Amended tax returns more:label_amended_20tax_20returns more:taxes You also can depreciate certain intangible property, such as patents, copyrights, and computer software. Amended tax returns more:label_amended_20tax_20returns more:taxes To be depreciable, the property must meet all the following requirements. Amended tax returns more:label_amended_20tax_20returns more:taxes It must be property you own. Amended tax returns more:label_amended_20tax_20returns more:taxes It must be used in your business or income-producing activity. Amended tax returns more:label_amended_20tax_20returns more:taxes It must have a determinable useful life. Amended tax returns more:label_amended_20tax_20returns more:taxes It must be expected to last more than one year. Amended tax returns more:label_amended_20tax_20returns more:taxes The following discussions provide information about these requirements. Amended tax returns more:label_amended_20tax_20returns more:taxes Property You Own To claim depreciation, you usually must be the owner of the property. Amended tax returns more:label_amended_20tax_20returns more:taxes You are considered as owning property even if it is subject to a debt. Amended tax returns more:label_amended_20tax_20returns more:taxes Example 1. Amended tax returns more:label_amended_20tax_20returns more:taxes You made a down payment to purchase rental property and assumed the previous owner's mortgage. Amended tax returns more:label_amended_20tax_20returns more:taxes You own the property and you can depreciate it. Amended tax returns more:label_amended_20tax_20returns more:taxes Example 2. Amended tax returns more:label_amended_20tax_20returns more:taxes You bought a new van that you will use only for your courier business. Amended tax returns more:label_amended_20tax_20returns more:taxes You will be making payments on the van over the next 5 years. Amended tax returns more:label_amended_20tax_20returns more:taxes You own the van and you can depreciate it. Amended tax returns more:label_amended_20tax_20returns more:taxes Leased property. Amended tax returns more:label_amended_20tax_20returns more:taxes   You can depreciate leased property only if you retain the incidents of ownership in the property (explained below). Amended tax returns more:label_amended_20tax_20returns more:taxes This means you bear the burden of exhaustion of the capital investment in the property. Amended tax returns more:label_amended_20tax_20returns more:taxes Therefore, if you lease property from someone to use in your trade or business or for the production of income, you generally cannot depreciate its cost because you do not retain the incidents of ownership. Amended tax returns more:label_amended_20tax_20returns more:taxes You can, however, depreciate any capital improvements you make to the property. Amended tax returns more:label_amended_20tax_20returns more:taxes See How Do You Treat Repairs and Improvements later in this chapter and Additions and Improvements under Which Recovery Period Applies in chapter 4. Amended tax returns more:label_amended_20tax_20returns more:taxes   If you lease property to someone, you generally can depreciate its cost even if the lessee (the person leasing from you) has agreed to preserve, replace, renew, and maintain the property. Amended tax returns more:label_amended_20tax_20returns more:taxes However, if the lease provides that the lessee is to maintain the property and return to you the same property or its equivalent in value at the expiration of the lease in as good condition and value as when leased, you cannot depreciate the cost of the property. Amended tax returns more:label_amended_20tax_20returns more:taxes Incidents of ownership. Amended tax returns more:label_amended_20tax_20returns more:taxes   Incidents of ownership in property include the following. Amended tax returns more:label_amended_20tax_20returns more:taxes The legal title to the property. Amended tax returns more:label_amended_20tax_20returns more:taxes The legal obligation to pay for the property. Amended tax returns more:label_amended_20tax_20returns more:taxes The responsibility to pay maintenance and operating expenses. Amended tax returns more:label_amended_20tax_20returns more:taxes The duty to pay any taxes on the property. Amended tax returns more:label_amended_20tax_20returns more:taxes The risk of loss if the property is destroyed, condemned, or diminished in value through obsolescence or exhaustion. Amended tax returns more:label_amended_20tax_20returns more:taxes Life tenant. Amended tax returns more:label_amended_20tax_20returns more:taxes   Generally, if you hold business or investment property as a life tenant, you can depreciate it as if you were the absolute owner of the property. Amended tax returns more:label_amended_20tax_20returns more:taxes However, see Certain term interests in property under Excepted Property, later. Amended tax returns more:label_amended_20tax_20returns more:taxes Cooperative apartments. Amended tax returns more:label_amended_20tax_20returns more:taxes   If you are a tenant-stockholder in a cooperative housing corporation and use your cooperative apartment in your business or for the production of income, you can depreciate your stock in the corporation, even though the corporation owns the apartment. Amended tax returns more:label_amended_20tax_20returns more:taxes   Figure your depreciation deduction as follows. Amended tax returns more:label_amended_20tax_20returns more:taxes Figure the depreciation for all the depreciable real property owned by the corporation in which you have a proprietary lease or right of tenancy. Amended tax returns more:label_amended_20tax_20returns more:taxes If you bought your cooperative stock after its first offering, figure the depreciable basis of this property as follows. Amended tax returns more:label_amended_20tax_20returns more:taxes Multiply your cost per share by the total number of outstanding shares, including any shares held by the corporation. Amended tax returns more:label_amended_20tax_20returns more:taxes Add to the amount figured in (a) any mortgage debt on the property on the date you bought the stock. Amended tax returns more:label_amended_20tax_20returns more:taxes Subtract from the amount figured in (b) any mortgage debt that is not for the depreciable real property, such as the part for the land. Amended tax returns more:label_amended_20tax_20returns more:taxes Subtract from the amount figured in (1) any depreciation for space owned by the corporation that can be rented but cannot be lived in by tenant-stockholders. Amended tax returns more:label_amended_20tax_20returns more:taxes Divide the number of your shares of stock by the total number of outstanding shares, including any shares held by the corporation. Amended tax returns more:label_amended_20tax_20returns more:taxes Multiply the result of (2) by the percentage you figured in (3). Amended tax returns more:label_amended_20tax_20returns more:taxes This is your depreciation on the stock. Amended tax returns more:label_amended_20tax_20returns more:taxes   Your depreciation deduction for the year cannot be more than the part of your adjusted basis in the stock of the corporation that is allocable to your business or income-producing property. Amended tax returns more:label_amended_20tax_20returns more:taxes You must also reduce your depreciation deduction if only a portion of the property is used in a business or for the production of income. Amended tax returns more:label_amended_20tax_20returns more:taxes Example. Amended tax returns more:label_amended_20tax_20returns more:taxes You figure your share of the cooperative housing corporation's depreciation to be $30,000. Amended tax returns more:label_amended_20tax_20returns more:taxes Your adjusted basis in the stock of the corporation is $50,000. Amended tax returns more:label_amended_20tax_20returns more:taxes You use one half of your apartment solely for business purposes. Amended tax returns more:label_amended_20tax_20returns more:taxes Your depreciation deduction for the stock for the year cannot be more than $25,000 (½ of $50,000). Amended tax returns more:label_amended_20tax_20returns more:taxes Change to business use. Amended tax returns more:label_amended_20tax_20returns more:taxes   If you change your cooperative apartment to business use, figure your allowable depreciation as explained earlier. Amended tax returns more:label_amended_20tax_20returns more:taxes The basis of all the depreciable real property owned by the cooperative housing corporation is the smaller of the following amounts. Amended tax returns more:label_amended_20tax_20returns more:taxes The fair market value of the property on the date you change your apartment to business use. Amended tax returns more:label_amended_20tax_20returns more:taxes This is considered to be the same as the corporation's adjusted basis minus straight line depreciation, unless this value is unrealistic. Amended tax returns more:label_amended_20tax_20returns more:taxes The corporation's adjusted basis in the property on that date. Amended tax returns more:label_amended_20tax_20returns more:taxes Do not subtract depreciation when figuring the corporation's adjusted basis. Amended tax returns more:label_amended_20tax_20returns more:taxes   If you bought the stock after its first offering, the corporation's adjusted basis in the property is the amount figured in (1), above. Amended tax returns more:label_amended_20tax_20returns more:taxes The fair market value of the property is considered to be the same as the corporation's adjusted basis figured in this way minus straight line depreciation, unless the value is unrealistic. Amended tax returns more:label_amended_20tax_20returns more:taxes   For a discussion of fair market value and adjusted basis, see Publication 551. Amended tax returns more:label_amended_20tax_20returns more:taxes Property Used in Your Business or Income-Producing Activity To claim depreciation on property, you must use it in your business or income-producing activity. Amended tax returns more:label_amended_20tax_20returns more:taxes If you use property to produce income (investment use), the income must be taxable. Amended tax returns more:label_amended_20tax_20returns more:taxes You cannot depreciate property that you use solely for personal activities. Amended tax returns more:label_amended_20tax_20returns more:taxes Partial business or investment use. Amended tax returns more:label_amended_20tax_20returns more:taxes   If you use property for business or investment purposes and for personal purposes, you can deduct depreciation based only on the business or investment use. Amended tax returns more:label_amended_20tax_20returns more:taxes For example, you cannot deduct depreciation on a car used only for commuting, personal shopping trips, family vacations, driving children to and from school, or similar activities. Amended tax returns more:label_amended_20tax_20returns more:taxes    You must keep records showing the business, investment, and personal use of your property. Amended tax returns more:label_amended_20tax_20returns more:taxes For more information on the records you must keep for listed property, such as a car, see What Records Must Be Kept in chapter 5. Amended tax returns more:label_amended_20tax_20returns more:taxes    Although you can combine business and investment use of property when figuring depreciation deductions, do not treat investment use as qualified business use when determining whether the business-use requirement for listed property is met. Amended tax returns more:label_amended_20tax_20returns more:taxes For information about qualified business use of listed property, see What Is the Business-Use Requirement in chapter 5. Amended tax returns more:label_amended_20tax_20returns more:taxes Office in the home. Amended tax returns more:label_amended_20tax_20returns more:taxes   If you use part of your home as an office, you may be able to deduct depreciation on that part based on its business use. Amended tax returns more:label_amended_20tax_20returns more:taxes For information about depreciating your home office, see Publication 587. Amended tax returns more:label_amended_20tax_20returns more:taxes Inventory. Amended tax returns more:label_amended_20tax_20returns more:taxes   You cannot depreciate inventory because it is not held for use in your business. Amended tax returns more:label_amended_20tax_20returns more:taxes Inventory is any property you hold primarily for sale to customers in the ordinary course of your business. Amended tax returns more:label_amended_20tax_20returns more:taxes   If you are a rent-to-own dealer, you may be able to treat certain property held in your business as depreciable property rather than as inventory. Amended tax returns more:label_amended_20tax_20returns more:taxes See Rent-to-own dealer under Which Property Class Applies Under GDS in chapter 4. Amended tax returns more:label_amended_20tax_20returns more:taxes   In some cases, it is not clear whether property is held for sale (inventory) or for use in your business. Amended tax returns more:label_amended_20tax_20returns more:taxes If it is unclear, examine carefully all the facts in the operation of the particular business. Amended tax returns more:label_amended_20tax_20returns more:taxes The following example shows how a careful examination of the facts in two similar situations results in different conclusions. Amended tax returns more:label_amended_20tax_20returns more:taxes Example. Amended tax returns more:label_amended_20tax_20returns more:taxes Maple Corporation is in the business of leasing cars. Amended tax returns more:label_amended_20tax_20returns more:taxes At the end of their useful lives, when the cars are no longer profitable to lease, Maple sells them. Amended tax returns more:label_amended_20tax_20returns more:taxes Maple does not have a showroom, used car lot, or individuals to sell the cars. Amended tax returns more:label_amended_20tax_20returns more:taxes Instead, it sells them through wholesalers or by similar arrangements in which a dealer's profit is not intended or considered. Amended tax returns more:label_amended_20tax_20returns more:taxes Maple can depreciate the leased cars because the cars are not held primarily for sale to customers in the ordinary course of business, but are leased. Amended tax returns more:label_amended_20tax_20returns more:taxes If Maple buys cars at wholesale prices, leases them for a short time, and then sells them at retail prices or in sales in which a dealer's profit is intended, the cars are treated as inventory and are not depreciable property. Amended tax returns more:label_amended_20tax_20returns more:taxes In this situation, the cars are held primarily for sale to customers in the ordinary course of business. Amended tax returns more:label_amended_20tax_20returns more:taxes Containers. Amended tax returns more:label_amended_20tax_20returns more:taxes   Generally, containers for the products you sell are part of inventory and you cannot depreciate them. Amended tax returns more:label_amended_20tax_20returns more:taxes However, you can depreciate containers used to ship your products if they have a life longer than one year and meet the following requirements. Amended tax returns more:label_amended_20tax_20returns more:taxes They qualify as property used in your business. Amended tax returns more:label_amended_20tax_20returns more:taxes Title to the containers does not pass to the buyer. Amended tax returns more:label_amended_20tax_20returns more:taxes   To determine if these requirements are met, consider the following questions. Amended tax returns more:label_amended_20tax_20returns more:taxes Does your sales contract, sales invoice, or other type of order acknowledgment indicate whether you have retained title? Does your invoice treat the containers as separate items? Do any of your records state your basis in the containers? Property Having a Determinable Useful Life To be depreciable, your property must have a determinable useful life. Amended tax returns more:label_amended_20tax_20returns more:taxes This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Amended tax returns more:label_amended_20tax_20returns more:taxes Property Lasting More Than One Year To be depreciable, property must have a useful life that extends substantially beyond the year you place it in service. Amended tax returns more:label_amended_20tax_20returns more:taxes Example. Amended tax returns more:label_amended_20tax_20returns more:taxes You maintain a library for use in your profession. Amended tax returns more:label_amended_20tax_20returns more:taxes You can depreciate it. Amended tax returns more:label_amended_20tax_20returns more:taxes However, if you buy technical books, journals, or information services for use in your business that have a useful life of one year or less, you cannot depreciate them. Amended tax returns more:label_amended_20tax_20returns more:taxes Instead, you deduct their cost as a business expense. Amended tax returns more:label_amended_20tax_20returns more:taxes What Property Cannot Be Depreciated? Certain property cannot be depreciated. Amended tax returns more:label_amended_20tax_20returns more:taxes This includes land and certain excepted property. Amended tax returns more:label_amended_20tax_20returns more:taxes Land You cannot depreciate the cost of land because land does not wear out, become obsolete, or get used up. Amended tax returns more:label_amended_20tax_20returns more:taxes The cost of land generally includes the cost of clearing, grading, planting, and landscaping. Amended tax returns more:label_amended_20tax_20returns more:taxes Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. Amended tax returns more:label_amended_20tax_20returns more:taxes These costs must be so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property. Amended tax returns more:label_amended_20tax_20returns more:taxes Example. Amended tax returns more:label_amended_20tax_20returns more:taxes You constructed a new building for use in your business and paid for grading, clearing, seeding, and planting bushes and trees. Amended tax returns more:label_amended_20tax_20returns more:taxes Some of the bushes and trees were planted right next to the building, while others were planted around the outer border of the lot. Amended tax returns more:label_amended_20tax_20returns more:taxes If you replace the building, you would have to destroy the bushes and trees right next to it. Amended tax returns more:label_amended_20tax_20returns more:taxes These bushes and trees are closely associated with the building, so they have a determinable useful life. Amended tax returns more:label_amended_20tax_20returns more:taxes Therefore, you can depreciate them. Amended tax returns more:label_amended_20tax_20returns more:taxes Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. Amended tax returns more:label_amended_20tax_20returns more:taxes Excepted Property Even if the requirements explained in the preceding discussions are met, you cannot depreciate the following property. Amended tax returns more:label_amended_20tax_20returns more:taxes Property placed in service and disposed of in the same year. Amended tax returns more:label_amended_20tax_20returns more:taxes Determining when property is placed in service is explained later. Amended tax returns more:label_amended_20tax_20returns more:taxes Equipment used to build capital improvements. Amended tax returns more:label_amended_20tax_20returns more:taxes You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Amended tax returns more:label_amended_20tax_20returns more:taxes See Uniform Capitalization Rules in Publication 551. Amended tax returns more:label_amended_20tax_20returns more:taxes Section 197 intangibles. Amended tax returns more:label_amended_20tax_20returns more:taxes You must amortize these costs. Amended tax returns more:label_amended_20tax_20returns more:taxes Section 197 intangibles are discussed in detail in Chapter 8 of Publication 535. Amended tax returns more:label_amended_20tax_20returns more:taxes Intangible property, such as certain computer software, that is not section 197 intangible property, can be depreciated if it meets certain requirements. Amended tax returns more:label_amended_20tax_20returns more:taxes See Intangible Property , later. Amended tax returns more:label_amended_20tax_20returns more:taxes Certain term interests. Amended tax returns more:label_amended_20tax_20returns more:taxes Certain term interests in property. Amended tax returns more:label_amended_20tax_20returns more:taxes   You cannot depreciate a term interest in property created or acquired after July 27, 1989, for any period during which the remainder interest is held, directly or indirectly, by a person related to you. Amended tax returns more:label_amended_20tax_20returns more:taxes A term interest in property means a life interest in property, an interest in property for a term of years, or an income interest in a trust. Amended tax returns more:label_amended_20tax_20returns more:taxes Related persons. Amended tax returns more:label_amended_20tax_20returns more:taxes   For a description of related persons, see Related Persons, later. Amended tax returns more:label_amended_20tax_20returns more:taxes For this purpose, however, treat as related persons only the relationships listed in items (1) through (10) of that discussion and substitute “50%” for “10%” each place it appears. Amended tax returns more:label_amended_20tax_20returns more:taxes Basis adjustments. Amended tax returns more:label_amended_20tax_20returns more:taxes   If you would be allowed a depreciation deduction for a term interest in property except that the holder of the remainder interest is related to you, you generally must reduce your basis in the term interest by any depreciation or amortization not allowed. Amended tax returns more:label_amended_20tax_20returns more:taxes   If you hold the remainder interest, you generally must increase your basis in that interest by the depreciation not allowed to the term interest holder. Amended tax returns more:label_amended_20tax_20returns more:taxes However, do not increase your basis for depreciation not allowed for periods during which either of the following situations applies. Amended tax returns more:label_amended_20tax_20returns more:taxes The term interest is held by an organization exempt from tax. Amended tax returns more:label_amended_20tax_20returns more:taxes The term interest is held by a nonresident alien individual or foreign corporation, and the income from the term interest is not effectively connected with the conduct of a trade or business in the United States. Amended tax returns more:label_amended_20tax_20returns more:taxes Exceptions. Amended tax returns more:label_amended_20tax_20returns more:taxes   The above rules do not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. Amended tax returns more:label_amended_20tax_20returns more:taxes They also do not apply to the holder of dividend rights that were separated from any stripped preferred stock if the rights were purchased after April 30, 1993, or to a person whose basis in the stock is determined by reference to the basis in the hands of the purchaser. Amended tax returns more:label_amended_20tax_20returns more:taxes When Does Depreciation Begin and End? You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income. Amended tax returns more:label_amended_20tax_20returns more:taxes You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first. Amended tax returns more:label_amended_20tax_20returns more:taxes Placed in Service You place property in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. Amended tax returns more:label_amended_20tax_20returns more:taxes Even if you are not using the property, it is in service when it is ready and available for its specific use. Amended tax returns more:label_amended_20tax_20returns more:taxes Example 1. Amended tax returns more:label_amended_20tax_20returns more:taxes Donald Steep bought a machine for his business. Amended tax returns more:label_amended_20tax_20returns more:taxes The machine was delivered last year. Amended tax returns more:label_amended_20tax_20returns more:taxes However, it was not installed and operational until this year. Amended tax returns more:label_amended_20tax_20returns more:taxes It is considered placed in service this year. Amended tax returns more:label_amended_20tax_20returns more:taxes If the machine had been ready and available for use when it was delivered, it would be considered placed in service last year even if it was not actually used until this year. Amended tax returns more:label_amended_20tax_20returns more:taxes Example 2. Amended tax returns more:label_amended_20tax_20returns more:taxes On April 6, Sue Thorn bought a house to use as residential rental property. Amended tax returns more:label_amended_20tax_20returns more:taxes She made several repairs and had it ready for rent on July 5. Amended tax returns more:label_amended_20tax_20returns more:taxes At that time, she began to advertise it for rent in the local newspaper. Amended tax returns more:label_amended_20tax_20returns more:taxes The house is considered placed in service in July when it was ready and available for rent. Amended tax returns more:label_amended_20tax_20returns more:taxes She can begin to depreciate it in July. Amended tax returns more:label_amended_20tax_20returns more:taxes Example 3. Amended tax returns more:label_amended_20tax_20returns more:taxes James Elm is a building contractor who specializes in constructing office buildings. Amended tax returns more:label_amended_20tax_20returns more:taxes He bought a truck last year that had to be modified to lift materials to second-story levels. Amended tax returns more:label_amended_20tax_20returns more:taxes The installation of the lifting equipment was completed and James accepted delivery of the modified truck on January 10 of this year. Amended tax returns more:label_amended_20tax_20returns more:taxes The truck was placed in service on January 10, the date it was ready and available to perform the function for which it was bought. Amended tax returns more:label_amended_20tax_20returns more:taxes Conversion to business use. Amended tax returns more:label_amended_20tax_20returns more:taxes   If you place property in service in a personal activity, you cannot claim depreciation. Amended tax returns more:label_amended_20tax_20returns more:taxes However, if you change the property's use to use in a business or income-producing activity, then you can begin to depreciate it at the time of the change. Amended tax returns more:label_amended_20tax_20returns more:taxes You place the property in service in the business or income-producing activity on the date of the change. Amended tax returns more:label_amended_20tax_20returns more:taxes Example. Amended tax returns more:label_amended_20tax_20returns more:taxes You bought a home and used it as your personal home several years before you converted it to rental property. Amended tax returns more:label_amended_20tax_20returns more:taxes Although its specific use was personal and no depreciation was allowable, you placed the home in service when you began using it as your home. Amended tax returns more:label_amended_20tax_20returns more:taxes You can begin to claim depreciation in the year you converted it to rental property because its use changed to an income-producing use at that time. Amended tax returns more:label_amended_20tax_20returns more:taxes Idle Property Continue to claim a deduction for depreciation on property used in your business or for the production of income even if it is temporarily idle (not in use). Amended tax returns more:label_amended_20tax_20returns more:taxes For example, if you stop using a machine because there is a temporary lack of a market for a product made with that machine, continue to deduct depreciation on the machine. Amended tax returns more:label_amended_20tax_20returns more:taxes Cost or Other Basis Fully Recovered You stop depreciating property when you have fully recovered your cost or other basis. Amended tax returns more:label_amended_20tax_20returns more:taxes You recover your basis when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property. Amended tax returns more:label_amended_20tax_20returns more:taxes See What Is the Basis of Your Depreciable Property , later. Amended tax returns more:label_amended_20tax_20returns more:taxes Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. Amended tax returns more:label_amended_20tax_20returns more:taxes You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events. Amended tax returns more:label_amended_20tax_20returns more:taxes You sell or exchange the property. Amended tax returns more:label_amended_20tax_20returns more:taxes You convert the property to personal use. Amended tax returns more:label_amended_20tax_20returns more:taxes You abandon the property. Amended tax returns more:label_amended_20tax_20returns more:taxes You transfer the property to a supplies or scrap account. Amended tax returns more:label_amended_20tax_20returns more:taxes The property is destroyed. Amended tax returns more:label_amended_20tax_20returns more:taxes If you included the property in a general asset account, see How Do You Use General Asset Accounts in chapter 4 for the rules that apply when you dispose of that property. Amended tax returns more:label_amended_20tax_20returns more:taxes What Method Can You Use To Depreciate Your Property? You must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most property. Amended tax returns more:label_amended_20tax_20returns more:taxes MACRS is discussed in chapter 4. Amended tax returns more:label_amended_20tax_20returns more:taxes You cannot use MACRS to depreciate the following property. Amended tax returns more:label_amended_20tax_20returns more:taxes Property you placed in service before 1987. Amended tax returns more:label_amended_20tax_20returns more:taxes Certain property owned or used in 1986. Amended tax returns more:label_amended_20tax_20returns more:taxes Intangible property. Amended tax returns more:label_amended_20tax_20returns more:taxes Films, video tapes, and recordings. Amended tax returns more:label_amended_20tax_20returns more:taxes Certain corporate or partnership property acquired in a nontaxable transfer. Amended tax returns more:label_amended_20tax_20returns more:taxes Property you elected to exclude from MACRS. Amended tax returns more:label_amended_20tax_20returns more:taxes The following discussions describe the property listed above and explain what depreciation method should be used. Amended tax returns more:label_amended_20tax_20returns more:taxes Property You Placed in Service Before 1987 You cannot use MACRS for property you placed in service before 1987 (except property you placed in service after July 31, 1986, if MACRS was elected). Amended tax returns more:label_amended_20tax_20returns more:taxes Property placed in service before 1987 must be depreciated under the methods discussed in Publication 534. Amended tax returns more:label_amended_20tax_20returns more:taxes For a discussion of when property is placed in service, see When Does Depreciation Begin and End , earlier. Amended tax returns more:label_amended_20tax_20returns more:taxes Use of real property changed. Amended tax returns more:label_amended_20tax_20returns more:taxes   You generally must use MACRS to depreciate real property that you acquired for personal use before 1987 and changed to business or income-producing use after 1986. Amended tax returns more:label_amended_20tax_20returns more:taxes Improvements made after 1986. Amended tax returns more:label_amended_20tax_20returns more:taxes   You must treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. Amended tax returns more:label_amended_20tax_20returns more:taxes Therefore, you can depreciate that improvement as separate property under MACRS if it is the type of property that otherwise qualifies for MACRS depreciation. Amended tax returns more:label_amended_20tax_20returns more:taxes For more information about improvements, see How Do You Treat Repairs and Improvements , later and Additions and Improvements under Which Recovery Period Applies in chapter 4. Amended tax returns more:label_amended_20tax_20returns more:taxes Property Owned or Used in 1986 You may not be able to use MACRS for property you acquired and placed in service after 1986 if any of the situations described below apply. Amended tax returns more:label_amended_20tax_20returns more:taxes If you cannot use MACRS, the property must be depreciated under the methods discussed in Publication 534. Amended tax returns more:label_amended_20tax_20returns more:taxes For the following discussions, do not treat property as owned before you placed it in service. Amended tax returns more:label_amended_20tax_20returns more:taxes If you owned property in 1986 but did not place it in service until 1987, you do not treat it as owned in 1986. Amended tax returns more:label_amended_20tax_20returns more:taxes Personal property. Amended tax returns more:label_amended_20tax_20returns more:taxes   You cannot use MACRS for personal property (section 1245 property) in any of the following situations. Amended tax returns more:label_amended_20tax_20returns more:taxes You or someone related to you owned or used the property in 1986. Amended tax returns more:label_amended_20tax_20returns more:taxes You acquired the property from a person who owned it in 1986 and as part of the transaction the user of the property did not change. Amended tax returns more:label_amended_20tax_20returns more:taxes You lease the property to a person (or someone related to this person) who owned or used the property in 1986. Amended tax returns more:label_amended_20tax_20returns more:taxes You acquired the property in a transaction in which: The user of the property did not change, and The property was not MACRS property in the hands of the person from whom you acquired it because of (2) or (3) above. Amended tax returns more:label_amended_20tax_20returns more:taxes Real property. Amended tax returns more:label_amended_20tax_20returns more:taxes   You generally cannot use MACRS for real property (section 1250 property) in any of the following situations. Amended tax returns more:label_amended_20tax_20returns more:taxes You or someone related to you owned the property in 1986. Amended tax returns more:label_amended_20tax_20returns more:taxes You lease the property to a person who owned the property in 1986 (or someone related to that person). Amended tax returns more:label_amended_20tax_20returns more:taxes You acquired the property in a like-kind exchange, involuntary conversion, or repossession of property you or someone related to you owned in 1986. Amended tax returns more:label_amended_20tax_20returns more:taxes MACRS applies only to that part of your basis in the acquired property that represents cash paid or unlike property given up. Amended tax returns more:label_amended_20tax_20returns more:taxes It does not apply to the carried-over part of the basis. Amended tax returns more:label_amended_20tax_20returns more:taxes Exceptions. Amended tax returns more:label_amended_20tax_20returns more:taxes   The rules above do not apply to the following. Amended tax returns more:label_amended_20tax_20returns more:taxes Residential rental property or nonresidential real property. Amended tax returns more:label_amended_20tax_20returns more:taxes Any property if, in the first tax year it is placed in service, the deduction under the Accelerated Cost Recovery System (ACRS) is more than the deduction under MACRS using the half-year convention. Amended tax returns more:label_amended_20tax_20returns more:taxes For information on how to figure depreciation under ACRS, see Publication 534. Amended tax returns more:label_amended_20tax_20returns more:taxes Property that was MACRS property in the hands of the person from whom you acquired it because of (2) above. Amended tax returns more:label_amended_20tax_20returns more:taxes Related persons. Amended tax returns more:label_amended_20tax_20returns more:taxes   For this purpose, the following are related persons. Amended tax returns more:label_amended_20tax_20returns more:taxes An individual and a member of his or her family, including only a spouse, child, parent, brother, sister, half-brother, half-sister, ancestor, and lineal descendant. Amended tax returns more:label_amended_20tax_20returns more:taxes A corporation and an individual who directly or indirectly owns more than 10% of the value of the outstanding stock of that corporation. Amended tax returns more:label_amended_20tax_20returns more:taxes Two corporations that are members of the same controlled group. Amended tax returns more:label_amended_20tax_20returns more:taxes A trust fiduciary and a corporation if more than 10% of the value of the outstanding stock is directly or indirectly owned by or for the trust or grantor of the trust. Amended tax returns more:label_amended_20tax_20returns more:taxes The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Amended tax returns more:label_amended_20tax_20returns more:taxes The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of both trusts. Amended tax returns more:label_amended_20tax_20returns more:taxes A tax-exempt educational or charitable organization and any person (or, if that person is an individual, a member of that person's family) who directly or indirectly controls the organization. Amended tax returns more:label_amended_20tax_20returns more:taxes Two S corporations, and an S corporation and a regular corporation, if the same persons own more than 10% of the value of the outstanding stock of each corporation. Amended tax returns more:label_amended_20tax_20returns more:taxes A corporation and a partnership if the same persons own both of the following. Amended tax returns more:label_amended_20tax_20returns more:taxes More than 10% of the value of the outstanding stock of the corporation. Amended tax returns more:label_amended_20tax_20returns more:taxes More than 10% of the capital or profits interest in the partnership. Amended tax returns more:label_amended_20tax_20returns more:taxes The executor and beneficiary of any estate. Amended tax returns more:label_amended_20tax_20returns more:taxes A partnership and a person who directly or indirectly owns more than 10% of the capital or profits interest in the partnership. Amended tax returns more:label_amended_20tax_20returns more:taxes Two partnerships, if the same persons directly or indirectly own more than 10% of the capital or profits interest in each. Amended tax returns more:label_amended_20tax_20returns more:taxes The related person and a person who is engaged in trades or businesses under common control. Amended tax returns more:label_amended_20tax_20returns more:taxes See section 52(a) and 52(b) of the Internal Revenue Code. Amended tax returns more:label_amended_20tax_20returns more:taxes When to determine relationship. Amended tax returns more:label_amended_20tax_20returns more:taxes   You must determine whether you are related to another person at the time you acquire the property. Amended tax returns more:label_amended_20tax_20returns more:taxes   A partnership acquiring property from a terminating partnership must determine whether it is related to the terminating partnership immediately before the event causing the termination. Amended tax returns more:label_amended_20tax_20returns more:taxes For this rule, a terminating partnership is one that sells or exchanges, within 12 months, 50% or more of its total interest in partnership capital or profits. Amended tax returns more:label_amended_20tax_20returns more:taxes Constructive ownership of stock or partnership interest. Amended tax returns more:label_amended_20tax_20returns more:taxes   To determine whether a person directly or indirectly owns any of the outstanding stock of a corporation or an interest in a partnership, apply the following rules. Amended tax returns more:label_amended_20tax_20returns more:taxes Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Amended tax returns more:label_amended_20tax_20returns more:taxes However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more of the value of the stock of the corporation. Amended tax returns more:label_amended_20tax_20returns more:taxes An individual is considered to own the stock or partnership interest directly or indirectly owned by or for the individual's family. Amended tax returns more:label_amended_20tax_20returns more:taxes An individual who owns, except by applying rule (2), any stock in a corporation is considered to own the stock directly or indirectly owned by or for the individual's partner. Amended tax returns more:label_amended_20tax_20returns more:taxes For purposes of rules (1), (2), or (3), stock or a partnership interest considered to be owned by a person under rule (1) is treated as actually owned by that person. Amended tax returns more:label_amended_20tax_20returns more:taxes However, stock or a partnership interest considered to be owned by an individual under rule (2) or (3) is not treated as owned by that individual for reapplying either rule (2) or (3) to make another person considered to be the owner of the same stock or partnership interest. Amended tax returns more:label_amended_20tax_20returns more:taxes Intangible Property Generally, if you can depreciate intangible property, you usually use the straight line method of depreciation. Amended tax returns more:label_amended_20tax_20returns more:taxes However, you can choose to depreciate certain intangible property under the income forecast method (discussed later). Amended tax returns more:label_amended_20tax_20returns more:taxes You cannot depreciate intangible property that is a section 197 intangible or that otherwise does not meet all the requirements discussed earlier under What Property Can Be Depreciated. Amended tax returns more:label_amended_20tax_20returns more:taxes Straight Line Method This method lets you deduct the same amount of depreciation each year over the useful life of the property. Amended tax returns more:label_amended_20tax_20returns more:taxes To figure your deduction, first determine the adjusted basis, salvage value, and estimated useful life of your property. Amended tax returns more:label_amended_20tax_20returns more:taxes Subtract the salvage value, if any, from the adjusted basis. Amended tax returns more:label_amended_20tax_20returns more:taxes The balance is the total depreciation you can take over the useful life of the property. Amended tax returns more:label_amended_20tax_20returns more:taxes Divide the balance by the number of years in the useful life. Amended tax returns more:label_amended_20tax_20returns more:taxes This gives you your yearly depreciation deduction. Amended tax returns more:label_amended_20tax_20returns more:taxes Unless there is a big change in adjusted basis or useful life, this amount will stay the same throughout the time you depreciate the property. Amended tax returns more:label_amended_20tax_20returns more:taxes If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use. Amended tax returns more:label_amended_20tax_20returns more:taxes Example. Amended tax returns more:label_amended_20tax_20returns more:taxes In April, Frank bought a patent for $5,100 that is not a section 197 intangible. Amended tax returns more:label_amended_20tax_20returns more:taxes He depreciates the patent under the straight line method, using a 17-year useful life and no salvage value. Amended tax returns more:label_amended_20tax_20returns more:taxes He divides the $5,100 basis by 17 years to get his $300 yearly depreciation deduction. Amended tax returns more:label_amended_20tax_20returns more:taxes He only used the patent for 9 months during the first year, so he multiplies $300 by 9/12 to get his deduction of $225 for the first year. Amended tax returns more:label_amended_20tax_20returns more:taxes Next year, Frank can deduct $300 for the full year. Amended tax returns more:label_amended_20tax_20returns more:taxes Patents and copyrights. Amended tax returns more:label_amended_20tax_20returns more:taxes   If you can depreciate the cost of a patent or copyright, use the straight line method over the useful life. Amended tax returns more:label_amended_20tax_20returns more:taxes The useful life of a patent or copyright is the lesser of the life granted to it by the government or the remaining life when you acquire it. Amended tax returns more:label_amended_20tax_20returns more:taxes However, if the patent or copyright becomes valueless before the end of its useful life, you can deduct in that year any of its remaining cost or other basis. Amended tax returns more:label_amended_20tax_20returns more:taxes Computer software. Amended tax returns more:label_amended_20tax_20returns more:taxes   Computer software is generally a section 197 intangible and cannot be depreciated if you acquired it in connection with the acquisition of assets constituting a business or a substantial part of a business. Amended tax returns more:label_amended_20tax_20returns more:taxes   However, computer software is not a section 197 intangible and can be depreciated, even if acquired in connection with the acquisition of a business, if it meets all of the following tests. Amended tax returns more:label_amended_20tax_20returns more:taxes It is readily available for purchase by the general public. Amended tax returns more:label_amended_20tax_20returns more:taxes It is subject to a nonexclusive license. Amended tax returns more:label_amended_20tax_20returns more:taxes It has not been substantially modified. Amended tax returns more:label_amended_20tax_20returns more:taxes   If the software meets the tests above, it may also qualify for the section 179 deduction and the special depreciation allowance, discussed later. Amended tax returns more:label_amended_20tax_20returns more:taxes If you can depreciate the cost of computer software, use the straight line method over a useful life of 36 months. Amended tax returns more:label_amended_20tax_20returns more:taxes    Tax-exempt use property subject to a lease. Amended tax returns more:label_amended_20tax_20returns more:taxes   The useful life of computer software leased under a lease agreement entered into after March 12, 2004, to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership), cannot be less than 125% of the lease term. Amended tax returns more:label_amended_20tax_20returns more:taxes Certain created intangibles. Amended tax returns more:label_amended_20tax_20returns more:taxes   You can amortize certain intangibles created on or after December 31, 2003, over a 15-year period using the straight line method and no salvage value, even though they have a useful life that cannot be estimated with reasonable accuracy. Amended tax returns more:label_amended_20tax_20returns more:taxes For example, amounts paid to acquire memberships or privileges of indefinite duration, such as a trade association membership, are eligible costs. Amended tax returns more:label_amended_20tax_20returns more:taxes   The following are not eligible. Amended tax returns more:label_amended_20tax_20returns more:taxes Any intangible asset acquired from another person. Amended tax returns more:label_amended_20tax_20returns more:taxes Created financial interests. Amended tax returns more:label_amended_20tax_20returns more:taxes Any intangible asset that has a useful life that can be estimated with reasonable accuracy. Amended tax returns more:label_amended_20tax_20returns more:taxes Any intangible asset that has an amortization period or limited useful life that is specifically prescribed or prohibited by the Code, regulations, or other published IRS guidance. Amended tax returns more:label_amended_20tax_20returns more:taxes Any amount paid to facilitate an acquisition of a trade or business, a change in the capital structure of a business entity, and certain other transactions. Amended tax returns more:label_amended_20tax_20returns more:taxes   You must also increase the 15-year safe harbor amortization period to a 25-year period for certain intangibles related to benefits arising from the provision, production, or improvement of real property. Amended tax returns more:label_amended_20tax_20returns more:taxes For this purpose, real property includes property that will remain attached to the real property for an indefinite period of time, such as roads, bridges, tunnels, pavements, and pollution control facilities. Amended tax returns more:label_amended_20tax_20returns more:taxes Income Forecast Method You can choose to use the income forecast method instead of the straight line method to depreciate the following depreciable intangibles. Amended tax returns more:label_amended_20tax_20returns more:taxes Motion picture films or video tapes. Amended tax returns more:label_amended_20tax_20returns more:taxes Sound recordings. Amended tax returns more:label_amended_20tax_20returns more:taxes Copyrights. Amended tax returns more:label_amended_20tax_20returns more:taxes Books. Amended tax returns more:label_amended_20tax_20returns more:taxes Patents. Amended tax returns more:label_amended_20tax_20returns more:taxes Under the income forecast method, each year's depreciation deduction is equal to the cost of the property, multiplied by a fraction. Amended tax returns more:label_amended_20tax_20returns more:taxes The numerator of the fraction is the current year's net income from the property, and the denominator is the total income anticipated from the property through the end of the 10th taxable year following the taxable year the property is placed in service. Amended tax returns more:label_amended_20tax_20returns more:taxes For more information, see section 167(g) of the Internal Revenue Code. Amended tax returns more:label_amended_20tax_20returns more:taxes Films, video tapes, and recordings. Amended tax returns more:label_amended_20tax_20returns more:taxes   You cannot use MACRS for motion picture films, video tapes, and sound recordings. Amended tax returns more:label_amended_20tax_20returns more:taxes For this purpose, sound recordings are discs, tapes, or other phonorecordings resulting from the fixation of a series of sounds. Amended tax returns more:label_amended_20tax_20returns more:taxes You can depreciate this property using either the straight line method or the income forecast method. Amended tax returns more:label_amended_20tax_20returns more:taxes Participations and residuals. Amended tax returns more:label_amended_20tax_20returns more:taxes   You can include participations and residuals in the adjusted basis of the property for purposes of computing your depreciation deduction under the income forecast method. Amended tax returns more:label_amended_20tax_20returns more:taxes The participations and residuals must relate to income to be derived from the property before the end of the 10th taxable year after the property is placed in service. Amended tax returns more:label_amended_20tax_20returns more:taxes For this purpose, participations and residuals are defined as costs which by contract vary with the amount of income earned in connection with the property. Amended tax returns more:label_amended_20tax_20returns more:taxes   Instead of including these amounts in the adjusted basis of the property, you can deduct the costs in the taxable year that they are paid. Amended tax returns more:label_amended_20tax_20returns more:taxes Videocassettes. Amended tax returns more:label_amended_20tax_20returns more:taxes   If you are in the business of renting videocassettes, you can depreciate only those videocassettes bought for rental. Amended tax returns more:label_amended_20tax_20returns more:taxes If the videocassette has a useful life of one year or less, you can currently deduct the cost as a business expense. Amended tax returns more:label_amended_20tax_20returns more:taxes Corporate or Partnership Property Acquired in a Nontaxable Transfer MACRS does not apply to property used before 1987 and transferred after 1986 to a corporation or partnership (except property the transferor placed in service after July 31, 1986, if MACRS was elected) to the extent its basis is carried over from the property's adjusted basis in the transferor's hands. Amended tax returns more:label_amended_20tax_20returns more:taxes You must continue to use the same depreciation method as the transferor and figure depreciation as if the transfer had not occurred. Amended tax returns more:label_amended_20tax_20returns more:taxes However, if MACRS would otherwise apply, you can use it to depreciate the part of the property's basis that exceeds the carried-over basis. Amended tax returns more:label_amended_20tax_20returns more:taxes The nontaxable transfers covered by this rule include the following. Amended tax returns more:label_amended_20tax_20returns more:taxes A distribution in complete liquidation of a subsidiary. Amended tax returns more:label_amended_20tax_20returns more:taxes A transfer to a corporation controlled by the transferor. Amended tax returns more:label_amended_20tax_20returns more:taxes An exchange of property solely for corporate stock or securities in a reorganization. Amended tax returns more:label_amended_20tax_20returns more:taxes A contribution of property to a partnership in exchange for a partnership interest. Amended tax returns more:label_amended_20tax_20returns more:taxes A partnership distribution of property to a partner. Amended tax returns more:label_amended_20tax_20returns more:taxes Election To Exclude Property From MACRS If you can properly depreciate any property under a method not based on a term of years, such as the unit-of-production method, you can elect to exclude that property from MACRS. Amended tax returns more:label_amended_20tax_20returns more:taxes You make the election by reporting your depreciation for the property on line 15 in Part II of Form 4562 and attaching a statement as described in the instructions for Form 4562. Amended tax returns more:label_amended_20tax_20returns more:taxes You must make this election by the return due date (including extensions) for the tax year you place your property in service. Amended tax returns more:label_amended_20tax_20returns more:taxes However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within six months of the due date of the return (excluding extensions). Amended tax returns more:label_amended_20tax_20returns more:taxes Attach the election to the amended return and write “Filed pursuant to section 301. Amended tax returns more:label_amended_20tax_20returns more:taxes 9100-2” on the election statement. Amended tax returns more:label_amended_20tax_20returns more:taxes File the amended return at the same address you filed the original return. Amended tax returns more:label_amended_20tax_20returns more:taxes Use of standard mileage rate. Amended tax returns more:label_amended_20tax_20returns more:taxes   If you use the standard mileage rate to figure your tax deduction for your business automobile, you are treated as having made an election to exclude the automobile from MACRS. Amended tax returns more:label_amended_20tax_20returns more:taxes See Publication 463 for a discussion of the standard mileage rate. Amended tax returns more:label_amended_20tax_20returns more:taxes What Is the Basis of Your Depreciable Property? To figure your depreciation deduction, you must determine the basis of your property. Amended tax returns more:label_amended_20tax_20returns more:taxes To determine basis, you need to know the cost or other basis of your property. Amended tax returns more:label_amended_20tax_20returns more:taxes Cost as Basis The basis of property you buy is its cost plus amounts you paid for items such as sales tax (see Exception , below), freight charges, and installation and testing fees. Amended tax returns more:label_amended_20tax_20returns more:taxes The cost includes the amount you pay in cash, debt obligations, other property, or services. Amended tax returns more:label_amended_20tax_20returns more:taxes Exception. Amended tax returns more:label_amended_20tax_20returns more:taxes   You can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). Amended tax returns more:label_amended_20tax_20returns more:taxes If you make that choice, you cannot include those sales taxes as part of your cost basis. Amended tax returns more:label_amended_20tax_20returns more:taxes Assumed debt. Amended tax returns more:label_amended_20tax_20returns more:taxes   If you buy property and assume (or buy subject to) an existing mortgage or other debt on the property, your basis includes the amount you pay for the property plus the amount of the assumed debt. Amended tax returns more:label_amended_20tax_20returns more:taxes Example. Amended tax returns more:label_amended_20tax_20returns more:taxes You make a $20,000 down payment on property and assume the seller's mortgage of $120,000. Amended tax returns more:label_amended_20tax_20returns more:taxes Your total cost is $140,000, the cash you paid plus the mortgage you assumed. Amended tax returns more:label_amended_20tax_20returns more:taxes Settlement costs. Amended tax returns more:label_amended_20tax_20returns more:taxes   The basis of real property also includes certain fees and charges you pay in addition to the purchase price. Amended tax returns more:label_amended_20tax_20returns more:taxes These generally are shown on your settlement statement and include the following. Amended tax returns more:label_amended_20tax_20returns more:taxes Legal and recording fees. Amended tax returns more:label_amended_20tax_20returns more:taxes Abstract fees. Amended tax returns more:label_amended_20tax_20returns more:taxes Survey charges. Amended tax returns more:label_amended_20tax_20returns more:taxes Owner's title insurance. Amended tax returns more:label_amended_20tax_20returns more:taxes Amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. Amended tax returns more:label_amended_20tax_20returns more:taxes   For fees and charges you cannot include in the basis of property, see Real Property in Publication 551. Amended tax returns more:label_amended_20tax_20returns more:taxes Property you construct or build. Amended tax returns more:label_amended_20tax_20returns more:taxes   If you construct, build, or otherwise produce property for use in your business, you may have to use the uniform capitalization rules to determine the basis of your property. Amended tax returns more:label_amended_20tax_20returns more:taxes For information about the uniform capitalization rules, see Publication 551 and the regulations under section 263A of the Internal Revenue Code. Amended tax returns more:label_amended_20tax_20returns more:taxes Other Basis Other basis usually refers to basis that is determined by the way you received the property. Amended tax returns more:label_amended_20tax_20returns more:taxes For example, your basis is other than cost if you acquired the property in exchange for other property, as payment for services you performed, as a gift, or as an inheritance. Amended tax returns more:label_amended_20tax_20returns more:taxes If you acquired property in this or some other way, see Publication 551 to determine your basis. Amended tax returns more:label_amended_20tax_20returns more:taxes Property changed from personal use. Amended tax returns more:label_amended_20tax_20returns more:taxes   If you held property for personal use and later use it in your business or income-producing activity, your depreciable basis is the lesser of the following. Amended tax returns more:label_amended_20tax_20returns more:taxes The fair market value (FMV) of the property on the date of the change in use. Amended tax returns more:label_amended_20tax_20returns more:taxes Your original cost or other basis adjusted as follows. Amended tax returns more:label_amended_20tax_20returns more:taxes Increased by the cost of any permanent improvements or additions and other costs that must be added to basis. Amended tax returns more:label_amended_20tax_20returns more:taxes Decreased by any deductions you claimed for casualty and theft losses and other items that reduced your basis. Amended tax returns more:label_amended_20tax_20returns more:taxes Example. Amended tax returns more:label_amended_20tax_20returns more:taxes Several years ago, Nia paid $160,000 to have her home built on a lot that cost her $25,000. Amended tax returns more:label_amended_20tax_20returns more:taxes Before changing the property to rental use last year, she paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house. Amended tax returns more:label_amended_20tax_20returns more:taxes Land is not depreciable, so she includes only the cost of the house when figuring the basis for depreciation. Amended tax returns more:label_amended_20tax_20returns more:taxes Nia's adjusted basis in the house when she changed its use was $178,000 ($160,000 + $20,000 − $2,000). Amended tax returns more:label_amended_20tax_20returns more:taxes On the same date, her property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. Amended tax returns more:label_amended_20tax_20returns more:taxes The basis for depreciation on the house is the FMV on the date of change ($165,000), because it is less than her adjusted basis ($178,000). Amended tax returns more:label_amended_20tax_20returns more:taxes Property acquired in a nontaxable transaction. Amended tax returns more:label_amended_20tax_20returns more:taxes   Generally, if you receive property in a nontaxable exchange, the basis of the property you receive is the same as the adjusted basis of the property you gave up. Amended tax returns more:label_amended_20tax_20returns more:taxes Special rules apply in determining the basis and figuring the MACRS depreciation deduction and special depreciation allowance for property acquired in a like-kind exchange or involuntary conversion. Amended tax returns more:label_amended_20tax_20returns more:taxes See Like-kind exchanges and involuntary conversions. Amended tax returns more:label_amended_20tax_20returns more:taxes under How Much Can You Deduct? in chapter 3 and Figuring the Deduction for Property Acquired in a Nontaxable Exchange in chapter 4. Amended tax returns more:label_amended_20tax_20returns more:taxes   There are also special rules for determining the basis of MACRS property involved in a like-kind exchange or involuntary conversion when the property is contained in a general asset account. Amended tax returns more:label_amended_20tax_20returns more:taxes See How Do You Use General Asset Accounts in chapter 4. Amended tax returns more:label_amended_20tax_20returns more:taxes Adjusted Basis To find your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service. Amended tax returns more:label_amended_20tax_20returns more:taxes These events could include the following. Amended tax returns more:label_amended_20tax_20returns more:taxes Installing utility lines. Amended tax returns more:label_amended_20tax_20returns more:taxes Paying legal fees for perfecting the title. Amended tax returns more:label_amended_20tax_20returns more:taxes Settling zoning issues. Amended tax returns more:label_amended_20tax_20returns more:taxes Receiving rebates. Amended tax returns more:label_amended_20tax_20returns more:taxes Incurring a casualty or theft loss. Amended tax returns more:label_amended_20tax_20returns more:taxes For a discussion of adjustments to the basis of your property, see Adjusted Basis in Publication 551. Amended tax returns more:label_amended_20tax_20returns more:taxes If you depreciate your property under MACRS, you also may have to reduce your basis by certain deductions and credits with respect to the property. Amended tax returns more:label_amended_20tax_20returns more:taxes For more information, see What Is the Basis for Depreciation in chapter 4. Amended tax returns more:label_amended_20tax_20returns more:taxes . Amended tax returns more:label_amended_20tax_20returns more:taxes Basis adjustment for depreciation allowed or allowable. Amended tax returns more:label_amended_20tax_20returns more:taxes   You must reduce the basis of property by the depreciation allowed or allowable, whichever is greater. Amended tax returns more:label_amended_20tax_20returns more:taxes Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). Amended tax returns more:label_amended_20tax_20returns more:taxes Depreciation allowable is depreciation you are entitled to deduct. Amended tax returns more:label_amended_20tax_20returns more:taxes   If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the full amount of depreciation allowable. Amended tax returns more:label_amended_20tax_20returns more:taxes   If you deduct more depreciation than you should, you must reduce your basis by any amount deducted from which you received a tax benefit (the depreciation allowed). Amended tax returns more:label_amended_20tax_20returns more:taxes How Do You Treat Repairs and Improvements? If you improve depreciable property, you must treat the improvement as separate depreciable property. Amended tax returns more:label_amended_20tax_20returns more:taxes Improvement means an addition to or partial replacement of property that adds to its value, appreciably lengthens the time you can use it, or adapts it to a different use. Amended tax returns more:label_amended_20tax_20returns more:taxes You generally deduct the cost of repairing business property in the same way as any other business expense. Amended tax returns more:label_amended_20tax_20returns more:taxes However, if a repair or replacement increases the value of your property, makes it more useful, or lengthens its life, you must treat it as an improvement and depreciate it. Amended tax returns more:label_amended_20tax_20returns more:taxes Example. Amended tax returns more:label_amended_20tax_20returns more:taxes You repair a small section on one corner of the roof of a rental house. Amended tax returns more:label_amended_20tax_20returns more:taxes You deduct the cost of the repair as a rental expense. Amended tax returns more:label_amended_20tax_20returns more:taxes However, if you completely replace the roof, the new roof is an improvement because it increases the value and lengthens the life of the property. Amended tax returns more:label_amended_20tax_20returns more:taxes You depreciate the cost of the new roof. Amended tax returns more:label_amended_20tax_20returns more:taxes Improvements to rented property. Amended tax returns more:label_amended_20tax_20returns more:taxes   You can depreciate permanent improvements you make to business property you rent from someone else. Amended tax returns more:label_amended_20tax_20returns more:taxes Do You Have To File Form 4562? Use Form 4562 to figure your deduction for depreciation and amortization. Amended tax returns more:label_amended_20tax_20returns more:taxes Attach Form 4562 to your tax return for the current tax year if you are claiming any of the following items. Amended tax returns more:label_amended_20tax_20returns more:taxes A section 179 deduction for the current year or a section 179 carryover from a prior year. Amended tax returns more:label_amended_20tax_20returns more:taxes See chapter 2 for information on the section 179 deduction. Amended tax returns more:label_amended_20tax_20returns more:taxes Depreciation for property placed in service during the current year. Amended tax returns more:label_amended_20tax_20returns more:taxes Depreciation on any vehicle or other listed property, regardless of when it was placed in service. Amended tax returns more:label_amended_20tax_20returns more:taxes See chapter 5 for information on listed property. Amended tax returns more:label_amended_20tax_20returns more:taxes A deduction for any vehicle if the deduction is reported on a form other than Schedule C (Form 1040) or Schedule C-EZ (Form 1040). Amended tax returns more:label_amended_20tax_20returns more:taxes Amortization of costs if the current year is the first year of the amortization period. Amended tax returns more:label_amended_20tax_20returns more:taxes Depreciation or amortization on any asset on a corporate income tax return (other than Form 1120S, U. Amended tax returns more:label_amended_20tax_20returns more:taxes S. Amended tax returns more:label_amended_20tax_20returns more:taxes Income Tax Return for an S Corporation) regardless of when it was placed in service. Amended tax returns more:label_amended_20tax_20returns more:taxes You must submit a separate Form 4562 for each business or activity on your return for which a Form 4562 is required. Amended tax returns more:label_amended_20tax_20returns more:taxes Table 1-1 presents an overview of the purpose of the various parts of Form 4562. Amended tax returns more:label_amended_20tax_20returns more:taxes Employee. Amended tax returns more:label_amended_20tax_20returns more:taxes   Do not use Form 4562 if you are an employee and you deduct job-related vehicle expenses using either actual expenses (including depreciation) or the standard mileage rate. Amended tax returns more:label_amended_20tax_20returns more:taxes Instead, use either Form 2106 or Form 2106-EZ. Amended tax returns more:label_amended_20tax_20returns more:taxes Use Form 2106-EZ if you are claiming the standard mileage rate and you are not reimbursed by your employer for any expenses. Amended tax returns more:label_amended_20tax_20returns more:taxes How Do You Correct Depreciation Deductions? If you deducted an incorrect amount of depreciation in any year, you may be able to make a correction by filing an amended return for that year. Amended tax returns more:label_amended_20tax_20returns more:taxes See Filing an Amended Return , next. Amended tax returns more:label_amended_20tax_20returns more:taxes If you are not allowed to make the correction on an amended return, you may be able to change your accounting method to claim the correct amount of depreciation. Amended tax returns more:label_amended_20tax_20returns more:taxes See Changing Your Accounting Method , later. Amended tax returns more:label_amended_20tax_20returns more:taxes Filing an Amended Return You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. Amended tax returns more:label_amended_20tax_20returns more:taxes You claimed the incorrect amount because of a mathematical error made in any year. Amended tax returns more:label_amended_20tax_20returns more:taxes You claimed the incorrect amount because of a posting error made in any year. Amended tax returns more:label_amended_20tax_20returns more:taxes You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. Amended tax returns more:label_amended_20tax_20returns more:taxes You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. Amended tax returns more:label_amended_20tax_20returns more:taxes Adoption of accounting method defined. Amended tax returns more:label_amended_20tax_20returns more:taxes   Generally, you adopt a method of accounting for depreciation by using a permissible method of determining depreciation when you file your first tax return, or by using the same impermissible method of determining depreciation in two or more consecutively filed tax returns. Amended tax returns more:label_amended_20tax_20returns more:taxes   For an exception to this 2-year rule, see Revenue Procedure 2011-14 on page 330 of the Internal Revenue Bulletin 2011-4, available at www. Amended tax returns more:label_amended_20tax_20returns more:taxes irs. Amended tax returns more:label_amended_20tax_20returns more:taxes gov/pub/irs-irbs/irb11-04. Amended tax returns more:label_amended_20tax_20returns more:taxes pdf. Amended tax returns more:label_amended_20tax_20returns more:taxes (Note. Amended tax returns more:label_amended_20tax_20returns more:taxes Revenue Procedure 2011-14 is clarified and modified by Revenue Procedure 2012-20. Amended tax returns more:label_amended_20tax_20returns more:taxes For more information, see Revenue Procedure 2012-20 on page 700 of the Internal Revenue Bulletin 2012-14, available at www. Amended tax returns more:label_amended_20tax_20returns more:taxes irs. Amended tax returns more:label_amended_20tax_20returns more:taxes gov/pub/irs-irbs/irb12-14. Amended tax returns more:label_amended_20tax_20returns more:taxes pdf. Amended tax returns more:label_amended_20tax_20returns more:taxes )   For a safe harbor method of accounting to treat rotable spare parts as depreciable assets and procedures to obtain automatic consent to change to the safe harbor method of accounting, see Revenue Procedure 2007-48 on page 110 of Internal Revenue Bulletin 2007-29, available at www. Amended tax returns more:label_amended_20tax_20returns more:taxes irs. Amended tax returns more:label_amended_20tax_20returns more:taxes gov/pub/irs-irbs/irb07-29. Amended tax returns more:label_amended_20tax_20returns more:taxes pdf. Amended tax returns more:label_amended_20tax_20returns more:taxes When to file. Amended tax returns more:label_amended_20tax_20returns more:taxes   If an amended return is allowed, you must file it by the later of the following. Amended tax returns more:label_amended_20tax_20returns more:taxes 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. Amended tax returns more:label_amended_20tax_20returns more:taxes A return filed before an unextended due date is considered filed on that due date. Amended tax returns more:label_amended_20tax_20returns more:taxes 2 years from the time you paid your tax for that year. Amended tax returns more:label_amended_20tax_20returns more:taxes Changing Your Accounting Method Generally, you must get IRS approval to change your method of accounting. Amended tax returns more:label_amended_20tax_20returns more:taxes You generally must file Form 3115, Application for Change in Accounting Method, to request a change in your method of accounting for depreciation. Amended tax returns more:label_amended_20tax_20returns more:taxes The following are examples of a change in method of accounting for depreciation. Amended tax returns more:label_amended_20tax_20returns more:taxes A change from an impermissible method of determining depreciation for depreciable property, if the impermissible method was used in two or more consecutively filed tax returns. Amended tax returns more:label_amended_20tax_20returns more:taxes A change in the treatment of an asset from nondepreciable to depreciable or vice versa. Amended tax returns more:label_amended_20tax_20returns more:taxes A change in the depreciation method, period of recovery, or convention of a depreciable asset. Amended tax returns more:label_amended_20tax_20returns more:taxes A change from not claiming to claiming the special depreciation allowance if you did not make the election to not claim any special allowance. Amended tax returns more:label_amended_20tax_20returns more:taxes A change from claiming a 50% special depreciation allowance to claiming a 30% special depreciation allowance for qualified property (including property that is included in a class of property for which you elected a 30% special allowance instead of a 50% special allowance). Amended tax returns more:label_amended_20tax_20returns more:taxes Changes in depreciation that are not a change in method of accounting (and may only be made on an amended return) include the following. Amended tax returns more:label_amended_20tax_20returns more:taxes An adjustment in the useful life of a depreciable asset for which depreciation is determined under section 167. Amended tax returns more:label_amended_20tax_20returns more:taxes A change in use of an asset in the hands of the same taxpayer. Amended tax returns more:label_amended_20tax_20returns more:taxes Making a late depreciation election or revoking a timely valid depreciation election (including the election not to deduct the special depreciation allowance). Amended tax returns more:label_amended_20tax_20returns more:taxes If you elected not to claim any special allowance, a change from not claiming to claiming the special allowance is a revocation of the election and is not an accounting method change. Amended tax returns more:label_amended_20tax_20returns more:taxes Generally, you must get IRS approval to make a late depreciation election or revoke a depreciation election. Amended tax returns more:label_amended_20tax_20returns more:taxes You must submit a request for a letter ruling to make a late election or revoke an election. Amended tax returns more:label_amended_20tax_20returns more:taxes Any change in the placed in service date of a depreciable asset. Amended tax returns more:label_amended_20tax_20returns more:taxes See section 1. Amended tax returns more:label_amended_20tax_20returns more:taxes 446-1(e)(2)(ii)(d) of the regulations for more information and examples. Amended tax returns more:label_amended_20tax_20returns more:taxes IRS approval. Amended tax returns more:label_amended_20tax_20returns more:taxes   In some instances, you may be able to get approval from the IRS to change your method of accounting for depreciation under the automatic change request procedures generally covered in Revenue Procedure 2011-14. Amended tax returns more:label_amended_20tax_20returns more:taxes If you do not qualify to use the automatic procedures to get approval, you must use the advance consent request procedures generally covered in Revenue Procedure 97-27, 1997-1 C. Amended tax returns more:label_amended_20tax_20returns more:taxes B. Amended tax returns more:label_amended_20tax_20returns more:taxes 680. Amended tax returns more:label_amended_20tax_20returns more:taxes Also see the Instructions for Form 3115 for more information on getting approval, including lists of scope limitations and automatic accounting method changes. Amended tax returns more:label_amended_20tax_20returns more:taxes Additional guidance. Amended tax returns more:label_amended_20tax_20returns more:taxes    For additional guidance and special procedures for changing your accounting method, automatic change procedures, amending your return, and filing Form 3115, see Revenue Procedure 2011-14 on page 330 of the Internal Revenue Bulletin 2011-4, available at www. Amended tax returns more:label_amended_20tax_20returns more:taxes irs. Amended tax returns more:label_amended_20tax_20returns more:taxes gov/pub/irs-irbs/irb11-04. Amended tax returns more:label_amended_20tax_20returns more:taxes pdf. Amended tax returns more:label_amended_20tax_20returns more:taxes (Note. Amended tax returns more:label_amended_20tax_20returns more:taxes Revenue Procedure 2011-14 is clarified and modified by Revenue Procedure 2012-20. Amended tax returns more:label_amended_20tax_20returns more:taxes For more information, see Revenue Procedure 2012-20 on page 700 of the Internal Revenue Bulletin 2012-14, available at www. Amended tax returns more:label_amended_20tax_20returns more:taxes irs. Amended tax returns more:label_amended_20tax_20returns more:taxes gov/pub/irs-irbs/irb12-14. Amended tax returns more:label_amended_20tax_20returns more:taxes pdf. Amended tax returns more:label_amended_20tax_20returns more:taxes )   For a safe harbor method of accounting to treat rotable spare parts as depreciable assets, see Revenue Procedure 2007-48 on page 110 of Internal Revenue Bulletin 2007-29, available at www. Amended tax returns more:label_amended_20tax_20returns more:taxes irs. Amended tax returns more:label_amended_20tax_20returns more:taxes gov/pub/irs-irbs/irb07-29. Amended tax returns more:label_amended_20tax_20returns more:taxes pdf. Amended tax returns more:label_amended_20tax_20returns more:taxes Table 1-1. Amended tax returns more:label_amended_20tax_20returns more:taxes Purpose of Form 4562 This table describes the purpose of the various parts of Form 4562. Amended tax returns more:label_amended_20tax_20returns more:taxes For more information, see Form 4562 and its instructions. Amended tax returns more:label_amended_20tax_20returns more:taxes Part Purpose I • Electing the section 179 deduction • Figuring the maximum section 179 deduction for the current year • Figuring any section 179 deduction carryover to the next year II • Reporting the special depreciation allowance for property (other than listed property) placed in service during the tax year • Reporting depreciation deductions on property being depreciated under any method other than Modified Accelerated Cost Recovery System (MACRS) III • Reporting MACRS depreciation deductions for property placed in service before this year • Reporting MACRS depreciation deductions for property (other than listed property) placed in service during the current year IV • Summarizing other parts V • Reporting the special depreciation allowance for automobiles and other listed property • Reporting MACRS depreciation on automobiles and other listed property • Reporting the section 179 cost elected for automobiles and other listed property • Reporting information on the use of automobiles and other transportation vehicles VI • Reporting amortization deductions Section 481(a) adjustment. Amended tax returns more:label_amended_20tax_20returns more:taxes   If you file Form 3115 and change from an impermissible method to a permissible method of accounting for depreciation, you can make a section 481(a) adjustment for any unclaimed or excess amount of allowable depreciation. Amended tax returns more:label_amended_20tax_20returns more:taxes The adjustment is the difference between the total depreciation actually deducted for the property and the total amount allowable prior to the year of change. Amended tax returns more:label_amended_20tax_20returns more:taxes If no depreciation was deducted, the adjustment is the total depreciation allowable prior to the year of change. Amended tax returns more:label_amended_20tax_20returns more:taxes A negative section 481(a) adjustment results in a decrease in taxable income. Amended tax returns more:label_amended_20tax_20returns more:taxes It is taken into account in the year of change and is reported on your business tax returns as “other expenses. Amended tax returns more:label_amended_20tax_20returns more:taxes ” A positive section 481(a) adjustment results in an increase in taxable income. Amended tax returns more:label_amended_20tax_20returns more:taxes It is generally taken into account over 4 tax years and is reported on your business tax returns as “other income. Amended tax returns more:label_amended_20tax_20returns more:taxes ” However, you can elect to use a one-year adjustment period and report the adjustment in the year of change if the total adjustment is less than $25,000. Amended tax returns more:label_amended_20tax_20returns more:taxes Make the election by completing the appropriate line on Form 3115. Amended tax returns more:label_amended_20tax_20returns more:taxes   If you file a Form 3115 and change from one permissible method to another permissible method, the section 481(a) adjustment is zero. Amended tax returns more:label_amended_20tax_20returns more:taxes Prev  Up  Next   Home   More Online Publications