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E file state taxes only Accelerated Cost Recovery System (ACRS) Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: ACRS Defined What Can and Cannot Be Depreciated Under ACRSRecovery Property Nonrecovery Property How To Figure the DeductionUnadjusted Basis Classes of Recovery Property Recovery Periods Alternate ACRS Method (Modified Straight Line Method) ACRS Deduction in Short Tax Year DispositionsEarly dispositions of ACRS property other than 15-, 18-, or 19-year real property. E file state taxes only Dispositions — mass asset accounts. E file state taxes only Early dispositions — 15-year real property. E file state taxes only Early dispositions — 18- and 19-year real property. E file state taxes only Depreciation Recapture Topics - This chapter discusses: The definition of ACRS What can and cannot be depreciated under ACRS How to figure the deduction Dispositions Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 551 Basis of Assets 583 Starting a Business and Keeping Records Form (and Instructions) 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization The Accelerated Cost Recovery System (ACRS) applies to property first used before 1987. E file state taxes only It is the name given to tax rules for getting back (recovering) through depreciation deductions the cost of property used in a trade or business or to produce income. E file state taxes only These rules are mandatory and generally apply to tangible property placed in service after 1980 and before 1987. E file state taxes only If you placed property in service during this period, you must continue to figure your depreciation under ACRS. E file state taxes only If you used listed property placed in service after June 18, 1984, less than 50% for business in 1995, see Predominant Use Test in chapter 3. E file state taxes only Listed property includes cars, other means of transportation, and certain computers. E file state taxes only Any additions or improvements placed in service after 1986, including any components of a building (such as plumbing, wiring, storm windows, etc. E file state taxes only ), are depreciated using MACRS, discussed in chapter 3 of Publication 946. E file state taxes only It does not matter that the underlying property is depreciated under ACRS or one of the other methods. E file state taxes only ACRS Defined ACRS consists of accelerated depreciation methods and an alternate ACRS method that could have been elected. E file state taxes only The alternate ACRS method used a recovery percentage based on a modified straight line method. E file state taxes only The law prescribes fixed percentages to be uses for each class of property. E file state taxes only Property depreciable under ACRS is called recovery property. E file state taxes only The recovery class of property determines the recovery period. E file state taxes only Generally, the class life of property places it in a 3-year, 5-year, 10-year, 15-year, 18-year, or 19-year recovery class. E file state taxes only Under ACRS, the prescribed percentages are used to recover the unadjusted basis of recovery property. E file state taxes only To figure a depreciation deduction, you multiply the prescribed percentage for the recovery class by the unadjusted basis of the recovery property. E file state taxes only You must continue to figure your depreciation under ACRS for property placed in service after 1980 and before 1987. E file state taxes only For property you placed in service after 1986, you must use MACRS, discussed in chapter 3 of Publication 946. E file state taxes only What Can and Cannot Be Depreciated Under ACRS ACRS applies to most depreciable tangible property placed in service after 1980 and before 1987. E file state taxes only It includes new or used and real or personal property. E file state taxes only The property must be for use in a trade or business or for the production of income. E file state taxes only Property you acquired before 1981 or after 1986 is not ACRS recovery property. E file state taxes only For information on depreciating property acquired before 1981, see chapter 2. E file state taxes only For information on depreciating property acquired after 1986, see chapter 3 of Publication 946. E file state taxes only Recovery Property Recovery property under ACRS is tangible depreciable property placed in service after 1980 and before 1987. E file state taxes only It generally includes new or used property that you acquired after 1980 and before 1987 for use in your trade or business or for the production of income. E file state taxes only Nonrecovery Property You cannot use ACRS for property you placed in service before 1981 or after 1986. E file state taxes only Nonrecovery property also includes: Intangible property, Property you elected to exclude from ACRS that is properly depreciated under a method of depreciation that is not based on a term of years, Certain public utility property, and Certain property acquired and excluded from ACRS because of the antichurning rules. E file state taxes only Intangible property. E file state taxes only   Intangible property is not depreciated under ACRS. E file state taxes only Property depreciated under methods not expressed in a term of years. E file state taxes only   Certain property depreciated under a method not expressed in a term of years is not depreciated under ACRS. E file state taxes only This included any property: If you made an irrevocable election to exclude such property, and In the first year that you could have claimed depreciation, you properly used the unit-of-production method or any method of depreciation not expressed in a term of years (not including the retirement-replacement-betterment method). E file state taxes only Public utility property. E file state taxes only   Public utility property for which the taxpayer does not use a normalization method of accounting is excluded from ACRS and is subject to depreciation under a special rule. E file state taxes only Additions or improvements to ACRS property after 1986. E file state taxes only   Any additions or improvements placed in service after 1986, including any components of a building (plumbing, wiring, storm windows, etc. E file state taxes only ) are depreciated using MACRS, discussed in chapter 3 of Publication 946. E file state taxes only It does not matter that the underlying property is depreciated under ACRS or one of the other methods. E file state taxes only How To Figure the Deduction After you determine that your property can be depreciated under ACRS, you are ready to figure your deduction. E file state taxes only Because the conventions are built into the percentage table rates, you only need to know the following: The unadjusted basis of your recovery property, The classes of recovery property, The recovery periods, and Whether to use the prescribed percentages based on accelerated methods or percentages based on using the alternate ACRS method. E file state taxes only Unadjusted Basis To figure your ACRS deduction, you multiply the unadjusted basis in your recovery property by its applicable percentage for the year. E file state taxes only Unadjusted basis is the same amount you would use to figure gain on a sale, but it is figured without taking into account any depreciation taken in earlier years. E file state taxes only However, reduce your original basis by the amount of amortization taken on the property and by any section 179 deduction claimed as discussed in chapter 2 of Publication 946. E file state taxes only If you buy property, your unadjusted basis is usually its cost minus any amortized amount and minus any section 179 deduction elected. E file state taxes only If you acquire property in some other way, such as by inheriting it, getting it as a gift, or building it yourself, you figure your unadjusted basis under other rules. E file state taxes only See Publication 551. E file state taxes only Classes of Recovery Property All recovery property under ACRS is in one of the following classes. E file state taxes only The class for your property was determined when you began to depreciate it. E file state taxes only 3-Year Property 3-year property includes automobiles, light-duty trucks (actual unloaded weight less than 13,000 pounds), and tractor units for use over-the-road. E file state taxes only Race horses over 2 years old when placed in service are 3-year property. E file state taxes only Any other horses over 12 years old when you placed them in service are also included in the 3-year property class. E file state taxes only The ACRS percentages for 3-year recovery property are: Recovery Period Percentage 1st year 25% 2nd year 38% 3rd year 37% If you used the percentages above to depreciate your 3-year recovery property, your property, except for certain passenger automobiles, is fully depreciated. E file state taxes only You cannot claim depreciation for this property after 1988. E file state taxes only 5-Year Property 5-year property includes computers, copiers, and equipment, such as office furniture and fixtures. E file state taxes only It also includes single purpose agricultural or horticultural structures and petroleum storage facilities (other than buildings and their structural components). E file state taxes only The ACRS percentages for 5-year recovery property are: Recovery period Percentage 1st year 15% 2nd year 22% 3rd through 5th year 21% If you used the percentages above to depreciate your 5-year recovery property, it is fully depreciated. E file state taxes only You cannot claim depreciation for this property after 1990. E file state taxes only 10-Year Property 10-year property includes certain real property such as theme-park structures and certain public utility property. E file state taxes only Manufactured homes (including mobile homes) and railroad tank cars are also 10-year property. E file state taxes only You do not treat a building, and its structural components, as 10-year property by reason of a change in use after you placed the property in service. E file state taxes only For example, a building (15-year real property) that was placed in service in 1981 and was converted to a theme-park structure in 1986 remains 15-year real property. E file state taxes only The ACRS percentages for 10-year recovery property are: Recovery Period Percentage 1st year 8% 2nd year 14% 3rd year 12% 4th through 6th year 10% 7th through 10th year 9% If you used the percentages above, you cannot claim depreciation for this property after 1995. E file state taxes only Example. E file state taxes only On April 21, 1986, you bought and placed in service a new mobile home for $26,000 to be used as rental property. E file state taxes only You paid $10,000 cash and signed a note for $16,000 giving you an unadjusted basis of $26,000. E file state taxes only On June 8, 1986, you bought and placed in service a used mobile home for use as rental property at a total cost of $11,500. E file state taxes only The total unadjusted basis of your 10-year recovery property placed in service in 1986 was $37,500 ($26,000 + $11,500). E file state taxes only Your ACRS deduction was $3,000 (8% × $37,500). E file state taxes only In 1987, your ACRS deduction was $5,250 (14% × $37,500). E file state taxes only In 1988, your ACRS deduction was $4,500 (12% × $37,500). E file state taxes only In 1989, 1990, and 1991, your ACRS deduction was $3,750 (10% × $37,500). E file state taxes only In 1992, 1993, 1994, and 1995 your deduction for each year is $3,375 (9% × $37,500). E file state taxes only 15-Year Real Property 15-year real property is real property that is recovery property placed in service before March 16, 1984. E file state taxes only It includes all real property, such as buildings, other than that designated as 5-year or 10-year property. E file state taxes only Unlike the 3-, 5-, or 10-year classes of property, the percentages for 15-year real property depend on when you placed the property in service during your tax year. E file state taxes only You could group 15-year real property by month and year placed in service. E file state taxes only In Table 1, at the end of this publication in the Appendix, find the month in your tax year that you placed the property in service in your trade or business or for the production of income. E file state taxes only You use the percentages listed under that month for each year of the recovery period to determine your depreciation deduction each year. E file state taxes only Example. E file state taxes only On March 5, 1984, you placed an apartment building in service in your business. E file state taxes only It is 15-year real property. E file state taxes only After subtracting the value of the land, your unadjusted basis in the building is $250,000. E file state taxes only You use the calendar year as your tax year. E file state taxes only March is the third month of your tax year. E file state taxes only Your ACRS deduction for 1984 was $25,000 (10% × $250,000). E file state taxes only For 1985, the percentage for the third month of the second year of the recovery period is 11%. E file state taxes only Your deduction was $27,500 (11% × $250,000). E file state taxes only For the third, fourth, and fifth years of the recovery period (1986, 1987, and 1988), the percentages are 9%, 8%, and 7%. E file state taxes only For 1989 through 1992, the percentage for the third month is 6%. E file state taxes only Your deduction each year is $15,000 (6% × $250,000). E file state taxes only For 1993, 1994, and 1995, the percentage for the third month is 5%. E file state taxes only Your depreciation deduction is $12,500 (5% × $250,000) for 1993, 1994, and 1995. E file state taxes only Low-Income Housing Low-income housing that was assigned a 15-year recovery period under ACRS includes the following types of property: Federally assisted housing projects where the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by direct loan or tax abatement under similar provisions of state or local laws. E file state taxes only Low-income rental housing for which a depreciation deduction for rehabilitation expenditures is allowed. E file state taxes only Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under the provisions of state or local laws that authorize similar subsidies for low-income families. E file state taxes only Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. E file state taxes only The ACRS percentages for low-income housing real property, like the regular 15-year real property percentages, depend on when you placed the property in service. E file state taxes only Find the month in your tax year in Table 2 or 3 at the end of this publication in the Appendix that you first placed the property in service as rental housing. E file state taxes only Use the percentages listed under that month for each year of the recovery period. E file state taxes only Table 2 shows percentages for low-income housing placed in service before May 9, 1985. E file state taxes only Table 3 shows percentages for low-income housing placed in service after May 8, 1985, and before 1987. E file state taxes only Example. E file state taxes only In May 1986, you acquired and placed in service a house that qualified as low-income rental housing under item 3) of the above listing. E file state taxes only You use the calendar year as your tax year. E file state taxes only You use Table C–3 because the property was placed in service after May 8, 1985. E file state taxes only Your unadjusted basis for the property, not including the land, was $59,000. E file state taxes only Your deduction for 1986 through 2001 is shown in the following table. E file state taxes only Year Rate Deduction 1986 8. E file state taxes only 9% $5,251 1987 12. E file state taxes only 1% 7,139 1988 10. E file state taxes only 5% 6,195 1989 9. E file state taxes only 1% 5,369 1990 7. E file state taxes only 9% 4,661 1991 6. E file state taxes only 9% 4,071 1992 5. E file state taxes only 9% 3,481 1993 5. E file state taxes only 2% 3,068 1994 4. E file state taxes only 6% 2,714 1995 4. E file state taxes only 6% 2,714 1996 4. E file state taxes only 6% 2,714 1997 4. E file state taxes only 6% 2,714 1998 4. E file state taxes only 6% 2,714 1999 4. E file state taxes only 5% 2,655 2000 4. E file state taxes only 5% 2,655 2001 1. E file state taxes only 5% 885 18-Year Real Property 18-year real property is real property that is recovery property placed in service after March 15, 1984, and before May 9, 1985. E file state taxes only It includes real property, such as buildings, other than that designated as 5-year, 10-year, 15-year real property, or low-income housing. E file state taxes only The ACRS percentages for 18-year real property depend on when you placed the property in service in your trade or business or for the production of income during your tax year. E file state taxes only There are also tables for 18-year real property in the Appendix. E file state taxes only Table 4 shows the percentages for 18-year real property you placed in service after June 22, 1984, and before May 9, 1985. E file state taxes only Table 5 is for 18-year real property placed in service after March 15, 1984, and before June 23, 1984. E file state taxes only Find the month in your tax year that you placed the property in service in a trade or business or for the production of income. E file state taxes only Use the percentages listed under that month for each year of the recovery period. E file state taxes only Example. E file state taxes only On April 28, 1985, you bought and placed in service a rental house. E file state taxes only The house, not including the land, cost $95,000. E file state taxes only This is your unadjusted basis for the house. E file state taxes only You use the calendar year as your tax year. E file state taxes only Because the house was placed in service after June 22, 1984, and before May 9, 1985, it is 18-year real property. E file state taxes only You use Table 4 to figure your deduction for the house. E file state taxes only April is the fourth month of your tax year. E file state taxes only Your deduction for 1985 through 2003 is shown in the following table. E file state taxes only Year Rate Deduction 1985 7. E file state taxes only 0% $6,650 1986 9. E file state taxes only 0% 8,550 1987 8. E file state taxes only 0% 7,600 1988 7. E file state taxes only 0% 6,650 1989 7. E file state taxes only 0% 6,650 1990 6. E file state taxes only 0% 5,700 1991 5. E file state taxes only 0% 4,750 1992 5. E file state taxes only 0% 4,750 1993 5. E file state taxes only 0% 4,750 1994 5. E file state taxes only 0% 4,750 1995 5. E file state taxes only 0% 4,750 1996 5. E file state taxes only 0% 4,750 1997 5. E file state taxes only 0% 4,750 1998 4. E file state taxes only 0% 3,800 1999 4. E file state taxes only 0% 3,800 2000 4. E file state taxes only 0% 3,800 2001 4. E file state taxes only 0% 3,800 2002 4. E file state taxes only 0% 3,800 2003 1. E file state taxes only 0% 950 19-Year Real Property 19-year real property is real property that is recovery property placed in service after May 8, 1985, and before 1987. E file state taxes only It includes all real property, other than that designated as 5-year, 10-year, 15-year, or 18-year real property, or low-income housing. E file state taxes only The ACRS percentages for 19-year real property depend on when you placed the property in service in a trade or business or for the production of income during your tax year. E file state taxes only Table 6 shows the percentages for 19-year real property. E file state taxes only You find the month in your tax year that you placed the property in service. E file state taxes only You use the percentages listed under that month for each year of the recovery period. E file state taxes only Recovery Periods Each item of recovery property is assigned to a class of property. E file state taxes only The classes of recovery property establish the recovery periods over which the unadjusted basis of items in a class is recovered. E file state taxes only The classes of property are: 3-Year property 5-Year property 10-Year property 15-Year real property Low-income housing 18-Year real property 19-Year real property Alternate ACRS Method (Modified Straight Line Method) ACRS provides an alternate ACRS method that could be elected. E file state taxes only This alternate ACRS method uses a recovery percentage based on a modified straight line method. E file state taxes only This alternate ACRS method generally uses percentages other than those from the tables. E file state taxes only If you elected the alternate ACRS method, you determine the recovery period by using the following schedule. E file state taxes only This schedule is for other than 18- and 19-year real property and low-income housing: In the case of: You could have elected a recovery period of: 3-year property 3, 5, or 12 years 5-year property 5, 12, or 25 years 15-year real property 15, 35, or 45 years Percentages. E file state taxes only   The straight-line percentages for the alternate ACRS method are: Recovery Period Percentage 5 years 20. E file state taxes only 00% 10 years 10. E file state taxes only 00% 12 years 8. E file state taxes only 333% 15 years 6. E file state taxes only 667% 25 years 4. E file state taxes only 00% 35 years 2. E file state taxes only 857%   You apply the percentage to the unadjusted basis(defined earlier) of the property to figure your ACRS deduction. E file state taxes only There are tables for 18- and 19-year real property later in this publication in the Appendix. E file state taxes only For 15-year real property, see 15-year real property, later. E file state taxes only 3-, 5-, and 10-year property. E file state taxes only   If you elected to use an alternate recovery percentage, you have to use the same recovery percentage for all property in that class that you placed in service in that tax year. E file state taxes only This applies throughout the recovery period you selected. E file state taxes only Half-year convention. E file state taxes only   If you elected the alternate method, only a half-year of depreciation was deducted for the year you placed the property in service. E file state taxes only This applied regardless of when in the tax year you placed the property in service. E file state taxes only For each of the remaining years in the recovery period, you take a full year's deduction. E file state taxes only If you hold the property for the entire recovery period, a half-year of depreciation is allowable for the year following the end of the recovery period. E file state taxes only Example. E file state taxes only You operate a small upholstery business. E file state taxes only On March 19, 1986, you bought and placed in service a $13,000 light-duty panel truck to be used in your business and a $500 electric saw. E file state taxes only You elected to use the alternate ACRS method. E file state taxes only You did not elect to take a section 179 deduction. E file state taxes only You decided to recover the cost of the truck, which is 3-year recovery property, over 5 years. E file state taxes only The saw is 5-year property, but you decided to recover its cost over 12 years. E file state taxes only For 1986, your ACRS deduction reflected the half-year convention. E file state taxes only In the first year, you deducted half of the amount determined for a full year. E file state taxes only Your ACRS deduction for 1986 is as follows: Light-duty truck   5 years straight line = 20% 20% ÷ $13,000 = $2,600 Half-year convention -½ of $2,600= $1,300. E file state taxes only 00     Electric saw   12 years straight line = 8. E file state taxes only 333% 8. E file state taxes only 333% ÷ $500 = $41. E file state taxes only 67 Half-year convention -½ of $41. E file state taxes only 67= 20. E file state taxes only 84 Total ACRS deduction for 1986 $1,320. E file state taxes only 84       You take a full year of depreciation for both the truck and the saw for the years 1987 through 1990. E file state taxes only Your ACRS deduction for each of those years is as follows: Light-duty truck   5 years straight line = 20% 20% ÷ $13,000 = $2,600     Electric saw     12 years straight line = 8. E file state taxes only 333% 8. E file state taxes only 333% ÷ $500 = $41. E file state taxes only 67 Total annual ACRS deduction for 1987 through 1990 $2,641. E file state taxes only 67       In 1991, you take a half-year of depreciation for the truck and a full year of depreciation for the saw. E file state taxes only Your ACRS deduction for 1991 is as follows: Light-duty truck   5 years straight line = 20% 20% ÷ $13,000 = $2,600 Half-year convention -½ of $2,600= $1,300. E file state taxes only 00     Electric saw   12 years straight line = 8. E file state taxes only 333% 8. E file state taxes only 333% ÷ $500 = $41. E file state taxes only 67 Total ACRS deduction for 1991 $1,341. E file state taxes only 67       The truck is fully depreciated after 1991. E file state taxes only You take a full year of depreciation for the saw for the years 1992 through 1997. E file state taxes only Your ACRS deduction for each of those years is as follows: Electric saw     12 years straight line = 8. E file state taxes only 333% 8. E file state taxes only 333% ÷ $500 = $41. E file state taxes only 67 Total annual ACRS deduction for 1992 through 1997 $41. E file state taxes only 67       You take a half-year of depreciation for the saw for 1998. E file state taxes only Your ACRS deduction for 1998 is as follows: Electric saw   12 years straight line = 8. E file state taxes only 333% 8. E file state taxes only 333% ÷ $500 = $41. E file state taxes only 67 Half-year convention -½ of $41. E file state taxes only 67= 20. E file state taxes only 84 Total ACRS deduction for 1998 $20. E file state taxes only 84       The saw is fully depreciated after 1998. E file state taxes only 15-year real property. E file state taxes only   Under ACRS, you could also elect to use the alternate ACRS method for 15-year real property. E file state taxes only The alternate ACRS method allows you to depreciate your 15-year real property using the straight line ACRS method over the alternate recovery periods of 15, 35, or 45 years. E file state taxes only If you selected a 15-year recovery period, you use the percentage (6. E file state taxes only 667%) from the schedule above. E file state taxes only You prorate this percentage for the number of months the property was in service in the first year. E file state taxes only If you selected a 35- or 45-year recovery period, you use either Table 11 or 15. E file state taxes only Alternate periods for 18-year real property. E file state taxes only   For 18-year real property, the alternate recovery periods are 18, 35, or 45 years. E file state taxes only The percentages for 18-year real property under the alternate method are in Tables 7, 8, 10, 11, 14, and 15 in the Appendix. E file state taxes only There are two tables for each alternate recovery period. E file state taxes only One table shows the percentage for property placed in service after June 22, 1984. E file state taxes only The other table has the percentages for property placed in service after March 15, 1984, and before June 23, 1984. E file state taxes only Alternate periods for 19-year real property. E file state taxes only   For 19-year real property, the alternate recovery periods are 19, 35, or 45 years. E file state taxes only If you selected a 19-year recovery period, use Table 9 to determine your deduction. E file state taxes only If you select a 35- or 45-year recovery period, use either Table 13 or 14. E file state taxes only Example. E file state taxes only You placed in service an apartment building on August 3, 1986. E file state taxes only The building is 19-year real property. E file state taxes only The sales contract allocated $300,000 to the building and $100,000 to the land. E file state taxes only You use the calendar year as your tax year. E file state taxes only You chose the alternate ACRS method over a recovery period of 35 years. E file state taxes only For 1986, you figure your ACRS deduction usingTable 13. E file state taxes only August is the eighth month of your tax year. E file state taxes only The percentage from Table 13 for the eighth month is 1. E file state taxes only 1%. E file state taxes only Your deduction was $3,300 ($300,000 ÷ 1. E file state taxes only 1%). E file state taxes only The deduction rate from ACRS Table 13 for years 2 through 20 is 2. E file state taxes only 9% so that your deduction in 1987 through 2005 is $8,700 ($300,000 ÷ 2. E file state taxes only 9%). E file state taxes only Alternate periods for low-income housing. E file state taxes only   For low-income housing, the alternate recovery periods are 15, 35, or 45 years. E file state taxes only If you selected a 15-year period for this property, use 6. E file state taxes only 667% as the percentage. E file state taxes only If you selected a 35- or 45-year period, use either Table 11, 12, or 15. E file state taxes only Election. E file state taxes only   You had to make the election to use the alternate ACRS method by the return due date (including extensions) for the tax year you placed the property in service. E file state taxes only Revocation of election. E file state taxes only   Your election to use an alternate ACRS method, once made, can be changed only with the consent of the Commissioner. E file state taxes only The Commissioner grants consent only in extraordinary circumstances. E file state taxes only Any request for a revocation will be considered a request for a ruling. E file state taxes only ACRS Deduction in Short Tax Year For a tax year that is less than 12 months, the ACRS deduction is prorated on a 12-month basis. E file state taxes only Figure the amount of the ACRS deduction for a short tax year as follows: First, you figure the ACRS deduction for a full year. E file state taxes only You figure this by multiplying the unadjusted basis by the recovery percentage. E file state taxes only You then multiply the ACRS deduction determined for a full tax year by a fraction. E file state taxes only The numerator (top number) of the fraction is the number of months in the short tax year and the denominator (bottom number) is 12. E file state taxes only For example, a corporation placed in service in June 1986 an item of 3-year property with an unadjusted basis of $10,000. E file state taxes only The corporation files a tax return, because of a change in its accounting period, for the 6-month short tax year ending June 30, 1986. E file state taxes only The full year's ACRS deduction for this item is $2,500 ($10,000 ÷ 25%), the first year percentage from the 3-year table. E file state taxes only The ACRS deduction for the short tax year is $1,250 ($2,500 ÷ 6/12). E file state taxes only You use the full ACRS percentages during the remaining years of the recovery period. E file state taxes only For the first tax year after the recovery period, the unrecovered basis will be deductible. E file state taxes only Exception. E file state taxes only   For the tax year in which you placed 15-, 18-, or 19-year real property in service or in the tax year you dispose of it, you compute the ACRS deduction for the number of months that the property is in service during that tax year. E file state taxes only You compute the number of months using either a full month or mid-month convention. E file state taxes only This is true regardless of the number of months in the tax year and the recovery period and method used. E file state taxes only Dispositions A disposition is the permanent withdrawal of property from use in your trade or business or in the production of income. E file state taxes only You can make a withdrawal by sale, exchange, retirement, abandonment, or destruction. E file state taxes only You generally recognize gain or loss on the disposition of an asset by sale. E file state taxes only However, nonrecognition rules can allow you to postpone some gain. E file state taxes only See Publication 544. E file state taxes only If you physically abandon property, you can deduct as a loss the adjusted basis of the asset at the time of its abandonment. E file state taxes only Your intent must be to discard the asset so that you will not use it again or retrieve it for sale, exchange, or other disposition. E file state taxes only Early dispositions. E file state taxes only   The disposal of an asset before the end of its specified recovery period, is referred to as an early disposition. E file state taxes only When an early disposition occurs, the depreciation deduction in the year of disposition depends on the class of property involved. E file state taxes only Early dispositions of ACRS property other than 15-, 18-, or 19-year real property. E file state taxes only   Generally, you get no ACRS deduction for the tax year in which you dispose of or retire recovery property, except for 15-, 18-, and 19-year real property. E file state taxes only This means there is no depreciation deduction under ACRS in the year you dispose of or retire any of your 3-, 5-, or 10-year recovery property. E file state taxes only Dispositions — mass asset accounts. E file state taxes only   The law provides a special rule to avoid the calculation of gain on the disposition of assets from mass asset accounts. E file state taxes only A mass asset account includes items usually minor in value in relation to the group, numerous in quantity, impractical to separately identify, and not usually accounted for on a separate basis, but on a total dollar value. E file state taxes only Examples of mass assets include minor items of office, plant, and store furniture and fixtures. E file state taxes only   Under the special rule, if you elected to use a mass asset account, you recognize gain to the extent of the proceeds from the disposition of the asset. E file state taxes only You leave the unadjusted basis of the property in the account until recovered in future years. E file state taxes only If you did this, include the total proceeds realized from the disposition in income on the tax return for the year of disposition. E file state taxes only Early dispositions — 15-year real property. E file state taxes only   If you dispose of 15-year real property, you base your ACRS deduction for the year of disposition on the number of months in use. E file state taxes only You use a full-month convention. E file state taxes only For a disposition at any time during a particular month before the end of the recovery period, no deduction is allowed for the month of disposition. E file state taxes only This applies whether you use the regular ACRS method or elected the alternate ACRS method. E file state taxes only Example. E file state taxes only You purchased and placed in service a rental house on March 2, 1984, for $98,000 (not including the cost of land). E file state taxes only You file your return based on a calendar year. E file state taxes only Your rate from Table 1 for the third month is 10%. E file state taxes only Your ACRS deduction for 1984 was $9,800 ($98. E file state taxes only 000 ÷ 10%). E file state taxes only For 1985 through 1988, you figured your ACRS deductions using 11%, 9%, 8%, and 7% ÷ $98,000. E file state taxes only For 1989 through 1992, you figured your ACRS deductions using 6% for each year. E file state taxes only The deduction each year was $98,000 ÷ 6%. E file state taxes only For 1993 and 1994, the ACRS deduction is ($98,000 ÷ 5%) $4,900 for each year. E file state taxes only You sell the house on June 1, 1995. E file state taxes only You figure your ACRS deduction for 1995 for the full year and then prorate that amount for the months of use. E file state taxes only The full ACRS deduction for 1995 is $4,900 ($98,000 ÷ 5%). E file state taxes only You then prorate this amount to the 5 months in 1995 during which it was rented. E file state taxes only Your ACRS deduction for 1995 is $2,042 ($4,900 ÷ 5/12). E file state taxes only Early dispositions — 18- and 19-year real property. E file state taxes only   If you dispose of 18- or 19-year real property, you base your ACRS deduction for the year of disposition on the number of months in use. E file state taxes only For 18-year property placed in service before June 23, 1984, use a full-month convention on a disposition. E file state taxes only For 18-year property placed in service after June 22, 1984, and for 19-year property, determine the number of months in use by using the mid-month convention. E file state taxes only Under the mid-month convention,treat real property disposed of any time during a month as disposed of in the middle of that month. E file state taxes only Count the month of disposition as half a month of use. E file state taxes only Example. E file state taxes only You purchased and placed in service a rental house on July 2, 1984, for $100,000 (not including the cost of land). E file state taxes only You file your return based on a calendar year. E file state taxes only Your rate from Table 4 for the seventh month is 4%. E file state taxes only You figured your ACRS deduction for 1984 was $4,000 ($100,000 ÷ 4%). E file state taxes only In 1985 through 1994, your ACRS deductions were 9%, 8%, 8%, 7%, 6%, 6%, 5%, 5%, and 5% ÷ $100,000. E file state taxes only You sell the house on September 24, 1995. E file state taxes only Figure your ACRS deduction for 1995 for the months of use. E file state taxes only The full ACRS deduction for 1995 is $5,000 ($100,000 ÷ 5%). E file state taxes only Prorate this amount for the 8. E file state taxes only 5 months in 1995 that you held the property. E file state taxes only Under the mid-month convention, you count September as half a month. E file state taxes only Your ACRS deduction for 1995 is $3,542 ($5,000 ÷ 8. E file state taxes only 5/12). E file state taxes only Depreciation Recapture If you dispose of property depreciated under ACRS that is section 1245 recovery property, you will generally recognize gain or loss. E file state taxes only Gain recognized on a disposition is ordinary income to the extent of prior depreciation deductions taken. E file state taxes only This recapture rule applies to all personal property in the 3-year, 5-year, and 10-year classes. E file state taxes only You recapture gain on manufactured homes and theme park structures in the 10-year class as section 1245 property. E file state taxes only Section 1245 property generally includes all personal property. E file state taxes only See Section 1245 property in chapter 4 of Publication 544 for more information. E file state taxes only You treat dispositions of section 1250 real property on which you have a gain as section 1245 recovery property. E file state taxes only You recognize gain on this property as ordinary income to the extent of prior depreciation deductions taken. E file state taxes only Section 1250 property includes most real property. E file state taxes only See Section 1250 property in chapter 4 of Publication 544 for more information. E file state taxes only This rule applies to all section 1250 real property except the following property: Any 15-, 18-, or 19-year real property that is residential rental property. E file state taxes only Any 15-, 18-, or 19-year real property that you elected to depreciate using the alternate ACRS method. E file state taxes only Any 15-, 18-, or 19-year real property that is subsidized low-income housing. E file state taxes only For these recapture rules, you treat the section 179 deduction and 50% of the investment credit that reduced your basis as depreciation. E file state taxes only See Publication 544 for further discussion of dispositions of section 1245 and 1250 property. E file state taxes only Prev  Up  Next   Home   More Online Publications
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Protect Yourself Online

Every day, millions of computer users share files online. Whether it is music, games, video, or software, peer-to-peer (P2P) file sharing allows users to share all kinds of content. To share files, you download special software that connects your computer to an informal network of other computers running the same software. Millions of users could be connected to each other through this software at one time. The software is often free and easy to access.

However, file sharing can have a number of risks. For example, when you are connected to file-sharing programs, you could unknowingly allow others to copy private files you never intended to share. You could download material that is protected by copyright laws and find yourself mired in legal issues. You could download a virus or facilitate a security breach. Or you could unwittingly download pornography labeled as something else.

To secure the personal information stored on your computer, the FTC suggests that you:

  • Set up the file-sharing software very carefully.
  • Be aware of spyware. Use a good anti-spyware program.
  • Close your connection when you're not using it.
  • Use an effective anti-virus program and update it regularly.
  • Talk with your family about file sharing.

For more complete information on P2P, visit the FTC's website, OnguardOnline.

Online Copyright Issues

Quite simply, to make or download unauthorized copies of software is to break the law, no matter how many copies are involved. Whether you are casually making a few copies for friends, loaning disks, distributing and/or downloading pirated software via the Internet, or buying a single software program and then installing it on 100 computers, you are committing a copyright infringement. It doesn't matter if you make money or not. If you or your company is caught copying software, you may be held liable under both civil and criminal law.

If the copyright owner brings a civil action against you, the owner can stop you from using its software immediately and can also request monetary damages. The copyright owner can sue for as much as $150,000 for each program copied. In addition, the government can criminally prosecute you for copyright infringement. If convicted, you can be fined up to $250,000, be sentenced to jail for up to five years, or both.

For more information contact the U.S. Department of Justice or the Business Software alliance, with content on online piracy issues.

The E File State Taxes Only

E file state taxes only 2. E file state taxes only   Electing the Section 179 Deduction Table of Contents Introduction Useful Items - You may want to see: What Property Qualifies?Eligible Property Property Acquired for Business Use Property Acquired by Purchase What Property Does Not Qualify?Land and Improvements Excepted Property How Much Can You Deduct?Dollar Limits Business Income Limit Partnerships and Partners S Corporations Other Corporations How Do You Elect the Deduction? When Must You Recapture the Deduction? Introduction You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. E file state taxes only This is the section 179 deduction. E file state taxes only You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions. E file state taxes only Estates and trusts cannot elect the section 179 deduction. E file state taxes only This chapter explains what property does and does not qualify for the section 179 deduction, what limits apply to the deduction (including special rules for partnerships and corporations), and how to elect it. E file state taxes only It also explains when and how to recapture the deduction. E file state taxes only Useful Items - You may want to see: Publication 537 Installment Sales 544 Sales and Other Dispositions of Assets 954 Tax Incentives for Distressed Communities Form (and Instructions) 4562 Depreciation and Amortization 4797 Sales of Business Property See chapter 6 for information about getting publications and forms. E file state taxes only What Property Qualifies? To qualify for the section 179 deduction, your property must meet all the following requirements. E file state taxes only It must be eligible property. E file state taxes only It must be acquired for business use. E file state taxes only It must have been acquired by purchase. E file state taxes only It must not be property described later under What Property Does Not Qualify . E file state taxes only The following discussions provide information about these requirements and exceptions. E file state taxes only Eligible Property To qualify for the section 179 deduction, your property must be one of the following types of depreciable property. E file state taxes only Tangible personal property. E file state taxes only Other tangible property (except buildings and their structural components) used as: An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services, A research facility used in connection with any of the activities in (a) above, or A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities. E file state taxes only Single purpose agricultural (livestock) or horticultural structures. E file state taxes only See chapter 7 of Publication 225 for definitions and information regarding the use requirements that apply to these structures. E file state taxes only Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum. E file state taxes only Off-the-shelf computer software. E file state taxes only Qualified real property (described below). E file state taxes only Tangible personal property. E file state taxes only   Tangible personal property is any tangible property that is not real property. E file state taxes only It includes the following property. E file state taxes only Machinery and equipment. E file state taxes only Property contained in or attached to a building (other than structural components), such as refrigerators, grocery store counters, office equipment, printing presses, testing equipment, and signs. E file state taxes only Gasoline storage tanks and pumps at retail service stations. E file state taxes only Livestock, including horses, cattle, hogs, sheep, goats, and mink and other furbearing animals. E file state taxes only   The treatment of property as tangible personal property for the section 179 deduction is not controlled by its treatment under local law. E file state taxes only For example, property may not be tangible personal property for the deduction even if treated so under local law, and some property (such as fixtures) may be tangible personal property for the deduction even if treated as real property under local law. E file state taxes only Off-the-shelf computer software. E file state taxes only   Off-the-shelf computer software placed in service during the tax year is qualifying property for purposes of the section 179 deduction. E file state taxes only This is computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. E file state taxes only It includes any program designed to cause a computer to perform a desired function. E file state taxes only However, a database or similar item is not considered computer software unless it is in the public domain and is incidental to the operation of otherwise qualifying software. E file state taxes only Qualified real property. E file state taxes only   You can elect to treat certain qualified real property you placed in service as section 179 property for tax years beginning in 2013. E file state taxes only If this election is made, the term “section 179 property” will include any qualified real property that is: Qualified leasehold improvement property, Qualified restaurant property, or Qualified retail improvement property. E file state taxes only The maximum section 179 expense deduction that can be elected for qualified section 179 real property is $250,000 of the maximum section 179 deduction of $500,000 in 2013. E file state taxes only For more information, see Special rules for qualified section 179 real property, later. E file state taxes only Also, see Election for certain qualified section 179 real property, later, for information on how to make this election. E file state taxes only Qualified leasehold improvement property. E file state taxes only   Generally, this is any improvement to an interior part of a building (placed in service before January 1, 2014) that is nonresidential real property, provided all of the requirements discussed in chapter 3 under Qualified leasehold improvement property are met. E file state taxes only   In addition, an improvement made by the lessor does not qualify as qualified leasehold improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor’s death or in any of the following types of transactions. E file state taxes only A transaction to which section 381(a) applies, A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business, A like-kind exchange, involuntary conversion, or re-acquisition of real property to the extent that the basis in the property represents the carryover basis, or Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor’s or distributor’s basis in the property. E file state taxes only Examples include the following. E file state taxes only A complete liquidation of a subsidiary. E file state taxes only A transfer to a corporation controlled by the transferor. E file state taxes only An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. E file state taxes only Qualified restaurant property. E file state taxes only   Qualified restaurant property is any section 1250 property that is a building or an improvement to a building placed in service after December 31, 2008, and before January 1, 2014. E file state taxes only Also, more than 50% of the building’s square footage must be devoted to preparation of meals and seating for on-premise consumption of prepared meals. E file state taxes only Qualified retail improvement property. E file state taxes only   Generally, this is any improvement (placed in service after December 31, 2008, and before January 1, 2014) to an interior portion of nonresidential real property if it meets the following requirements. E file state taxes only The portion is open to the general public and is used in the retail trade or business of selling tangible property to the general public. E file state taxes only The improvement is placed in service more than 3 years after the date the building was first placed in service. E file state taxes only The expenses are not for the enlargement of the building, any elevator or escalator, any structural components benefiting a common area, or the internal structural framework of the building. E file state taxes only In addition, an improvement made by the lessor does not qualify as qualified retail improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor’s death or in any of the following types of transactions. E file state taxes only A transaction to which section 381(a) applies, A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business, A like-kind exchange, involuntary conversion, or re-acquisition of real property to the extent that the basis in the property represents the carryover basis, or Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor’s or distributor’s basis in the property. E file state taxes only Examples include the following. E file state taxes only A complete liquidation of a subsidiary. E file state taxes only A transfer to a corporation controlled by the transferor. E file state taxes only An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. E file state taxes only Property Acquired for Business Use To qualify for the section 179 deduction, your property must have been acquired for use in your trade or business. E file state taxes only Property you acquire only for the production of income, such as investment property, rental property (if renting property is not your trade or business), and property that produces royalties, does not qualify. E file state taxes only Partial business use. E file state taxes only   When you use property for both business and nonbusiness purposes, you can elect the section 179 deduction only if you use the property more than 50% for business in the year you place it in service. E file state taxes only If you use the property more than 50% for business, multiply the cost of the property by the percentage of business use. E file state taxes only Use the resulting business cost to figure your section 179 deduction. E file state taxes only Example. E file state taxes only May Oak bought and placed in service an item of section 179 property costing $11,000. E file state taxes only She used the property 80% for her business and 20% for personal purposes. E file state taxes only The business part of the cost of the property is $8,800 (80% × $11,000). E file state taxes only Property Acquired by Purchase To qualify for the section 179 deduction, your property must have been acquired by purchase. E file state taxes only For example, property acquired by gift or inheritance does not qualify. E file state taxes only Property is not considered acquired by purchase in the following situations. E file state taxes only It is acquired by one component member of a controlled group from another component member of the same group. E file state taxes only Its basis is determined either— In whole or in part by its adjusted basis in the hands of the person from whom it was acquired, or Under the stepped-up basis rules for property acquired from a decedent. E file state taxes only It is acquired from a related person. E file state taxes only Related persons. E file state taxes only   Related persons are described under Related persons earlier. E file state taxes only However, to determine whether property qualifies for the section 179 deduction, treat as an individual's family only his or her spouse, ancestors, and lineal descendants and substitute "50%" for "10%" each place it appears. E file state taxes only Example. E file state taxes only Ken Larch is a tailor. E file state taxes only He bought two industrial sewing machines from his father. E file state taxes only He placed both machines in service in the same year he bought them. E file state taxes only They do not qualify as section 179 property because Ken and his father are related persons. E file state taxes only He cannot claim a section 179 deduction for the cost of these machines. E file state taxes only What Property Does Not Qualify? Certain property does not qualify for the section 179 deduction. E file state taxes only This includes the following. E file state taxes only Land and Improvements Land and land improvements do not qualify as section 179 property. E file state taxes only Land improvements include swimming pools, paved parking areas, wharves, docks, bridges, and fences. E file state taxes only Excepted Property Even if the requirements explained earlier under What Property Qualifies are met, you cannot elect the section 179 deduction for the following property. E file state taxes only Certain property you lease to others (if you are a noncorporate lessor). E file state taxes only Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging. E file state taxes only Air conditioning or heating units. E file state taxes only Property used predominantly outside the United States, except property described in section 168(g)(4) of the Internal Revenue Code. E file state taxes only Property used by certain tax-exempt organizations, except property used in connection with the production of income subject to the tax on unrelated trade or business income. E file state taxes only Property used by governmental units or foreign persons or entities, except property used under a lease with a term of less than 6 months. E file state taxes only Leased property. E file state taxes only   Generally, you cannot claim a section 179 deduction based on the cost of property you lease to someone else. E file state taxes only This rule does not apply to corporations. E file state taxes only However, you can claim a section 179 deduction for the cost of the following property. E file state taxes only Property you manufacture or produce and lease to others. E file state taxes only Property you purchase and lease to others if both the following tests are met. E file state taxes only The term of the lease (including options to renew) is less than 50% of the property's class life. E file state taxes only For the first 12 months after the property is transferred to the lessee, the total business deductions you are allowed on the property (other than rents and reimbursed amounts) are more than 15% of the rental income from the property. E file state taxes only Property used for lodging. E file state taxes only   Generally, you cannot claim a section 179 deduction for property used predominantly to furnish lodging or in connection with the furnishing of lodging. E file state taxes only However, this does not apply to the following types of property. E file state taxes only Nonlodging commercial facilities that are available to those not using the lodging facilities on the same basis as they are available to those using the lodging facilities. E file state taxes only Property used by a hotel or motel in connection with the trade or business of furnishing lodging where the predominant portion of the accommodations is used by transients. E file state taxes only Any certified historic structure to the extent its basis is due to qualified rehabilitation expenditures. E file state taxes only Any energy property. E file state taxes only Energy property. E file state taxes only   Energy property is property that meets the following requirements. E file state taxes only It is one of the following types of property. E file state taxes only Equipment that uses solar energy to generate electricity, to heat or cool a structure, to provide hot water for use in a structure, or to provide solar process heat, except for equipment used to generate energy to heat a swimming pool. E file state taxes only Equipment placed in service after December 31, 2005, and before January 1, 2017, that uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight. E file state taxes only Equipment used to produce, distribute, or use energy derived from a geothermal deposit. E file state taxes only For electricity generated by geothermal power, this includes equipment up to (but not including) the electrical transmission stage. E file state taxes only Qualified fuel cell property or qualified microturbine property placed in service after December 31, 2005, and before January 1, 2017. E file state taxes only The construction, reconstruction, or erection of the property must be completed by you. E file state taxes only For property you acquire, the original use of the property must begin with you. E file state taxes only The property must meet the performance and quality standards, if any, prescribed by Income Tax Regulations in effect at the time you get the property. E file state taxes only   For periods before February 14, 2008, energy property does not include any property that is public utility property as defined by section 46(f)(5) of the Internal Revenue Code (as in effect on November 4, 1990). E file state taxes only How Much Can You Deduct? Your section 179 deduction is generally the cost of the qualifying property. E file state taxes only However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. E file state taxes only These limits apply to each taxpayer, not to each business. E file state taxes only However, see Married Individuals under Dollar Limits , later. E file state taxes only For a passenger automobile, the total section 179 deduction and depreciation deduction are limited. E file state taxes only See Do the Passenger Automobile Limits Apply in chapter 5 . E file state taxes only If you deduct only part of the cost of qualifying property as a section 179 deduction, you can generally depreciate the cost you do not deduct. E file state taxes only Trade-in of other property. E file state taxes only   If you buy qualifying property with cash and a trade-in, its cost for purposes of the section 179 deduction includes only the cash you paid. E file state taxes only Example. E file state taxes only Silver Leaf, a retail bakery, traded two ovens having a total adjusted basis of $680 for a new oven costing $1,320. E file state taxes only They received an $800 trade-in allowance for the old ovens and paid $520 in cash for the new oven. E file state taxes only The bakery also traded a used van with an adjusted basis of $4,500 for a new van costing $9,000. E file state taxes only They received a $4,800 trade-in allowance on the used van and paid $4,200 in cash for the new van. E file state taxes only Only the portion of the new property's basis paid by cash qualifies for the section 179 deduction. E file state taxes only Therefore, Silver Leaf's qualifying costs for the section 179 deduction are $4,720 ($520 + $4,200). E file state taxes only Dollar Limits The total amount you can elect to deduct under section 179 for most property placed in service in 2013 generally cannot be more than $500,000. E file state taxes only If you acquire and place in service more than one item of qualifying property during the year, you can allocate the section 179 deduction among the items in any way, as long as the total deduction is not more than $500,000. E file state taxes only You do not have to claim the full $500,000. E file state taxes only Qualified real property (described earlier) that you elected to treat as section 179 real property is limited to $250,000 of the maximum deduction of $500,000 for 2013. E file state taxes only The amount you can elect to deduct is not affected if you place qualifying property in service in a short tax year or if you place qualifying property in service for only a part of a 12-month tax year. E file state taxes only After you apply the dollar limit to determine a tentative deduction, you must apply the business income limit (described later) to determine your actual section 179 deduction. E file state taxes only Example. E file state taxes only In 2013, you bought and placed in service $500,000 in machinery and a $25,000 circular saw for your business. E file state taxes only You elect to deduct $475,000 for the machinery and the entire $25,000 for the saw, a total of $500,000. E file state taxes only This is the maximum amount you can deduct. E file state taxes only Your $25,000 deduction for the saw completely recovered its cost. E file state taxes only Your basis for depreciation is zero. E file state taxes only The basis for depreciation of your machinery is $25,000. E file state taxes only You figure this by subtracting your $475,000 section 179 deduction for the machinery from the $500,000 cost of the machinery. E file state taxes only Situations affecting dollar limit. E file state taxes only   Under certain circumstances, the general dollar limits on the section 179 deduction may be reduced or increased or there may be additional dollar limits. E file state taxes only The general dollar limit is affected by any of the following situations. E file state taxes only The cost of your section 179 property placed in service exceeds $2,000,000. E file state taxes only Your business is an enterprise zone business. E file state taxes only You placed in service a sport utility or certain other vehicles. E file state taxes only You are married filing a joint or separate return. E file state taxes only Costs exceeding $2,000,000 If the cost of your qualifying section 179 property placed in service in a year is more than $2,000,000, you generally must reduce the dollar limit (but not below zero) by the amount of cost over $2,000,000. E file state taxes only If the cost of your section 179 property placed in service during 2013 is $2,500,000 or more, you cannot take a section 179 deduction. E file state taxes only Example. E file state taxes only In 2013, Jane Ash placed in service machinery costing $2,100,000. E file state taxes only This cost is $100,000 more than $2,000,000, so she must reduce her dollar limit to $400,000 ($500,000 − $100,000). E file state taxes only Enterprise Zone Businesses An increased section 179 deduction is available to enterprise zone businesses for qualified zone property placed in service during the tax year, in an empowerment zone. E file state taxes only For more information including the definitions of “enterprise zone business” and “qualified zone property,” see sections 1397A, 1397C, and 1397D of the Internal Revenue Code. E file state taxes only The dollar limit on the section 179 deduction is increased by the smaller of: $35,000, or The cost of section 179 property that is also qualified zone property placed in service before January 1, 2014 (including such property placed in service by your spouse, even if you are filing a separate return). E file state taxes only Note. E file state taxes only   You take into account only 50% (instead of 100%) of the cost of qualified zone property placed in service in a year when figuring the reduced dollar limit for costs exceeding $2,000,000 (explained earlier). E file state taxes only Sport Utility and Certain Other Vehicles You cannot elect to expense more than $25,000 of the cost of any heavy sport utility vehicle (SUV) and certain other vehicles placed in service during the tax year. E file state taxes only This rule applies to any 4-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, or highways, that is rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight. E file state taxes only However, the $25,000 limit does not apply to any vehicle: Designed to seat more than nine passengers behind the driver's seat, Equipped with a cargo area (either open or enclosed by a cap) of at least six feet in interior length that is not readily accessible from the passenger compartment, or That has an integral enclosure fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver's seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield. E file state taxes only Married Individuals If you are married, how you figure your section 179 deduction depends on whether you file jointly or separately. E file state taxes only If you file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service. E file state taxes only If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit, including the reduction for costs over $2,000,000. E file state taxes only You must allocate the dollar limit (after any reduction) between you equally, unless you both elect a different allocation. E file state taxes only If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you. E file state taxes only Example. E file state taxes only Jack Elm is married. E file state taxes only He and his wife file separate returns. E file state taxes only Jack bought and placed in service $2,000,000 of qualified farm machinery in 2013. E file state taxes only His wife has her own business, and she bought and placed in service $30,000 of qualified business equipment. E file state taxes only Their combined dollar limit is $470,000. E file state taxes only This is because they must figure the limit as if they were one taxpayer. E file state taxes only They reduce the $500,000 dollar limit by the $30,000 excess of their costs over $2,000,000. E file state taxes only They elect to allocate the $470,000 dollar limit as follows. E file state taxes only $446,500 ($470,000 x 95%) to Mr. E file state taxes only Elm's machinery. E file state taxes only $23,500 ($470,000 x 5%) to Mrs. E file state taxes only Elm's equipment. E file state taxes only If they did not make an election to allocate their costs in this way, they would have to allocate $235,000 ($470,000 × 50%) to each of them. E file state taxes only Joint return after filing separate returns. E file state taxes only   If you and your spouse elect to amend your separate returns by filing a joint return after the due date for filing your return, the dollar limit on the joint return is the lesser of the following amounts. E file state taxes only The dollar limit (after reduction for any cost of section 179 property over $2,000,000). E file state taxes only The total cost of section 179 property you and your spouse elected to expense on your separate returns. E file state taxes only Example. E file state taxes only The facts are the same as in the previous example except that Jack elected to deduct $30,000 of the cost of section 179 property on his separate return and his wife elected to deduct $2,000. E file state taxes only After the due date of their returns, they file a joint return. E file state taxes only Their dollar limit for the section 179 deduction is $32,000. E file state taxes only This is the lesser of the following amounts. E file state taxes only $470,000—The dollar limit less the cost of section 179 property over $2,000,000. E file state taxes only $32,000—The total they elected to expense on their separate returns. E file state taxes only Business Income Limit The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. E file state taxes only Generally, you are considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business. E file state taxes only Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. E file state taxes only Special rules apply to a 2013 deduction of qualified section 179 real property that is disallowed because of the business income limit. E file state taxes only See Special rules for qualified section 179 property under Carryover of disallowed deduction, later. E file state taxes only Taxable income. E file state taxes only   In general, figure taxable income for this purpose by totaling the net income and losses from all trades and businesses you actively conducted during the year. E file state taxes only Net income or loss from a trade or business includes the following items. E file state taxes only Section 1231 gains (or losses). E file state taxes only Interest from working capital of your trade or business. E file state taxes only Wages, salaries, tips, or other pay earned as an employee. E file state taxes only For information about section 1231 gains and losses, see chapter 3 in Publication 544. E file state taxes only   In addition, figure taxable income without regard to any of the following. E file state taxes only The section 179 deduction. E file state taxes only The self-employment tax deduction. E file state taxes only Any net operating loss carryback or carryforward. E file state taxes only Any unreimbursed employee business expenses. E file state taxes only Two different taxable income limits. E file state taxes only   In addition to the business income limit for your section 179 deduction, you may have a taxable income limit for some other deduction. E file state taxes only You may have to figure the limit for this other deduction taking into account the section 179 deduction. E file state taxes only If so, complete the following steps. E file state taxes only Step Action 1 Figure taxable income without the section 179 deduction or the other deduction. E file state taxes only 2 Figure a hypothetical section 179 deduction using the taxable income figured in Step 1. E file state taxes only 3 Subtract the hypothetical section 179 deduction figured in Step 2 from the taxable income figured in Step 1. E file state taxes only 4 Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income. E file state taxes only 5 Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in Step 1. E file state taxes only 6 Figure your actual section 179 deduction using the taxable income figured in Step 5. E file state taxes only 7 Subtract your actual section 179 deduction figured in Step 6 from the taxable income figured in Step 1. E file state taxes only 8 Figure your actual other deduction using the taxable income figured in Step 7. E file state taxes only Example. E file state taxes only On February 1, 2013, the XYZ corporation purchased and placed in service qualifying section 179 property that cost $500,000. E file state taxes only It elects to expense the entire $500,000 cost under section 179. E file state taxes only In June, the corporation gave a charitable contribution of $10,000. E file state taxes only A corporation's limit on charitable contributions is figured after subtracting any section 179 deduction. E file state taxes only The business income limit for the section 179 deduction is figured after subtracting any allowable charitable contributions. E file state taxes only XYZ's taxable income figured without the section 179 deduction or the deduction for charitable contributions is $520,000. E file state taxes only XYZ figures its section 179 deduction and its deduction for charitable contributions as follows. E file state taxes only Step 1– Taxable income figured without either deduction is $520,000. E file state taxes only Step 2– Using $520,000 as taxable income, XYZ's hypothetical section 179 deduction is $500,000. E file state taxes only Step 3– $20,000 ($520,000 − $500,000). E file state taxes only Step 4– Using $20,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable income) is $2,000. E file state taxes only Step 5– $518,000 ($520,000 − $2,000). E file state taxes only Step 6– Using $518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 deduction. E file state taxes only Because the taxable income is at least $500,000, XYZ can take a $500,000 section 179 deduction. E file state taxes only Step 7– $20,000 ($520,000 − $500,000). E file state taxes only Step 8– Using $20,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable income) is $2,000. E file state taxes only Carryover of disallowed deduction. E file state taxes only   You can carry over for an unlimited number of years the cost of any section 179 property you elected to expense but were unable to because of the business income limit. E file state taxes only This disallowed deduction amount is shown on line 13 of Form 4562. E file state taxes only You use the amount you carry over to determine your section 179 deduction in the next year. E file state taxes only Enter that amount on line 10 of your Form 4562 for the next year. E file state taxes only   If you place more than one property in service in a year, you can select the properties for which all or a part of the costs will be carried forward. E file state taxes only Your selections must be shown in your books and records. E file state taxes only For this purpose, treat section 179 costs allocated from a partnership or an S corporation as one item of section 179 property. E file state taxes only If you do not make a selection, the total carryover will be allocated equally among the properties you elected to expense for the year. E file state taxes only   If costs from more than one year are carried forward to a subsequent year in which only part of the total carryover can be deducted, you must deduct the costs being carried forward from the earliest year first. E file state taxes only Special rules for qualified section 179 real property. E file state taxes only   You can carry over to 2013 a 2012 deduction attributable to qualified section 179 real property that you elected to expense but were unable to take because of the business income limitation. E file state taxes only Any such 2012 carryover amounts that are not deducted in 2013, plus any 2013 disallowed section 179 expense deductions attributable to qualified real property, are not carried over to 2014. E file state taxes only Instead these amounts are treated as property placed in service on the first day of 2013 for purposes of computing depreciation (including the special depreciation allowance, if applicable). E file state taxes only See section 179(f) of the Internal Revenue Code and Notice 2013-59 for more information. E file state taxes only If there is a sale or other disposition of your property (including a transfer at death) before you can use the full amount of any outstanding carryover of your disallowed section 179 deduction, neither you nor the new owner can deduct any of the unused amount. E file state taxes only Instead, you must add it back to the property's basis. E file state taxes only Partnerships and Partners The section 179 deduction limits apply both to the partnership and to each partner. E file state taxes only The partnership determines its section 179 deduction subject to the limits. E file state taxes only It then allocates the deduction among its partners. E file state taxes only Each partner adds the amount allocated from partnerships (shown on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. E file state taxes only ) to his or her nonpartnership section 179 costs and then applies the dollar limit to this total. E file state taxes only To determine any reduction in the dollar limit for costs over $2,000,000, the partner does not include any of the cost of section 179 property placed in service by the partnership. E file state taxes only After the dollar limit (reduced for any nonpartnership section 179 costs over $2,000,000) is applied, any remaining cost of the partnership and nonpartnership section 179 property is subject to the business income limit. E file state taxes only Partnership's taxable income. E file state taxes only   For purposes of the business income limit, figure the partnership's taxable income by adding together the net income and losses from all trades or businesses actively conducted by the partnership during the year. E file state taxes only See the Instructions for Form 1065 for information on how to figure partnership net income (or loss). E file state taxes only However, figure taxable income without regard to credits, tax-exempt income, the section 179 deduction, and guaranteed payments under section 707(c) of the Internal Revenue Code. E file state taxes only Partner's share of partnership's taxable income. E file state taxes only   For purposes of the business income limit, the taxable income of a partner engaged in the active conduct of one or more of a partnership's trades or businesses includes his or her allocable share of taxable income derived from the partnership's active conduct of any trade or business. E file state taxes only Example. E file state taxes only In 2013, Beech Partnership placed in service section 179 property with a total cost of $2,025,000. E file state taxes only The partnership must reduce its dollar limit by $25,000 ($2,025,000 − $2,000,000). E file state taxes only Its maximum section 179 deduction is $475,000 ($500,000 − $25,000), and it elects to expense that amount. E file state taxes only The partnership's taxable income from the active conduct of all its trades or businesses for the year was $600,000, so it can deduct the full $475,000. E file state taxes only It allocates $40,000 of its section 179 deduction and $50,000 of its taxable income to Dean, one of its partners. E file state taxes only In addition to being a partner in Beech Partnership, Dean is also a partner in the Cedar Partnership, which allocated to him a $30,000 section 179 deduction and $35,000 of its taxable income from the active conduct of its business. E file state taxes only He also conducts a business as a sole proprietor and, in 2013, placed in service in that business qualifying section 179 property costing $55,000. E file state taxes only He had a net loss of $5,000 from that business for the year. E file state taxes only Dean does not have to include section 179 partnership costs to figure any reduction in his dollar limit, so his total section 179 costs for the year are not more than $2,000,000 and his dollar limit is not reduced. E file state taxes only His maximum section 179 deduction is $500,000. E file state taxes only He elects to expense all of the $70,000 in section 179 deductions allocated from the partnerships ($40,000 from Beech Partnership plus $30,000 from Cedar Partnership), plus $55,000 of his sole proprietorship's section 179 costs, and notes that information in his books and records. E file state taxes only However, his deduction is limited to his business taxable income of $80,000 ($50,000 from Beech Partnership, plus $35,000 from Cedar Partnership minus $5,000 loss from his sole proprietorship). E file state taxes only He carries over $45,000 ($125,000 − $80,000) of the elected section 179 costs to 2014. E file state taxes only He allocates the carryover amount to the cost of section 179 property placed in service in his sole proprietorship, and notes that allocation in his books and records. E file state taxes only Different tax years. E file state taxes only   For purposes of the business income limit, if the partner's tax year and that of the partnership differ, the partner's share of the partnership's taxable income for a tax year is generally the partner's distributive share for the partnership tax year that ends with or within the partner's tax year. E file state taxes only Example. E file state taxes only John and James Oak are equal partners in Oak Partnership. E file state taxes only Oak Partnership uses a tax year ending January 31. E file state taxes only John and James both use a tax year ending December 31. E file state taxes only For its tax year ending January 31, 2013, Oak Partnership's taxable income from the active conduct of its business is $80,000, of which $70,000 was earned during 2012. E file state taxes only John and James each include $40,000 (each partner's entire share) of partnership taxable income in computing their business income limit for the 2013 tax year. E file state taxes only Adjustment of partner's basis in partnership. E file state taxes only   A partner must reduce the basis of his or her partnership interest by the total amount of section 179 expenses allocated from the partnership even if the partner cannot currently deduct the total amount. E file state taxes only If the partner disposes of his or her partnership interest, the partner's basis for determining gain or loss is increased by any outstanding carryover of disallowed section 179 expenses allocated from the partnership. E file state taxes only Adjustment of partnership's basis in section 179 property. E file state taxes only   The basis of a partnership's section 179 property must be reduced by the section 179 deduction elected by the partnership. E file state taxes only This reduction of basis must be made even if a partner cannot deduct all or part of the section 179 deduction allocated to that partner by the partnership because of the limits. E file state taxes only S Corporations Generally, the rules that apply to a partnership and its partners also apply to an S corporation and its shareholders. E file state taxes only The deduction limits apply to an S corporation and to each shareholder. E file state taxes only The S corporation allocates its deduction to the shareholders who then take their section 179 deduction subject to the limits. E file state taxes only Figuring taxable income for an S corporation. E file state taxes only   To figure taxable income (or loss) from the active conduct by an S corporation of any trade or business, you total the net income and losses from all trades or businesses actively conducted by the S corporation during the year. E file state taxes only   To figure the net income (or loss) from a trade or business actively conducted by an S corporation, you take into account the items from that trade or business that are passed through to the shareholders and used in determining each shareholder's tax liability. E file state taxes only However, you do not take into account any credits, tax-exempt income, the section 179 deduction, and deductions for compensation paid to shareholder-employees. E file state taxes only For purposes of determining the total amount of S corporation items, treat deductions and losses as negative income. E file state taxes only In figuring the taxable income of an S corporation, disregard any limits on the amount of an S corporation item that must be taken into account when figuring a shareholder's taxable income. E file state taxes only Other Corporations A corporation's taxable income from its active conduct of any trade or business is its taxable income figured with the following changes. E file state taxes only It is figured before deducting the section 179 deduction, any net operating loss deduction, and special deductions (as reported on the corporation's income tax return). E file state taxes only It is adjusted for items of income or deduction included in the amount figured in 1, above, not derived from a trade or business actively conducted by the corporation during the tax year. E file state taxes only How Do You Elect the Deduction? You elect to take the section 179 deduction by completing Part I of Form 4562. E file state taxes only If you elect the deduction for listed property (described in chapter 5), complete Part V of Form 4562 before completing Part I. E file state taxes only For property placed in service in 2013, file Form 4562 with either of the following. E file state taxes only Your original 2013 tax return, whether or not you file it timely. E file state taxes only An amended return for 2013 filed within the time prescribed by law. E file state taxes only An election made on an amended return must specify the item of section 179 property to which the election applies and the part of the cost of each such item to be taken into account. E file state taxes only The amended return must also include any resulting adjustments to taxable income. E file state taxes only You must keep records that show the specific identification of each piece of qualifying section 179 property. E file state taxes only These records must show how you acquired the property, the person you acquired it from, and when you placed it in service. E file state taxes only Election for certain qualified section 179 real property. E file state taxes only   You can elect to expense certain qualified real property that you placed in service as section 179 property for tax years beginning in 2013. E file state taxes only If you elect to treat this property as section 179 property, you must elect the application of the special rules for qualified real property described in section 179(f) of the Internal Revenue Code. E file state taxes only   To make the election, attach a statement indicating you are “electing the application of section 179(f) of the Internal Revenue Code” with either of the following. E file state taxes only Your original 2013 tax return, whether or not you file it timely. E file state taxes only An amended return for 2013 filed within the time prescribed by law. E file state taxes only The amended return must also include any adjustments to taxable income. E file state taxes only   The statement should indicate your election to expense certain qualified real property under section 179(f) on your return. E file state taxes only It must specify one or more of the three types of qualified property (described under Qualified real property ) to which the election applies, the cost of each such type, and the portion of the cost of each such property to be taken into account. E file state taxes only Also, report this on line 6 of Form 4562. E file state taxes only    The maximum section 179 expense deduction that can be taken for qualified section 179 real property is limited to $250,000. E file state taxes only Revoking an election. E file state taxes only   An election (or any specification made in the election) to take a section 179 deduction for 2013 can be revoked without IRS approval by filing an amended return. E file state taxes only The amended return must be filed within the time prescribed by law. E file state taxes only The amended return must also include any resulting adjustments to taxable income. E file state taxes only Once made, the revocation is irrevocable. E file state taxes only When Must You Recapture the Deduction? You may have to recapture the section 179 deduction if, in any year during the property's recovery period, the percentage of business use drops to 50% or less. E file state taxes only In the year the business use drops to 50% or less, you include the recapture amount as ordinary income in Part IV of Form 4797. E file state taxes only You also increase the basis of the property by the recapture amount. E file state taxes only Recovery periods for property are discussed under Which Recovery Period Applies in chapter 4 . E file state taxes only If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. E file state taxes only Instead, use the rules for recapturing depreciation explained in chapter 3 of Publication 544 under Section 1245 Property. E file state taxes only For qualified real property (described earlier), see Notice 2013-59 for determining the portion of the gain that is attributable to section 1245 property upon the sale or other disposition of qualified real property. E file state taxes only If the property is listed property (described in chapter 5 ), do not figure the recapture amount under the rules explained in this discussion when the percentage of business use drops to 50% or less. E file state taxes only Instead, use the rules for recapturing excess depreciation in chapter 5 under What Is the Business-Use Requirement. E file state taxes only Figuring the recapture amount. E file state taxes only   To figure the amount to recapture, take the following steps. E file state taxes only Figure the depreciation that would have been allowable on the section 179 deduction you claimed. E file state taxes only Begin with the year you placed the property in service and include the year of recapture. E file state taxes only Subtract the depreciation figured in (1) from the section 179 deduction you claimed. E file state taxes only The result is the amount you must recapture. E file state taxes only Example. E file state taxes only In January 2011, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. E file state taxes only The property is not listed property. E file state taxes only The property is 3-year property. E file state taxes only He elected a $5,000 section 179 deduction for the property and also elected not to claim a special depreciation allowance. E file state taxes only He used the property only for business in 2011 and 2012. E file state taxes only In 2013, he used the property 40% for business and 60% for personal use. E file state taxes only He figures his recapture amount as follows. E file state taxes only Section 179 deduction claimed (2011) $5,000. E file state taxes only 00 Minus: Allowable depreciation using Table A-1 (instead of section 179 deduction):   2011 $1,666. E file state taxes only 50   2012 2,222. E file state taxes only 50   2013 ($740. E file state taxes only 50 × 40% (business)) 296. E file state taxes only 20 4,185. E file state taxes only 20 2013 — Recapture amount $ 814. E file state taxes only 80 Paul must include $814. E file state taxes only 80 in income for 2013. E file state taxes only If any qualified zone property placed in service during the year ceases to be used in an empowerment zone by an enterprise zone business in a later year, the benefit of the increased section 179 deduction must be reported as other income on your return. E file state taxes only Prev  Up  Next   Home   More Online Publications