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Ezform Depreciation Table of Contents Introduction Special Depreciation AllowanceQualified Property Election Not To Claim the Allowance Rules for Returns Filed Before June 1, 2002 Passenger Automobiles New York Liberty Zone BenefitsSpecial Liberty Zone Depreciation Allowance Increased Section 179 Deduction Liberty Zone Leasehold Improvement Property If you depreciate business property that you acquired and placed in service after September 10, 2001, new law contains provisions that may affect your depreciation deduction for that property. Ezform Publication 946, How To Depreciate Property, contains information on depreciation. Ezform However, Publication 946 does not contain the new provisions because it was printed before the law was enacted. Ezform The new provisions are in the Supplement to Publication 946, which is reprinted below. Ezform Supplement to Publication 946 How To Depreciate Property   Introduction After Publication 946 was printed, the Job Creation and Worker Assistance Act of 2002 was signed into law by the President. Ezform The new law made several changes in the tax rules explained in the publication. Ezform Some of the changes apply to property placed in service during 2001. Ezform This supplemental publication describes those changes and explains what you should do if you are affected by them. Ezform The situations and examples in Publication 946 do not reflect any of the changes made by the Job Creation and Worker Assistance Act of 2002. Ezform The new law contains the following provisions. Ezform 30% depreciation deductions (special depreciation allowance and special New York Liberty Zone (Liberty Zone) depreciation allowance) for the year qualified property is placed in service after September 10, 2001. Ezform An increased dollar limit on the section 179 deduction for qualified Liberty Zone property purchased after September 10, 2001. Ezform A shorter recovery period for qualified Liberty Zone leasehold improvement property placed in service after September 10, 2001. Ezform An increase in the maximum depreciation deduction for 2001 for a qualified passenger automobile placed in service after September 10, 2001. Ezform If you believe you qualify for an increased deduction under any of these new rules, you must file the revised 2001 Form 4562 (dated March 2002) for 2001 calendar or fiscal years and 2000 fiscal years ending after September 10, 2001. Ezform If you have already filed a tax return, this supplemental publication explains how to claim these benefits and how to elect not to claim the special depreciation allowance or special Liberty Zone depreciation allowance. Ezform See Table 2 at the end of the supplement for an overview of the rules that apply if you filed your return before June 1, 2002. Ezform Special Depreciation Allowance You can take a special depreciation allowance for qualified property you place in service after September 10, 2001. Ezform The allowance is an additional deduction of 30% of the property's depreciable basis. Ezform To figure the depreciable basis, you must first multiply the property's cost or other basis by the percentage of business/investment use and then reduce that amount by any section 179 deduction and certain other deductions and credits for the property. Ezform See What Is the Basis for Depreciation? on page 23 in Publication 946 for more information on figuring depreciable basis. Ezform The allowance is deductible for both regular tax and alternative minimum tax (AMT) purposes. Ezform There is no AMT adjustment required for any depreciation figured on the remaining basis of the property. Ezform In the year you claim the allowance (generally the year you place the property in service), you must reduce the depreciable basis of the property by the allowance before figuring your regular depreciation deduction. Ezform Example 1. Ezform On November 1, 2001, you bought and placed in service in your business qualified property that cost $100,000. Ezform You did not elect to claim a section 179 deduction. Ezform You can deduct 30% of the cost ($30,000) as a special depreciation allowance for 2001. Ezform You use the remaining $70,000 of cost to figure your regular depreciation deduction for 2001 and later years. Ezform Example 2. Ezform The facts are the same as in Example 1, except that you choose to deduct $24,000 of the property's cost as a section 179 deduction. Ezform You use the remaining $76,000 of cost to figure your special depreciation allowance of $22,800 ($76,000 × 30%). Ezform You use the remaining $53,200 of cost to figure your regular depreciation deduction for 2001 and later years. Ezform Qualified Property To qualify for the special depreciation allowance, your property must meet the following requirements. Ezform It is new property of one of the following types. Ezform Property depreciated under the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less. Ezform See Can You Use MACRS To Depreciate Your Property and Which Recovery Period Applies? on pages 7 and 23, respectively, in Publication 946. Ezform Water utility property. Ezform See 25-year property on page 22 in Publication 946. Ezform Computer software that is not a section 197 intangible as described in Computer software on page 5 in Publication 946. Ezform (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS. Ezform ) Qualified leasehold improvement property (defined later). Ezform It meets the following tests (explained later under Tests To Be Met). Ezform Acquisition date test. Ezform Placed in service date test. Ezform Original use test. Ezform It is not excepted property (explained later under Excepted Property). Ezform Qualified leasehold improvement property. Ezform    Generally, this is any improvement to an interior part of a building that is nonresidential real property, provided all of the following requirements are met. Ezform The improvement is made under or pursuant to a lease by the lessee (or any sublessee) or the lessor of that part of the building. Ezform That part of the building is to be occupied exclusively by the lessee (or any sublessee) of that part. Ezform The improvement is placed in service more than 3 years after the date the building was first placed in service. Ezform   However, a qualified leasehold improvement does not include any improvement for which the expenditure is attributable to any of the following. Ezform The enlargement of the building. Ezform Any elevator or escalator. Ezform Any structural component benefiting a common area. Ezform The internal structural framework of the building. Ezform   Generally, a binding commitment to enter into a lease is treated as a lease and the parties to the commitment are treated as the lessor and lessee. Ezform However, a binding commitment between related persons is not treated as a lease. Ezform Related persons. Ezform   For this purpose, the following are related persons. Ezform Members of an affiliated group. Ezform The persons listed in items (1) through (9) under Related persons on page 8 of Publication 946 (except that “80% or more” should be substituted for “more than 10%” each place it appears). Ezform An executor and a beneficiary of the same estate. Ezform Tests To Be Met To qualify for the special depreciation allowance, the property must meet all of the following tests. Ezform Acquisition date test. Ezform    Generally, you must have acquired the property either: After September 10, 2001, and before September 11, 2004, but only if no written binding contract for the acquisition was in effect before September 11, 2001, or Pursuant to a written binding contract entered into after September 10, 2001, and before September 11, 2004. Ezform   Property you manufacture, construct, or produce for your own use meets this test if you began the manufacture, construction, or production of the property after September 10, 2001, and before September 11, 2004. Ezform Placed in service date test. Ezform   Generally, the property must be placed in service for use in your trade or business or for the production of income after September 10, 2001, and before January 1, 2005. Ezform   If you sold property you placed in service after September 10, 2001, and you leased it back within 3 months after the property was originally placed in service, the property is treated as placed in service no earlier than the date it is used under the leaseback. Ezform Original use test. Ezform   The original use of the property must have begun with you after September 10, 2001. Ezform “Original use” means the first use to which the property is put, whether or not by you. Ezform Additional capital expenditures you incurred after September 10, 2001, to recondition or rebuild your property meet the original use test. Ezform Excepted Property The following property does not qualify for the special depreciation allowance. Ezform Property used by any person before September 11, 2001. Ezform Property required to be depreciated using ADS. Ezform This includes listed property used 50% or less in a qualified business use. Ezform Qualified New York Liberty Zone leasehold improvement property (defined next). Ezform Qualified New York Liberty Zone leasehold improvement property. Ezform   This is any qualified leasehold improvement property (as defined earlier) if all of the following requirements are met. Ezform The improvement is to a building located in the New York Liberty Zone (defined later under New York Liberty Zone Benefits). Ezform The improvement is placed in service after September 10, 2001, and before January 1, 2007. Ezform No written binding contract for the improvement was in effect before September 11, 2001. Ezform Election Not To Claim the Allowance You can elect not to claim the special depreciation allowance for qualified property. Ezform If you make this election for any property, it applies to all property in the same property class placed in service during the year. Ezform To make this election, attach a statement to your return indicating you elect not to claim the allowance and the class of property for which you are making the election. Ezform When to make election. Ezform   Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service. Ezform   However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the original return (not including extensions). Ezform Attach the election statement to the amended return. Ezform At the top of the election statement, write “Filed pursuant to section 301. Ezform 9100–2. Ezform ” Revoking an election. Ezform   Once you elect not to deduct the special depreciation allowance for a class of property, you cannot revoke the election without IRS consent. Ezform A request to revoke the election is subject to a user fee. Ezform Rules for Returns Filed Before June 1, 2002 The following rules apply if you placed qualified property in service after September 10, 2001, and filed your return before June 1, 2002. Ezform The rules apply to returns for the following years. Ezform 2000 fiscal years that end after September 10, 2001. Ezform 2001 calendar and fiscal years. Ezform Claiming the allowance. Ezform   If you did not claim the allowance on your return and did not make the election not to claim the allowance, you can do either of the following to claim the allowance. Ezform File an amended return by the due date (not including extensions) of your return for the year following the year the property was placed in service. Ezform Write “Filed Pursuant to Rev. Ezform Proc. Ezform 2002–33” at the top of the amended return. Ezform File Form 3115, Application for Change in Accounting Method, with your return for the year following the year the property was placed in service. Ezform Your return must be filed by the due date (including extensions). Ezform Write “Automatic Change Filed Under Rev. Ezform Proc. Ezform 2002–33” on the appropriate line of Form 3115. Ezform You must also file a copy (with signature) of the completed Form 3115 with the IRS National Office no later than when you file the original with your return. Ezform For more information about filing Form 3115, including the address to send it to, see Revenue Procedure 2002–9, Revenue Procedure 2002–19, and Revenue Procedure 2002–33. Ezform Example 1. Ezform You are an individual and you use the calendar year. Ezform You placed qualified property in service for your business in December 2001. Ezform You filed your 2001 income tax return before April 15, 2002. Ezform You did not claim the special depreciation allowance for the property and did not make the election not to claim the allowance. Ezform You can claim the special allowance by filing an amended 2001 return by April 15, 2003, with “Filed Pursuant to Rev. Ezform Proc. Ezform 2002–33” at the top of the amended return. Ezform You must file an amended return by April 15, 2003, even if you get an extension of time to file your 2002 tax return. Ezform Example 2. Ezform The facts concerning your 2001 return are the same as in Example 1. Ezform In addition, you got an automatic 4-month extension of time (to August 15, 2003) to file your 2002 return. Ezform You can claim the special allowance by filing a Form 3115 (with “Filed Pursuant to Rev. Ezform Proc. Ezform 2002–33” on the appropriate line) with your 2002 return by August 15, 2003. Ezform You must also file a copy of this Form 3115 with the IRS National Office no later than when you file your 2002 return. Ezform Electing not to claim the allowance. Ezform   Generally, you have elected not to claim the special depreciation allowance for a class of property if you: Filed your return timely (including extensions) for the year you placed qualified property in service and indicated on a statement with the return that you are not claiming the allowance, or Filed your return timely and filed an amended return within 6 months of the due date of the original return (not including extensions) and indicated on a statement with the amended return that you are not claiming the allowance. Ezform The statement must indicate that you are not deducting the special depreciation allowance and the class of property to which the election applies. Ezform The statement can be either attached to or written on the return. Ezform You can, for example, write “not deducting 30%” on Form 4562. Ezform Deemed election. Ezform   If you have not followed either of the procedures described above to elect not to claim the allowance, you may still be treated as making the election. Ezform You will be treated as making the election if you meet both of the following conditions. Ezform You filed your return for the year you placed the property in service and claimed depreciation, but not the special allowance, for any class of property. Ezform You do not file an amended return or a Form 3115 within the time prescribed for claiming the special allowance. Ezform See Claiming the allowance, earlier. Ezform Passenger Automobiles The limit on your depreciation deduction (including any section 179 deduction) for any passenger automobile that is qualified property (defined earlier) placed in service after September 10, 2001, and for which you claim the special depreciation allowance is increased. Ezform Generally, the limit is increased from $3,060 to $7,660. Ezform However, if the automobile is a qualified electric car, the limit is increased from $9,280 to $23,080 ($22,980 if placed in service in 2002). Ezform Table 1 shows the maximum deduction amounts for 2001. Ezform Table 1. Ezform Maximum Deduction for 2001 Qualified Vehicle Placed in Service Before Sept. Ezform 11 Placed in Service After Sept. Ezform 10 Passenger automobile $3,060 $7,660 Electric car 9,280 23,080 1 1$22,980 if you place an electric car in service in 2002. Ezform Election not to claim the allowance. Ezform   The increased maximum depreciation deduction does not apply if you elected not to claim the special depreciation allowance as explained earlier under Election Not To Claim the Allowance and Rules for Returns Filed Before June 1, 2002. Ezform New York Liberty Zone Benefits Several benefits are available for property you place in service in the New York Liberty Zone (Liberty Zone). Ezform They include a special depreciation allowance for the year you place the property in service, an increased section 179 deduction, and the classification of certain leasehold improvement property as 5-year property. Ezform Area defined. Ezform   The New York Liberty Zone is the area located on or south of Canal Street, East Broadway (east of its intersection with Canal Street), or Grand Street (east of its intersection with East Broadway) in the Borough of Manhattan in the City of New York, New York. Ezform Special Liberty Zone Depreciation Allowance You can take a special depreciation allowance for qualified Liberty Zone property you place in service after September 10, 2001. Ezform The allowance is an additional deduction of 30% of the property's depreciable basis. Ezform To figure the depreciable basis, you must first multiply the property's cost or other basis by the percentage of business/investment use and then reduce that amount by any section 179 deduction and certain other deductions and credits for the property. Ezform See What Is the Basis for Depreciation? on page 23 in Publication 946 for more information on figuring depreciable basis. Ezform The allowance is deductible for both regular tax and alternative minimum tax (AMT) purposes. Ezform There is no AMT adjustment required for any depreciation figured on the remaining basis of the property. Ezform In the year you claim the allowance (generally the year you place the property in service), you must reduce the depreciable basis of the property by the allowance before figuring your regular depreciation deduction. Ezform You cannot claim the special Liberty Zone depreciation allowance for property eligible for the special depreciation allowance explained earlier in Qualified Property under Special Depreciation Allowance. Ezform Qualified property is eligible for only one special depreciation allowance. Ezform Example 1. Ezform On November 1, 2001, you bought and placed in service in your business, which is in the Liberty Zone, qualified Liberty Zone property that cost $200,000. Ezform You did not elect to claim a section 179 deduction. Ezform You can deduct 30% of the cost ($60,000) as a special Liberty Zone depreciation allowance for 2001. Ezform You use the remaining $140,000 of cost to figure your regular depreciation deduction for 2001 and later years. Ezform Example 2. Ezform The facts are the same as in Example 1, except that you choose to deduct $59,000 of the property's cost as a section 179 deduction. Ezform (See Increased Section 179 Deduction, later, for information concerning how this section 179 deduction amount is figured). Ezform You use the remaining $141,000 of cost to figure your special Liberty Zone depreciation allowance of $42,300 ($141,000 × 30%). Ezform You use the remaining $98,700 of cost to figure your regular depreciation deduction for 2001 and later years. Ezform Qualified Liberty Zone Property For a 2001 calendar or fiscal year and a 2000 fiscal year that ends after September 10, 2001, property qualifies for the special Liberty Zone depreciation allowance if it meets the following requirements. Ezform It is one of the following types of property. Ezform Used property depreciated under MACRS with a recovery period of 20 years or less. Ezform See Can You Use MACRS To Depreciate Your Property and Which Recovery Period Applies? on pages 7 and 23, respectively, in Publication 946. Ezform Used water utility property. Ezform See 25-year property on page 22 in Publication 946. Ezform Used computer software that is not a section 197 intangible as described in Computer software on page 5 in Publication 946. Ezform (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS. Ezform ) Certain nonresidential real property and residential rental property (defined later). Ezform It meets the following tests (explained later under Tests to be met). Ezform Acquisition date test. Ezform Placed in service date test. Ezform Substantial use test. Ezform Original use test. Ezform It is not excepted property (explained later under Excepted property). Ezform Nonresidential real property and residential rental property. Ezform   This property is qualifying property only to the extent it rehabilitates real property damaged, or replaces real property destroyed or condemned, as a result of the terrorist attack of September 11, 2001. Ezform Property is treated as replacing destroyed or condemned property if, as part of an integrated plan, such property replaces real property included in a continuous area that includes real property destroyed or condemned. Ezform   For these purposes, real property is considered destroyed (or condemned) only if an entire building or structure was destroyed (or condemned) as a result of the terrorist attack. Ezform Otherwise, the property is considered damaged real property. Ezform For example, if certain structural components of a building (such as walls, floors, or plumbing fixtures) are damaged or destroyed as a result of the terrorist attack, but the building is not destroyed (or condemned), then only costs related to replacing the damaged or destroyed structural components qualify for the special Liberty Zone depreciation allowance. Ezform Tests to be met. Ezform   To qualify for the special Liberty Zone depreciation allowance, your property must meet all of the following tests. Ezform Acquisition date test. Ezform   You must have acquired the property by purchase after September 10, 2001, and there must not have been a binding written contract for the acquisition in effect before September 11, 2001. Ezform   For information on the acquisition of property by purchase, see Property Acquired by Purchase on page 15 of Publication 946. Ezform   Property you manufacture, construct, or produce for your own use meets this test if you began the manufacture, construction, or production of the property after September 10, 2001. Ezform Placed in service date test. Ezform   Generally, the property must be placed in service for use in your trade or business or for the production of income before January 1, 2007 (January 1, 2010, in the case of qualifying nonresidential real property and residential rental property). Ezform   If you sold property you placed in service after September 10, 2001, and you leased it back within 3 months after the property was originally placed in service, the property is treated as placed in service no earlier than the date it is used under the leaseback. Ezform Substantial use test. Ezform   Substantially all use of the property must be in the Liberty Zone and in the active conduct of your trade or business in the Liberty Zone. Ezform Original use test. Ezform   The original use of the property in the Liberty Zone must have begun with you after September 10, 2001. Ezform   Used property can be qualified Liberty Zone property if it has not previously been used within the Liberty Zone. Ezform Also, additional capital expenditures you incurred after September 10, 2001, to recondition or rebuild your property meet the original use test if the original use of the property in the Liberty Zone began with you. Ezform Excepted property. Ezform   The following property does not qualify for the special Liberty Zone depreciation allowance. Ezform Property eligible for the special depreciation allowance explained earlier in Qualified Property under Special Depreciation Allowance. Ezform Property required to be depreciated using ADS. Ezform This includes listed property used 50% or less in a qualified business use. Ezform Qualified New York Liberty Zone leasehold improvement property (defined earlier in Excepted Property under Special Depreciation Allowance). Ezform Example. Ezform In December 2001, you bought and placed in service in your business in the Liberty Zone the following property. Ezform New office furniture with a MACRS recovery period of 7 years. Ezform A used computer with a MACRS recovery period of 5 years. Ezform The computer had not previously been used within the Liberty Zone. Ezform Because the office furniture is new property, it qualifies for the special depreciation allowance, but not the special Liberty Zone depreciation allowance. Ezform Because the computer is used property that had not previously been used in the Liberty Zone, it qualifies for the special Liberty Zone depreciation allowance, but not the special depreciation allowance. Ezform Election Not To Claim the Liberty Zone Allowance You can elect not to claim the special Liberty Zone depreciation allowance for qualified property. Ezform If you make this election for any property, it applies to all property in the same property class placed in service during the year. Ezform To make this election, attach a statement to your return indicating you elect not to claim the allowance and the class of property for which you are making the election. Ezform When to make the election. Ezform   Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service. Ezform   However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the original return (not including extensions). Ezform Attach the election statement to the amended return. Ezform At the top of the election statement, write “Filed pursuant to section 301. Ezform 9100–2. Ezform ” Revoking an election. Ezform   Once you elect not to deduct the special Liberty Zone depreciation allowance for a class of property, you cannot revoke the election without IRS consent. Ezform A request to revoke the election is subject to a user fee. Ezform Returns filed before June 1, 2002. Ezform   The rules that apply to the special depreciation allowance discussed earlier in Rules for Returns Filed Before June 1, 2002 under Special Depreciation Allowance also apply to the special Liberty Zone depreciation allowance. Ezform Increased Section 179 Deduction Under section 179 of the Internal Revenue Code, you can choose 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. Ezform For tax years beginning in 2000, that limit was $20,000. Ezform For tax years beginning in 2001 and 2002, that limit is generally $24,000. Ezform If the cost of qualifying section 179 property placed in service in a year is over $200,000, you must reduce the dollar limit (but not below zero) by the amount of the cost over $200,000. Ezform Increased Dollar Limit The dollar limit on the section 179 deduction is increased for certain property placed in service in the Liberty Zone. Ezform The increase is the smaller of the following amounts. Ezform $35,000. Ezform The cost of section 179 property that is qualified Liberty Zone property placed in service during the year. Ezform If you use the revised 2001 Form 4562 (dated March 2002) for a tax year beginning in 2000, you must reduce the section 179 dollar limit to $20,000 before adding the additional amount for qualified property. Ezform Qualified property. Ezform   To qualify for the increased section 179 deduction, your property must be section 179 property that is either: Qualified Liberty Zone property, or Property that would be qualified Liberty Zone property except that it is eligible for the special depreciation allowance. Ezform Qualified Liberty Zone property is explained earlier in Qualified Liberty Zone Property under Special Liberty Zone Depreciation Allowance. Ezform Property eligible for the special depreciation allowance is explained earlier in Qualified Property under Special Depreciation Allowance. Ezform For information on the requirements that must be met for property to qualify for the section 179 deduction, see What Property Qualifies? on page 14 of Publication 946. Ezform Example 1. Ezform In 2002, you place in service in your business, which is in the Liberty Zone, qualified property (defined earlier) costing $25,000. Ezform Because this cost is less than $35,000, the dollar limit on the section 179 deduction is increased by $25,000 to $49,000 ($24,000 + $25,000). Ezform Example 2. Ezform In 2002, you place in service in your business, which is in the Liberty Zone, qualified property (defined earlier) costing $75,000. Ezform Because $35,000 is less than the cost of the property you place in service, the dollar limit on the section 179 deduction you can claim is increased by $35,000 to $59,000 ($24,000 + $35,000). Ezform Reduced Dollar Limit Generally, you must reduce the dollar limit for a year by the cost of qualifying section 179 property placed in service in the year that is more than $200,000. Ezform However, if the cost of your Liberty Zone property exceeds $200,000, you take into account only 50% (instead of 100%) of the cost of qualified property placed in service in a year. Ezform Example. Ezform In 2002, you place in service in your business, which is in the Liberty Zone, qualified property costing $460,000. Ezform Your increased dollar limit is $59,000 ($35,000 + $24,000). Ezform Because 50% of the cost of the property you place in service ($230,000) is $30,000 more than $200,000, you must reduce your $59,000 dollar limit to $29,000 ($59,000 - $30,000). Ezform Recapture Rules Rules similar to those explained on page 20 of Publication 946 under When Must You Recapture the Deduction? apply with respect to any qualified property you stop using in the Liberty Zone. Ezform Returns Filed Before June 1, 2002 If you filed a return before June 1, 2002, and did not deduct the increased section 179 amount for qualified property placed in service after September 10, 2001, you can deduct the increased amount by filing an amended return by the due date (not including extensions) of the return for the year after the year the property was placed in service. Ezform This rule applies to returns for the following years. Ezform 2000 fiscal years that end after September 10, 2001. Ezform 2001 calendar and fiscal years. Ezform On the amended return, write “Filed Pursuant to Rev. Ezform Proc. Ezform 2002–33. Ezform ” Liberty Zone Leasehold Improvement Property Qualified Liberty Zone leasehold improvement property (described earlier in Qualified Property under Special Depreciation Allowance) is 5-year property. Ezform This means that it is depreciated over a recovery period of 5 years. Ezform For information about recovery periods, see Which Recovery Period Applies? on page 23 of Publication 946. Ezform The straight-line method must be used with respect to qualified Liberty Zone leasehold improvement property. Ezform Under ADS, the recovery period for qualified Liberty Zone leasehold improvement property is 9 years. Ezform Returns Filed Before June 1, 2002 If you filed either of the following returns before June 1, 2002, and did not depreciate qualified Liberty Zone leasehold improvement property placed in service during the tax year as 5-year property using the straight line method, you should file an amended return before you file your return for the year after the year the property was placed in service. Ezform Your 2000 fiscal year return (for a 2000 fiscal year that ends after September 10, 2001). Ezform Your 2001 calendar or fiscal year return. Ezform On the amended return, write “Filed Pursuant to Rev. Ezform Proc. Ezform 2002–33. Ezform ” Table 2. Ezform Rules for Returns Filed Before June 1, 2002 Note:This chart highlights the rules for returns affected by the Job Creation and Worker Assistance Act of 2002 that were filed before June 1, 2002, without accounting for any of the new benefits under the law. Ezform See the text for definitions and examples. Ezform Do not rely on this chart alone. Ezform IF you want to. Ezform . Ezform . Ezform THEN you. Ezform . Ezform . Ezform BY. Ezform . Ezform . Ezform claim the special depreciation allowance or special Liberty Zone depreciation allowance • must file an amended return • the due date (not including extensions) of your return for the year after the year the property was placed in service, or • must file Form 3115, Application for Change in Accounting Method, with your return for the year after the year the property was placed in service • the due date (including extensions) of your return for the year after the year the property was placed in service, and • must file a copy of your completed Form 3115 with the IRS National Office • the date you file the original Form 3115 with your return for the year after the year the property was placed in service. Ezform elect not to claim the special depreciation allowance or the special Liberty Zone depreciation allowance 1 • must have filed your return timely for the year the property was placed in service, and   • must file an amended return stating you are not claiming the allowance • the date that is 6 months after the due date of the original return (not including extensions). Ezform deduct the increased section 179 amount • must file an amended return • the due date (not including extensions) of your return for the year after the year the property was placed in service. Ezform use a 5-year recovery period for depreciating qualified Liberty Zone leasehold improvement property • should file an amended return • the date you file your return for the year after the year the property was placed in service. Ezform 1See also Deemed election under Rules for Returns Filed Before June 1, 2002, earlier. Ezform Prev  Up  Next   Home   More Online Publications
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Understanding your CP12A Notice

We made changes to correct the Earned Income Credit (EIC) claimed on your tax return.

Printable samples of this notice (PDF)

Tax publications you may find useful

How to get help

Calling the 1-800 number listed on the top right corner of your notice is the fastest way to get your questions answered.

You can also authorize someone (such as an accountant) to contact the IRS on your behalf using this Power of Attorney and Declaration of Representative (Form 2848).

Or you may qualify for help from a Low Income Taxpayer Clinic.
 


What you need to do

  • Review the notice, and compare our changes to the information on your tax return.
  • If you agree with the changes we made, do nothing; you should receive a refund check in 4-6 weeks, as long as you don't owe other tax or debts we're required to collect.
  • If you don't agree, call 1-800-829-8374 to review your account or contact us by mail. Include any correspondence or documentation.

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Answers to Common Questions

How can I find out what caused my tax return to change?
Please contact us at the toll free number listed on the top right corner of your notice for specific information concerning your tax return.

What should I do if I disagree with the changes you made?
If you disagree, contact us at the toll free number listed on the top right corner of your notice.

If you contact us in writing within 60 days of the date of this notice, we'll reverse the changes we made to your account. However, if you're unable to provide us with additional information that justifies the reversal and we believe the reversal is in error, we'll forward your case to examination for audit. This step gives you formal appeal rights, including the right to appeal our decision in court. After we forward your case, the audit staff will contact you within five to six weeks to fully explain the audit process and your rights. If you don't contact us within the 60 day period, you'll lose your right to appeal our decision before payment of tax.

My child is turning 18 this year. Can I still get the Additional Child Tax Credit?
No. Your child must be under the age of 17 at the end of 2010 to qualify for both the Child Tax Credit and the Additional Child Tax Credit.


Tips for next year

Consider filing your taxes electronically. Filing online can help you avoid mistakes and find credits and deductions that you may qualify for. In many cases you can file for free. Learn more about e-file.

Page Last Reviewed or Updated: 19-Feb-2014

The Ezform

Ezform Other Methods of Depreciation Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: How To Figure the DeductionBasis Useful Life Salvage Value Methods To UseStraight Line Method Declining Balance Method Income Forecast Method How To Change Methods DispositionsSale or exchange. Ezform Property not disposed of or abandoned. Ezform Special rule for normal retirements from item accounts. Ezform Abandoned property. Ezform Single item accounts. Ezform Multiple property account. Ezform Topics - This chapter discusses: How to figure the deduction Methods to use How to change methods 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 946 How To Depreciate Property Form (and Instructions) 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization Schedule C (Form 1040) Profit or Loss From Business If your property is being depreciated under ACRS, you must continue to use rules for depreciation that applied when you placed the property in service. Ezform If your property qualified for MACRS, you must depreciate it under MACRS. Ezform See Publication 946. Ezform However, you cannot use MACRS for certain property because of special rules that exclude it from MACRS. Ezform Also, you can elect to exclude certain property from being depreciated under MACRS. Ezform Property that you cannot depreciate using MACRS includes: Intangible property, Property you can elect to exclude from MACRS that you properly depreciate under a method that is not based on a term of years, Certain public utility property, Any motion picture film or video tape, Any sound recording, and Certain real and personal property placed in service before 1987. Ezform Intangible property. Ezform   You cannot depreciate intangible property under ACRS or MACRS. Ezform You depreciate intangible property using any other reasonable method, usually, the straight line method. Ezform Note. Ezform The cost of certain intangible property that you acquire after August 10, 1993, must be amortized over a 15-year period. Ezform For more information, see chapter 12 of Publication 535. Ezform Public utility property. Ezform   The law excludes from MACRS any public utility property for which the taxpayer does not use a normalization method of accounting. Ezform This type of property is subject to depreciation under a special rule. Ezform Videocassettes. Ezform   If you are in the videocassette rental business, you can depreciate those videocassettes purchased for rental. Ezform You can depreciate the cost less salvage value of those videocassettes that have a useful life over one year using either: The straight line method, or The income forecast method. Ezform The straight line method, salvage value, and useful life are discussed later under Methods To Use. Ezform You can deduct in the year of purchase as a business expense the cost of any cassette that has a useful life of one year or less. Ezform How To Figure the Deduction Two other reasonable methods can be used to figure your deduction for property not covered under ACRS or MACRS. Ezform These methods are straight line and declining balance. Ezform To figure depreciation using these methods, you must generally determine three things about the property you intend to depreciate. Ezform They are: The basis, The useful life, and The estimated salvage value at the end of its useful life. Ezform The amount of the deduction in any year also depends on which method of depreciation you choose. Ezform Basis To deduct the proper amount of depreciation each year, first determine your basis in the property you intend to depreciate. Ezform The basis used for figuring depreciation is the same as the basis that would be used for figuring the gain on a sale. Ezform Your original basis is usually the purchase price. Ezform However, if you acquire property in some other way, such as inheriting it, getting it as a gift, or building it yourself, you have to figure your original basis in a different way. Ezform Adjusted basis. Ezform   Events will often change the basis of property. Ezform When this occurs, the changed basis is called the adjusted basis. Ezform Some events, such as improvements you make, increase basis. Ezform Events such as deducting casualty losses and depreciation decrease basis. Ezform If basis is adjusted, the depreciation deduction may also have to be changed, depending on the reason for the adjustment and the method of depreciation you are using. Ezform   Publication 551 explains how to figure basis for property acquired in different ways. Ezform It also discusses what items increase and decrease basis, how to figure adjusted basis, and how to allocate cost if you buy several pieces of property at one time. Ezform Useful Life The useful life of a piece of property is an estimate of how long you can expect to use it in your trade or business, or to produce income. Ezform It is the length of time over which you will make yearly depreciation deductions of your basis in the property. Ezform It is how long it will continue to be useful to you, not how long the property will last. Ezform Many things affect the useful life of property, such as: Frequency of use, Age when acquired, Your repair policy, and Environmental conditions. Ezform The useful life can also be affected by technological improvements, progress in the arts, reasonably foreseeable economic changes, shifting of business centers, prohibitory laws, and other causes. Ezform Consider all these factors before you arrive at a useful life for your property. Ezform The useful life of the same type of property varies from user to user. Ezform When you determine the useful life of your property, keep in mind your own experience with similar property. Ezform You can use the general experience of the industry you are in until you are able to determine a useful life of your property from your own experience. Ezform Change in useful life. Ezform   You base your estimate of useful life on certain facts. Ezform If these facts change significantly, you can adjust your estimate of the remaining useful life. Ezform However, you redetermine the estimated useful life only when the change is substantial and there is a clear reason for making the change. Ezform Salvage Value It is important for you to accurately determine the correct salvage value of the property you want to depreciate. Ezform You generally cannot depreciate property below a reasonable salvage value. Ezform Determining salvage value. Ezform   Salvage value is the estimated value of property at the end of its useful life. Ezform It is what you expect to get for the property if you sell it after you can no longer use it productively. Ezform You must estimate the salvage value of a piece of property when you first acquire it. Ezform   Salvage value is affected both by how you use the property and how long you use it. Ezform If it is your policy to dispose of property that is still in good operating condition, the salvage value can be relatively large. Ezform However, if your policy is to use property until it is no longer usable, its salvage value can be its junk value. Ezform Changing salvage value. Ezform   Once you determine the salvage value for property, you should not change it merely because prices have changed. Ezform However, if you redetermine the useful life of property, as discussed earlier under Change in useful life, you can also redetermine the salvage value. Ezform When you redetermine the salvage value, take into account the facts that exist at the time. Ezform Net salvage. Ezform   Net salvage is the salvage value of property minus what it costs to remove it when you dispose of it. Ezform You can choose either salvage value or net salvage when you figure depreciation. Ezform You must consistently use the one you choose and the treatment of the costs of removal must be consistent with the practice adopted. Ezform However, if the cost to remove the property is more than the estimated salvage value, then net salvage is zero. Ezform Your salvage value can never be less than zero. Ezform Ten percent rule. Ezform   If you acquire personal property that has a useful life of 3 years or more, you can use an amount for salvage value that is less than your actual estimate. Ezform You can subtract from your estimate of salvage value an amount equal to 10% of your basis in the property. Ezform If salvage value is less than 10% of basis, you can ignore salvage value when you figure depreciation. Ezform Methods To Use Two methods of depreciation are the straight line and declining balance methods. Ezform If ACRS or MACRS does not apply, you can use one of these methods. Ezform The straight line and declining balance methods discussed in this section are not figured in the same way as straight line or declining balance methods under MACRS. Ezform Straight Line Method Before 1981, you could use any reasonable method for every kind of depreciable property. Ezform One of these methods was the straight line method. Ezform This method was also used for intangible property. Ezform It lets you deduct the same amount of depreciation each year. Ezform To figure your deduction, determine the adjusted basis of your property, its salvage value, and its estimated useful life. Ezform Subtract the salvage value, if any, from the adjusted basis. Ezform The balance is the total amount of depreciation you can take over the useful life of the property. Ezform Divide the balance by the number of years remaining in the useful life. Ezform This gives you the amount of your yearly depreciation deduction. Ezform Unless there is a big change in adjusted basis, or useful life, this amount will stay the same throughout the time you depreciate the property. Ezform If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use. Ezform Example. Ezform In April 1994, Frank bought a franchise for $5,600. Ezform It expires in 10 years. Ezform This property is intangible property that cannot be depreciated under MACRS. Ezform Frank depreciates the franchise under the straight line method, using a 10-year useful life and no salvage value. Ezform He takes the $5,600 basis and divides that amount by 10 years ($5,600 ÷ 10 = $560, a full year's use). Ezform He must prorate the $560 for his 9 months of use in 1994. Ezform This gives him a deduction of $420 ($560 ÷ 9/12). Ezform In 1995, Frank can deduct $560 for the full year. Ezform Declining Balance Method The declining balance method allows you to recover a larger amount of the cost of the property in the early years of your use of the property. Ezform The rate cannot be more than twice the straight line rate. Ezform Rate of depreciation. Ezform   Under this method, you must determine your declining balance rate of depreciation. Ezform The initial step is to: Divide the number 1 by the useful life of your property to get a straight line rate. Ezform (For example, if property has a useful life of 5 years, its normal straight line rate of depreciation is ⅕, or 20%. Ezform ) Multiply this straight line rate by a number that is more than 1 but not more than 2 to determine the declining balance rate. Ezform Unless there is a change in the useful life during the time you depreciate the property, the rate of depreciation generally will not change. Ezform Depreciation deductions. Ezform   After you determine the rate of depreciation, multiply the adjusted basis of the property by it. Ezform This gives you the amount of your deduction. Ezform For example, if your adjusted basis at the beginning of the first year is $10,000, and your declining balance rate is 20%, your depreciation deduction for the first year is $2,000 ($10,000 ÷ 20%). Ezform To figure your depreciation deduction in the second year, you must first adjust the basis for the amount of depreciation you deducted in the first year. Ezform Subtract the previous year's depreciation from your basis ($10,000 - $2,000 = $8,000). Ezform Multiply this amount by the rate of depreciation ($8,000 ÷ 20% = $1,600). Ezform Your depreciation deduction for the second year is $1,600. Ezform   As you can see from this example, your adjusted basis in the property gets smaller each year. Ezform Also, under this method, deductions are larger in the earlier years and smaller in the later years. Ezform You can make a change to the straight line method without consent. Ezform Salvage value. Ezform   Do not subtract salvage value when you figure your yearly depreciation deductions under the declining balance method. Ezform However, you cannot depreciate the property below its reasonable salvage value. Ezform Determine salvage value using the rules discussed earlier, including the special 10% rule. Ezform Example. Ezform If your adjusted basis has been decreased to $1,000 and the rate of depreciation is 20%, your depreciation deduction should be $200. Ezform But if your estimate of salvage value was $900, you can only deduct $100. Ezform This is because $100 is the amount that would lower your adjusted basis to equal salvage value. Ezform Income Forecast Method The income forecast method requires income projections for each videocassette or group of videocassettes. Ezform You can group the videocassettes by title for making this projection. Ezform You determine the depreciation by applying a fraction to the cost less salvage value of the cassette. Ezform The numerator is the income from the videocassette for the tax year and the denominator is the total projected income for the cassette. Ezform For more information on the income forecast method, see Revenue Ruling 60-358 in Cumulative Bulletin 1960, Volume 2, on page 68. Ezform How To Change Methods In some cases, you may change your method of depreciation for property depreciated under a reasonable method. Ezform If you change your method of depreciation, it is generally a change in your method of accounting. Ezform You must get IRS consent before making the change. Ezform However, you do not need permission for certain changes in your method of depreciation. Ezform The rules discussed in this section do not apply to property depreciated under ACRS or MACRS. Ezform For information on ACRS elections,see Revocation of election, in chapter 1 under Alternate ACRS Method. Ezform Change to the straight line method. Ezform   You can change from the declining balance method to the straight line method at any time during the useful life of your property without IRS consent. Ezform However, if you have a written agreement with the IRS that prohibits a change, you must first get IRS permission. Ezform When the change is made, figure depreciation based on your adjusted basis in the property at that time. Ezform Your adjusted basis takes into account all previous depreciation deductions. Ezform Use the estimated remaining useful life of your property at the time of change and its estimated salvage value. Ezform   You can change from the declining balance method to straight line only on the original tax return for the year you first use the straight line method. Ezform You cannot make the change on an amended return filed after the due date of the original return (including extensions). Ezform   When you make the change, attach a statement to your tax return showing: When you acquired the property, Its original cost or other original basis, The total amount claimed for depreciation and other allowances since you acquired it, Its salvage value and remaining useful life, and A description of the property and its use. Ezform   After you change to straight line, you cannot change back to the declining balance method or to any other method for a period of 10 years without written permission from the IRS. Ezform Changes that require permission. Ezform   For most other changes in method of depreciation, you must get permission from the IRS. Ezform To request a change in method of depreciation, file Form 3115. Ezform File the application within the first 180 days of the tax year the change is to become effective. Ezform In most cases, there is a user fee that must accompany Form 3115. Ezform See the instructions for Form 3115 to determine if a fee is required. Ezform Changes granted automatically. Ezform   The IRS automatically approves certain changes of a method of depreciation. Ezform But, you must file Form 3115 for these automatic changes. Ezform   However, IRS can deny permission if Form 3115 is not filed on time. Ezform For more information on automatic changes, see Revenue Procedure 74-11, 1974-1 C. Ezform B. Ezform 420. Ezform Changes for which approval is not automatic. Ezform   The automatic change procedures do not apply to: Property or an account where you made a change in depreciation within the last 10 tax years (unless the change was made under the Class Life System), Class Life Asset Depreciation Range System, and Public utility property. Ezform   You must request and receive permission for these changes. Ezform To make the request, file Form 3115 during the first 180 days of the tax year for which you want the change to be effective. Ezform Change from an improper method. Ezform   If the IRS disallows the method you are using, you do not need permission to change to a proper method. Ezform You can adopt the straight line method, or any other method that would have been permitted if you had used it from the beginning. Ezform If you file your tax return using an improper method, but later file an amended return, you can use a proper method on the amended return without getting IRS permission. Ezform However, you must file the amended return before the filing date for the next tax year. Ezform Dispositions Retirement is the permanent withdrawal of depreciable property from use in your trade or business or for the production of income. Ezform You can do this by selling, exchanging, or abandoning the item of property. Ezform You can also withdraw it from use without disposing of it. Ezform For example, you could place it in a supplies or scrap account. Ezform Retirements can be either normal or abnormal depending on all facts and circumstances. Ezform The rules discussed next do not apply to MACRS and ACRS property. Ezform Normal retirement. Ezform   A normal retirement is a permanent withdrawal of depreciable property from use if the following apply: The retirement is made within the useful life you estimated originally, and The property has reached a condition at which you customarily retire or would retire similar property from use. Ezform A retirement is generally considered normal unless you can show that you retired the property because of a reason you did not consider when you originally estimated the useful life of the property. Ezform Abnormal retirement. Ezform   A retirement can be abnormal if you withdraw the property early or under other circumstances. Ezform For example, if the property is damaged by a fire or suddenly becomes obsolete and is now useless. Ezform Gain or loss on retirement. Ezform   There are special rules for figuring the gain or loss on retirement of property. Ezform The gain or loss will depend on several factors. Ezform These include the type of withdrawal, if the withdrawal was from a single property or multiple property account, and if the retirement was normal or abnormal. Ezform A single property account contains only one item of property. Ezform A multiple property account is one in which several items have been combined with a single rate of depreciation assigned to the entire account. Ezform Sale or exchange. Ezform   If property is retired by sale or exchange, you figure gain or loss by the usual rules that apply to sales or other dispositions of property. Ezform See Publication 544. Ezform Property not disposed of or abandoned. Ezform   If property is retired permanently, but not disposed of or physically abandoned, you do not recognize gain. Ezform You are allowed a loss in such a case, but only if the retirement is: An abnormal retirement, A normal retirement from a single property account in which you determined the life of each item of property separately, or A normal retirement from a multiple property account in which the depreciation rate is based on the maximum expected life of the longest lived item of property and the loss occurs before the expiration of the full useful life. Ezform However, you are not allowed a loss if the depreciation rate is based on the average useful life of the items of property in the account. Ezform   To figure your loss, subtract the estimated salvage or fair market value of the property at the date of retirement, whichever is more, from its adjusted basis. Ezform Special rule for normal retirements from item accounts. Ezform   You can generally deduct losses upon retirement of a few depreciable items of property with similar useful lives, if: You account for each one in a separate account, and You use the average useful life to figure depreciation. Ezform However, you cannot deduct losses if you use the average useful life to figure depreciation and they have a wide range of useful lives. Ezform   If you have a large number of depreciable property items and use average useful lives to figure depreciation, you cannot deduct the losses upon normal retirements from these accounts. Ezform Abandoned property. Ezform   If you physically abandon property, you can deduct as a loss the adjusted basis of the property at the time of its abandonment. Ezform However, your intent must be to discard the property so that you will not use it again or retrieve it for sale, exchange, or other disposition. Ezform Basis of property retired. Ezform   The basis for figuring gain or loss on the retirement of property is its adjusted basis at the time of retirement, as determined in the following discussions. Ezform Single item accounts. Ezform   If an item of property is accounted for in a single item account, the adjusted basis is the basis you would use to figure gain or loss for a sale or exchange of the property. Ezform This is generally the cost or other basis of the item of property less depreciation. Ezform See Publication 551. Ezform Multiple property account. Ezform   For a normal retirement from a multiple property account, if you figured depreciation using the average expected useful life, the adjusted basis is the salvage value estimated for the item of property when it was originally acquired. Ezform If you figured depreciation using the maximum expected useful life of the longest lived item of property in the account, you must use the depreciation method used for the multiple property account and a rate based on the maximum expected useful life of the item of property retired. Ezform   You make the adjustment for depreciation for an abnormal retirement from a multiple property account at the rate that would be proper if the item of property was depreciated in a single property account. Ezform The method of depreciation used for the multiple property account is used. Ezform You base the rate on either the average expected useful life or the maximum expected useful life of the retired item of property, depending on the method used to determine the depreciation rate for the multiple property account. Ezform Prev  Up  Next   Home   More Online Publications