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Federal 1040x Instructions

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Federal 1040x Instructions

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

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The Federal 1040x Instructions

Federal 1040x instructions 9. Federal 1040x instructions   Worksheets Table of Contents When Should I Figure MAC?Checking the Previous Year's Contributions Available Worksheets Chapter 2 introduced you to the term maximum amount contributable (MAC). Federal 1040x instructions Generally, your MAC is the lesser of your: Limit on annual additions (chapter 3), or Limit on elective deferrals (chapter 4). Federal 1040x instructions The worksheets in this chapter can help you figure the cost of incidental life insurance, your includible compensation, your limit on annual additions, your limit on elective deferrals, your limit on catch-up contributions, and your MAC. Federal 1040x instructions After completing the worksheets, you should maintain them with your 403(b) records for that year. Federal 1040x instructions Do not attach them to your tax return. Federal 1040x instructions At the end of the year or the beginning of the next year, you should compare your estimated compensation figures with your actual figures. Federal 1040x instructions If your compensation is the same as, or more than, the projected amounts and the calculations are correct, then you should simply file these worksheets with your other tax records for the year. Federal 1040x instructions If your compensation was lower than your estimated figures, you will need to check the amount contributed during the year to determine if contributions are more than your MAC. Federal 1040x instructions When Should I Figure MAC? At the beginning of each year, you should figure your MAC using a conservative estimate of your compensation. Federal 1040x instructions Should your income change during the year, you should refigure your MAC based on a revised conservative estimate. Federal 1040x instructions By doing this, you will be able to determine if contributions to your 403(b) account should be increased or decreased for the year. Federal 1040x instructions Checking the Previous Year's Contributions At the beginning of the following year, you should refigure your MAC based on your actual earned income. Federal 1040x instructions At the end of the current year or the beginning of the next year, you should check your contributions to be sure you did not exceed your MAC. Federal 1040x instructions This means refiguring your limit based on your actual compensation figures for the year. Federal 1040x instructions This will allow you to determine if the amount contributed is more than the allowable amounts, and possibly avoid additional taxes. Federal 1040x instructions Available Worksheets The following worksheets have been provided to help you figure your MAC. Federal 1040x instructions Worksheet A. Federal 1040x instructions Cost of Incidental Life Insurance. Federal 1040x instructions Worksheet B. Federal 1040x instructions Includible Compensation for Your Most Recent Year of Service Worksheet C. Federal 1040x instructions Limit on Catch-Up Contributions. Federal 1040x instructions ??? Worksheet 1. Federal 1040x instructions Maximum Amount Contributable (MAC). Federal 1040x instructions Worksheet A. Federal 1040x instructions Cost of Incidental Life Insurance Note. Federal 1040x instructions Use this worksheet to figure the cost of incidental life insurance included in your annuity contract. Federal 1040x instructions This amount will be used to figure includible compensation for your most recent year of service. Federal 1040x instructions 1. Federal 1040x instructions Enter the value of the contract (amount payable upon your death) 1. Federal 1040x instructions   2. Federal 1040x instructions Enter the cash value in the contract at the end of the year 2. Federal 1040x instructions   3. Federal 1040x instructions Subtract line 2 from line 1. Federal 1040x instructions This is the value of your current life insurance protection 3. Federal 1040x instructions   4. Federal 1040x instructions Enter your age on your birthday nearest the beginning of the policy year 4. Federal 1040x instructions   5. Federal 1040x instructions Enter the 1-year term premium for $1,000 of life insurance based on your age. Federal 1040x instructions (From Figure 3-1) 5. Federal 1040x instructions   6. Federal 1040x instructions Divide line 3 by $1,000 6. Federal 1040x instructions   7. Federal 1040x instructions Multiply line 6 by line 5. Federal 1040x instructions This is the cost of your incidental life insurance 7. Federal 1040x instructions   Worksheet B. Federal 1040x instructions Includible Compensation for Your Most Recent Year of Service1 Note. Federal 1040x instructions Use this worksheet to figure includible compensation for your most recent year of service. Federal 1040x instructions 1. Federal 1040x instructions Enter your includible wages from the employer maintaining your 403(b) account for your most recent year of service 1. Federal 1040x instructions   2. Federal 1040x instructions Enter elective deferrals excluded from your gross income for your most recent year of service2 2. Federal 1040x instructions   3. Federal 1040x instructions Enter amounts contributed or deferred by your employer under a cafeteria plan for your most recent year of service 3. Federal 1040x instructions   4. Federal 1040x instructions Enter amounts contributed or deferred by your employer according to your election to your 457 account (a nonqualified plan of a state or local government or of a tax-exempt organization) for your most recent year of service 4. Federal 1040x instructions   5. Federal 1040x instructions Enter pre-tax contributions (employer's contributions made on your behalf according to your election) to a qualified transportation fringe benefit plan for your most recent year of service 5. Federal 1040x instructions   6. Federal 1040x instructions Enter your foreign earned income exclusion for your most recent year of service 6. Federal 1040x instructions   7. Federal 1040x instructions Add lines 1, 2, 3, 4, 5, and 6 7. Federal 1040x instructions   8. Federal 1040x instructions Enter the cost of incidental life insurance that is part of your annuity contract for your most recent year of service 8. Federal 1040x instructions   9. Federal 1040x instructions Enter compensation that was both: Earned during your most recent year of service, and Earned while your employer was not qualified to maintain a 403(b) plan 9. Federal 1040x instructions   10. Federal 1040x instructions Add lines 8 and 9 10. Federal 1040x instructions   11. Federal 1040x instructions Subtract line 10 from line 7. Federal 1040x instructions This is your includible compensation for your most recent year of service 11. Federal 1040x instructions   1Use estimated amounts if figuring includible compensation before the end of the year. Federal 1040x instructions  2Elective deferrals made to a designated Roth account are not excluded from your gross income and should not be included on this line. Federal 1040x instructions Worksheet C. Federal 1040x instructions Limit on Catch-Up Contributions Note. Federal 1040x instructions If you will be age 50 or older by the end of the year, use this worksheet to figure your limit on catch-up contributions. Federal 1040x instructions 1. Federal 1040x instructions Maximum catch-up contributions 1. Federal 1040x instructions $5,500 2. Federal 1040x instructions Enter your includible compensation for your most recent year of service 2. Federal 1040x instructions   3. Federal 1040x instructions Enter your elective deferrals 3. Federal 1040x instructions   4. Federal 1040x instructions Subtract line 3 from line 2 4. Federal 1040x instructions   5. Federal 1040x instructions Enter the lesser of line 1 or line 4. Federal 1040x instructions This is your limit on catch-up contributions 5. Federal 1040x instructions   Worksheet 1. Federal 1040x instructions Maximum Amount Contributable (MAC) Note. Federal 1040x instructions Use this worksheet to figure your MAC. Federal 1040x instructions Part I. Federal 1040x instructions Limit on Annual Additions     1. Federal 1040x instructions Enter your includible compensation for your most recent year of service 1. Federal 1040x instructions   2. Federal 1040x instructions Maximum1: For 2013, enter $51,000 For 2014, enter $52,000 2. Federal 1040x instructions   3. Federal 1040x instructions Enter the lesser of line 1 or line 2. Federal 1040x instructions This is your limit on annual additions 3. Federal 1040x instructions     Caution: If you had only nonelective contributions, skip Part II and enter the amount from line 3 on line 18. Federal 1040x instructions     Part II. Federal 1040x instructions Limit on Elective Deferrals     4. Federal 1040x instructions Maximum contribution: For 2013, enter $17,500 For 2014, enter $17,500 4. Federal 1040x instructions     Note. Federal 1040x instructions If you have at least 15 years of service with a qualifying organization, complete lines 5 through 17. Federal 1040x instructions If not, enter zero (-0-) on line 16 and go to line 17. Federal 1040x instructions     5. Federal 1040x instructions Amount per year of service 5. Federal 1040x instructions $ 5,000 6. Federal 1040x instructions Enter your years of service 6. Federal 1040x instructions   7. Federal 1040x instructions Multiply line 5 by line 6 7. Federal 1040x instructions   8. Federal 1040x instructions Enter the total of all elective deferrals made for you by the qualifying organization for prior years 8. Federal 1040x instructions   9. Federal 1040x instructions Subtract line 8 from line 7. Federal 1040x instructions If zero or less, enter zero (-0-) 9. Federal 1040x instructions   10. Federal 1040x instructions Maximum increase in limit for long service 10. Federal 1040x instructions $15,000 11. Federal 1040x instructions Enter the total of additional pre-tax elective deferrals made in prior years under the 15-year rule 11. Federal 1040x instructions   12. Federal 1040x instructions Enter the aggregate amount of all designated Roth contributions permitted for prior years under the 15-year rule 12. Federal 1040x instructions   13. Federal 1040x instructions Add line 11 and line 12 13. Federal 1040x instructions   14. Federal 1040x instructions Subtract line 13 from line 10 14. Federal 1040x instructions   15. Federal 1040x instructions Maximum additional contributions 15. Federal 1040x instructions $ 3,000 16. Federal 1040x instructions Enter the least of lines 9, 14, or 15. Federal 1040x instructions This is your increase in the limit for long service 16. Federal 1040x instructions   17. Federal 1040x instructions Add lines 4 and 16. Federal 1040x instructions This is your limit on elective deferrals 17. Federal 1040x instructions     Part III. Federal 1040x instructions Maximum Amount Contributable     18. Federal 1040x instructions If you had only nonelective contributions, enter the amount from line 3. Federal 1040x instructions This is your MAC. Federal 1040x instructions    If you had only elective deferrals, enter the lesser of lines 3 or 17. Federal 1040x instructions This is your MAC. Federal 1040x instructions    If you had both elective deferrals and nonelective contributions, enter the amount from line 3. Federal 1040x instructions This is your MAC. Federal 1040x instructions (Use the amount on line 17 to determine if you have excess elective deferrals as explained in chapter 7. Federal 1040x instructions ) 18. Federal 1040x instructions   1If you participate in a 403(b) plan and a qualified plan, you must combine contributions made to your 403(b) account with contributions to a qualified plan and simplified employee pension plans of all corporations, partnerships, and sole proprietorships in which you have more than 50% control. Federal 1040x instructions You must also combine the contributions made to all 403(b) accounts on your behalf by your employer. Federal 1040x instructions Prev  Up  Next   Home   More Online Publications