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File 1040x free 7. File 1040x free   Depreciation, Depletion, and Amortization Table of Contents What's New for 2013 Introduction Topics - This chapter discusses: Useful Items - You may want to see: Overview of DepreciationWhat Property Can Be Depreciated? What Property Cannot Be Depreciated? When Does Depreciation Begin and End? Can You Use MACRS To Depreciate Your Property? What Is the Basis of Your Depreciable Property? How Do You Treat Repairs and Improvements? Do You Have To File Form 4562? How Do You Correct Depreciation Deductions? Section 179 Expense DeductionWhat Property Qualifies? What Property Does Not Qualify? How Much Can You Deduct? How Do You Elect the Deduction? When Must You Recapture the Deduction? Claiming the Special Depreciation AllowanceWhat is Qualified Property? How Can You Elect Not To Claim the Allowance? When Must You Recapture an Allowance Figuring Depreciation Under MACRSWhich Depreciation System (GDS or ADS) Applies? Which Property Class Applies Under GDS? What Is the Placed-in-Service Date? What Is the Basis for Depreciation? Which Recovery Period Applies? Which Convention Applies? Which Depreciation Method Applies? How Is the Depreciation Deduction Figured? How Do You Use General Asset Accounts? When Do You Recapture MACRS Depreciation? Additional Rules for Listed PropertyWhat Is Listed Property? What Is the Business-Use Requirement? Do the Passenger Automobile Limits Apply? Depletion Who Can Claim Depletion? Figuring Depletion AmortizationBusiness Start-Up Costs Reforestation Costs Section 197 Intangibles What's New for 2013 Increased section 179 expense deduction dollar limits. File 1040x free  The maximum amount you can elect to deduct for most section 179 property you placed in service in 2013 is $500,000. File 1040x free This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2 million. File 1040x free See Dollar Limits under Section 179 Expense Deduction , later. File 1040x free Extension of special depreciation allowance for certain qualified property acquired after December 31, 2007. File 1040x free . File 1040x free  You may be able to take a 50% special depreciation allowance for certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. File 1040x free See Claiming the Special Depreciation Allowance , later. File 1040x free Expiration of the 3- year recovery period for certain race horses. File 1040x free  The 3-year recovery period for race horses two years old or younger will expire for such horses placed in service after December 31, 2013. File 1040x free Introduction If you buy or make improvements to farm property such as machinery, equipment, livestock, or a structure with a useful life of more than a year, you generally cannot deduct its entire cost in one year. File 1040x free Instead, you must spread the cost over the time you use the property and deduct part of it each year. File 1040x free For most types of property, this is called depreciation. File 1040x free This chapter gives information on depreciation methods that generally apply to property placed in service after 1986. File 1040x free For information on depreciating pre-1987 property, see Publication 534, Depreciating Property Placed in Service Before 1987. File 1040x free Topics - This chapter discusses: Overview of depreciation Section 179 expense deduction Special depreciation allowance Modified Accelerated Cost Recovery System (MACRS) Listed property Basic information on cost depletion (including timber depletion) and percentage depletion Amortization of the costs of going into business, reforestation costs, the costs of pollution control facilities, and the costs of section 197 intangibles Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) T (Timber), Forest Activities Schedule 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. File 1040x free It is important to keep good records for property you depreciate. File 1040x free Do not file these records with your return. File 1040x free Instead, you should keep them as part of the permanent records of the depreciated property. File 1040x free They will help you verify the accuracy of the depreciation of assets placed in service in the current and previous tax years. File 1040x free For general information on recordkeeping, see Publication 583, Starting a Business and Keeping Records. File 1040x free For specific information on keeping records for section 179 property and listed property, see Publication 946, How To Depreciate Property. File 1040x free Overview of Depreciation This overview discusses basic information on the following. File 1040x free What property can be depreciated. File 1040x free What property cannot be depreciated. File 1040x free When depreciation begins and ends. File 1040x free Whether MACRS can be used to figure depreciation. File 1040x free What is the basis of your depreciable property. File 1040x free How to treat repairs and improvements. File 1040x free When you must file Form 4562. File 1040x free How you can correct depreciation claimed incorrectly. File 1040x free What Property Can Be Depreciated? You can depreciate most types of tangible property (except land), such as buildings, machinery, equipment, vehicles, certain livestock, and furniture. File 1040x free You can also depreciate certain intangible property, such as copyrights, patents, and computer software. File 1040x free To be depreciable, the property must meet all the following requirements. File 1040x free It must be property you own. File 1040x free It must be used in your business or income-producing activity. File 1040x free It must have a determinable useful life. File 1040x free It must have a useful life that extends substantially beyond the year you place it in service. File 1040x free Property You Own To claim depreciation, you usually must be the owner of the property. File 1040x free You are considered as owning property even if it is subject to a debt. File 1040x free Leased property. File 1040x free   You can depreciate leased property only if you retain the incidents of ownership in the property. File 1040x free This means you bear the burden of exhaustion of the capital investment in the property. File 1040x free Therefore, if you lease property from someone to use in your trade or business or for the production of income, you generally cannot depreciate its cost because you do not retain the incidents of ownership. File 1040x free You can, however, depreciate any capital improvements you make to the leased property. File 1040x free See Additions and Improvements under Which Recovery Period Applies in chapter 4 of Publication 946. File 1040x free   If you lease property to someone, you generally can depreciate its cost even if the lessee (the person leasing from you) has agreed to preserve, replace, renew, and maintain the property. File 1040x free However, you cannot depreciate the cost of the property if the lease provides that the lessee is to maintain the property and return to you the same property or its equivalent in value at the expiration of the lease in as good condition and value as when leased. File 1040x free Life tenant. File 1040x free   Generally, if you hold business or investment property as a life tenant, you can depreciate it as if you were the absolute owner of the property. File 1040x free See Certain term interests in property , later, for an exception. File 1040x free Property Used in Your Business or Income-Producing Activity To claim depreciation on property, you must use it in your business or income-producing activity. File 1040x free If you use property to produce income (investment use), the income must be taxable. File 1040x free You cannot depreciate property that you use solely for personal activities. File 1040x free However, if you use property for business or investment purposes and for personal purposes, you can deduct depreciation based only on the percentage of business or investment use. File 1040x free Example 1. File 1040x free   If you use your car for farm business, you can deduct depreciation based on its percentage of use in farming. File 1040x free If you also use it for investment purposes, you can depreciate it based on its percentage of investment use. File 1040x free Example 2. File 1040x free   If you use part of your home for business, you may be able to deduct depreciation on that part based on its business use. File 1040x free For more information, see Business Use of Your Home in chapter 4. File 1040x free Inventory. File 1040x free   You can never depreciate inventory because it is not held for use in your business. File 1040x free Inventory is any property you hold primarily for sale to customers in the ordinary course of your business. File 1040x free Livestock. File 1040x free   Livestock purchased for draft, breeding, or dairy purposes can be depreciated only if they are not kept in an inventory account. File 1040x free Livestock you raise usually has no depreciable basis because the costs of raising them are deducted and not added to their basis. File 1040x free However, see Immature livestock under When Does Depreciation Begin and End , later, for a special rule. File 1040x free Property Having a Determinable Useful Life To be depreciable, your property must have a determinable useful life. File 1040x free This means it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. File 1040x free Irrigation systems and water wells. File 1040x free   Irrigation systems and wells used in a trade or business can be depreciated if their useful life can be determined. File 1040x free You can depreciate irrigation systems and wells composed of masonry, concrete, tile, metal, or wood. File 1040x free In addition, you can depreciate costs for moving dirt to construct irrigation systems and water wells composed of these materials. File 1040x free However, land preparation costs for center pivot irrigation systems are not depreciable. File 1040x free Dams, ponds, and terraces. File 1040x free   In general, you cannot depreciate earthen dams, ponds, and terraces unless the structures have a determinable useful life. File 1040x free What Property Cannot Be Depreciated? Certain property cannot be depreciated, even if the requirements explained earlier are met. File 1040x free This includes the following. File 1040x free Land. File 1040x free You can never depreciate the cost of land because land does not wear out, become obsolete, or get used up. File 1040x free The cost of land generally includes the cost of clearing, grading, planting, and landscaping. File 1040x free Although you cannot depreciate land, you can depreciate certain costs incurred in preparing land for business use. File 1040x free See chapter 1 of Publication 946. File 1040x free Property placed in service and disposed of in the same year. File 1040x free Determining when property is placed in service is explained later. File 1040x free Equipment used to build capital improvements. File 1040x free You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. File 1040x free Intangible property such as section 197 intangibles. File 1040x free This property does not have a determinable useful life and generally cannot be depreciated. File 1040x free However, see Amortization , later. File 1040x free Special rules apply to computer software (discussed below). File 1040x free Certain term interests (discussed below). File 1040x free Computer software. File 1040x free   Computer software is generally not a section 197 intangible even if acquired in connection with the acquisition of a business, if it meets all of the following tests. File 1040x free It is readily available for purchase by the general public. File 1040x free It is subject to a nonexclusive license. File 1040x free It has not been substantially modified. File 1040x free   If the software meets the tests above, it can be depreciated and may qualify for the section 179 expense deduction and the special depreciation allowance (if applicable), discussed later. File 1040x free Certain term interests in property. File 1040x free   You cannot depreciate a term interest in property created or acquired after July 27, 1989, for any period during which the remainder interest is held, directly or indirectly, by a person related to you. File 1040x free This rule does not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. File 1040x free For more information, see chapter 1 of Publication 946. File 1040x free When Does Depreciation Begin and End? You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income. File 1040x free You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first. File 1040x free Placed in Service Property is placed in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. File 1040x free Even if you are not using the property, it is in service when it is ready and available for its specific use. File 1040x free Example. File 1040x free You bought a planter for use in your farm business. File 1040x free The planter was delivered in December 2012 after harvest was over. File 1040x free You begin to depreciate the planter for 2012 because it was ready and available for its specific use in 2012, even though it will not be used until the spring of 2013. File 1040x free If your planter comes unassembled in December 2012 and is put together in February 2013, it is not placed in service until 2013. File 1040x free You begin to depreciate it in 2013. File 1040x free If your planter was delivered and assembled in February 2013 but not used until April 2013, it is placed in service in February 2013, because this is when the planter was ready for its specified use. File 1040x free You begin to depreciate it in 2013. File 1040x free Fruit or nut trees and vines. File 1040x free   If you acquire an orchard, grove, or vineyard before the trees or vines have reached the income-producing stage, and they have a preproductive period of more than 2 years, you must capitalize the preproductive-period costs under the uniform capitalization rules (unless you elect not to use these rules). File 1040x free See chapter 6 for information about the uniform capitalization rules. File 1040x free Your depreciation begins when the trees and vines reach the income-producing stage (that is, when they bear fruit, nuts, or grapes in quantities sufficient to commercially warrant harvesting). File 1040x free Immature livestock. File 1040x free   Depreciation for livestock begins when the livestock reaches the age of maturity. File 1040x free If you bought immature livestock for drafting purposes, depreciation begins when they can be worked. File 1040x free If you bought immature livestock for dairy purposes, depreciation begins when they can be milked. File 1040x free If you bought immature livestock for breeding purposes, depreciation begins when they can be bred. File 1040x free Your basis for depreciation is your initial cost for the immature livestock. File 1040x free Idle Property Continue to claim a deduction for depreciation on property used in your business or for the production of income even if it is temporarily idle. File 1040x free For example, if you stop using a machine because there is a temporary lack of a market for a product made with that machine, continue to deduct depreciation on the machine. File 1040x free Cost or Other Basis Fully Recovered You stop depreciating property when you have fully recovered your cost or other basis. File 1040x free This happens when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property. File 1040x free Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. File 1040x free You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events. File 1040x free You sell or exchange the property. File 1040x free You convert the property to personal use. File 1040x free You abandon the property. File 1040x free You transfer the property to a supplies or scrap account. File 1040x free The property is destroyed. File 1040x free For information on abandonment of property, see chapter 8. File 1040x free For information on destroyed property, see chapter 11 and Publication 547, Casualties, Disasters, and Thefts. File 1040x free Can You Use MACRS To Depreciate Your Property? You must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most business and investment property placed in service after 1986. File 1040x free MACRS is explained later under Figuring Depreciation Under MACRS . File 1040x free You cannot use MACRS to depreciate the following property. File 1040x free Property you placed in service before 1987. File 1040x free Use the methods discussed in Publication 534. File 1040x free Certain property owned or used in 1986. File 1040x free See chapter 1 of Publication 946. File 1040x free Intangible property. File 1040x free Films, video tapes, and recordings. File 1040x free Certain corporate or partnership property acquired in a nontaxable transfer. File 1040x free Property you elected to exclude from MACRS. File 1040x free For more information, see chapter 1 of Publication 946. File 1040x free What Is the Basis of Your Depreciable Property? To figure your depreciation deduction, you must determine the basis of your property. File 1040x free To determine basis, you need to know the cost or other basis of your property. File 1040x free Cost or other basis. File 1040x free   The basis of property you buy is usually its cost plus amounts you paid for items such as sales tax, freight charges, and installation and testing fees. File 1040x free The cost includes the amount you pay in cash, debt obligations, other property, or services. File 1040x free   There are times when you cannot use cost as basis. File 1040x free In these situations, the fair market value (FMV) or the adjusted basis of the property may be used. File 1040x free Adjusted basis. File 1040x free   To find your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service. File 1040x free Basis adjustment for depreciation allowed or allowable. File 1040x free   After you place your property in service, you must reduce the basis of the property by the depreciation allowed or allowable, whichever is greater. File 1040x free Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). File 1040x free Depreciation allowable is depreciation you are entitled to deduct. File 1040x free   If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the full amount of depreciation allowable. File 1040x free   If you deduct more depreciation than you should, you must reduce your basis by any amount deducted from which you received a tax benefit (the depreciation allowed). File 1040x free   For more information, see chapter 6. File 1040x free How Do You Treat Repairs and Improvements? You generally deduct the cost of repairing business property in the same way as any other business expense. File 1040x free However, if a repair or replacement increases the value of your property, makes it more useful, or lengthens its life, you must treat it as an improvement and depreciate it. File 1040x free Treat improvements as separate depreciable property. File 1040x free See chapter 1 of Publication 946 for more information. File 1040x free Example. File 1040x free You repair a small section on a corner of the roof of a barn that you rent to others. File 1040x free You deduct the cost of the repair as a business expense. File 1040x free However, if you replace the entire roof, the new roof is considered to be an improvement because it increases the value and lengthens the life for the property. File 1040x free You depreciate the cost of the new roof. File 1040x free Improvements to rented property. File 1040x free   You can depreciate permanent improvements you make to business property you rent from someone else. File 1040x free Do You Have To File Form 4562? Use Form 4562 to claim your deduction for depreciation and amortization. File 1040x free You must complete and attach Form 4562 to your tax return if you are claiming any of the following. File 1040x free A section 179 expense deduction for the current year or a section 179 carryover from a prior year. File 1040x free Depreciation for property placed in service during the current year. File 1040x free Depreciation on any vehicle or other listed property, regardless of when it was placed in service. File 1040x free Amortization of costs that began in the current year. File 1040x free For more information, see the Instructions for Form 4562. File 1040x free How Do You Correct Depreciation Deductions? If you deducted an incorrect amount of depreciation in any year, you may be able to make a correction by filing an amended return for that year. File 1040x free You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. File 1040x free You claimed the incorrect amount because of a mathematical error made in any year. File 1040x free You claimed the incorrect amount because of a posting error made in any year, for example, omitting an asset from the depreciation schedule. File 1040x free You have not adopted a method of accounting for the property placed in service by you in tax years ending after December 29, 2003. File 1040x free You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. File 1040x free Note. File 1040x free You have adopted a method of accounting if you used the same incorrect method of depreciation for two or more consecutively filed returns. File 1040x free If you are not allowed to make the correction on an amended return, you may be able to change your accounting method to claim the correct amount of depreciation. File 1040x free See the Instructions for Form 3115. File 1040x free Section 179 Expense Deduction You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. File 1040x free This is the section 179 expense deduction. File 1040x free You can elect the section 179 expense deduction instead of recovering the cost by taking depreciation deductions. File 1040x free This part of the chapter explains the rules for the section 179 expense deduction. File 1040x free It explains what property qualifies for the deduction, what property does not qualify for the deduction, the limits that may apply, how to elect the deduction, and when you may have to recapture the deduction. File 1040x free For more information, see chapter 2 of Publication 946. File 1040x free What Property Qualifies? To qualify for the section 179 expense deduction, your property must meet all the following requirements. File 1040x free It must be eligible property. File 1040x free It must be acquired for business use. File 1040x free It must have been acquired by purchase. File 1040x free Eligible Property To qualify for the section 179 expense deduction, your property must be one of the following types of depreciable property. File 1040x free Tangible personal property. File 1040x free Qualified real property. File 1040x free (Special rules apply to qualified real property that you elect to treat as qualified section 179 real property. File 1040x free For more information, see chapter 2 of Publication 946 and section 179(f) of the Internal Revenue Code. File 1040x free ) Other tangible property (except buildings and their structural components) used as: An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services; A research facility used in connection with any of the activities in (a) above; or A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities. File 1040x free Single purpose agricultural (livestock) or horticultural structures. File 1040x free Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum. File 1040x free Off-the-shelf computer software that is readily available for purchase by the general public, is subject to a nonexclusive lease, and has not been substantially modified. File 1040x free Tangible personal property. File 1040x free   Tangible personal property is any tangible property that is not real property. File 1040x free It includes the following property. File 1040x free Machinery and equipment. File 1040x free Property contained in or attached to a building (other than structural components), such as milk tanks, automatic feeders, barn cleaners, and office equipment. File 1040x free Gasoline storage tanks and pumps at retail service stations. File 1040x free Livestock, including horses, cattle, hogs, sheep, goats, and mink and other fur-bearing animals. File 1040x free Facility used for the bulk storage of fungible commodities. File 1040x free   A facility used for the bulk storage of fungible commodities is qualifying property for purposes of the section 179 expense deduction if it is used in connection with any of the activities listed earlier in item (3)(a). File 1040x free Bulk storage means the storage of a commodity in a large mass before it is used. File 1040x free Grain bins. File 1040x free   A grain bin is an example of a storage facility that is qualifying section 179 property. File 1040x free It is a facility used in connection with the production of grain or livestock for the bulk storage of fungible commodities. File 1040x free Single purpose agricultural or horticultural structures. File 1040x free   A single purpose agricultural (livestock) or horticultural structure is qualifying property for purposes of the section 179 expense deduction. File 1040x free Agricultural structure. File 1040x free   A single purpose agricultural (livestock) structure is any building or enclosure specifically designed, constructed, and used for both the following reasons. File 1040x free To house, raise, and feed a particular type of livestock and its produce. File 1040x free To house the equipment, including any replacements, needed to house, raise, or feed the livestock. File 1040x free For this purpose, livestock includes poultry. File 1040x free   Single purpose structures are qualifying property if used, for example, to breed chickens or hogs, produce milk from dairy cattle, or produce feeder cattle or pigs, broiler chickens, or eggs. File 1040x free The facility must include, as an integral part of the structure or enclosure, equipment necessary to house, raise, and feed the livestock. File 1040x free Horticultural structure. File 1040x free   A single purpose horticultural structure is either of the following. File 1040x free A greenhouse specifically designed, constructed, and used for the commercial production of plants. File 1040x free A structure specifically designed, constructed, and used for the commercial production of mushrooms. File 1040x free Use of structure. File 1040x free   A structure must be used only for the purpose that qualified it. File 1040x free For example, a hog barn will not be qualifying property if you use it to house poultry. File 1040x free Similarly, using part of your greenhouse to sell plants will make the greenhouse nonqualifying property. File 1040x free   If a structure includes work space, the work space can be used only for the following activities. File 1040x free Stocking, caring for, or collecting livestock or plants or their produce. File 1040x free Maintaining the enclosure or structure. File 1040x free Maintaining or replacing the equipment or stock enclosed or housed in the structure. File 1040x free Property Acquired by Purchase To qualify for the section 179 expense deduction, your property must have been acquired by purchase. File 1040x free For example, property acquired by gift or inheritance does not qualify. File 1040x free Property acquired from a related person (that is, your spouse, ancestors, or lineal descendants) is not considered acquired by purchase. File 1040x free Example. File 1040x free Ken is a farmer. File 1040x free He purchased two tractors, one from his brother and one from his father. File 1040x free He placed both tractors in service in the same year he bought them. File 1040x free The tractor purchased from his father does not qualify for the section 179 expense deduction because he is a related person (as defined above). File 1040x free The tractor purchased from his brother does qualify for the deduction because Ken is not a related person (as defined above). File 1040x free What Property Does Not Qualify? Land and improvements. File 1040x free   Land and land improvements, do not qualify as section 179 property. File 1040x free Land improvements include nonagricultural fences, swimming pools, paved parking areas, wharves, docks, bridges, and fences. File 1040x free However, agricultural fences do qualify as section 179 property. File 1040x free Similarly, field drainage tile also qualifies as section 179 property. File 1040x free Excepted property. File 1040x free   Even if the requirements explained in the preceding discussions are met, farmers cannot elect the section 179 expense deduction for the following property. File 1040x free Certain property you lease to others (if you are a noncorporate lessor). File 1040x free Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging. File 1040x free Property used by a tax-exempt organization (other than a tax-exempt farmers' cooperative) unless the property is used mainly in a taxable unrelated trade or business. File 1040x free Property used by governmental units or foreign persons or entities (except property used under a lease with a term of less than 6 months). File 1040x free How Much Can You Deduct? Your section 179 expense deduction is generally the cost of the qualifying property. File 1040x free However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. File 1040x free These limits apply to each taxpayer, not to each business. File 1040x free However, see Married individuals under Dollar Limits , later. File 1040x free See also the special rules for applying the limits for partnerships and S corporations under Partnerships and S Corporations , later. File 1040x free If you deduct only part of the cost of qualifying property as a section 179 expense deduction, you can generally depreciate the cost you do not deduct. File 1040x free Use Part I of Form 4562 to figure your section 179 expense deduction. File 1040x free Partial business use. File 1040x free   When you use property for business and nonbusiness purposes, you can elect the section 179 expense deduction only if you use it more than 50% for business in the year you place it in service. File 1040x free If you used the property more than 50% for business, multiply the cost of the property by the percentage of business use. File 1040x free Use the resulting business cost to figure your section 179 expense deduction. File 1040x free Trade-in of other property. File 1040x free   If you buy qualifying property with cash and a trade-in, its cost for purposes of the section 179 expense deduction includes only the cash you paid. File 1040x free For example, if you buy (for cash and a trade-in) a new tractor for use in your business, your cost for the section 179 expense deduction is the cash you paid. File 1040x free It does not include the adjusted basis of the old tractor you trade for the new tractor. File 1040x free Example. File 1040x free J-Bar Farms traded two cultivators having a total adjusted basis of $6,800 for a new cultivator costing $13,200. File 1040x free They received an $8,000 trade-in allowance for the old cultivators and paid $5,200 cash for the new cultivator. File 1040x free J-Bar also traded a used pickup truck with an adjusted basis of $8,000 for a new pickup truck costing $35,000. File 1040x free They received a $5,000 trade-in allowance and paid $30,000 cash for the new pickup truck. File 1040x free Only the cash paid by J-Bar qualifies for the section 179 expense deduction. File 1040x free J-Bar's business costs that qualify for a section 179 expense deduction are $35,200 ($5,200 + $30,000). File 1040x free Dollar Limits The total amount you can elect to deduct under section 179 for most property placed in service in 2013 is $500,000. File 1040x free If you acquire and place in service more than one item of qualifying property during the year, you can allocate the section 179 expense deduction among the items in any way, as long as the total deduction is not more than $500,000. File 1040x free Qualified real property that you elect to treat as section 179 property is limited to $250,000 of the maximum section 179 deduction of $500,000 for 2013. File 1040x free You do not have to claim the full $500,000. File 1040x free For specific information on the section 179 dollar limits, see chapter 2 of Publication 946. File 1040x free Reduced dollar limit for cost exceeding $2 million. File 1040x free   If the cost of your qualifying section 179 property placed in service in 2013 is over $2 million, you must reduce the dollar limit (but not below zero) by the amount of cost over $2 million. File 1040x free If the cost of your section 179 property placed in service during 2013 is $2,500,000 or more, you cannot take a section 179 expense deduction and you cannot carry over the cost that is more than $2,500,000. File 1040x free Example. File 1040x free This year, James Smith placed in service machinery costing $2,050,000. File 1040x free Because this cost is $50,000 more than $2 million, he must reduce his dollar limit to $450,000 ($500,000 − $50,000). File 1040x free Limits for sport utility vehicles. File 1040x free   The total amount you can elect to deduct for certain sport utility vehicles and certain other vehicles placed in service in 2013 is $25,000. File 1040x free This rule applies to any 4-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, and highways that is rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight. File 1040x free   For more information, see chapter 2 of Publication 946. File 1040x free Limits for passenger automobiles. File 1040x free   For a passenger automobile that is placed in service in 2013, the total section 179 and depreciation deduction is limited. File 1040x free See Do the Passenger Automobile Limits Apply , later. File 1040x free Married individuals. File 1040x free   If you are married, how you figure your section 179 expense deduction depends on whether you file jointly or separately. File 1040x free If you file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service. File 1040x free If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit, including the reduction for costs over $2 million. File 1040x free You must allocate the dollar limit (after any reduction) equally between you, unless you both elect a different allocation. File 1040x free If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you. File 1040x free Joint return after separate returns. File 1040x free   If you and your spouse elect to amend your separate returns by filing a joint return after the due date for filing your return, the dollar limit on the joint return is the lesser of the following amounts. File 1040x free The dollar limit (after reduction for any cost of section 179 property over $2 million). File 1040x free The total cost of section 179 property you and your spouse elected to expense on your separate returns. File 1040x free Business Income Limit The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. File 1040x free Generally, you are considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business. File 1040x free Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. File 1040x free See Carryover of disallowed deduction , later. File 1040x free Taxable income. File 1040x free   In general, figure taxable income for this purpose by totaling the net income and losses from all trades and businesses you actively conducted during the year. File 1040x free In addition to net income or loss from a sole proprietorship, partnership, or S corporation, net income or loss derived from a trade or business also includes the following items. File 1040x free Section 1231 gains (or losses) as discussed in chapter 9. File 1040x free Interest from working capital of your trade or business. File 1040x free Wages, salaries, tips, or other pay earned by you (or your spouse if you file a joint return) as an employee of any employer. File 1040x free   In addition, figure taxable income without regard to any of the following. File 1040x free The section 179 expense deduction. File 1040x free The self-employment tax deduction. File 1040x free Any net operating loss carryback or carryforward. File 1040x free Any unreimbursed employee business expenses. File 1040x free Two different taxable income limits. File 1040x free   In addition to the business income limit for your section 179 expense deduction, you may have a taxable income limit for some other deduction (for example, charitable contributions). File 1040x free You may have to figure the limit for this other deduction taking into account the section 179 expense deduction. File 1040x free If so, complete the following steps. File 1040x free Step Action 1 Figure taxable income without the section 179 expense deduction or the other deduction. File 1040x free 2 Figure a hypothetical section 179 expense deduction using the taxable income figured in Step 1. File 1040x free 3 Subtract the hypothetical section 179 expense deduction figured in Step 2 from the taxable income figured in Step 1. File 1040x free 4 Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income. File 1040x free 5 Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in  Step 1. File 1040x free 6 Figure your actual section 179 expense deduction using the taxable income figured in Step 5. File 1040x free 7 Subtract your actual section 179 expense deduction figured in Step 6 from the taxable income figured in Step 1. File 1040x free 8 Figure your actual other deduction using the taxable income figured in Step 7. File 1040x free Example. File 1040x free On February 1, 2013, the XYZ farm corporation purchased and placed in service qualifying section 179 property that cost $500,000. File 1040x free It elects to expense the entire $500,000 cost under section 179. File 1040x free In June, the corporation gave a charitable contribution of $10,000. File 1040x free A corporation's limit on charitable contributions is figured after subtracting any section 179 expense deduction. File 1040x free The business income limit for the section 179 expense deduction is figured after subtracting any allowable charitable contributions. File 1040x free XYZ's taxable income figured without the section 179 expense deduction or the deduction for charitable contributions is $520,000. File 1040x free XYZ figures its section 179 expense deduction and its deduction for charitable contributions as follows. File 1040x free Step 1. File 1040x free Taxable income figured without either deduction is $520,000. File 1040x free Step 2. File 1040x free Using $520,000 as taxable income, XYZ's hypothetical section 179 expense deduction is $500,000. File 1040x free Step 3. File 1040x free $20,000 ($520,000 − $500,000). File 1040x free Step 4. File 1040x free Using $20,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable income) is $2,000. File 1040x free Step 5. File 1040x free $518,000 ($520,000 − $2,000). File 1040x free Step 6. File 1040x free Using $518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 expense deduction. File 1040x free Because the taxable income is at least $500,000, XYZ can take a $500,000 section 179 expense deduction. File 1040x free Step 7. File 1040x free $20,000 ($520,000 − $500,000). File 1040x free Step 8. File 1040x free Using $20,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable income) is $2,000. File 1040x free Carryover of disallowed deduction. File 1040x free   You can carry over for an unlimited number of years the cost of any section 179 property you elected to expense but were unable to because of the business income limit. File 1040x free   The amount you carry over is used in determining your section 179 expense deduction in the next year. File 1040x free However, it is subject to the limits in that year. File 1040x free If you place more than one property in service in a year, you can select the properties for which all or a part of the cost will be carried forward. File 1040x free Your selections must be shown in your books and records. File 1040x free Example. File 1040x free Last year, Joyce Jones placed in service a machine that cost $8,000 and elected to deduct all $8,000 under section 179. File 1040x free The taxable income from her business (determined without regard to both a section 179 expense deduction for the cost of the machine and the self-employment tax deduction) was $6,000. File 1040x free Her section 179 expense deduction was limited to $6,000. File 1040x free The $2,000 cost that was not allowed as a section 179 expense deduction (because of the business income limit) is carried to this year. File 1040x free This year, Joyce placed another machine in service that cost $9,000. File 1040x free Her taxable income from business (determined without regard to both a section 179 expense deduction for the cost of the machine and the self-employment tax deduction) is $10,000. File 1040x free Joyce can deduct the full cost of the machine ($9,000) but only $1,000 of the carryover from last year because of the business income limit. File 1040x free She can carry over the balance of $1,000 to next year. File 1040x free Partnerships and S Corporations The section 179 expense deduction limits apply both to the partnership or S corporation and to each partner or shareholder. File 1040x free The partnership or S corporation determines its section 179 expense deduction subject to the limits. File 1040x free It then allocates the deduction among its partners or shareholders. File 1040x free If you are a partner in a partnership or shareholder of an S corporation, you add the amount allocated from the partnership or S corporation to any section 179 costs not related to the partnership or S corporation and then apply the dollar limit to this total. File 1040x free To determine any reduction in the dollar limit for costs over $560,000, you do not include any of the cost of section 179 property placed in service by the partnership or S corporation. File 1040x free After you apply the dollar limit, you apply the business income limit to any remaining section 179 costs. File 1040x free For more information, see chapter 2 of Publication 946. File 1040x free Example. File 1040x free In 2013, Partnership P placed in service section 179 property with a total cost of $2,160,000. File 1040x free P must reduce its dollar limit by $160,000 ($2,160,000 − $2,000,000). File 1040x free Its maximum section 179 expense deduction is $340,000 ($500,000 − $160,000), and it elects to expense that amount. File 1040x free Because P's taxable income from the active conduct of all its trades or businesses for the year was $400,000, it can deduct the full $340,000. File 1040x free P allocates $100,000 of its section 179 expense deduction and $110,000 of its taxable income to John, one of its partners. File 1040x free John also conducts a business as a sole proprietor and in 2013, placed in service in that business, section 179 property costing $28,000. File 1040x free John's taxable income from that business was $10,000. File 1040x free In addition to the $100,000 allocated from P, he elects to expense the $28,000 of his sole proprietorship's section 179 costs. File 1040x free However, John's deduction is limited to his business taxable income of $120,000 ($110,000 from P plus $10,000 from his sole proprietorship). File 1040x free He carries over $8,000 ($128,000 − $120,000) of the elected section 179 costs to 2014. File 1040x free How Do You Elect the Deduction? You elect to take the section 179 expense deduction by completing Part I of Form 4562. File 1040x free If you elect the deduction for listed property, complete Part V of  Form 4562 before completing Part I. File 1040x free   File Form 4562 with either of the following: Your original tax return (whether or not you filed it timely), or An amended return filed within the time prescribed by law. File 1040x free An election made on an amended return must specify the item of section 179 property to which the election applies and the part of the cost of each such item to be taken into account. File 1040x free The amended return must also include any resulting adjustments to taxable income. File 1040x free Revoking an election. File 1040x free   An election (or any specification made in the election) to take a section 179 expense deduction for 2013 can be revoked without IRS approval by filing an amended return. File 1040x free The amended return must be filed within the time prescribed by law. File 1040x free The amended return must also include any resulting adjustments to taxable income (for example, allowable depreciation in that tax year for the item of section 179 property for which the election pertains. File 1040x free ) Once made, the revocation is irrevocable. File 1040x free When Must You Recapture the Deduction? You may have to recapture the section 179 expense deduction if, in any year during the property's recovery period, the percentage of business use drops to 50% or less. File 1040x free In the year the business use drops to 50% or less, you include the recapture amount as ordinary income. File 1040x free You also increase the basis of the property by the recapture amount. File 1040x free Recovery periods for property are discussed later. File 1040x free If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. File 1040x free Instead, use the rules for recapturing depreciation explained in  chapter 9 under Section 1245 Property. File 1040x free   If the property is listed property, do not figure the recapture amount under the rules explained in this discussion when the percentage of business use drops to 50% or less. File 1040x free Instead, use the rules for recapturing depreciation explained in chapter 5 of Publication 946 under Recapture of Excess Depreciation. File 1040x free Figuring the recapture amount. File 1040x free   To figure the amount to recapture, take the following steps. File 1040x free Figure the allowable depreciation for the section 179 expense deduction you claimed. File 1040x free Begin with the year you placed the property in service and include the year of recapture. File 1040x free Subtract the depreciation figured in (1) from the section 179 expense deduction you actually claimed. File 1040x free The result is the amount you must recapture. File 1040x free Example. File 1040x free In January 2011, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. File 1040x free The property is not listed property. File 1040x free He elected a $5,000 section 179 expense deduction for the property and also elected not to claim a special depreciation allowance. File 1040x free He used the property only for business in 2011 and 2012. File 1040x free During 2013, he used the property 40% for business and 60% for personal use. File 1040x free He figures his recapture amount as follows. File 1040x free Section 179 expense deduction claimed (2011) $5,000 Minus: Allowable depreciation (instead of section 179 expense deduction):   2011 $1,250   2012 1,875   2013 ($1,250 × 40% (business)) 500 3,625 2013 — Recapture amount $1,375     Paul must include $1,375 in income for 2013. File 1040x free Where to report recapture. File 1040x free   Report any recapture of the section 179 expense deduction as ordinary income in Part IV of Form 4797 and include it in income on Schedule F (Form 1040). File 1040x free Recapture for qualified section 179 GO Zone property. File 1040x free   If any qualified section 179 GO Zone property ceases to be used in the GO Zone in a later year, you must recapture the benefit of the increased section 179 expense deduction as “other income. File 1040x free ” Claiming the Special Depreciation Allowance For qualified property (defined below) placed in service in 2013, you can take an additional 50% special depreciation allowance. File 1040x free The allowance is an additional deduction you can take after any section 179 expense deduction and before you figure regular depreciation under MACRS. File 1040x free Figure the special depreciation allowance by multiplying the depreciable basis of the qualified property by 50%. File 1040x free What is Qualified Property? For farmers, qualified property generally is certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. File 1040x free Certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. File 1040x free   Certain qualified property (defined below) acquired after December 31, 2007, and before January 1, 2014, is eligible for a 50% special depreciation allowance. File 1040x free   Qualified property includes the following: Tangible property depreciated under the Modified Accelerated Cost Recovery System (MACRS) with a recovery period of 20 years or less. File 1040x free Water utility property. File 1040x free Off-the-shelf computer software. File 1040x free Qualified leasehold improvement property. File 1040x free   Qualified property must also meet all of the following tests: You must have acquired qualified property by purchase after December 31, 2007. File 1040x free If a binding contract to acquire the property existed before January 1, 2008, the property does not qualify. File 1040x free Qualified property must be placed in service after December 31, 2007 and placed in service before January 1, 2014 (before January 1, 2015 for certain property with a long production period and for certain aircraft). File 1040x free The original use of the property must begin with you after December 31, 2007. File 1040x free For more information, see chapter 3 of Publication 946. File 1040x free How Can You Elect Not To Claim the Allowance? You can elect, for any class of property, not to deduct the special depreciation allowance for all property in such class placed in service during the tax year. File 1040x free To make the election, attach a statement to your return indicating the class of property for which you are making the election. File 1040x free Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service. File 1040x free 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 original return (not including extensions). File 1040x free Attach the election statement to the amended return. File 1040x free On the amended return, write “Filed pursuant to section 301. File 1040x free 9100-2. File 1040x free ” Once made, the election may not be revoked without IRS consent. File 1040x free If you elect not to have the special depreciation allowance apply, the property may be subject to an alternative minimum tax adjustment for depreciation. File 1040x free When Must You Recapture an Allowance When you dispose of property for which you claimed a special depreciation allowance, any gain on the disposition is generally recaptured (included in income) as ordinary income up to the amount of the special depreciation allowance previously allowed or allowable. File 1040x free For more information, see chapter 3 of Publication 946. File 1040x free Figuring Depreciation Under MACRS The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. File 1040x free MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). File 1040x free Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. File 1040x free To be sure you can use MACRS to figure depreciation for your property, see Can You Use MACRS To Depreciate Your Property, earlier. File 1040x free This part explains how to determine which MACRS depreciation system applies to your property. File 1040x free It also discusses the following information that you need to know before you can figure depreciation under MACRS. File 1040x free Property's recovery class. File 1040x free Placed-in-service date. File 1040x free Basis for depreciation. File 1040x free Recovery period. File 1040x free Convention. File 1040x free Depreciation method. File 1040x free Finally, this part explains how to use this information to figure your depreciation deduction. File 1040x free 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. File 1040x free You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. File 1040x free Required use of ADS. File 1040x free   You must use ADS for the following property. File 1040x free 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. File 1040x free Listed property used 50% or less in a qualified business use. File 1040x free See Additional Rules for Listed Property , later. File 1040x free Any tax-exempt use property. File 1040x free Any tax-exempt bond-financed property. File 1040x free 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. File 1040x free Any tangible property used predominantly outside the United States during the year. File 1040x free If you are required to use ADS to depreciate your property, you cannot claim the special depreciation allowance. File 1040x free Electing ADS. File 1040x free   Although your property may qualify for GDS, you can elect to use ADS. File 1040x free The election generally must cover all property in the same property class you placed in service during the year. File 1040x free However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. File 1040x free Once you make this election, you can never revoke it. File 1040x free   You make the election by completing line 20 in Part III of Form 4562. File 1040x free Which Property Class Applies Under GDS? The following is a list of the nine property classes under GDS. File 1040x free 3-year property. File 1040x free 5-year property. File 1040x free 7-year property. File 1040x free 10-year property. File 1040x free 15-year property. File 1040x free 20-year property. File 1040x free 25-year property. File 1040x free Residential rental property. File 1040x free Nonresidential real property. File 1040x free See Which Property Class Applies Under GDS in chapter 4 of Publication 946 for examples of the types of property included in each class. File 1040x free What Is the Placed-in-Service Date? You begin to claim depreciation when your property is placed in service for use either in a trade or business or for the production of income. File 1040x free The placed-in-service date for your property is the date the property is ready and available for a specific use. File 1040x free It is therefore not necessarily the date it is first used. File 1040x free 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. File 1040x free See Placed in Service under When Does Depreciation Begin and End , earlier, for examples illustrating when property is placed in service. File 1040x free 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. File 1040x free Reduce that amount by any credits and deductions allocable to the property. File 1040x free The following are examples of some of the credits and deductions that reduce basis. File 1040x free Any deduction for section 179 property. File 1040x free Any deduction for removal of barriers to the disabled and the elderly. File 1040x free Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. File 1040x free Any special depreciation allowance. File 1040x free Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. File 1040x free For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property , earlier. File 1040x free Also, see chapter 6. File 1040x free For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. File 1040x free Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. File 1040x free It is determined based on the depreciation system (GDS or ADS) used. File 1040x free See Table 7-1 for recovery periods under both GDS and ADS for some commonly used assets. File 1040x free For a complete list of recovery periods, see the Table of Class Lives and Recovery Periods in Appendix B of Publication 946. File 1040x free House trailers for farm laborers. File 1040x free   To depreciate a house trailer you supply as housing for those who work on your farm, use one of the following recovery periods if the house trailer is mobile (it has wheels and a history of movement). File 1040x free A 7-year recovery period under GDS. File 1040x free A 10-year recovery period under ADS. File 1040x free   However, if the house trailer is not mobile (its wheels have been removed and permanent utilities and pipes attached to it), use one of the following recovery periods. File 1040x free A 20-year recovery period under GDS. File 1040x free A 25-year recovery period under ADS. File 1040x free Water wells. File 1040x free   Water wells used to provide water for raising poultry and livestock are land improvements. File 1040x free If they are depreciable, use one of the following recovery periods. File 1040x free A 15-year recovery period under GDS. File 1040x free A 20-year recovery period under ADS. File 1040x free   The types of water wells that can be depreciated were discussed earlier in Irrigation systems and water wells under Property Having a Determinable Useful Life . File 1040x free Table 7-1. File 1040x free Farm Property Recovery Periods   Recovery Period in Years Assets GDS ADS Agricultural structures (single purpose) 10 15 Automobiles 5 5 Calculators and copiers 5 6 Cattle (dairy or breeding) 5 7 Communication equipment1 7 10 Computer and peripheral equipment 5 5 Drainage facilities 15 20 Farm buildings2 20 25 Farm machinery and equipment 7 10 Fences (agricultural) 7 10 Goats and sheep (breeding) 5 5 Grain bin 7 10 Hogs (breeding) 3 3 Horses (age when placed in service)     Breeding and working (12 years or less) 7 10 Breeding and working (more than 12 years) 3 10 Racing horses 3 12 Horticultural structures (single purpose) 10 15 Logging machinery and equipment3 5 6 Nonresidential real property 394 40 Office furniture, fixtures, and equipment (not calculators, copiers, or typewriters) 7 10 Paved lots 15 20 Residential rental property 27. File 1040x free 5 40 Tractor units (over-the-road) 3 4 Trees or vines bearing fruit or nuts 10 20 Truck (heavy duty, unloaded weight 13,000 lbs. File 1040x free or more) 5 6 Truck (actual weight less than 13,000 lbs) 5 5 Water wells 15 20 1 Not including communication equipment listed in other classes. File 1040x free 2 Not including single purpose agricultural or horticultural structures. File 1040x free 3 Used by logging and sawmill operators for cutting of timber. File 1040x free 4 For property placed in service after May 12, 1993; for property placed in service before May 13, 1993,  the recovery period is 31. File 1040x free 5 years. File 1040x free Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. File 1040x free 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. File 1040x free Use one of the following conventions. File 1040x free The half-year convention. File 1040x free The mid-month convention. File 1040x free The mid-quarter convention. File 1040x free For a detailed explanation of each convention, see Which Convention Applies in chapter 4 of Publication 946. File 1040x free Also, see the Instructions for Form 4562. File 1040x free Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. File 1040x free The 200% declining balance method over a GDS recovery period. File 1040x free The 150% declining balance method over a GDS recovery period. File 1040x free The straight line method over a GDS recovery period. File 1040x free The straight line method over an ADS recovery period. File 1040x free Depreciation Table. File 1040x free   The following table lists the types of property you can depreciate under each method. File 1040x free The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. File 1040x free Depreciation Table System/Method   Type of Property GDS using  150% DB • All property used in a farming business (except real property)   • All 15- and 20-year property   • Nonfarm 3-, 5-, 7-, and 10-year property1 GDS using SL • Nonresidential real property   • Residential rental property   • Trees or vines bearing fruit or nuts   • All 3-, 5-, 7-, 10-, 15-, and 20-year property1 ADS using SL • Property used predomi- nantly outside the United States   • Farm property used when an election not to apply the uniform capitalization rules is in effect   • Tax-exempt property   • Tax-exempt bond-financed property   • Imported property2   • Any property for which you elect to use this method1 GDS using  200% DB • Nonfarm 3-, 5-, 7-, and 10-year property 1Elective method 2See section 168(g)(6) of the Internal Revenue  Code Property used in farming business. File 1040x free   For personal property placed in service after 1988 in a farming business, you must use the 150% declining balance method over a GDS recovery period or you can elect one of the following methods. File 1040x free The straight line method over a GDS recovery period. File 1040x free The straight line method over an ADS recovery period. File 1040x free For property placed in service before 1999, you could have elected to use the 150% declining balance method using the ADS recovery periods for certain property classes. File 1040x free If you made this election, continue to use the same method and recovery period for that property. File 1040x free Real property. File 1040x free   You can depreciate real property using the straight line method under either GDS or ADS. File 1040x free Switching to straight line. File 1040x free   If you use a declining balance method, you switch to the straight line method in the year it provides an equal or greater deduction. File 1040x free If you use the MACRS percentage tables, discussed later under How Is the Depreciation Deduction Figured , you do not need to determine in which year your deduction is greater using the straight line method. File 1040x free The tables have the switch to the straight line method built into their rates. File 1040x free Fruit or nut trees and vines. File 1040x free   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a 10-year recovery period. File 1040x free ADS required for some farmers. File 1040x free   If you elect not to apply the uniform capitalization rules to any plant shown in Table 6-1 of chapter 6 and produced in your farming business, you must use ADS for all property you place in service in any year the election is in effect. File 1040x free See chapter 6 for a discussion of the application of the uniform capitalization rules to farm property. File 1040x free Electing a different method. File 1040x free   As shown in the Depreciation Table , you can elect a different method for depreciation for certain types of property. File 1040x free You must make the election by the due date of the return (including extensions) for the year you placed the property in service. File 1040x free However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). File 1040x free Attach the election to the amended return and write “Filed pursuant to section 301. File 1040x free 9100-2” on the election statement. File 1040x free File the amended return at the same address you filed the original return. File 1040x free Once you make the election, you cannot change it. File 1040x free    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. File 1040x free However, you can make the election on a property-by-property basis for residential rental and nonresidential real property. File 1040x free Straight line election. File 1040x free   Instead of using the declining balance method, you can elect to use the straight line method over the GDS recovery period. File 1040x free Make the election by entering “S/L” under column (f) in Part III of Form 4562. File 1040x free ADS election. File 1040x free   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. File 1040x free ADS uses the straight line method of depreciation over the ADS recovery periods, which are generally longer than the GDS recovery periods. File 1040x free The ADS recovery periods for many assets used in the business of farming are listed in Table 7–1. File 1040x free Additional ADS recovery periods for other classes of property may be found in the Table of Class Lives and Recovery Periods in Appendix B of Publication 946. File 1040x free 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. File 1040x free Then you are ready to figure your depreciation deduction. File 1040x free You can figure it in one of two ways. File 1040x free You can use the percentage tables provided by the IRS. File 1040x free You can figure your own deduction without using the tables. File 1040x free Figuring your own MACRS deduction will generally result in a slightly different amount than using the tables. File 1040x free 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. File 1040x free These percentage tables are in Appendix A of Publication 946. File 1040x free Rules for using the tables. File 1040x free   The following rules cover the use of the percentage tables. File 1040x free You must apply the rates in the percentage tables to your property's unadjusted basis. File 1040x free Unadjusted basis is the same basis amount you would use to figure gain on a sale but figured without reducing your original basis by any MACRS depreciation taken in earlier years. File 1040x free You cannot use the percentage tables for a short tax year. File 1040x free See chapter 4 of Publication 946 for information on how to figure the deduction for a short tax year. File 1040x free You generally must continue to use them for the entire recovery period of the property. File 1040x free 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 the property, which is depreciated as a separate property. File 1040x free Basis adjustment due to casualty loss. File 1040x free   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. File 1040x free 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. File 1040x free See Figuring the Deduction Without Using the Tables in chapter 4 of Publication 946. File 1040x free Figuring depreciation using the 150% DB method and half-year convention. File 1040x free    Table 7-2 has the percentages for 3-, 5-, 7-, and 20-year property. File 1040x free The percentages are based on the 150% declining balance method with a change to the straight line method. File 1040x free This table covers only the half-year convention and the first 8 years for 20-year property. File 1040x free See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. File 1040x free   The following examples show how to figure depreciation under MACRS using the percentages in Table 7-2 . File 1040x free Example 1. File 1040x free During the year, you bought an item of 7-year property for $10,000 and placed it in service. File 1040x free You do not elect a section 179 expense deduction for this property. File 1040x free In addition, the property is not qualified property for purposes of the special depreciation allowance. File 1040x free The unadjusted basis of the property is $10,000. File 1040x free You use the percentages in Table 7-2 to figure your deduction. File 1040x free Since this is 7-year property, you multiply $10,000 by 10. File 1040x free 71% to get this year's depreciation of $1,071. File 1040x free For next year, your depreciation will be $1,913 ($10,000 × 19. File 1040x free 13%). File 1040x free Example 2. File 1040x free You had a barn constructed on your farm at a cost of $20,000. File 1040x free You placed the barn in service this year. File 1040x free You elect not to claim the special depreciation allowance. File 1040x free The barn is 20-year property and you use the table percentages to figure your deduction. File 1040x free You figure this year's depreciation by multiplying $20,000 (unadjusted basis) by 3. File 1040x free 75% to get $750. File 1040x free For next year, your depreciation will be $1,443. File 1040x free 80 ($20,000 × 7. File 1040x free 219%). File 1040x free Table 7-2. File 1040x free 150% Declining Balance Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 25. File 1040x free 0 % 15. File 1040x free 00 % 10. File 1040x free 71 % 3. File 1040x free 750 % 2 37. File 1040x free 5   25. File 1040x free 50   19. File 1040x free 13   7. File 1040x free 219   3 25. File 1040x free 0   17. File 1040x free 85   15. File 1040x free 03   6. File 1040x free 677   4 12. File 1040x free 5   16. File 1040x free 66   12. File 1040x free 25   6. File 1040x free 177   5     16. File 1040x free 66   12. File 1040x free 25   5. File 1040x free 713   6     8. File 1040x free 33   12. File 1040x free 25   5. File 1040x free 285   7         12. File 1040x free 25   4. File 1040x free 888   8         6. File 1040x free 13   4. File 1040x free 522   Figuring depreciation using the straight line method and half-year convention. File 1040x free   The following table has the straight line percentages for 3-, 5-, 7-, and 20-year property using the half-year convention. File 1040x free The table covers only the first 8 years for 20-year property. File 1040x free See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. File 1040x free Table 7-3. File 1040x free Straight Line Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 16. File 1040x free 67 % 10 % 7. File 1040x free 14 % 2. File 1040x free 5 % 2 33. File 1040x free 33   20   14. File 1040x free 29   5. File 1040x free 0   3 33. File 1040x free 33   20   14. File 1040x free 29   5. File 1040x free 0   4 16. File 1040x free 67   20   14. File 1040x free 28   5. File 1040x free 0   5     20   14. File 1040x free 29   5. File 1040x free 0   6     10   14. File 1040x free 28   5. File 1040x free 0   7         14. File 1040x free 29   5. File 1040x free 0   8         7. File 1040x free 14   5. File 1040x free 0    
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Understanding your CP01 Notice

We received the information that you provided and have verified your claim of identity theft. We have placed an identity theft indicator on your account.

Printable samples of this notice (PDF)

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How to get help

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

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

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


What you need to do

  • You need take no further action except continue to file your federal income tax returns as required by law.

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Answers to Common Questions

What effect does the Identity Theft Indicator have on my account?
The indicator assists the IRS in identifying you as the valid owner of the Social Security Number (SSN) that is shown on your tax return. The indicator has no effect on your ability to file your tax return, make payments, or receive a refund.

What happens if someone else uses my SSN to file a fraudulent tax return?
The indicator that was placed on your account will alert us to research to make sure that a tax return filed with your SSN is valid. If the tax return is found to be invalid, we won't process it.

How long does the indicator remain on my account?
Because you were a victim of identity theft, to protect your tax account, the indicator will remain on your account unless you specifically request that it be removed.

Who should I contact if I have more questions about my account related to identity theft?
The Identity Theft Specialized Unit can assist you with questions regarding identity theft related to your account. You may call them at 1-800-908-4490. The number can also be found on your notice. For all other tax account related questions contact the IRS help desk at 1-800-829-1040.

Where can I find more information on preventing identity theft?


Tips for next year

File your return as you normally would. If we find that someone is attempting to use your SSN for filing a tax return we will notify you and provide you with a PIN to use when filing your return.

 

Page Last Reviewed or Updated: 27-Feb-2014

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