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Free tax forms Publication 525 - Introductory Material Table of Contents Future Developments What's New Reminders IntroductionAssignment of income. Free tax forms Ordering forms and publications. Free tax forms Tax questions. Free tax forms Useful Items - You may want to see: Future Developments For the latest information about developments related to Publication 525, such as legislation enacted after it was published, go to www. Free tax forms irs. Free tax forms gov/pub525. Free tax forms What's New Health flexible spending arrangements (health FSAs) under cafeteria plans. Free tax forms  For plan years beginning after 2012, health FSAs are subject to a $2,500 limit on salary reduction contributions. Free tax forms For plan years beginning after 2013, the $2,500 limit is subject to an inflation adjustment. Free tax forms Itemized deduction for medical expenses. Free tax forms  Beginning in 2013, an itemized deduction is generally allowed for uncompensated medical expenses that exceed 10% of adjusted gross income (AGI). Free tax forms If an individual or an individual’s spouse was born before January 2, 1949, the deduction is allowed for expenses that exceed 7. Free tax forms 5% of AGI. Free tax forms Additional Medicare Tax. Free tax forms  Beginning in 2013, a 0. Free tax forms 9% Additional Medicare Tax applies to Medicare wages, railroad retirement (RRTA) compensation, and self-employment income that are more than: $125,000 if married filing separately, $250,000 if married filing jointly, or $200,000 if single, head of household, or qualifying widow(er). Free tax forms For more information, see Form 8959 and its instructions. Free tax forms Net Investment Income Tax (NIIT). Free tax forms  Beginning in 2013, the NIIT applies at a rate of 3. Free tax forms 8% to certain net investment income of individuals, estates and trusts that have income above the threshold amounts. Free tax forms Individuals will owe the tax if they have net investment income and also have modified adjusted gross income over the following thresholds for their filing status: Married filing jointly, $250,000; Married filing separately, $125,000; Single, $200,000; Head of household (with qualifying person), $200,000; Qualifying widow(er) with dependent child, $250,000. Free tax forms For more information, see Form 8960 and its instructions. Free tax forms Reminders Terrorist attacks. Free tax forms  You can exclude from income certain disaster assistance, disability, and death payments received as a result of a terrorist or military action. Free tax forms For more information, see Publication 3920, Tax Relief for Victims of Terrorist Attacks. Free tax forms Gulf oil spill. Free tax forms  You are required to include in your gross income payments you received for lost wages, lost business income, or lost profits. Free tax forms See Gulf oil spill under Other Income, later. Free tax forms Qualified settlement income. Free tax forms . Free tax forms  If you are a qualified taxpayer, you can contribute all or part of your qualified settlement income, up to $100,000, to an eligible retirement plan, including an IRA. Free tax forms Contributions to eligible retirement plans, other than a Roth IRA or a designated Roth contribution, reduce the qualified settlement income that you must include in income. Free tax forms See Exxon Valdez settlement income under Other Income, later. Free tax forms Foreign income. Free tax forms  If you are a U. Free tax forms S. Free tax forms citizen or resident alien, you must report income from sources outside the United States (foreign income) on your tax return unless it is exempt by U. Free tax forms S. Free tax forms law. Free tax forms This is true whether you reside inside or outside the United States and whether or not you receive a Form W-2, Wage and Tax Statement, or Form 1099 from the foreign payer. Free tax forms This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents, and royalties). Free tax forms If you reside outside the United States, you may be able to exclude part or all of your foreign source earned income. Free tax forms For details, see Publication 54, Tax Guide for U. Free tax forms S. Free tax forms Citizens and Resident Aliens Abroad. Free tax forms Disaster mitigation payments. Free tax forms . Free tax forms  You can exclude from income grants you use to mitigate (reduce the severity of) potential damage from future natural disasters that are paid to you through state and local governments. Free tax forms For more information, see Disaster mitigation payments under Welfare and Other Public Assistance Benefits, later. Free tax forms Qualified joint venture. Free tax forms  A qualified joint venture conducted by you and your spouse may not be treated as a partnership if you file a joint return for the tax year. Free tax forms See Partnership Income under Business and Investment Income, later. Free tax forms Photographs of missing children. Free tax forms  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Free tax forms Photographs of missing children selected by the Center may appear in this publication on pages that otherwise would be blank. Free tax forms You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Free tax forms Introduction You can receive income in the form of money, property, or services. Free tax forms This publication discusses many kinds of income and explains whether they are taxable or nontaxable. Free tax forms It includes discussions on employee wages and fringe benefits, and income from bartering, partnerships, S corporations, and royalties. Free tax forms It also includes information on disability pensions, life insurance proceeds, and welfare and other public assistance benefits. Free tax forms Check the index for the location of a specific subject. Free tax forms In most cases, an amount included in your income is taxable unless it is specifically exempted by law. Free tax forms Income that is taxable must be reported on your return and is subject to tax. Free tax forms Income that is nontaxable may have to be shown on your tax return but is not taxable. Free tax forms Constructively received income. Free tax forms   You are generally taxed on income that is available to you, regardless of whether it is actually in your possession. Free tax forms    A valid check that you received or that was made available to you before the end of the tax year is considered income constructively received in that year, even if you do not cash the check or deposit it to your account until the next year. Free tax forms For example, if the postal service tries to deliver a check to you on the last day of the tax year but you are not at home to receive it, you must include the amount in your income for that tax year. Free tax forms If the check was mailed so that it could not possibly reach you until after the end of the tax year, and you otherwise could not get the funds before the end of the year, you include the amount in your income for the next tax year. Free tax forms Assignment of income. Free tax forms   Income received by an agent for you is income you constructively received in the year the agent received it. Free tax forms If you agree by contract that a third party is to receive income for you, you must include the amount in your income when the third party receives it. Free tax forms Example. Free tax forms You and your employer agree that part of your salary is to be paid directly to one of your creditors. Free tax forms You must include that amount in your income when your creditor receives it. Free tax forms Prepaid income. Free tax forms   In most cases, prepaid income, such as compensation for future services, is included in your income in the year you receive it. Free tax forms However, if you use an accrual method of accounting, you can defer prepaid income you receive for services to be performed before the end of the next tax year. Free tax forms In this case, you include the payment in your income as you earn it by performing the services. Free tax forms Comments and suggestions. Free tax forms   We welcome your comments about this publication and your suggestions for future editions. Free tax forms   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Free tax forms NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Free tax forms Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Free tax forms   You can send your comments from www. Free tax forms irs. Free tax forms gov/formspubs/. Free tax forms Click on “More Information” and then on “Comment on Tax Forms and Publications. Free tax forms ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Free tax forms Ordering forms and publications. Free tax forms   Visit www. Free tax forms irs. Free tax forms gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Free tax forms Internal Revenue Service 1201 N. Free tax forms Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Free tax forms   If you have a tax question, check the information available on IRS. Free tax forms gov or call 1-800-829-1040. Free tax forms We cannot answer tax questions sent to either of the above addresses. Free tax forms Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 523 Selling Your Home 527 Residential Rental Property 541 Partnerships 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 559 Survivors, Executors, and Administrators 575 Pension and Annuity Income 915 Social Security and Equivalent Railroad Retirement Benefits 970 Tax Benefits for Education 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Form (and Instructions) 1040 U. Free tax forms S. Free tax forms Individual Income Tax Return 1040A U. Free tax forms S. Free tax forms Individual Income Tax Return 1040EZ Income Tax Return for Single and Joint Filers With No Dependents 1040NR U. Free tax forms S. Free tax forms Nonresident Alien Income Tax Return 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Free tax forms W-2 Wage and Tax Statement  See How To Get Tax Help , near the end of this publication, for information about getting these publications. Free tax forms Prev  Up  Next   Home   More Online Publications
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Free tax forms 7. Free tax forms   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. Free tax forms  The maximum amount you can elect to deduct for most section 179 property you placed in service in 2013 is $500,000. Free tax forms This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2 million. Free tax forms See Dollar Limits under Section 179 Expense Deduction , later. Free tax forms Extension of special depreciation allowance for certain qualified property acquired after December 31, 2007. Free tax forms . Free tax forms  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. Free tax forms See Claiming the Special Depreciation Allowance , later. Free tax forms Expiration of the 3- year recovery period for certain race horses. Free tax forms  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. Free tax forms 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. Free tax forms Instead, you must spread the cost over the time you use the property and deduct part of it each year. Free tax forms For most types of property, this is called depreciation. Free tax forms This chapter gives information on depreciation methods that generally apply to property placed in service after 1986. Free tax forms For information on depreciating pre-1987 property, see Publication 534, Depreciating Property Placed in Service Before 1987. Free tax forms 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. Free tax forms It is important to keep good records for property you depreciate. Free tax forms Do not file these records with your return. Free tax forms Instead, you should keep them as part of the permanent records of the depreciated property. Free tax forms They will help you verify the accuracy of the depreciation of assets placed in service in the current and previous tax years. Free tax forms For general information on recordkeeping, see Publication 583, Starting a Business and Keeping Records. Free tax forms For specific information on keeping records for section 179 property and listed property, see Publication 946, How To Depreciate Property. Free tax forms Overview of Depreciation This overview discusses basic information on the following. Free tax forms What property can be depreciated. Free tax forms What property cannot be depreciated. Free tax forms When depreciation begins and ends. Free tax forms Whether MACRS can be used to figure depreciation. Free tax forms What is the basis of your depreciable property. Free tax forms How to treat repairs and improvements. Free tax forms When you must file Form 4562. Free tax forms How you can correct depreciation claimed incorrectly. Free tax forms 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. Free tax forms You can also depreciate certain intangible property, such as copyrights, patents, and computer software. Free tax forms To be depreciable, the property must meet all the following requirements. Free tax forms It must be property you own. Free tax forms It must be used in your business or income-producing activity. Free tax forms It must have a determinable useful life. Free tax forms It must have a useful life that extends substantially beyond the year you place it in service. Free tax forms Property You Own To claim depreciation, you usually must be the owner of the property. Free tax forms You are considered as owning property even if it is subject to a debt. Free tax forms Leased property. Free tax forms   You can depreciate leased property only if you retain the incidents of ownership in the property. Free tax forms This means you bear the burden of exhaustion of the capital investment in the property. Free tax forms 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. Free tax forms You can, however, depreciate any capital improvements you make to the leased property. Free tax forms See Additions and Improvements under Which Recovery Period Applies in chapter 4 of Publication 946. Free tax forms   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. Free tax forms 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. Free tax forms Life tenant. Free tax forms   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. Free tax forms See Certain term interests in property , later, for an exception. Free tax forms 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. Free tax forms If you use property to produce income (investment use), the income must be taxable. Free tax forms You cannot depreciate property that you use solely for personal activities. Free tax forms 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. Free tax forms Example 1. Free tax forms   If you use your car for farm business, you can deduct depreciation based on its percentage of use in farming. Free tax forms If you also use it for investment purposes, you can depreciate it based on its percentage of investment use. Free tax forms Example 2. Free tax forms   If you use part of your home for business, you may be able to deduct depreciation on that part based on its business use. Free tax forms For more information, see Business Use of Your Home in chapter 4. Free tax forms Inventory. Free tax forms   You can never depreciate inventory because it is not held for use in your business. Free tax forms Inventory is any property you hold primarily for sale to customers in the ordinary course of your business. Free tax forms Livestock. Free tax forms   Livestock purchased for draft, breeding, or dairy purposes can be depreciated only if they are not kept in an inventory account. Free tax forms Livestock you raise usually has no depreciable basis because the costs of raising them are deducted and not added to their basis. Free tax forms However, see Immature livestock under When Does Depreciation Begin and End , later, for a special rule. Free tax forms Property Having a Determinable Useful Life To be depreciable, your property must have a determinable useful life. Free tax forms This means it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Free tax forms Irrigation systems and water wells. Free tax forms   Irrigation systems and wells used in a trade or business can be depreciated if their useful life can be determined. Free tax forms You can depreciate irrigation systems and wells composed of masonry, concrete, tile, metal, or wood. Free tax forms In addition, you can depreciate costs for moving dirt to construct irrigation systems and water wells composed of these materials. Free tax forms However, land preparation costs for center pivot irrigation systems are not depreciable. Free tax forms Dams, ponds, and terraces. Free tax forms   In general, you cannot depreciate earthen dams, ponds, and terraces unless the structures have a determinable useful life. Free tax forms What Property Cannot Be Depreciated? Certain property cannot be depreciated, even if the requirements explained earlier are met. Free tax forms This includes the following. Free tax forms Land. Free tax forms You can never depreciate the cost of land because land does not wear out, become obsolete, or get used up. Free tax forms The cost of land generally includes the cost of clearing, grading, planting, and landscaping. Free tax forms Although you cannot depreciate land, you can depreciate certain costs incurred in preparing land for business use. Free tax forms See chapter 1 of Publication 946. Free tax forms Property placed in service and disposed of in the same year. Free tax forms Determining when property is placed in service is explained later. Free tax forms Equipment used to build capital improvements. Free tax forms You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Free tax forms Intangible property such as section 197 intangibles. Free tax forms This property does not have a determinable useful life and generally cannot be depreciated. Free tax forms However, see Amortization , later. Free tax forms Special rules apply to computer software (discussed below). Free tax forms Certain term interests (discussed below). Free tax forms Computer software. Free tax forms   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. Free tax forms It is readily available for purchase by the general public. Free tax forms It is subject to a nonexclusive license. Free tax forms It has not been substantially modified. Free tax forms   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. Free tax forms Certain term interests in property. Free tax forms   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. Free tax forms This rule does not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. Free tax forms For more information, see chapter 1 of Publication 946. Free tax forms 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. Free tax forms 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. Free tax forms 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. Free tax forms Even if you are not using the property, it is in service when it is ready and available for its specific use. Free tax forms Example. Free tax forms You bought a planter for use in your farm business. Free tax forms The planter was delivered in December 2012 after harvest was over. Free tax forms 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. Free tax forms If your planter comes unassembled in December 2012 and is put together in February 2013, it is not placed in service until 2013. Free tax forms You begin to depreciate it in 2013. Free tax forms 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. Free tax forms You begin to depreciate it in 2013. Free tax forms Fruit or nut trees and vines. Free tax forms   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). Free tax forms See chapter 6 for information about the uniform capitalization rules. Free tax forms 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). Free tax forms Immature livestock. Free tax forms   Depreciation for livestock begins when the livestock reaches the age of maturity. Free tax forms If you bought immature livestock for drafting purposes, depreciation begins when they can be worked. Free tax forms If you bought immature livestock for dairy purposes, depreciation begins when they can be milked. Free tax forms If you bought immature livestock for breeding purposes, depreciation begins when they can be bred. Free tax forms Your basis for depreciation is your initial cost for the immature livestock. Free tax forms 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. Free tax forms 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. Free tax forms Cost or Other Basis Fully Recovered You stop depreciating property when you have fully recovered your cost or other basis. Free tax forms This happens when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property. Free tax forms 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. Free tax forms 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. Free tax forms You sell or exchange the property. Free tax forms You convert the property to personal use. Free tax forms You abandon the property. Free tax forms You transfer the property to a supplies or scrap account. Free tax forms The property is destroyed. Free tax forms For information on abandonment of property, see chapter 8. Free tax forms For information on destroyed property, see chapter 11 and Publication 547, Casualties, Disasters, and Thefts. Free tax forms 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. Free tax forms MACRS is explained later under Figuring Depreciation Under MACRS . Free tax forms You cannot use MACRS to depreciate the following property. Free tax forms Property you placed in service before 1987. Free tax forms Use the methods discussed in Publication 534. Free tax forms Certain property owned or used in 1986. Free tax forms See chapter 1 of Publication 946. Free tax forms Intangible property. Free tax forms Films, video tapes, and recordings. Free tax forms Certain corporate or partnership property acquired in a nontaxable transfer. Free tax forms Property you elected to exclude from MACRS. Free tax forms For more information, see chapter 1 of Publication 946. Free tax forms What Is the Basis of Your Depreciable Property? To figure your depreciation deduction, you must determine the basis of your property. Free tax forms To determine basis, you need to know the cost or other basis of your property. Free tax forms Cost or other basis. Free tax forms   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. Free tax forms The cost includes the amount you pay in cash, debt obligations, other property, or services. Free tax forms   There are times when you cannot use cost as basis. Free tax forms In these situations, the fair market value (FMV) or the adjusted basis of the property may be used. Free tax forms Adjusted basis. Free tax forms   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. Free tax forms Basis adjustment for depreciation allowed or allowable. Free tax forms   After you place your property in service, you must reduce the basis of the property by the depreciation allowed or allowable, whichever is greater. Free tax forms Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). Free tax forms Depreciation allowable is depreciation you are entitled to deduct. Free tax forms   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. Free tax forms   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). Free tax forms   For more information, see chapter 6. Free tax forms 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. Free tax forms 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. Free tax forms Treat improvements as separate depreciable property. Free tax forms See chapter 1 of Publication 946 for more information. Free tax forms Example. Free tax forms You repair a small section on a corner of the roof of a barn that you rent to others. Free tax forms You deduct the cost of the repair as a business expense. Free tax forms 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. Free tax forms You depreciate the cost of the new roof. Free tax forms Improvements to rented property. Free tax forms   You can depreciate permanent improvements you make to business property you rent from someone else. Free tax forms Do You Have To File Form 4562? Use Form 4562 to claim your deduction for depreciation and amortization. Free tax forms You must complete and attach Form 4562 to your tax return if you are claiming any of the following. Free tax forms A section 179 expense deduction for the current year or a section 179 carryover from a prior year. Free tax forms Depreciation for property placed in service during the current year. Free tax forms Depreciation on any vehicle or other listed property, regardless of when it was placed in service. Free tax forms Amortization of costs that began in the current year. Free tax forms For more information, see the Instructions for Form 4562. Free tax forms 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. Free tax forms You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. Free tax forms You claimed the incorrect amount because of a mathematical error made in any year. Free tax forms You claimed the incorrect amount because of a posting error made in any year, for example, omitting an asset from the depreciation schedule. Free tax forms You have not adopted a method of accounting for the property placed in service by you in tax years ending after December 29, 2003. Free tax forms You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. Free tax forms Note. Free tax forms You have adopted a method of accounting if you used the same incorrect method of depreciation for two or more consecutively filed returns. Free tax forms 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. Free tax forms See the Instructions for Form 3115. Free tax forms 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. Free tax forms This is the section 179 expense deduction. Free tax forms You can elect the section 179 expense deduction instead of recovering the cost by taking depreciation deductions. Free tax forms This part of the chapter explains the rules for the section 179 expense deduction. Free tax forms 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. Free tax forms For more information, see chapter 2 of Publication 946. Free tax forms What Property Qualifies? To qualify for the section 179 expense deduction, your property must meet all the following requirements. Free tax forms It must be eligible property. Free tax forms It must be acquired for business use. Free tax forms It must have been acquired by purchase. Free tax forms Eligible Property To qualify for the section 179 expense deduction, your property must be one of the following types of depreciable property. Free tax forms Tangible personal property. Free tax forms Qualified real property. Free tax forms (Special rules apply to qualified real property that you elect to treat as qualified section 179 real property. Free tax forms For more information, see chapter 2 of Publication 946 and section 179(f) of the Internal Revenue Code. Free tax forms ) 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. Free tax forms Single purpose agricultural (livestock) or horticultural structures. Free tax forms Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum. Free tax forms 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. Free tax forms Tangible personal property. Free tax forms   Tangible personal property is any tangible property that is not real property. Free tax forms It includes the following property. Free tax forms Machinery and equipment. Free tax forms Property contained in or attached to a building (other than structural components), such as milk tanks, automatic feeders, barn cleaners, and office equipment. Free tax forms Gasoline storage tanks and pumps at retail service stations. Free tax forms Livestock, including horses, cattle, hogs, sheep, goats, and mink and other fur-bearing animals. Free tax forms Facility used for the bulk storage of fungible commodities. Free tax forms   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). Free tax forms Bulk storage means the storage of a commodity in a large mass before it is used. Free tax forms Grain bins. Free tax forms   A grain bin is an example of a storage facility that is qualifying section 179 property. Free tax forms It is a facility used in connection with the production of grain or livestock for the bulk storage of fungible commodities. Free tax forms Single purpose agricultural or horticultural structures. Free tax forms   A single purpose agricultural (livestock) or horticultural structure is qualifying property for purposes of the section 179 expense deduction. Free tax forms Agricultural structure. Free tax forms   A single purpose agricultural (livestock) structure is any building or enclosure specifically designed, constructed, and used for both the following reasons. Free tax forms To house, raise, and feed a particular type of livestock and its produce. Free tax forms To house the equipment, including any replacements, needed to house, raise, or feed the livestock. Free tax forms For this purpose, livestock includes poultry. Free tax forms   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. Free tax forms The facility must include, as an integral part of the structure or enclosure, equipment necessary to house, raise, and feed the livestock. Free tax forms Horticultural structure. Free tax forms   A single purpose horticultural structure is either of the following. Free tax forms A greenhouse specifically designed, constructed, and used for the commercial production of plants. Free tax forms A structure specifically designed, constructed, and used for the commercial production of mushrooms. Free tax forms Use of structure. Free tax forms   A structure must be used only for the purpose that qualified it. Free tax forms For example, a hog barn will not be qualifying property if you use it to house poultry. Free tax forms Similarly, using part of your greenhouse to sell plants will make the greenhouse nonqualifying property. Free tax forms   If a structure includes work space, the work space can be used only for the following activities. Free tax forms Stocking, caring for, or collecting livestock or plants or their produce. Free tax forms Maintaining the enclosure or structure. Free tax forms Maintaining or replacing the equipment or stock enclosed or housed in the structure. Free tax forms Property Acquired by Purchase To qualify for the section 179 expense deduction, your property must have been acquired by purchase. Free tax forms For example, property acquired by gift or inheritance does not qualify. Free tax forms Property acquired from a related person (that is, your spouse, ancestors, or lineal descendants) is not considered acquired by purchase. Free tax forms Example. Free tax forms Ken is a farmer. Free tax forms He purchased two tractors, one from his brother and one from his father. Free tax forms He placed both tractors in service in the same year he bought them. Free tax forms The tractor purchased from his father does not qualify for the section 179 expense deduction because he is a related person (as defined above). Free tax forms The tractor purchased from his brother does qualify for the deduction because Ken is not a related person (as defined above). Free tax forms What Property Does Not Qualify? Land and improvements. Free tax forms   Land and land improvements, do not qualify as section 179 property. Free tax forms Land improvements include nonagricultural fences, swimming pools, paved parking areas, wharves, docks, bridges, and fences. Free tax forms However, agricultural fences do qualify as section 179 property. Free tax forms Similarly, field drainage tile also qualifies as section 179 property. Free tax forms Excepted property. Free tax forms   Even if the requirements explained in the preceding discussions are met, farmers cannot elect the section 179 expense deduction for the following property. Free tax forms Certain property you lease to others (if you are a noncorporate lessor). Free tax forms Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging. Free tax forms 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. Free tax forms Property used by governmental units or foreign persons or entities (except property used under a lease with a term of less than 6 months). Free tax forms How Much Can You Deduct? Your section 179 expense deduction is generally the cost of the qualifying property. Free tax forms However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. Free tax forms These limits apply to each taxpayer, not to each business. Free tax forms However, see Married individuals under Dollar Limits , later. Free tax forms See also the special rules for applying the limits for partnerships and S corporations under Partnerships and S Corporations , later. Free tax forms 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. Free tax forms Use Part I of Form 4562 to figure your section 179 expense deduction. Free tax forms Partial business use. Free tax forms   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. Free tax forms If you used the property more than 50% for business, multiply the cost of the property by the percentage of business use. Free tax forms Use the resulting business cost to figure your section 179 expense deduction. Free tax forms Trade-in of other property. Free tax forms   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. Free tax forms 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. Free tax forms It does not include the adjusted basis of the old tractor you trade for the new tractor. Free tax forms Example. Free tax forms J-Bar Farms traded two cultivators having a total adjusted basis of $6,800 for a new cultivator costing $13,200. Free tax forms They received an $8,000 trade-in allowance for the old cultivators and paid $5,200 cash for the new cultivator. Free tax forms J-Bar also traded a used pickup truck with an adjusted basis of $8,000 for a new pickup truck costing $35,000. Free tax forms They received a $5,000 trade-in allowance and paid $30,000 cash for the new pickup truck. Free tax forms Only the cash paid by J-Bar qualifies for the section 179 expense deduction. Free tax forms J-Bar's business costs that qualify for a section 179 expense deduction are $35,200 ($5,200 + $30,000). Free tax forms Dollar Limits The total amount you can elect to deduct under section 179 for most property placed in service in 2013 is $500,000. Free tax forms 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. Free tax forms 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. Free tax forms You do not have to claim the full $500,000. Free tax forms For specific information on the section 179 dollar limits, see chapter 2 of Publication 946. Free tax forms Reduced dollar limit for cost exceeding $2 million. Free tax forms   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. Free tax forms 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. Free tax forms Example. Free tax forms This year, James Smith placed in service machinery costing $2,050,000. Free tax forms Because this cost is $50,000 more than $2 million, he must reduce his dollar limit to $450,000 ($500,000 − $50,000). Free tax forms Limits for sport utility vehicles. Free tax forms   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. Free tax forms 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. Free tax forms   For more information, see chapter 2 of Publication 946. Free tax forms Limits for passenger automobiles. Free tax forms   For a passenger automobile that is placed in service in 2013, the total section 179 and depreciation deduction is limited. Free tax forms See Do the Passenger Automobile Limits Apply , later. Free tax forms Married individuals. Free tax forms   If you are married, how you figure your section 179 expense deduction depends on whether you file jointly or separately. Free tax forms 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. Free tax forms 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. Free tax forms You must allocate the dollar limit (after any reduction) equally between you, unless you both elect a different allocation. Free tax forms If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you. Free tax forms Joint return after separate returns. Free tax forms   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. Free tax forms The dollar limit (after reduction for any cost of section 179 property over $2 million). Free tax forms The total cost of section 179 property you and your spouse elected to expense on your separate returns. Free tax forms 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. Free tax forms 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. Free tax forms Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. Free tax forms See Carryover of disallowed deduction , later. Free tax forms Taxable income. Free tax forms   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. Free tax forms 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. Free tax forms Section 1231 gains (or losses) as discussed in chapter 9. Free tax forms Interest from working capital of your trade or business. Free tax forms Wages, salaries, tips, or other pay earned by you (or your spouse if you file a joint return) as an employee of any employer. Free tax forms   In addition, figure taxable income without regard to any of the following. Free tax forms The section 179 expense deduction. Free tax forms The self-employment tax deduction. Free tax forms Any net operating loss carryback or carryforward. Free tax forms Any unreimbursed employee business expenses. Free tax forms Two different taxable income limits. Free tax forms   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). Free tax forms You may have to figure the limit for this other deduction taking into account the section 179 expense deduction. Free tax forms If so, complete the following steps. Free tax forms Step Action 1 Figure taxable income without the section 179 expense deduction or the other deduction. Free tax forms 2 Figure a hypothetical section 179 expense deduction using the taxable income figured in Step 1. Free tax forms 3 Subtract the hypothetical section 179 expense deduction figured in Step 2 from the taxable income figured in Step 1. Free tax forms 4 Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income. Free tax forms 5 Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in  Step 1. Free tax forms 6 Figure your actual section 179 expense deduction using the taxable income figured in Step 5. Free tax forms 7 Subtract your actual section 179 expense deduction figured in Step 6 from the taxable income figured in Step 1. Free tax forms 8 Figure your actual other deduction using the taxable income figured in Step 7. Free tax forms Example. Free tax forms On February 1, 2013, the XYZ farm corporation purchased and placed in service qualifying section 179 property that cost $500,000. Free tax forms It elects to expense the entire $500,000 cost under section 179. Free tax forms In June, the corporation gave a charitable contribution of $10,000. Free tax forms A corporation's limit on charitable contributions is figured after subtracting any section 179 expense deduction. Free tax forms The business income limit for the section 179 expense deduction is figured after subtracting any allowable charitable contributions. Free tax forms XYZ's taxable income figured without the section 179 expense deduction or the deduction for charitable contributions is $520,000. Free tax forms XYZ figures its section 179 expense deduction and its deduction for charitable contributions as follows. Free tax forms Step 1. Free tax forms Taxable income figured without either deduction is $520,000. Free tax forms Step 2. Free tax forms Using $520,000 as taxable income, XYZ's hypothetical section 179 expense deduction is $500,000. Free tax forms Step 3. Free tax forms $20,000 ($520,000 − $500,000). Free tax forms Step 4. Free tax forms Using $20,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable income) is $2,000. Free tax forms Step 5. Free tax forms $518,000 ($520,000 − $2,000). Free tax forms Step 6. Free tax forms Using $518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 expense deduction. Free tax forms Because the taxable income is at least $500,000, XYZ can take a $500,000 section 179 expense deduction. Free tax forms Step 7. Free tax forms $20,000 ($520,000 − $500,000). Free tax forms Step 8. Free tax forms Using $20,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable income) is $2,000. Free tax forms Carryover of disallowed deduction. Free tax forms   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. Free tax forms   The amount you carry over is used in determining your section 179 expense deduction in the next year. Free tax forms However, it is subject to the limits in that year. Free tax forms 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. Free tax forms Your selections must be shown in your books and records. Free tax forms Example. Free tax forms Last year, Joyce Jones placed in service a machine that cost $8,000 and elected to deduct all $8,000 under section 179. Free tax forms 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. Free tax forms Her section 179 expense deduction was limited to $6,000. Free tax forms 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. Free tax forms This year, Joyce placed another machine in service that cost $9,000. Free tax forms 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. Free tax forms 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. Free tax forms She can carry over the balance of $1,000 to next year. Free tax forms Partnerships and S Corporations The section 179 expense deduction limits apply both to the partnership or S corporation and to each partner or shareholder. Free tax forms The partnership or S corporation determines its section 179 expense deduction subject to the limits. Free tax forms It then allocates the deduction among its partners or shareholders. Free tax forms 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. Free tax forms 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. Free tax forms After you apply the dollar limit, you apply the business income limit to any remaining section 179 costs. Free tax forms For more information, see chapter 2 of Publication 946. Free tax forms Example. Free tax forms In 2013, Partnership P placed in service section 179 property with a total cost of $2,160,000. Free tax forms P must reduce its dollar limit by $160,000 ($2,160,000 − $2,000,000). Free tax forms Its maximum section 179 expense deduction is $340,000 ($500,000 − $160,000), and it elects to expense that amount. Free tax forms 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. Free tax forms P allocates $100,000 of its section 179 expense deduction and $110,000 of its taxable income to John, one of its partners. Free tax forms John also conducts a business as a sole proprietor and in 2013, placed in service in that business, section 179 property costing $28,000. Free tax forms John's taxable income from that business was $10,000. Free tax forms In addition to the $100,000 allocated from P, he elects to expense the $28,000 of his sole proprietorship's section 179 costs. Free tax forms 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). Free tax forms He carries over $8,000 ($128,000 − $120,000) of the elected section 179 costs to 2014. Free tax forms How Do You Elect the Deduction? You elect to take the section 179 expense deduction by completing Part I of Form 4562. Free tax forms If you elect the deduction for listed property, complete Part V of  Form 4562 before completing Part I. Free tax forms   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. Free tax forms 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. Free tax forms The amended return must also include any resulting adjustments to taxable income. Free tax forms Revoking an election. Free tax forms   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. Free tax forms The amended return must be filed within the time prescribed by law. Free tax forms 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. Free tax forms ) Once made, the revocation is irrevocable. Free tax forms 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. Free tax forms In the year the business use drops to 50% or less, you include the recapture amount as ordinary income. Free tax forms You also increase the basis of the property by the recapture amount. Free tax forms Recovery periods for property are discussed later. Free tax forms If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. Free tax forms Instead, use the rules for recapturing depreciation explained in  chapter 9 under Section 1245 Property. Free tax forms   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. Free tax forms Instead, use the rules for recapturing depreciation explained in chapter 5 of Publication 946 under Recapture of Excess Depreciation. Free tax forms Figuring the recapture amount. Free tax forms   To figure the amount to recapture, take the following steps. Free tax forms Figure the allowable depreciation for the section 179 expense deduction you claimed. Free tax forms Begin with the year you placed the property in service and include the year of recapture. Free tax forms Subtract the depreciation figured in (1) from the section 179 expense deduction you actually claimed. Free tax forms The result is the amount you must recapture. Free tax forms Example. Free tax forms In January 2011, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. Free tax forms The property is not listed property. Free tax forms He elected a $5,000 section 179 expense deduction for the property and also elected not to claim a special depreciation allowance. Free tax forms He used the property only for business in 2011 and 2012. Free tax forms During 2013, he used the property 40% for business and 60% for personal use. Free tax forms He figures his recapture amount as follows. Free tax forms 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. Free tax forms Where to report recapture. Free tax forms   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). Free tax forms Recapture for qualified section 179 GO Zone property. Free tax forms   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. Free tax forms ” Claiming the Special Depreciation Allowance For qualified property (defined below) placed in service in 2013, you can take an additional 50% special depreciation allowance. Free tax forms The allowance is an additional deduction you can take after any section 179 expense deduction and before you figure regular depreciation under MACRS. Free tax forms Figure the special depreciation allowance by multiplying the depreciable basis of the qualified property by 50%. Free tax forms 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. Free tax forms Certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Free tax forms   Certain qualified property (defined below) acquired after December 31, 2007, and before January 1, 2014, is eligible for a 50% special depreciation allowance. Free tax forms   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. Free tax forms Water utility property. Free tax forms Off-the-shelf computer software. Free tax forms Qualified leasehold improvement property. Free tax forms   Qualified property must also meet all of the following tests: You must have acquired qualified property by purchase after December 31, 2007. Free tax forms If a binding contract to acquire the property existed before January 1, 2008, the property does not qualify. Free tax forms 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). Free tax forms The original use of the property must begin with you after December 31, 2007. Free tax forms For more information, see chapter 3 of Publication 946. Free tax forms 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. Free tax forms To make the election, attach a statement to your return indicating the class of property for which you are making the election. Free tax forms 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. Free tax forms 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). Free tax forms Attach the election statement to the amended return. Free tax forms On the amended return, write “Filed pursuant to section 301. Free tax forms 9100-2. Free tax forms ” Once made, the election may not be revoked without IRS consent. Free tax forms If you elect not to have the special depreciation allowance apply, the property may be subject to an alternative minimum tax adjustment for depreciation. Free tax forms 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. Free tax forms For more information, see chapter 3 of Publication 946. Free tax forms 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. Free tax forms MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Free tax forms Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. Free tax forms To be sure you can use MACRS to figure depreciation for your property, see Can You Use MACRS To Depreciate Your Property, earlier. Free tax forms This part explains how to determine which MACRS depreciation system applies to your property. Free tax forms It also discusses the following information that you need to know before you can figure depreciation under MACRS. Free tax forms Property's recovery class. Free tax forms Placed-in-service date. Free tax forms Basis for depreciation. Free tax forms Recovery period. Free tax forms Convention. Free tax forms Depreciation method. Free tax forms Finally, this part explains how to use this information to figure your depreciation deduction. Free tax forms 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. Free tax forms You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Free tax forms Required use of ADS. Free tax forms   You must use ADS for the following property. Free tax forms 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. Free tax forms Listed property used 50% or less in a qualified business use. Free tax forms See Additional Rules for Listed Property , later. Free tax forms Any tax-exempt use property. Free tax forms Any tax-exempt bond-financed property. Free tax forms 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. Free tax forms Any tangible property used predominantly outside the United States during the year. Free tax forms If you are required to use ADS to depreciate your property, you cannot claim the special depreciation allowance. Free tax forms Electing ADS. Free tax forms   Although your property may qualify for GDS, you can elect to use ADS. Free tax forms The election generally must cover all property in the same property class you placed in service during the year. Free tax forms However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. Free tax forms Once you make this election, you can never revoke it. Free tax forms   You make the election by completing line 20 in Part III of Form 4562. Free tax forms Which Property Class Applies Under GDS? The following is a list of the nine property classes under GDS. Free tax forms 3-year property. Free tax forms 5-year property. Free tax forms 7-year property. Free tax forms 10-year property. Free tax forms 15-year property. Free tax forms 20-year property. Free tax forms 25-year property. Free tax forms Residential rental property. Free tax forms Nonresidential real property. Free tax forms See Which Property Class Applies Under GDS in chapter 4 of Publication 946 for examples of the types of property included in each class. Free tax forms 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. Free tax forms The placed-in-service date for your property is the date the property is ready and available for a specific use. Free tax forms It is therefore not necessarily the date it is first used. Free tax forms 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. Free tax forms See Placed in Service under When Does Depreciation Begin and End , earlier, for examples illustrating when property is placed in service. Free tax forms 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. Free tax forms Reduce that amount by any credits and deductions allocable to the property. Free tax forms The following are examples of some of the credits and deductions that reduce basis. Free tax forms Any deduction for section 179 property. Free tax forms Any deduction for removal of barriers to the disabled and the elderly. Free tax forms Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. Free tax forms Any special depreciation allowance. Free tax forms Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. Free tax forms For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property , earlier. Free tax forms Also, see chapter 6. Free tax forms For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. Free tax forms Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. Free tax forms It is determined based on the depreciation system (GDS or ADS) used. Free tax forms See Table 7-1 for recovery periods under both GDS and ADS for some commonly used assets. Free tax forms For a complete list of recovery periods, see the Table of Class Lives and Recovery Periods in Appendix B of Publication 946. Free tax forms House trailers for farm laborers. Free tax forms   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). Free tax forms A 7-year recovery period under GDS. Free tax forms A 10-year recovery period under ADS. Free tax forms   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. Free tax forms A 20-year recovery period under GDS. Free tax forms A 25-year recovery period under ADS. Free tax forms Water wells. Free tax forms   Water wells used to provide water for raising poultry and livestock are land improvements. Free tax forms If they are depreciable, use one of the following recovery periods. Free tax forms A 15-year recovery period under GDS. Free tax forms A 20-year recovery period under ADS. Free tax forms   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 . Free tax forms Table 7-1. Free tax forms 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. Free tax forms 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. Free tax forms 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. Free tax forms 2 Not including single purpose agricultural or horticultural structures. Free tax forms 3 Used by logging and sawmill operators for cutting of timber. Free tax forms 4 For property placed in service after May 12, 1993; for property placed in service before May 13, 1993,  the recovery period is 31. Free tax forms 5 years. Free tax forms Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. Free tax forms 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. Free tax forms Use one of the following conventions. Free tax forms The half-year convention. Free tax forms The mid-month convention. Free tax forms The mid-quarter convention. Free tax forms For a detailed explanation of each convention, see Which Convention Applies in chapter 4 of Publication 946. Free tax forms Also, see the Instructions for Form 4562. Free tax forms Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. Free tax forms The 200% declining balance method over a GDS recovery period. Free tax forms The 150% declining balance method over a GDS recovery period. Free tax forms The straight line method over a GDS recovery period. Free tax forms The straight line method over an ADS recovery period. Free tax forms Depreciation Table. Free tax forms   The following table lists the types of property you can depreciate under each method. Free tax forms The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. Free tax forms 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. Free tax forms   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. Free tax forms The straight line method over a GDS recovery period. Free tax forms The straight line method over an ADS recovery period. Free tax forms 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. Free tax forms If you made this election, continue to use the same method and recovery period for that property. Free tax forms Real property. Free tax forms   You can depreciate real property using the straight line method under either GDS or ADS. Free tax forms Switching to straight line. Free tax forms   If you use a declining balance method, you switch to the straight line method in the year it provides an equal or greater deduction. Free tax forms 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. Free tax forms The tables have the switch to the straight line method built into their rates. Free tax forms Fruit or nut trees and vines. Free tax forms   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a 10-year recovery period. Free tax forms ADS required for some farmers. Free tax forms   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. Free tax forms See chapter 6 for a discussion of the application of the uniform capitalization rules to farm property. Free tax forms Electing a different method. Free tax forms   As shown in the Depreciation Table , you can elect a different method for depreciation for certain types of property. Free tax forms You must make the election by the due date of the return (including extensions) for the year you placed the property in service. Free tax forms 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). Free tax forms Attach the election to the amended return and write “Filed pursuant to section 301. Free tax forms 9100-2” on the election statement. Free tax forms File the amended return at the same address you filed the original return. Free tax forms Once you make the election, you cannot change it. Free tax forms    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. Free tax forms However, you can make the election on a property-by-property basis for residential rental and nonresidential real property. Free tax forms Straight line election. Free tax forms   Instead of using the declining balance method, you can elect to use the straight line method over the GDS recovery period. Free tax forms Make the election by entering “S/L” under column (f) in Part III of Form 4562. Free tax forms ADS election. Free tax forms   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. Free tax forms ADS uses the straight line method of depreciation over the ADS recovery periods, which are generally longer than the GDS recovery periods. Free tax forms The ADS recovery periods for many assets used in the business of farming are listed in Table 7–1. Free tax forms 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. Free tax forms 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. Free tax forms Then you are ready to figure your depreciation deduction. Free tax forms You can figure it in one of two ways. Free tax forms You can use the percentage tables provided by the IRS. Free tax forms You can figure your own deduction without using the tables. Free tax forms Figuring your own MACRS deduction will generally result in a slightly different amount than using the tables. Free tax forms 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. Free tax forms These percentage tables are in Appendix A of Publication 946. Free tax forms Rules for using the tables. Free tax forms   The following rules cover the use of the percentage tables. Free tax forms You must apply the rates in the percentage tables to your property's unadjusted basis. Free tax forms 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. Free tax forms You cannot use the percentage tables for a short tax year. Free tax forms See chapter 4 of Publication 946 for information on how to figure the deduction for a short tax year. Free tax forms You generally must continue to use them for the entire recovery period of the property. Free tax forms 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. Free tax forms Basis adjustment due to casualty loss. Free tax forms   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. Free tax forms 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. Free tax forms See Figuring the Deduction Without Using the Tables in chapter 4 of Publication 946. Free tax forms Figuring depreciation using the 150% DB method and half-year convention. Free tax forms    Table 7-2 has the percentages for 3-, 5-, 7-, and 20-year property. Free tax forms The percentages are based on the 150% declining balance method with a change to the straight line method. Free tax forms This table covers only the half-year convention and the first 8 years for 20-year property. Free tax forms See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. Free tax forms   The following examples show how to figure depreciation under MACRS using the percentages in Table 7-2 . Free tax forms Example 1. Free tax forms During the year, you bought an item of 7-year property for $10,000 and placed it in service. Free tax forms You do not elect a section 179 expense deduction for this property. Free tax forms In addition, the property is not qualified property for purposes of the special depreciation allowance. Free tax forms The unadjusted basis of the property is $10,000. Free tax forms You use the percentages in Table 7-2 to figure your deduction. Free tax forms Since this is 7-year property, you multiply $10,000 by 10. Free tax forms 71% to get this year's depreciation of $1,071. Free tax forms For next year, your depreciation will be $1,913 ($10,000 × 19. Free tax forms 13%). Free tax forms Example 2. Free tax forms You had a barn constructed on your farm at a cost of $20,000. Free tax forms You placed the barn in service this year. Free tax forms You elect not to claim the special depreciation allowance. Free tax forms The barn is 20-year property and you use the table percentages to figure your deduction. Free tax forms You figure this year's depreciation by multiplying $20,000 (unadjusted basis) by 3. Free tax forms 75% to get $750. Free tax forms For next year, your depreciation will be $1,443. Free tax forms 80 ($20,000 × 7. Free tax forms 219%). Free tax forms Table 7-2. Free tax forms 150% Declining Balance Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 25. Free tax forms 0 % 15. Free tax forms 00 % 10. Free tax forms 71 % 3. Free tax forms 750 % 2 37. Free tax forms 5   25. Free tax forms 50   19. Free tax forms 13   7. Free tax forms 219   3 25. Free tax forms 0   17. Free tax forms 85   15. Free tax forms 03   6. Free tax forms 677   4 12. Free tax forms 5   16. Free tax forms 66   12. Free tax forms 25   6. Free tax forms 177   5     16. Free tax forms 66   12. Free tax forms 25   5. Free tax forms 713   6     8. Free tax forms 33   12. Free tax forms 25   5. Free tax forms 285   7         12. Free tax forms 25   4. Free tax forms 888   8         6. Free tax forms 13   4. Free tax forms 522   Figuring depreciation using the straight line method and half-year convention. Free tax forms   The following table has the straight line percentages for 3-, 5-, 7-, and 20-year property using the half-year convention. Free tax forms The table covers only the first 8 years for 20-year property. Free tax forms See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. Free tax forms Table 7-3. Free tax forms Straight Line Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 16. Free tax forms 67 % 10 % 7. Free tax forms 14 % 2. Free tax forms 5 % 2 33. Free tax forms 33   20   14. Free tax forms 29   5. Free tax forms 0   3 33. Free tax forms 33   20   14. Free tax forms 29   5. Free tax forms 0   4 16. Free tax forms 67   20   14. Free tax forms 28   5. Free tax forms 0   5     20   14. Free tax forms 29   5. Free tax forms 0   6     10   14. Free tax forms 28   5. Free tax forms 0   7         14. Free tax forms 29   5. Free tax forms 0   8         7. Free tax forms 14   5. Free tax forms 0