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Freetaxes Accelerated Cost Recovery System (ACRS) Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: ACRS Defined What Can and Cannot Be Depreciated Under ACRSRecovery Property Nonrecovery Property How To Figure the DeductionUnadjusted Basis Classes of Recovery Property Recovery Periods Alternate ACRS Method (Modified Straight Line Method) ACRS Deduction in Short Tax Year DispositionsEarly dispositions of ACRS property other than 15-, 18-, or 19-year real property. Freetaxes Dispositions — mass asset accounts. Freetaxes Early dispositions — 15-year real property. Freetaxes Early dispositions — 18- and 19-year real property. Freetaxes Depreciation Recapture Topics - This chapter discusses: The definition of ACRS What can and cannot be depreciated under ACRS How to figure the deduction Dispositions Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 551 Basis of Assets 583 Starting a Business and Keeping Records Form (and Instructions) 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization The Accelerated Cost Recovery System (ACRS) applies to property first used before 1987. Freetaxes It is the name given to tax rules for getting back (recovering) through depreciation deductions the cost of property used in a trade or business or to produce income. Freetaxes These rules are mandatory and generally apply to tangible property placed in service after 1980 and before 1987. Freetaxes If you placed property in service during this period, you must continue to figure your depreciation under ACRS. Freetaxes If you used listed property placed in service after June 18, 1984, less than 50% for business in 1995, see Predominant Use Test in chapter 3. Freetaxes Listed property includes cars, other means of transportation, and certain computers. Freetaxes Any additions or improvements placed in service after 1986, including any components of a building (such as plumbing, wiring, storm windows, etc. Freetaxes ), are depreciated using MACRS, discussed in chapter 3 of Publication 946. Freetaxes It does not matter that the underlying property is depreciated under ACRS or one of the other methods. Freetaxes ACRS Defined ACRS consists of accelerated depreciation methods and an alternate ACRS method that could have been elected. Freetaxes The alternate ACRS method used a recovery percentage based on a modified straight line method. Freetaxes The law prescribes fixed percentages to be uses for each class of property. Freetaxes Property depreciable under ACRS is called recovery property. Freetaxes The recovery class of property determines the recovery period. Freetaxes Generally, the class life of property places it in a 3-year, 5-year, 10-year, 15-year, 18-year, or 19-year recovery class. Freetaxes Under ACRS, the prescribed percentages are used to recover the unadjusted basis of recovery property. Freetaxes To figure a depreciation deduction, you multiply the prescribed percentage for the recovery class by the unadjusted basis of the recovery property. Freetaxes You must continue to figure your depreciation under ACRS for property placed in service after 1980 and before 1987. Freetaxes For property you placed in service after 1986, you must use MACRS, discussed in chapter 3 of Publication 946. Freetaxes What Can and Cannot Be Depreciated Under ACRS ACRS applies to most depreciable tangible property placed in service after 1980 and before 1987. Freetaxes It includes new or used and real or personal property. Freetaxes The property must be for use in a trade or business or for the production of income. Freetaxes Property you acquired before 1981 or after 1986 is not ACRS recovery property. Freetaxes For information on depreciating property acquired before 1981, see chapter 2. Freetaxes For information on depreciating property acquired after 1986, see chapter 3 of Publication 946. Freetaxes Recovery Property Recovery property under ACRS is tangible depreciable property placed in service after 1980 and before 1987. Freetaxes It generally includes new or used property that you acquired after 1980 and before 1987 for use in your trade or business or for the production of income. Freetaxes Nonrecovery Property You cannot use ACRS for property you placed in service before 1981 or after 1986. Freetaxes Nonrecovery property also includes: Intangible property, Property you elected to exclude from ACRS that is properly depreciated under a method of depreciation that is not based on a term of years, Certain public utility property, and Certain property acquired and excluded from ACRS because of the antichurning rules. Freetaxes Intangible property. Freetaxes   Intangible property is not depreciated under ACRS. Freetaxes Property depreciated under methods not expressed in a term of years. Freetaxes   Certain property depreciated under a method not expressed in a term of years is not depreciated under ACRS. Freetaxes This included any property: If you made an irrevocable election to exclude such property, and In the first year that you could have claimed depreciation, you properly used the unit-of-production method or any method of depreciation not expressed in a term of years (not including the retirement-replacement-betterment method). Freetaxes Public utility property. Freetaxes   Public utility property for which the taxpayer does not use a normalization method of accounting is excluded from ACRS and is subject to depreciation under a special rule. Freetaxes Additions or improvements to ACRS property after 1986. Freetaxes   Any additions or improvements placed in service after 1986, including any components of a building (plumbing, wiring, storm windows, etc. Freetaxes ) are depreciated using MACRS, discussed in chapter 3 of Publication 946. Freetaxes It does not matter that the underlying property is depreciated under ACRS or one of the other methods. Freetaxes How To Figure the Deduction After you determine that your property can be depreciated under ACRS, you are ready to figure your deduction. Freetaxes Because the conventions are built into the percentage table rates, you only need to know the following: The unadjusted basis of your recovery property, The classes of recovery property, The recovery periods, and Whether to use the prescribed percentages based on accelerated methods or percentages based on using the alternate ACRS method. Freetaxes Unadjusted Basis To figure your ACRS deduction, you multiply the unadjusted basis in your recovery property by its applicable percentage for the year. Freetaxes Unadjusted basis is the same amount you would use to figure gain on a sale, but it is figured without taking into account any depreciation taken in earlier years. Freetaxes However, reduce your original basis by the amount of amortization taken on the property and by any section 179 deduction claimed as discussed in chapter 2 of Publication 946. Freetaxes If you buy property, your unadjusted basis is usually its cost minus any amortized amount and minus any section 179 deduction elected. Freetaxes If you acquire property in some other way, such as by inheriting it, getting it as a gift, or building it yourself, you figure your unadjusted basis under other rules. Freetaxes See Publication 551. Freetaxes Classes of Recovery Property All recovery property under ACRS is in one of the following classes. Freetaxes The class for your property was determined when you began to depreciate it. Freetaxes 3-Year Property 3-year property includes automobiles, light-duty trucks (actual unloaded weight less than 13,000 pounds), and tractor units for use over-the-road. Freetaxes Race horses over 2 years old when placed in service are 3-year property. Freetaxes Any other horses over 12 years old when you placed them in service are also included in the 3-year property class. Freetaxes The ACRS percentages for 3-year recovery property are: Recovery Period Percentage 1st year 25% 2nd year 38% 3rd year 37% If you used the percentages above to depreciate your 3-year recovery property, your property, except for certain passenger automobiles, is fully depreciated. Freetaxes You cannot claim depreciation for this property after 1988. Freetaxes 5-Year Property 5-year property includes computers, copiers, and equipment, such as office furniture and fixtures. Freetaxes It also includes single purpose agricultural or horticultural structures and petroleum storage facilities (other than buildings and their structural components). Freetaxes The ACRS percentages for 5-year recovery property are: Recovery period Percentage 1st year 15% 2nd year 22% 3rd through 5th year 21% If you used the percentages above to depreciate your 5-year recovery property, it is fully depreciated. Freetaxes You cannot claim depreciation for this property after 1990. Freetaxes 10-Year Property 10-year property includes certain real property such as theme-park structures and certain public utility property. Freetaxes Manufactured homes (including mobile homes) and railroad tank cars are also 10-year property. Freetaxes You do not treat a building, and its structural components, as 10-year property by reason of a change in use after you placed the property in service. Freetaxes For example, a building (15-year real property) that was placed in service in 1981 and was converted to a theme-park structure in 1986 remains 15-year real property. Freetaxes The ACRS percentages for 10-year recovery property are: Recovery Period Percentage 1st year 8% 2nd year 14% 3rd year 12% 4th through 6th year 10% 7th through 10th year 9% If you used the percentages above, you cannot claim depreciation for this property after 1995. Freetaxes Example. Freetaxes On April 21, 1986, you bought and placed in service a new mobile home for $26,000 to be used as rental property. Freetaxes You paid $10,000 cash and signed a note for $16,000 giving you an unadjusted basis of $26,000. Freetaxes On June 8, 1986, you bought and placed in service a used mobile home for use as rental property at a total cost of $11,500. Freetaxes The total unadjusted basis of your 10-year recovery property placed in service in 1986 was $37,500 ($26,000 + $11,500). Freetaxes Your ACRS deduction was $3,000 (8% × $37,500). Freetaxes In 1987, your ACRS deduction was $5,250 (14% × $37,500). Freetaxes In 1988, your ACRS deduction was $4,500 (12% × $37,500). Freetaxes In 1989, 1990, and 1991, your ACRS deduction was $3,750 (10% × $37,500). Freetaxes In 1992, 1993, 1994, and 1995 your deduction for each year is $3,375 (9% × $37,500). Freetaxes 15-Year Real Property 15-year real property is real property that is recovery property placed in service before March 16, 1984. Freetaxes It includes all real property, such as buildings, other than that designated as 5-year or 10-year property. Freetaxes Unlike the 3-, 5-, or 10-year classes of property, the percentages for 15-year real property depend on when you placed the property in service during your tax year. Freetaxes You could group 15-year real property by month and year placed in service. Freetaxes In Table 1, at the end of this publication in the Appendix, find the month in your tax year that you placed the property in service in your trade or business or for the production of income. Freetaxes You use the percentages listed under that month for each year of the recovery period to determine your depreciation deduction each year. Freetaxes Example. Freetaxes On March 5, 1984, you placed an apartment building in service in your business. Freetaxes It is 15-year real property. Freetaxes After subtracting the value of the land, your unadjusted basis in the building is $250,000. Freetaxes You use the calendar year as your tax year. Freetaxes March is the third month of your tax year. Freetaxes Your ACRS deduction for 1984 was $25,000 (10% × $250,000). Freetaxes For 1985, the percentage for the third month of the second year of the recovery period is 11%. Freetaxes Your deduction was $27,500 (11% × $250,000). Freetaxes For the third, fourth, and fifth years of the recovery period (1986, 1987, and 1988), the percentages are 9%, 8%, and 7%. Freetaxes For 1989 through 1992, the percentage for the third month is 6%. Freetaxes Your deduction each year is $15,000 (6% × $250,000). Freetaxes For 1993, 1994, and 1995, the percentage for the third month is 5%. Freetaxes Your depreciation deduction is $12,500 (5% × $250,000) for 1993, 1994, and 1995. Freetaxes Low-Income Housing Low-income housing that was assigned a 15-year recovery period under ACRS includes the following types of property: Federally assisted housing projects where the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by direct loan or tax abatement under similar provisions of state or local laws. Freetaxes Low-income rental housing for which a depreciation deduction for rehabilitation expenditures is allowed. Freetaxes Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under the provisions of state or local laws that authorize similar subsidies for low-income families. Freetaxes Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. Freetaxes The ACRS percentages for low-income housing real property, like the regular 15-year real property percentages, depend on when you placed the property in service. Freetaxes Find the month in your tax year in Table 2 or 3 at the end of this publication in the Appendix that you first placed the property in service as rental housing. Freetaxes Use the percentages listed under that month for each year of the recovery period. Freetaxes Table 2 shows percentages for low-income housing placed in service before May 9, 1985. Freetaxes Table 3 shows percentages for low-income housing placed in service after May 8, 1985, and before 1987. Freetaxes Example. Freetaxes In May 1986, you acquired and placed in service a house that qualified as low-income rental housing under item 3) of the above listing. Freetaxes You use the calendar year as your tax year. Freetaxes You use Table C–3 because the property was placed in service after May 8, 1985. Freetaxes Your unadjusted basis for the property, not including the land, was $59,000. Freetaxes Your deduction for 1986 through 2001 is shown in the following table. Freetaxes Year Rate Deduction 1986 8. Freetaxes 9% $5,251 1987 12. Freetaxes 1% 7,139 1988 10. Freetaxes 5% 6,195 1989 9. Freetaxes 1% 5,369 1990 7. Freetaxes 9% 4,661 1991 6. Freetaxes 9% 4,071 1992 5. Freetaxes 9% 3,481 1993 5. Freetaxes 2% 3,068 1994 4. Freetaxes 6% 2,714 1995 4. Freetaxes 6% 2,714 1996 4. Freetaxes 6% 2,714 1997 4. Freetaxes 6% 2,714 1998 4. Freetaxes 6% 2,714 1999 4. Freetaxes 5% 2,655 2000 4. Freetaxes 5% 2,655 2001 1. Freetaxes 5% 885 18-Year Real Property 18-year real property is real property that is recovery property placed in service after March 15, 1984, and before May 9, 1985. Freetaxes It includes real property, such as buildings, other than that designated as 5-year, 10-year, 15-year real property, or low-income housing. Freetaxes The ACRS percentages for 18-year real property depend on when you placed the property in service in your trade or business or for the production of income during your tax year. Freetaxes There are also tables for 18-year real property in the Appendix. Freetaxes Table 4 shows the percentages for 18-year real property you placed in service after June 22, 1984, and before May 9, 1985. Freetaxes Table 5 is for 18-year real property placed in service after March 15, 1984, and before June 23, 1984. Freetaxes Find the month in your tax year that you placed the property in service in a trade or business or for the production of income. Freetaxes Use the percentages listed under that month for each year of the recovery period. Freetaxes Example. Freetaxes On April 28, 1985, you bought and placed in service a rental house. Freetaxes The house, not including the land, cost $95,000. Freetaxes This is your unadjusted basis for the house. Freetaxes You use the calendar year as your tax year. Freetaxes Because the house was placed in service after June 22, 1984, and before May 9, 1985, it is 18-year real property. Freetaxes You use Table 4 to figure your deduction for the house. Freetaxes April is the fourth month of your tax year. Freetaxes Your deduction for 1985 through 2003 is shown in the following table. Freetaxes Year Rate Deduction 1985 7. Freetaxes 0% $6,650 1986 9. Freetaxes 0% 8,550 1987 8. Freetaxes 0% 7,600 1988 7. Freetaxes 0% 6,650 1989 7. Freetaxes 0% 6,650 1990 6. Freetaxes 0% 5,700 1991 5. Freetaxes 0% 4,750 1992 5. Freetaxes 0% 4,750 1993 5. Freetaxes 0% 4,750 1994 5. Freetaxes 0% 4,750 1995 5. Freetaxes 0% 4,750 1996 5. Freetaxes 0% 4,750 1997 5. Freetaxes 0% 4,750 1998 4. Freetaxes 0% 3,800 1999 4. Freetaxes 0% 3,800 2000 4. Freetaxes 0% 3,800 2001 4. Freetaxes 0% 3,800 2002 4. Freetaxes 0% 3,800 2003 1. Freetaxes 0% 950 19-Year Real Property 19-year real property is real property that is recovery property placed in service after May 8, 1985, and before 1987. Freetaxes It includes all real property, other than that designated as 5-year, 10-year, 15-year, or 18-year real property, or low-income housing. Freetaxes The ACRS percentages for 19-year real property depend on when you placed the property in service in a trade or business or for the production of income during your tax year. Freetaxes Table 6 shows the percentages for 19-year real property. Freetaxes You find the month in your tax year that you placed the property in service. Freetaxes You use the percentages listed under that month for each year of the recovery period. Freetaxes Recovery Periods Each item of recovery property is assigned to a class of property. Freetaxes The classes of recovery property establish the recovery periods over which the unadjusted basis of items in a class is recovered. Freetaxes The classes of property are: 3-Year property 5-Year property 10-Year property 15-Year real property Low-income housing 18-Year real property 19-Year real property Alternate ACRS Method (Modified Straight Line Method) ACRS provides an alternate ACRS method that could be elected. Freetaxes This alternate ACRS method uses a recovery percentage based on a modified straight line method. Freetaxes This alternate ACRS method generally uses percentages other than those from the tables. Freetaxes If you elected the alternate ACRS method, you determine the recovery period by using the following schedule. Freetaxes This schedule is for other than 18- and 19-year real property and low-income housing: In the case of: You could have elected a recovery period of: 3-year property 3, 5, or 12 years 5-year property 5, 12, or 25 years 15-year real property 15, 35, or 45 years Percentages. Freetaxes   The straight-line percentages for the alternate ACRS method are: Recovery Period Percentage 5 years 20. Freetaxes 00% 10 years 10. Freetaxes 00% 12 years 8. Freetaxes 333% 15 years 6. Freetaxes 667% 25 years 4. Freetaxes 00% 35 years 2. Freetaxes 857%   You apply the percentage to the unadjusted basis(defined earlier) of the property to figure your ACRS deduction. Freetaxes There are tables for 18- and 19-year real property later in this publication in the Appendix. Freetaxes For 15-year real property, see 15-year real property, later. Freetaxes 3-, 5-, and 10-year property. Freetaxes   If you elected to use an alternate recovery percentage, you have to use the same recovery percentage for all property in that class that you placed in service in that tax year. Freetaxes This applies throughout the recovery period you selected. Freetaxes Half-year convention. Freetaxes   If you elected the alternate method, only a half-year of depreciation was deducted for the year you placed the property in service. Freetaxes This applied regardless of when in the tax year you placed the property in service. Freetaxes For each of the remaining years in the recovery period, you take a full year's deduction. Freetaxes If you hold the property for the entire recovery period, a half-year of depreciation is allowable for the year following the end of the recovery period. Freetaxes Example. Freetaxes You operate a small upholstery business. Freetaxes On March 19, 1986, you bought and placed in service a $13,000 light-duty panel truck to be used in your business and a $500 electric saw. Freetaxes You elected to use the alternate ACRS method. Freetaxes You did not elect to take a section 179 deduction. Freetaxes You decided to recover the cost of the truck, which is 3-year recovery property, over 5 years. Freetaxes The saw is 5-year property, but you decided to recover its cost over 12 years. Freetaxes For 1986, your ACRS deduction reflected the half-year convention. Freetaxes In the first year, you deducted half of the amount determined for a full year. Freetaxes Your ACRS deduction for 1986 is as follows: Light-duty truck   5 years straight line = 20% 20% ÷ $13,000 = $2,600 Half-year convention -½ of $2,600= $1,300. Freetaxes 00     Electric saw   12 years straight line = 8. Freetaxes 333% 8. Freetaxes 333% ÷ $500 = $41. Freetaxes 67 Half-year convention -½ of $41. Freetaxes 67= 20. Freetaxes 84 Total ACRS deduction for 1986 $1,320. Freetaxes 84       You take a full year of depreciation for both the truck and the saw for the years 1987 through 1990. Freetaxes Your ACRS deduction for each of those years is as follows: Light-duty truck   5 years straight line = 20% 20% ÷ $13,000 = $2,600     Electric saw     12 years straight line = 8. Freetaxes 333% 8. Freetaxes 333% ÷ $500 = $41. Freetaxes 67 Total annual ACRS deduction for 1987 through 1990 $2,641. Freetaxes 67       In 1991, you take a half-year of depreciation for the truck and a full year of depreciation for the saw. Freetaxes Your ACRS deduction for 1991 is as follows: Light-duty truck   5 years straight line = 20% 20% ÷ $13,000 = $2,600 Half-year convention -½ of $2,600= $1,300. Freetaxes 00     Electric saw   12 years straight line = 8. Freetaxes 333% 8. Freetaxes 333% ÷ $500 = $41. Freetaxes 67 Total ACRS deduction for 1991 $1,341. Freetaxes 67       The truck is fully depreciated after 1991. Freetaxes You take a full year of depreciation for the saw for the years 1992 through 1997. Freetaxes Your ACRS deduction for each of those years is as follows: Electric saw     12 years straight line = 8. Freetaxes 333% 8. Freetaxes 333% ÷ $500 = $41. Freetaxes 67 Total annual ACRS deduction for 1992 through 1997 $41. Freetaxes 67       You take a half-year of depreciation for the saw for 1998. Freetaxes Your ACRS deduction for 1998 is as follows: Electric saw   12 years straight line = 8. Freetaxes 333% 8. Freetaxes 333% ÷ $500 = $41. Freetaxes 67 Half-year convention -½ of $41. Freetaxes 67= 20. Freetaxes 84 Total ACRS deduction for 1998 $20. Freetaxes 84       The saw is fully depreciated after 1998. Freetaxes 15-year real property. Freetaxes   Under ACRS, you could also elect to use the alternate ACRS method for 15-year real property. Freetaxes The alternate ACRS method allows you to depreciate your 15-year real property using the straight line ACRS method over the alternate recovery periods of 15, 35, or 45 years. Freetaxes If you selected a 15-year recovery period, you use the percentage (6. Freetaxes 667%) from the schedule above. Freetaxes You prorate this percentage for the number of months the property was in service in the first year. Freetaxes If you selected a 35- or 45-year recovery period, you use either Table 11 or 15. Freetaxes Alternate periods for 18-year real property. Freetaxes   For 18-year real property, the alternate recovery periods are 18, 35, or 45 years. Freetaxes The percentages for 18-year real property under the alternate method are in Tables 7, 8, 10, 11, 14, and 15 in the Appendix. Freetaxes There are two tables for each alternate recovery period. Freetaxes One table shows the percentage for property placed in service after June 22, 1984. Freetaxes The other table has the percentages for property placed in service after March 15, 1984, and before June 23, 1984. Freetaxes Alternate periods for 19-year real property. Freetaxes   For 19-year real property, the alternate recovery periods are 19, 35, or 45 years. Freetaxes If you selected a 19-year recovery period, use Table 9 to determine your deduction. Freetaxes If you select a 35- or 45-year recovery period, use either Table 13 or 14. Freetaxes Example. Freetaxes You placed in service an apartment building on August 3, 1986. Freetaxes The building is 19-year real property. Freetaxes The sales contract allocated $300,000 to the building and $100,000 to the land. Freetaxes You use the calendar year as your tax year. Freetaxes You chose the alternate ACRS method over a recovery period of 35 years. Freetaxes For 1986, you figure your ACRS deduction usingTable 13. Freetaxes August is the eighth month of your tax year. Freetaxes The percentage from Table 13 for the eighth month is 1. Freetaxes 1%. Freetaxes Your deduction was $3,300 ($300,000 ÷ 1. Freetaxes 1%). Freetaxes The deduction rate from ACRS Table 13 for years 2 through 20 is 2. Freetaxes 9% so that your deduction in 1987 through 2005 is $8,700 ($300,000 ÷ 2. Freetaxes 9%). Freetaxes Alternate periods for low-income housing. Freetaxes   For low-income housing, the alternate recovery periods are 15, 35, or 45 years. Freetaxes If you selected a 15-year period for this property, use 6. Freetaxes 667% as the percentage. Freetaxes If you selected a 35- or 45-year period, use either Table 11, 12, or 15. Freetaxes Election. Freetaxes   You had to make the election to use the alternate ACRS method by the return due date (including extensions) for the tax year you placed the property in service. Freetaxes Revocation of election. Freetaxes   Your election to use an alternate ACRS method, once made, can be changed only with the consent of the Commissioner. Freetaxes The Commissioner grants consent only in extraordinary circumstances. Freetaxes Any request for a revocation will be considered a request for a ruling. Freetaxes ACRS Deduction in Short Tax Year For a tax year that is less than 12 months, the ACRS deduction is prorated on a 12-month basis. Freetaxes Figure the amount of the ACRS deduction for a short tax year as follows: First, you figure the ACRS deduction for a full year. Freetaxes You figure this by multiplying the unadjusted basis by the recovery percentage. Freetaxes You then multiply the ACRS deduction determined for a full tax year by a fraction. Freetaxes The numerator (top number) of the fraction is the number of months in the short tax year and the denominator (bottom number) is 12. Freetaxes For example, a corporation placed in service in June 1986 an item of 3-year property with an unadjusted basis of $10,000. Freetaxes The corporation files a tax return, because of a change in its accounting period, for the 6-month short tax year ending June 30, 1986. Freetaxes The full year's ACRS deduction for this item is $2,500 ($10,000 ÷ 25%), the first year percentage from the 3-year table. Freetaxes The ACRS deduction for the short tax year is $1,250 ($2,500 ÷ 6/12). Freetaxes You use the full ACRS percentages during the remaining years of the recovery period. Freetaxes For the first tax year after the recovery period, the unrecovered basis will be deductible. Freetaxes Exception. Freetaxes   For the tax year in which you placed 15-, 18-, or 19-year real property in service or in the tax year you dispose of it, you compute the ACRS deduction for the number of months that the property is in service during that tax year. Freetaxes You compute the number of months using either a full month or mid-month convention. Freetaxes This is true regardless of the number of months in the tax year and the recovery period and method used. Freetaxes Dispositions A disposition is the permanent withdrawal of property from use in your trade or business or in the production of income. Freetaxes You can make a withdrawal by sale, exchange, retirement, abandonment, or destruction. Freetaxes You generally recognize gain or loss on the disposition of an asset by sale. Freetaxes However, nonrecognition rules can allow you to postpone some gain. Freetaxes See Publication 544. Freetaxes If you physically abandon property, you can deduct as a loss the adjusted basis of the asset at the time of its abandonment. Freetaxes Your intent must be to discard the asset so that you will not use it again or retrieve it for sale, exchange, or other disposition. Freetaxes Early dispositions. Freetaxes   The disposal of an asset before the end of its specified recovery period, is referred to as an early disposition. Freetaxes When an early disposition occurs, the depreciation deduction in the year of disposition depends on the class of property involved. Freetaxes Early dispositions of ACRS property other than 15-, 18-, or 19-year real property. Freetaxes   Generally, you get no ACRS deduction for the tax year in which you dispose of or retire recovery property, except for 15-, 18-, and 19-year real property. Freetaxes This means there is no depreciation deduction under ACRS in the year you dispose of or retire any of your 3-, 5-, or 10-year recovery property. Freetaxes Dispositions — mass asset accounts. Freetaxes   The law provides a special rule to avoid the calculation of gain on the disposition of assets from mass asset accounts. Freetaxes A mass asset account includes items usually minor in value in relation to the group, numerous in quantity, impractical to separately identify, and not usually accounted for on a separate basis, but on a total dollar value. Freetaxes Examples of mass assets include minor items of office, plant, and store furniture and fixtures. Freetaxes   Under the special rule, if you elected to use a mass asset account, you recognize gain to the extent of the proceeds from the disposition of the asset. Freetaxes You leave the unadjusted basis of the property in the account until recovered in future years. Freetaxes If you did this, include the total proceeds realized from the disposition in income on the tax return for the year of disposition. Freetaxes Early dispositions — 15-year real property. Freetaxes   If you dispose of 15-year real property, you base your ACRS deduction for the year of disposition on the number of months in use. Freetaxes You use a full-month convention. Freetaxes For a disposition at any time during a particular month before the end of the recovery period, no deduction is allowed for the month of disposition. Freetaxes This applies whether you use the regular ACRS method or elected the alternate ACRS method. Freetaxes Example. Freetaxes You purchased and placed in service a rental house on March 2, 1984, for $98,000 (not including the cost of land). Freetaxes You file your return based on a calendar year. Freetaxes Your rate from Table 1 for the third month is 10%. Freetaxes Your ACRS deduction for 1984 was $9,800 ($98. Freetaxes 000 ÷ 10%). Freetaxes For 1985 through 1988, you figured your ACRS deductions using 11%, 9%, 8%, and 7% ÷ $98,000. Freetaxes For 1989 through 1992, you figured your ACRS deductions using 6% for each year. Freetaxes The deduction each year was $98,000 ÷ 6%. Freetaxes For 1993 and 1994, the ACRS deduction is ($98,000 ÷ 5%) $4,900 for each year. Freetaxes You sell the house on June 1, 1995. Freetaxes You figure your ACRS deduction for 1995 for the full year and then prorate that amount for the months of use. Freetaxes The full ACRS deduction for 1995 is $4,900 ($98,000 ÷ 5%). Freetaxes You then prorate this amount to the 5 months in 1995 during which it was rented. Freetaxes Your ACRS deduction for 1995 is $2,042 ($4,900 ÷ 5/12). Freetaxes Early dispositions — 18- and 19-year real property. Freetaxes   If you dispose of 18- or 19-year real property, you base your ACRS deduction for the year of disposition on the number of months in use. Freetaxes For 18-year property placed in service before June 23, 1984, use a full-month convention on a disposition. Freetaxes For 18-year property placed in service after June 22, 1984, and for 19-year property, determine the number of months in use by using the mid-month convention. Freetaxes Under the mid-month convention,treat real property disposed of any time during a month as disposed of in the middle of that month. Freetaxes Count the month of disposition as half a month of use. Freetaxes Example. Freetaxes You purchased and placed in service a rental house on July 2, 1984, for $100,000 (not including the cost of land). Freetaxes You file your return based on a calendar year. Freetaxes Your rate from Table 4 for the seventh month is 4%. Freetaxes You figured your ACRS deduction for 1984 was $4,000 ($100,000 ÷ 4%). Freetaxes In 1985 through 1994, your ACRS deductions were 9%, 8%, 8%, 7%, 6%, 6%, 5%, 5%, and 5% ÷ $100,000. Freetaxes You sell the house on September 24, 1995. Freetaxes Figure your ACRS deduction for 1995 for the months of use. Freetaxes The full ACRS deduction for 1995 is $5,000 ($100,000 ÷ 5%). Freetaxes Prorate this amount for the 8. Freetaxes 5 months in 1995 that you held the property. Freetaxes Under the mid-month convention, you count September as half a month. Freetaxes Your ACRS deduction for 1995 is $3,542 ($5,000 ÷ 8. Freetaxes 5/12). Freetaxes Depreciation Recapture If you dispose of property depreciated under ACRS that is section 1245 recovery property, you will generally recognize gain or loss. Freetaxes Gain recognized on a disposition is ordinary income to the extent of prior depreciation deductions taken. Freetaxes This recapture rule applies to all personal property in the 3-year, 5-year, and 10-year classes. Freetaxes You recapture gain on manufactured homes and theme park structures in the 10-year class as section 1245 property. Freetaxes Section 1245 property generally includes all personal property. Freetaxes See Section 1245 property in chapter 4 of Publication 544 for more information. Freetaxes You treat dispositions of section 1250 real property on which you have a gain as section 1245 recovery property. Freetaxes You recognize gain on this property as ordinary income to the extent of prior depreciation deductions taken. Freetaxes Section 1250 property includes most real property. Freetaxes See Section 1250 property in chapter 4 of Publication 544 for more information. Freetaxes This rule applies to all section 1250 real property except the following property: Any 15-, 18-, or 19-year real property that is residential rental property. Freetaxes Any 15-, 18-, or 19-year real property that you elected to depreciate using the alternate ACRS method. Freetaxes Any 15-, 18-, or 19-year real property that is subsidized low-income housing. Freetaxes For these recapture rules, you treat the section 179 deduction and 50% of the investment credit that reduced your basis as depreciation. Freetaxes See Publication 544 for further discussion of dispositions of section 1245 and 1250 property. Freetaxes Prev  Up  Next   Home   More Online Publications
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Understanding Your CP211A Notice

We approved your Form 8868, Application for Extension of Time To File an Exempt Organization Return.


What you need to do

  • Keep this notice for your records.
  • File your required form by your new due date shown on the notice. We encourage you to use electronic filing – the fastest and easiest way to file.

You may want to

  • Visit www.irs.gov/Charities-&-Non-Profits to learn about approved e-File providers, what types of returns can be filed electronically, and whether you are required to file electronically.

Answers to Common Questions

Q. Where can I go for more information about tax-exempt organizations?

A. For more information on Employee Benefit Plans, see Tax Information for Charities & Other Non-Profits.

Q. Can I get help over the phone?

A. If you have questions and/or need help, you can call 1-877-829-5500. Personal assistance is available Monday through Friday, 7:00 a.m. to 7:00 p.m. CT.


Tips for next year

Be sure to mail your Form 8868 on or before the due date of your return.

Page Last Reviewed or Updated: 24-Jan-2014

Printable samples of this notice (PDF)

 

 

How to get help

  • Call the 1-800 number listed on the top right corner of your notice.
  • Authorize someone (e.g., accountant) to contact the IRS on your behalf using Form 2848.
  • See if you qualify for help from a Low Income Taxpayer Clinic.
     

The Freetaxes

Freetaxes Publication 4492-A - Introductory Material Table of Contents Introduction Useful Items - You may want to see: Introduction This publication explains the temporary tax relief provided by the Food, Conservation, and Energy Act of 2008 for taxpayers in Kiowa County, Kansas, and surrounding areas, who were affected by the storms and tornadoes that began on May 4, 2007. Freetaxes Useful Items - You may want to see: Publication 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 547 Casualties, Disasters, and Thefts 590 Individual Retirement Arrangements (IRAs) 946 How To Depreciate Property Form (and Instructions) 4506Request for Copy of Tax Return 4506-TRequest for Transcript of Tax Return 4684Casualties and Thefts 5884-ACredits for Employers Affected by Hurricane Katrina, Rita, or Wilma 8606Nondeductible IRAs 8915Qualified Hurricane Retirement Plan Distributions and Repayments See How To Get Tax Help on page 14 for information about getting publications and forms. Freetaxes Prev  Up  Next   Home   More Online Publications