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Principal Reduction Alternative Under the Home Affordable Modification Program

Background


To help distressed homeowners lower their monthly mortgage payments, the U.S. Departments of the Treasury and of Housing and Urban Development established the Home Affordable Modification ProgramSM (HAMPSM) for mortgage loans that are not owned or guaranteed by Fannie Mae or Freddie Mac.

Under HAMP, a participating loan servicer must consider a sequence of modification steps for each eligible homeowner’s mortgage loan until the loan’s monthly payment is reduced to 31 percent of the homeowner’s verified monthly gross (pre-tax) income. Sometimes, a change in the mortgage loan’s interest rate is sufficient to reach the 31–percent target. Sometimes additional modification steps of term extension or forbearance are necessary as well. See the Home Affordable Modification Program (HAMP) page on the MakingHomeAffordable.gov website.

(For mortgage loans that are owned or guaranteed by Fannie Mae or Freddie Mac, eligible homeowners may be offered modifications under related programs also called “HAMP.” Because these related programs do not contain the principal reduction provision that these FAQs address, these FAQs use the term “HAMP” to refer only to the program for mortgage loans that are not owned or guaranteed by Fannie Mae or Freddie Mac.)

Since the last quarter of 2010, if a mortgage loan is being considered for a HAMP modification and if the ratio of the amount owed to the value of the home is greater than 115 percent, then the servicer must consider whether a Principal Reduction AlternativeSM (PRA) principal reduction should be effected as one part of the HAMP modification. See the Principal Reduction Alternative (PRA) page on the MakingHomeAffordable.gov website. 

For HAMP modifications that include a PRA principal reduction, the unpaid principal balance of the modified loan is divided into an interest-bearing principal amount and a non-interest-bearing PRA Forbearance Amount. If the homeowner then achieves a payment history that is sufficiently timely over a three-year period, the entire PRA Forbearance Amount is eventually reduced to zero. 

In connection with every HAMP modification of a loan that is not owned or guaranteed by Fannie Mae or Freddie Mac, to encourage participation in HAMP, the government provides incentives to the investor (that is, the holder of the loan), to the homeowner, and to the servicer. If a HAMP modification of such a mortgage loan includes a PRA principal reduction, the government makes additional incentive payments over three years to the investor. (These additional incentives are called “PRA investor incentive payments.”) The size of the PRA investor incentive payments depends not only on the amount of principal reduced but also on the loan-to-value ratio and the loan’s payment history before the HAMP modification. The PRA investor incentive payments range from 6% to 21% of the principal amount reduced.

For information on tax issues related to the Principal Reduction Alternative, see the questions and answers below.
 


Questions and Answers on Tax Issues Related to the Principal Reduction Alternative


Q1: If the government makes a PRA investor incentive payment to the holder of the mortgage loan, how is that payment analyzed for federal income tax purposes?

A1: The PRA investor incentive payment to the holder is treated as a payment on the loan by the government on behalf of the homeowner. 

Q2: Does a homeowner have income as a result of the government's having paid some of the homeowner’s mortgage loan by making a PRA investor incentive payment to the holder of the loan?

A2: No. This payment by the government on behalf of the homeowner is excludible from the homeowner’s income under the general welfare exclusion. Excluding this amount from the homeowner’s gross income is consistent with the treatment of Pay-for-Performance Success Payments, which are addressed in Revenue Ruling 2009–19

Q3: In a HAMP modification that includes a PRA principal reduction, the holder of the loan reduces the PRA Forbearance Amount by more than the PRA investor incentive payments (which are treated as payments on the loan on behalf of the homeowner). What federal income tax consequences for the homeowner result from that additional reduction by the holder?

A3: To the extent that the reduction in the PRA Forbearance Amount is more than the PRA investor incentive payments, the reduction is from the discharge of indebtedness. The full amount of this discharge of indebtedness is reported to the IRS and the homeowner on Form 1099–C, Cancellation of Debt, regardless of whether the homeowner may exclude any, or all, of it from gross income. See Questions 4 and 5 below for discussion of some exclusions that may apply.

Q4: Does the exclusion for qualified principal residence indebtedness apply to amounts discharged under a PRA principal reduction?

A4: The exclusion for qualified principal residence indebtedness may apply to a discharge of indebtedness under a PRA principal reduction if the amount discharged meets the criteria for qualified principal residence indebtedness. Under current law, this exclusion does not apply to discharges that occur after Dec. 31, 2013. For further discussion of the qualified principal residence exclusion, see the questions and answers on the The Mortgage Forgiveness Debt Relief Act and Debt Cancellation page.
 

Q5: Does the insolvency exclusion apply to amounts discharged under a PRA principal reduction?

A5: The insolvency exclusion may apply to a discharge of indebtedness under a PRA principal reduction to the extent that the taxpayer is insolvent when the discharge occurs. For further discussion of the insolvency exclusion, see page 4 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals).

 

Page Last Reviewed or Updated: 06-Feb-2014

The Online Turbotax 2011

Online turbotax 2011 7. Online turbotax 2011   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. Online turbotax 2011  The maximum amount you can elect to deduct for most section 179 property you placed in service in 2013 is $500,000. Online turbotax 2011 This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2 million. Online turbotax 2011 See Dollar Limits under Section 179 Expense Deduction , later. Online turbotax 2011 Extension of special depreciation allowance for certain qualified property acquired after December 31, 2007. Online turbotax 2011 . Online turbotax 2011  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. Online turbotax 2011 See Claiming the Special Depreciation Allowance , later. Online turbotax 2011 Expiration of the 3- year recovery period for certain race horses. Online turbotax 2011  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. Online turbotax 2011 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. Online turbotax 2011 Instead, you must spread the cost over the time you use the property and deduct part of it each year. Online turbotax 2011 For most types of property, this is called depreciation. Online turbotax 2011 This chapter gives information on depreciation methods that generally apply to property placed in service after 1986. Online turbotax 2011 For information on depreciating pre-1987 property, see Publication 534, Depreciating Property Placed in Service Before 1987. Online turbotax 2011 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. Online turbotax 2011 It is important to keep good records for property you depreciate. Online turbotax 2011 Do not file these records with your return. Online turbotax 2011 Instead, you should keep them as part of the permanent records of the depreciated property. Online turbotax 2011 They will help you verify the accuracy of the depreciation of assets placed in service in the current and previous tax years. Online turbotax 2011 For general information on recordkeeping, see Publication 583, Starting a Business and Keeping Records. Online turbotax 2011 For specific information on keeping records for section 179 property and listed property, see Publication 946, How To Depreciate Property. Online turbotax 2011 Overview of Depreciation This overview discusses basic information on the following. Online turbotax 2011 What property can be depreciated. Online turbotax 2011 What property cannot be depreciated. Online turbotax 2011 When depreciation begins and ends. Online turbotax 2011 Whether MACRS can be used to figure depreciation. Online turbotax 2011 What is the basis of your depreciable property. Online turbotax 2011 How to treat repairs and improvements. Online turbotax 2011 When you must file Form 4562. Online turbotax 2011 How you can correct depreciation claimed incorrectly. Online turbotax 2011 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. Online turbotax 2011 You can also depreciate certain intangible property, such as copyrights, patents, and computer software. Online turbotax 2011 To be depreciable, the property must meet all the following requirements. Online turbotax 2011 It must be property you own. Online turbotax 2011 It must be used in your business or income-producing activity. Online turbotax 2011 It must have a determinable useful life. Online turbotax 2011 It must have a useful life that extends substantially beyond the year you place it in service. Online turbotax 2011 Property You Own To claim depreciation, you usually must be the owner of the property. Online turbotax 2011 You are considered as owning property even if it is subject to a debt. Online turbotax 2011 Leased property. Online turbotax 2011   You can depreciate leased property only if you retain the incidents of ownership in the property. Online turbotax 2011 This means you bear the burden of exhaustion of the capital investment in the property. Online turbotax 2011 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. Online turbotax 2011 You can, however, depreciate any capital improvements you make to the leased property. Online turbotax 2011 See Additions and Improvements under Which Recovery Period Applies in chapter 4 of Publication 946. Online turbotax 2011   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. Online turbotax 2011 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. Online turbotax 2011 Life tenant. Online turbotax 2011   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. Online turbotax 2011 See Certain term interests in property , later, for an exception. Online turbotax 2011 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. Online turbotax 2011 If you use property to produce income (investment use), the income must be taxable. Online turbotax 2011 You cannot depreciate property that you use solely for personal activities. Online turbotax 2011 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. Online turbotax 2011 Example 1. Online turbotax 2011   If you use your car for farm business, you can deduct depreciation based on its percentage of use in farming. Online turbotax 2011 If you also use it for investment purposes, you can depreciate it based on its percentage of investment use. Online turbotax 2011 Example 2. Online turbotax 2011   If you use part of your home for business, you may be able to deduct depreciation on that part based on its business use. Online turbotax 2011 For more information, see Business Use of Your Home in chapter 4. Online turbotax 2011 Inventory. Online turbotax 2011   You can never depreciate inventory because it is not held for use in your business. Online turbotax 2011 Inventory is any property you hold primarily for sale to customers in the ordinary course of your business. Online turbotax 2011 Livestock. Online turbotax 2011   Livestock purchased for draft, breeding, or dairy purposes can be depreciated only if they are not kept in an inventory account. Online turbotax 2011 Livestock you raise usually has no depreciable basis because the costs of raising them are deducted and not added to their basis. Online turbotax 2011 However, see Immature livestock under When Does Depreciation Begin and End , later, for a special rule. Online turbotax 2011 Property Having a Determinable Useful Life To be depreciable, your property must have a determinable useful life. Online turbotax 2011 This means it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Online turbotax 2011 Irrigation systems and water wells. Online turbotax 2011   Irrigation systems and wells used in a trade or business can be depreciated if their useful life can be determined. Online turbotax 2011 You can depreciate irrigation systems and wells composed of masonry, concrete, tile, metal, or wood. Online turbotax 2011 In addition, you can depreciate costs for moving dirt to construct irrigation systems and water wells composed of these materials. Online turbotax 2011 However, land preparation costs for center pivot irrigation systems are not depreciable. Online turbotax 2011 Dams, ponds, and terraces. Online turbotax 2011   In general, you cannot depreciate earthen dams, ponds, and terraces unless the structures have a determinable useful life. Online turbotax 2011 What Property Cannot Be Depreciated? Certain property cannot be depreciated, even if the requirements explained earlier are met. Online turbotax 2011 This includes the following. Online turbotax 2011 Land. Online turbotax 2011 You can never depreciate the cost of land because land does not wear out, become obsolete, or get used up. Online turbotax 2011 The cost of land generally includes the cost of clearing, grading, planting, and landscaping. Online turbotax 2011 Although you cannot depreciate land, you can depreciate certain costs incurred in preparing land for business use. Online turbotax 2011 See chapter 1 of Publication 946. Online turbotax 2011 Property placed in service and disposed of in the same year. Online turbotax 2011 Determining when property is placed in service is explained later. Online turbotax 2011 Equipment used to build capital improvements. Online turbotax 2011 You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Online turbotax 2011 Intangible property such as section 197 intangibles. Online turbotax 2011 This property does not have a determinable useful life and generally cannot be depreciated. Online turbotax 2011 However, see Amortization , later. Online turbotax 2011 Special rules apply to computer software (discussed below). Online turbotax 2011 Certain term interests (discussed below). Online turbotax 2011 Computer software. Online turbotax 2011   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. Online turbotax 2011 It is readily available for purchase by the general public. Online turbotax 2011 It is subject to a nonexclusive license. Online turbotax 2011 It has not been substantially modified. Online turbotax 2011   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. Online turbotax 2011 Certain term interests in property. Online turbotax 2011   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. Online turbotax 2011 This rule does not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. Online turbotax 2011 For more information, see chapter 1 of Publication 946. Online turbotax 2011 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. Online turbotax 2011 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. Online turbotax 2011 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. Online turbotax 2011 Even if you are not using the property, it is in service when it is ready and available for its specific use. Online turbotax 2011 Example. Online turbotax 2011 You bought a planter for use in your farm business. Online turbotax 2011 The planter was delivered in December 2012 after harvest was over. Online turbotax 2011 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. Online turbotax 2011 If your planter comes unassembled in December 2012 and is put together in February 2013, it is not placed in service until 2013. Online turbotax 2011 You begin to depreciate it in 2013. Online turbotax 2011 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. Online turbotax 2011 You begin to depreciate it in 2013. Online turbotax 2011 Fruit or nut trees and vines. Online turbotax 2011   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). Online turbotax 2011 See chapter 6 for information about the uniform capitalization rules. Online turbotax 2011 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). Online turbotax 2011 Immature livestock. Online turbotax 2011   Depreciation for livestock begins when the livestock reaches the age of maturity. Online turbotax 2011 If you bought immature livestock for drafting purposes, depreciation begins when they can be worked. Online turbotax 2011 If you bought immature livestock for dairy purposes, depreciation begins when they can be milked. Online turbotax 2011 If you bought immature livestock for breeding purposes, depreciation begins when they can be bred. Online turbotax 2011 Your basis for depreciation is your initial cost for the immature livestock. Online turbotax 2011 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. Online turbotax 2011 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. Online turbotax 2011 Cost or Other Basis Fully Recovered You stop depreciating property when you have fully recovered your cost or other basis. Online turbotax 2011 This happens when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property. Online turbotax 2011 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. Online turbotax 2011 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. Online turbotax 2011 You sell or exchange the property. Online turbotax 2011 You convert the property to personal use. Online turbotax 2011 You abandon the property. Online turbotax 2011 You transfer the property to a supplies or scrap account. Online turbotax 2011 The property is destroyed. Online turbotax 2011 For information on abandonment of property, see chapter 8. Online turbotax 2011 For information on destroyed property, see chapter 11 and Publication 547, Casualties, Disasters, and Thefts. Online turbotax 2011 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. Online turbotax 2011 MACRS is explained later under Figuring Depreciation Under MACRS . Online turbotax 2011 You cannot use MACRS to depreciate the following property. Online turbotax 2011 Property you placed in service before 1987. Online turbotax 2011 Use the methods discussed in Publication 534. Online turbotax 2011 Certain property owned or used in 1986. Online turbotax 2011 See chapter 1 of Publication 946. Online turbotax 2011 Intangible property. Online turbotax 2011 Films, video tapes, and recordings. Online turbotax 2011 Certain corporate or partnership property acquired in a nontaxable transfer. Online turbotax 2011 Property you elected to exclude from MACRS. Online turbotax 2011 For more information, see chapter 1 of Publication 946. Online turbotax 2011 What Is the Basis of Your Depreciable Property? To figure your depreciation deduction, you must determine the basis of your property. Online turbotax 2011 To determine basis, you need to know the cost or other basis of your property. Online turbotax 2011 Cost or other basis. Online turbotax 2011   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. Online turbotax 2011 The cost includes the amount you pay in cash, debt obligations, other property, or services. Online turbotax 2011   There are times when you cannot use cost as basis. Online turbotax 2011 In these situations, the fair market value (FMV) or the adjusted basis of the property may be used. Online turbotax 2011 Adjusted basis. Online turbotax 2011   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. Online turbotax 2011 Basis adjustment for depreciation allowed or allowable. Online turbotax 2011   After you place your property in service, you must reduce the basis of the property by the depreciation allowed or allowable, whichever is greater. Online turbotax 2011 Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). Online turbotax 2011 Depreciation allowable is depreciation you are entitled to deduct. Online turbotax 2011   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. Online turbotax 2011   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). Online turbotax 2011   For more information, see chapter 6. Online turbotax 2011 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. Online turbotax 2011 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. Online turbotax 2011 Treat improvements as separate depreciable property. Online turbotax 2011 See chapter 1 of Publication 946 for more information. Online turbotax 2011 Example. Online turbotax 2011 You repair a small section on a corner of the roof of a barn that you rent to others. Online turbotax 2011 You deduct the cost of the repair as a business expense. Online turbotax 2011 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. Online turbotax 2011 You depreciate the cost of the new roof. Online turbotax 2011 Improvements to rented property. Online turbotax 2011   You can depreciate permanent improvements you make to business property you rent from someone else. Online turbotax 2011 Do You Have To File Form 4562? Use Form 4562 to claim your deduction for depreciation and amortization. Online turbotax 2011 You must complete and attach Form 4562 to your tax return if you are claiming any of the following. Online turbotax 2011 A section 179 expense deduction for the current year or a section 179 carryover from a prior year. Online turbotax 2011 Depreciation for property placed in service during the current year. Online turbotax 2011 Depreciation on any vehicle or other listed property, regardless of when it was placed in service. Online turbotax 2011 Amortization of costs that began in the current year. Online turbotax 2011 For more information, see the Instructions for Form 4562. Online turbotax 2011 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. Online turbotax 2011 You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. Online turbotax 2011 You claimed the incorrect amount because of a mathematical error made in any year. Online turbotax 2011 You claimed the incorrect amount because of a posting error made in any year, for example, omitting an asset from the depreciation schedule. Online turbotax 2011 You have not adopted a method of accounting for the property placed in service by you in tax years ending after December 29, 2003. Online turbotax 2011 You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. Online turbotax 2011 Note. Online turbotax 2011 You have adopted a method of accounting if you used the same incorrect method of depreciation for two or more consecutively filed returns. Online turbotax 2011 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. Online turbotax 2011 See the Instructions for Form 3115. Online turbotax 2011 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. Online turbotax 2011 This is the section 179 expense deduction. Online turbotax 2011 You can elect the section 179 expense deduction instead of recovering the cost by taking depreciation deductions. Online turbotax 2011 This part of the chapter explains the rules for the section 179 expense deduction. Online turbotax 2011 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. Online turbotax 2011 For more information, see chapter 2 of Publication 946. Online turbotax 2011 What Property Qualifies? To qualify for the section 179 expense deduction, your property must meet all the following requirements. Online turbotax 2011 It must be eligible property. Online turbotax 2011 It must be acquired for business use. Online turbotax 2011 It must have been acquired by purchase. Online turbotax 2011 Eligible Property To qualify for the section 179 expense deduction, your property must be one of the following types of depreciable property. Online turbotax 2011 Tangible personal property. Online turbotax 2011 Qualified real property. Online turbotax 2011 (Special rules apply to qualified real property that you elect to treat as qualified section 179 real property. Online turbotax 2011 For more information, see chapter 2 of Publication 946 and section 179(f) of the Internal Revenue Code. Online turbotax 2011 ) 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. Online turbotax 2011 Single purpose agricultural (livestock) or horticultural structures. Online turbotax 2011 Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum. Online turbotax 2011 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. Online turbotax 2011 Tangible personal property. Online turbotax 2011   Tangible personal property is any tangible property that is not real property. Online turbotax 2011 It includes the following property. Online turbotax 2011 Machinery and equipment. Online turbotax 2011 Property contained in or attached to a building (other than structural components), such as milk tanks, automatic feeders, barn cleaners, and office equipment. Online turbotax 2011 Gasoline storage tanks and pumps at retail service stations. Online turbotax 2011 Livestock, including horses, cattle, hogs, sheep, goats, and mink and other fur-bearing animals. Online turbotax 2011 Facility used for the bulk storage of fungible commodities. Online turbotax 2011   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). Online turbotax 2011 Bulk storage means the storage of a commodity in a large mass before it is used. Online turbotax 2011 Grain bins. Online turbotax 2011   A grain bin is an example of a storage facility that is qualifying section 179 property. Online turbotax 2011 It is a facility used in connection with the production of grain or livestock for the bulk storage of fungible commodities. Online turbotax 2011 Single purpose agricultural or horticultural structures. Online turbotax 2011   A single purpose agricultural (livestock) or horticultural structure is qualifying property for purposes of the section 179 expense deduction. Online turbotax 2011 Agricultural structure. Online turbotax 2011   A single purpose agricultural (livestock) structure is any building or enclosure specifically designed, constructed, and used for both the following reasons. Online turbotax 2011 To house, raise, and feed a particular type of livestock and its produce. Online turbotax 2011 To house the equipment, including any replacements, needed to house, raise, or feed the livestock. Online turbotax 2011 For this purpose, livestock includes poultry. Online turbotax 2011   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. Online turbotax 2011 The facility must include, as an integral part of the structure or enclosure, equipment necessary to house, raise, and feed the livestock. Online turbotax 2011 Horticultural structure. Online turbotax 2011   A single purpose horticultural structure is either of the following. Online turbotax 2011 A greenhouse specifically designed, constructed, and used for the commercial production of plants. Online turbotax 2011 A structure specifically designed, constructed, and used for the commercial production of mushrooms. Online turbotax 2011 Use of structure. Online turbotax 2011   A structure must be used only for the purpose that qualified it. Online turbotax 2011 For example, a hog barn will not be qualifying property if you use it to house poultry. Online turbotax 2011 Similarly, using part of your greenhouse to sell plants will make the greenhouse nonqualifying property. Online turbotax 2011   If a structure includes work space, the work space can be used only for the following activities. Online turbotax 2011 Stocking, caring for, or collecting livestock or plants or their produce. Online turbotax 2011 Maintaining the enclosure or structure. Online turbotax 2011 Maintaining or replacing the equipment or stock enclosed or housed in the structure. Online turbotax 2011 Property Acquired by Purchase To qualify for the section 179 expense deduction, your property must have been acquired by purchase. Online turbotax 2011 For example, property acquired by gift or inheritance does not qualify. Online turbotax 2011 Property acquired from a related person (that is, your spouse, ancestors, or lineal descendants) is not considered acquired by purchase. Online turbotax 2011 Example. Online turbotax 2011 Ken is a farmer. Online turbotax 2011 He purchased two tractors, one from his brother and one from his father. Online turbotax 2011 He placed both tractors in service in the same year he bought them. Online turbotax 2011 The tractor purchased from his father does not qualify for the section 179 expense deduction because he is a related person (as defined above). Online turbotax 2011 The tractor purchased from his brother does qualify for the deduction because Ken is not a related person (as defined above). Online turbotax 2011 What Property Does Not Qualify? Land and improvements. Online turbotax 2011   Land and land improvements, do not qualify as section 179 property. Online turbotax 2011 Land improvements include nonagricultural fences, swimming pools, paved parking areas, wharves, docks, bridges, and fences. Online turbotax 2011 However, agricultural fences do qualify as section 179 property. Online turbotax 2011 Similarly, field drainage tile also qualifies as section 179 property. Online turbotax 2011 Excepted property. Online turbotax 2011   Even if the requirements explained in the preceding discussions are met, farmers cannot elect the section 179 expense deduction for the following property. Online turbotax 2011 Certain property you lease to others (if you are a noncorporate lessor). Online turbotax 2011 Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging. Online turbotax 2011 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. Online turbotax 2011 Property used by governmental units or foreign persons or entities (except property used under a lease with a term of less than 6 months). Online turbotax 2011 How Much Can You Deduct? Your section 179 expense deduction is generally the cost of the qualifying property. Online turbotax 2011 However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. Online turbotax 2011 These limits apply to each taxpayer, not to each business. Online turbotax 2011 However, see Married individuals under Dollar Limits , later. Online turbotax 2011 See also the special rules for applying the limits for partnerships and S corporations under Partnerships and S Corporations , later. Online turbotax 2011 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. Online turbotax 2011 Use Part I of Form 4562 to figure your section 179 expense deduction. Online turbotax 2011 Partial business use. Online turbotax 2011   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. Online turbotax 2011 If you used the property more than 50% for business, multiply the cost of the property by the percentage of business use. Online turbotax 2011 Use the resulting business cost to figure your section 179 expense deduction. Online turbotax 2011 Trade-in of other property. Online turbotax 2011   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. Online turbotax 2011 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. Online turbotax 2011 It does not include the adjusted basis of the old tractor you trade for the new tractor. Online turbotax 2011 Example. Online turbotax 2011 J-Bar Farms traded two cultivators having a total adjusted basis of $6,800 for a new cultivator costing $13,200. Online turbotax 2011 They received an $8,000 trade-in allowance for the old cultivators and paid $5,200 cash for the new cultivator. Online turbotax 2011 J-Bar also traded a used pickup truck with an adjusted basis of $8,000 for a new pickup truck costing $35,000. Online turbotax 2011 They received a $5,000 trade-in allowance and paid $30,000 cash for the new pickup truck. Online turbotax 2011 Only the cash paid by J-Bar qualifies for the section 179 expense deduction. Online turbotax 2011 J-Bar's business costs that qualify for a section 179 expense deduction are $35,200 ($5,200 + $30,000). Online turbotax 2011 Dollar Limits The total amount you can elect to deduct under section 179 for most property placed in service in 2013 is $500,000. Online turbotax 2011 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. Online turbotax 2011 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. Online turbotax 2011 You do not have to claim the full $500,000. Online turbotax 2011 For specific information on the section 179 dollar limits, see chapter 2 of Publication 946. Online turbotax 2011 Reduced dollar limit for cost exceeding $2 million. Online turbotax 2011   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. Online turbotax 2011 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. Online turbotax 2011 Example. Online turbotax 2011 This year, James Smith placed in service machinery costing $2,050,000. Online turbotax 2011 Because this cost is $50,000 more than $2 million, he must reduce his dollar limit to $450,000 ($500,000 − $50,000). Online turbotax 2011 Limits for sport utility vehicles. Online turbotax 2011   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. Online turbotax 2011 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. Online turbotax 2011   For more information, see chapter 2 of Publication 946. Online turbotax 2011 Limits for passenger automobiles. Online turbotax 2011   For a passenger automobile that is placed in service in 2013, the total section 179 and depreciation deduction is limited. Online turbotax 2011 See Do the Passenger Automobile Limits Apply , later. Online turbotax 2011 Married individuals. Online turbotax 2011   If you are married, how you figure your section 179 expense deduction depends on whether you file jointly or separately. Online turbotax 2011 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. Online turbotax 2011 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. Online turbotax 2011 You must allocate the dollar limit (after any reduction) equally between you, unless you both elect a different allocation. Online turbotax 2011 If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you. Online turbotax 2011 Joint return after separate returns. Online turbotax 2011   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. Online turbotax 2011 The dollar limit (after reduction for any cost of section 179 property over $2 million). Online turbotax 2011 The total cost of section 179 property you and your spouse elected to expense on your separate returns. Online turbotax 2011 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. Online turbotax 2011 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. Online turbotax 2011 Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. Online turbotax 2011 See Carryover of disallowed deduction , later. Online turbotax 2011 Taxable income. Online turbotax 2011   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. Online turbotax 2011 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. Online turbotax 2011 Section 1231 gains (or losses) as discussed in chapter 9. Online turbotax 2011 Interest from working capital of your trade or business. Online turbotax 2011 Wages, salaries, tips, or other pay earned by you (or your spouse if you file a joint return) as an employee of any employer. Online turbotax 2011   In addition, figure taxable income without regard to any of the following. Online turbotax 2011 The section 179 expense deduction. Online turbotax 2011 The self-employment tax deduction. Online turbotax 2011 Any net operating loss carryback or carryforward. Online turbotax 2011 Any unreimbursed employee business expenses. Online turbotax 2011 Two different taxable income limits. Online turbotax 2011   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). Online turbotax 2011 You may have to figure the limit for this other deduction taking into account the section 179 expense deduction. Online turbotax 2011 If so, complete the following steps. Online turbotax 2011 Step Action 1 Figure taxable income without the section 179 expense deduction or the other deduction. Online turbotax 2011 2 Figure a hypothetical section 179 expense deduction using the taxable income figured in Step 1. Online turbotax 2011 3 Subtract the hypothetical section 179 expense deduction figured in Step 2 from the taxable income figured in Step 1. Online turbotax 2011 4 Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income. Online turbotax 2011 5 Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in  Step 1. Online turbotax 2011 6 Figure your actual section 179 expense deduction using the taxable income figured in Step 5. Online turbotax 2011 7 Subtract your actual section 179 expense deduction figured in Step 6 from the taxable income figured in Step 1. Online turbotax 2011 8 Figure your actual other deduction using the taxable income figured in Step 7. Online turbotax 2011 Example. Online turbotax 2011 On February 1, 2013, the XYZ farm corporation purchased and placed in service qualifying section 179 property that cost $500,000. Online turbotax 2011 It elects to expense the entire $500,000 cost under section 179. Online turbotax 2011 In June, the corporation gave a charitable contribution of $10,000. Online turbotax 2011 A corporation's limit on charitable contributions is figured after subtracting any section 179 expense deduction. Online turbotax 2011 The business income limit for the section 179 expense deduction is figured after subtracting any allowable charitable contributions. Online turbotax 2011 XYZ's taxable income figured without the section 179 expense deduction or the deduction for charitable contributions is $520,000. Online turbotax 2011 XYZ figures its section 179 expense deduction and its deduction for charitable contributions as follows. Online turbotax 2011 Step 1. Online turbotax 2011 Taxable income figured without either deduction is $520,000. Online turbotax 2011 Step 2. Online turbotax 2011 Using $520,000 as taxable income, XYZ's hypothetical section 179 expense deduction is $500,000. Online turbotax 2011 Step 3. Online turbotax 2011 $20,000 ($520,000 − $500,000). Online turbotax 2011 Step 4. Online turbotax 2011 Using $20,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable income) is $2,000. Online turbotax 2011 Step 5. Online turbotax 2011 $518,000 ($520,000 − $2,000). Online turbotax 2011 Step 6. Online turbotax 2011 Using $518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 expense deduction. Online turbotax 2011 Because the taxable income is at least $500,000, XYZ can take a $500,000 section 179 expense deduction. Online turbotax 2011 Step 7. Online turbotax 2011 $20,000 ($520,000 − $500,000). Online turbotax 2011 Step 8. Online turbotax 2011 Using $20,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable income) is $2,000. Online turbotax 2011 Carryover of disallowed deduction. Online turbotax 2011   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. Online turbotax 2011   The amount you carry over is used in determining your section 179 expense deduction in the next year. Online turbotax 2011 However, it is subject to the limits in that year. Online turbotax 2011 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. Online turbotax 2011 Your selections must be shown in your books and records. Online turbotax 2011 Example. Online turbotax 2011 Last year, Joyce Jones placed in service a machine that cost $8,000 and elected to deduct all $8,000 under section 179. Online turbotax 2011 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. Online turbotax 2011 Her section 179 expense deduction was limited to $6,000. Online turbotax 2011 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. Online turbotax 2011 This year, Joyce placed another machine in service that cost $9,000. Online turbotax 2011 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. Online turbotax 2011 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. Online turbotax 2011 She can carry over the balance of $1,000 to next year. Online turbotax 2011 Partnerships and S Corporations The section 179 expense deduction limits apply both to the partnership or S corporation and to each partner or shareholder. Online turbotax 2011 The partnership or S corporation determines its section 179 expense deduction subject to the limits. Online turbotax 2011 It then allocates the deduction among its partners or shareholders. Online turbotax 2011 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. Online turbotax 2011 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. Online turbotax 2011 After you apply the dollar limit, you apply the business income limit to any remaining section 179 costs. Online turbotax 2011 For more information, see chapter 2 of Publication 946. Online turbotax 2011 Example. Online turbotax 2011 In 2013, Partnership P placed in service section 179 property with a total cost of $2,160,000. Online turbotax 2011 P must reduce its dollar limit by $160,000 ($2,160,000 − $2,000,000). Online turbotax 2011 Its maximum section 179 expense deduction is $340,000 ($500,000 − $160,000), and it elects to expense that amount. Online turbotax 2011 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. Online turbotax 2011 P allocates $100,000 of its section 179 expense deduction and $110,000 of its taxable income to John, one of its partners. Online turbotax 2011 John also conducts a business as a sole proprietor and in 2013, placed in service in that business, section 179 property costing $28,000. Online turbotax 2011 John's taxable income from that business was $10,000. Online turbotax 2011 In addition to the $100,000 allocated from P, he elects to expense the $28,000 of his sole proprietorship's section 179 costs. Online turbotax 2011 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). Online turbotax 2011 He carries over $8,000 ($128,000 − $120,000) of the elected section 179 costs to 2014. Online turbotax 2011 How Do You Elect the Deduction? You elect to take the section 179 expense deduction by completing Part I of Form 4562. Online turbotax 2011 If you elect the deduction for listed property, complete Part V of  Form 4562 before completing Part I. Online turbotax 2011   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. Online turbotax 2011 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. Online turbotax 2011 The amended return must also include any resulting adjustments to taxable income. Online turbotax 2011 Revoking an election. Online turbotax 2011   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. Online turbotax 2011 The amended return must be filed within the time prescribed by law. Online turbotax 2011 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. Online turbotax 2011 ) Once made, the revocation is irrevocable. Online turbotax 2011 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. Online turbotax 2011 In the year the business use drops to 50% or less, you include the recapture amount as ordinary income. Online turbotax 2011 You also increase the basis of the property by the recapture amount. Online turbotax 2011 Recovery periods for property are discussed later. Online turbotax 2011 If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. Online turbotax 2011 Instead, use the rules for recapturing depreciation explained in  chapter 9 under Section 1245 Property. Online turbotax 2011   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. Online turbotax 2011 Instead, use the rules for recapturing depreciation explained in chapter 5 of Publication 946 under Recapture of Excess Depreciation. Online turbotax 2011 Figuring the recapture amount. Online turbotax 2011   To figure the amount to recapture, take the following steps. Online turbotax 2011 Figure the allowable depreciation for the section 179 expense deduction you claimed. Online turbotax 2011 Begin with the year you placed the property in service and include the year of recapture. Online turbotax 2011 Subtract the depreciation figured in (1) from the section 179 expense deduction you actually claimed. Online turbotax 2011 The result is the amount you must recapture. Online turbotax 2011 Example. Online turbotax 2011 In January 2011, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. Online turbotax 2011 The property is not listed property. Online turbotax 2011 He elected a $5,000 section 179 expense deduction for the property and also elected not to claim a special depreciation allowance. Online turbotax 2011 He used the property only for business in 2011 and 2012. Online turbotax 2011 During 2013, he used the property 40% for business and 60% for personal use. Online turbotax 2011 He figures his recapture amount as follows. Online turbotax 2011 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. Online turbotax 2011 Where to report recapture. Online turbotax 2011   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). Online turbotax 2011 Recapture for qualified section 179 GO Zone property. Online turbotax 2011   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. Online turbotax 2011 ” Claiming the Special Depreciation Allowance For qualified property (defined below) placed in service in 2013, you can take an additional 50% special depreciation allowance. Online turbotax 2011 The allowance is an additional deduction you can take after any section 179 expense deduction and before you figure regular depreciation under MACRS. Online turbotax 2011 Figure the special depreciation allowance by multiplying the depreciable basis of the qualified property by 50%. Online turbotax 2011 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. Online turbotax 2011 Certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Online turbotax 2011   Certain qualified property (defined below) acquired after December 31, 2007, and before January 1, 2014, is eligible for a 50% special depreciation allowance. Online turbotax 2011   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. Online turbotax 2011 Water utility property. Online turbotax 2011 Off-the-shelf computer software. Online turbotax 2011 Qualified leasehold improvement property. Online turbotax 2011   Qualified property must also meet all of the following tests: You must have acquired qualified property by purchase after December 31, 2007. Online turbotax 2011 If a binding contract to acquire the property existed before January 1, 2008, the property does not qualify. Online turbotax 2011 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). Online turbotax 2011 The original use of the property must begin with you after December 31, 2007. Online turbotax 2011 For more information, see chapter 3 of Publication 946. Online turbotax 2011 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. Online turbotax 2011 To make the election, attach a statement to your return indicating the class of property for which you are making the election. Online turbotax 2011 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. Online turbotax 2011 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). Online turbotax 2011 Attach the election statement to the amended return. Online turbotax 2011 On the amended return, write “Filed pursuant to section 301. Online turbotax 2011 9100-2. Online turbotax 2011 ” Once made, the election may not be revoked without IRS consent. Online turbotax 2011 If you elect not to have the special depreciation allowance apply, the property may be subject to an alternative minimum tax adjustment for depreciation. Online turbotax 2011 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. Online turbotax 2011 For more information, see chapter 3 of Publication 946. Online turbotax 2011 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. Online turbotax 2011 MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Online turbotax 2011 Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. Online turbotax 2011 To be sure you can use MACRS to figure depreciation for your property, see Can You Use MACRS To Depreciate Your Property, earlier. Online turbotax 2011 This part explains how to determine which MACRS depreciation system applies to your property. Online turbotax 2011 It also discusses the following information that you need to know before you can figure depreciation under MACRS. Online turbotax 2011 Property's recovery class. Online turbotax 2011 Placed-in-service date. Online turbotax 2011 Basis for depreciation. Online turbotax 2011 Recovery period. Online turbotax 2011 Convention. Online turbotax 2011 Depreciation method. Online turbotax 2011 Finally, this part explains how to use this information to figure your depreciation deduction. Online turbotax 2011 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. Online turbotax 2011 You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Online turbotax 2011 Required use of ADS. Online turbotax 2011   You must use ADS for the following property. Online turbotax 2011 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. Online turbotax 2011 Listed property used 50% or less in a qualified business use. Online turbotax 2011 See Additional Rules for Listed Property , later. Online turbotax 2011 Any tax-exempt use property. Online turbotax 2011 Any tax-exempt bond-financed property. Online turbotax 2011 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. Online turbotax 2011 Any tangible property used predominantly outside the United States during the year. Online turbotax 2011 If you are required to use ADS to depreciate your property, you cannot claim the special depreciation allowance. Online turbotax 2011 Electing ADS. Online turbotax 2011   Although your property may qualify for GDS, you can elect to use ADS. Online turbotax 2011 The election generally must cover all property in the same property class you placed in service during the year. Online turbotax 2011 However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. Online turbotax 2011 Once you make this election, you can never revoke it. Online turbotax 2011   You make the election by completing line 20 in Part III of Form 4562. Online turbotax 2011 Which Property Class Applies Under GDS? The following is a list of the nine property classes under GDS. Online turbotax 2011 3-year property. Online turbotax 2011 5-year property. Online turbotax 2011 7-year property. Online turbotax 2011 10-year property. Online turbotax 2011 15-year property. Online turbotax 2011 20-year property. Online turbotax 2011 25-year property. Online turbotax 2011 Residential rental property. Online turbotax 2011 Nonresidential real property. Online turbotax 2011 See Which Property Class Applies Under GDS in chapter 4 of Publication 946 for examples of the types of property included in each class. Online turbotax 2011 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. Online turbotax 2011 The placed-in-service date for your property is the date the property is ready and available for a specific use. Online turbotax 2011 It is therefore not necessarily the date it is first used. Online turbotax 2011 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. Online turbotax 2011 See Placed in Service under When Does Depreciation Begin and End , earlier, for examples illustrating when property is placed in service. Online turbotax 2011 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. Online turbotax 2011 Reduce that amount by any credits and deductions allocable to the property. Online turbotax 2011 The following are examples of some of the credits and deductions that reduce basis. Online turbotax 2011 Any deduction for section 179 property. Online turbotax 2011 Any deduction for removal of barriers to the disabled and the elderly. Online turbotax 2011 Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. Online turbotax 2011 Any special depreciation allowance. Online turbotax 2011 Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. Online turbotax 2011 For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property , earlier. Online turbotax 2011 Also, see chapter 6. Online turbotax 2011 For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. Online turbotax 2011 Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. Online turbotax 2011 It is determined based on the depreciation system (GDS or ADS) used. Online turbotax 2011 See Table 7-1 for recovery periods under both GDS and ADS for some commonly used assets. Online turbotax 2011 For a complete list of recovery periods, see the Table of Class Lives and Recovery Periods in Appendix B of Publication 946. Online turbotax 2011 House trailers for farm laborers. Online turbotax 2011   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). Online turbotax 2011 A 7-year recovery period under GDS. Online turbotax 2011 A 10-year recovery period under ADS. Online turbotax 2011   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. Online turbotax 2011 A 20-year recovery period under GDS. Online turbotax 2011 A 25-year recovery period under ADS. Online turbotax 2011 Water wells. Online turbotax 2011   Water wells used to provide water for raising poultry and livestock are land improvements. Online turbotax 2011 If they are depreciable, use one of the following recovery periods. Online turbotax 2011 A 15-year recovery period under GDS. Online turbotax 2011 A 20-year recovery period under ADS. Online turbotax 2011   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 . Online turbotax 2011 Table 7-1. Online turbotax 2011 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. Online turbotax 2011 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. Online turbotax 2011 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. Online turbotax 2011 2 Not including single purpose agricultural or horticultural structures. Online turbotax 2011 3 Used by logging and sawmill operators for cutting of timber. Online turbotax 2011 4 For property placed in service after May 12, 1993; for property placed in service before May 13, 1993,  the recovery period is 31. Online turbotax 2011 5 years. Online turbotax 2011 Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. Online turbotax 2011 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. Online turbotax 2011 Use one of the following conventions. Online turbotax 2011 The half-year convention. Online turbotax 2011 The mid-month convention. Online turbotax 2011 The mid-quarter convention. Online turbotax 2011 For a detailed explanation of each convention, see Which Convention Applies in chapter 4 of Publication 946. Online turbotax 2011 Also, see the Instructions for Form 4562. Online turbotax 2011 Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. Online turbotax 2011 The 200% declining balance method over a GDS recovery period. Online turbotax 2011 The 150% declining balance method over a GDS recovery period. Online turbotax 2011 The straight line method over a GDS recovery period. Online turbotax 2011 The straight line method over an ADS recovery period. Online turbotax 2011 Depreciation Table. Online turbotax 2011   The following table lists the types of property you can depreciate under each method. Online turbotax 2011 The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. Online turbotax 2011 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. Online turbotax 2011   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. Online turbotax 2011 The straight line method over a GDS recovery period. Online turbotax 2011 The straight line method over an ADS recovery period. Online turbotax 2011 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. Online turbotax 2011 If you made this election, continue to use the same method and recovery period for that property. Online turbotax 2011 Real property. Online turbotax 2011   You can depreciate real property using the straight line method under either GDS or ADS. Online turbotax 2011 Switching to straight line. Online turbotax 2011   If you use a declining balance method, you switch to the straight line method in the year it provides an equal or greater deduction. Online turbotax 2011 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. Online turbotax 2011 The tables have the switch to the straight line method built into their rates. Online turbotax 2011 Fruit or nut trees and vines. Online turbotax 2011   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a 10-year recovery period. Online turbotax 2011 ADS required for some farmers. Online turbotax 2011   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. Online turbotax 2011 See chapter 6 for a discussion of the application of the uniform capitalization rules to farm property. Online turbotax 2011 Electing a different method. Online turbotax 2011   As shown in the Depreciation Table , you can elect a different method for depreciation for certain types of property. Online turbotax 2011 You must make the election by the due date of the return (including extensions) for the year you placed the property in service. Online turbotax 2011 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). Online turbotax 2011 Attach the election to the amended return and write “Filed pursuant to section 301. Online turbotax 2011 9100-2” on the election statement. Online turbotax 2011 File the amended return at the same address you filed the original return. Online turbotax 2011 Once you make the election, you cannot change it. Online turbotax 2011    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. Online turbotax 2011 However, you can make the election on a property-by-property basis for residential rental and nonresidential real property. Online turbotax 2011 Straight line election. Online turbotax 2011   Instead of using the declining balance method, you can elect to use the straight line method over the GDS recovery period. Online turbotax 2011 Make the election by entering “S/L” under column (f) in Part III of Form 4562. Online turbotax 2011 ADS election. Online turbotax 2011   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. Online turbotax 2011 ADS uses the straight line method of depreciation over the ADS recovery periods, which are generally longer than the GDS recovery periods. Online turbotax 2011 The ADS recovery periods for many assets used in the business of farming are listed in Table 7–1. Online turbotax 2011 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. Online turbotax 2011 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. Online turbotax 2011 Then you are ready to figure your depreciation deduction. Online turbotax 2011 You can figure it in one of two ways. Online turbotax 2011 You can use the percentage tables provided by the IRS. Online turbotax 2011 You can figure your own deduction without using the tables. Online turbotax 2011 Figuring your own MACRS deduction will generally result in a slightly different amount than using the tables. Online turbotax 2011 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. Online turbotax 2011 These percentage tables are in Appendix A of Publication 946. Online turbotax 2011 Rules for using the tables. Online turbotax 2011   The following rules cover the use of the percentage tables. Online turbotax 2011 You must apply the rates in the percentage tables to your property's unadjusted basis. Online turbotax 2011 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. Online turbotax 2011 You cannot use the percentage tables for a short tax year. Online turbotax 2011 See chapter 4 of Publication 946 for information on how to figure the deduction for a short tax year. Online turbotax 2011 You generally must continue to use them for the entire recovery period of the property. Online turbotax 2011 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. Online turbotax 2011 Basis adjustment due to casualty loss. Online turbotax 2011   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. Online turbotax 2011 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. Online turbotax 2011 See Figuring the Deduction Without Using the Tables in chapter 4 of Publication 946. Online turbotax 2011 Figuring depreciation using the 150% DB method and half-year convention. Online turbotax 2011    Table 7-2 has the percentages for 3-, 5-, 7-, and 20-year property. Online turbotax 2011 The percentages are based on the 150% declining balance method with a change to the straight line method. Online turbotax 2011 This table covers only the half-year convention and the first 8 years for 20-year property. Online turbotax 2011 See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. Online turbotax 2011   The following examples show how to figure depreciation under MACRS using the percentages in Table 7-2 . Online turbotax 2011 Example 1. Online turbotax 2011 During the year, you bought an item of 7-year property for $10,000 and placed it in service. Online turbotax 2011 You do not elect a section 179 expense deduction for this property. Online turbotax 2011 In addition, the property is not qualified property for purposes of the special depreciation allowance. Online turbotax 2011 The unadjusted basis of the property is $10,000. Online turbotax 2011 You use the percentages in Table 7-2 to figure your deduction. Online turbotax 2011 Since this is 7-year property, you multiply $10,000 by 10. Online turbotax 2011 71% to get this year's depreciation of $1,071. Online turbotax 2011 For next year, your depreciation will be $1,913 ($10,000 × 19. Online turbotax 2011 13%). Online turbotax 2011 Example 2. Online turbotax 2011 You had a barn constructed on your farm at a cost of $20,000. Online turbotax 2011 You placed the barn in service this year. Online turbotax 2011 You elect not to claim the special depreciation allowance. Online turbotax 2011 The barn is 20-year property and you use the table percentages to figure your deduction. Online turbotax 2011 You figure this year's depreciation by multiplying $20,000 (unadjusted basis) by 3. Online turbotax 2011 75% to get $750. Online turbotax 2011 For next year, your depreciation will be $1,443. Online turbotax 2011 80 ($20,000 × 7. Online turbotax 2011 219%). Online turbotax 2011 Table 7-2. Online turbotax 2011 150% Declining Balance Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 25. Online turbotax 2011 0 % 15. Online turbotax 2011 00 % 10. Online turbotax 2011 71 % 3. Online turbotax 2011 750 % 2 37. Online turbotax 2011 5   25. Online turbotax 2011 50   19. Online turbotax 2011 13   7. Online turbotax 2011 219   3 25. Online turbotax 2011 0   17. Online turbotax 2011 85   15. Online turbotax 2011 03   6. Online turbotax 2011 677   4 12. Online turbotax 2011 5   16. Online turbotax 2011 66   12. Online turbotax 2011 25   6. Online turbotax 2011 177   5     16. Online turbotax 2011 66   12. Online turbotax 2011 25   5. Online turbotax 2011 713   6     8. Online turbotax 2011 33   12. Online turbotax 2011 25   5. Online turbotax 2011 285   7         12. Online turbotax 2011 25   4. Online turbotax 2011 888   8         6. Online turbotax 2011 13   4. Online turbotax 2011 522   Figuring depreciation using the straight line method and half-year convention. Online turbotax 2011   The following table has the straight line percentages for 3-, 5-, 7-, and 20-year property using the half-year convention. Online turbotax 2011 The table covers only the first 8 years for 20-year property. Online turbotax 2011 See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. Online turbotax 2011 Table 7-3. Online turbotax 2011 Straight Line Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 16. Online turbotax 2011 67 % 10 % 7. Online turbotax 2011 14 % 2. Online turbotax 2011 5 % 2 33. Online turbotax 2011 33   20   14. Online turbotax 2011 29   5. Online turbotax 2011 0   3 33. Online turbotax 2011 33   20   14. Online turbotax 2011 29   5. Online turbotax 2011 0   4 16. Online turbotax 2011 67   20   14. Online turbotax 2011 28   5. Online turbotax 2011 0   5     20   14. Online turbotax 2011 29   5. Online turbotax 2011 0   6     10   14. Online turbotax 2011 28   5. Online turbotax 2011 0   7         14. Online turbotax 2011 29   5. Online turbotax 2011 0   8         7. Online turbotax 2011 14   5. Online turbotax 2011 0