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Tax Form 1040 Ez

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Tax Form 1040 Ez

Tax form 1040 ez 7. Tax form 1040 ez   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. Tax form 1040 ez  The maximum amount you can elect to deduct for most section 179 property you placed in service in 2013 is $500,000. Tax form 1040 ez This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2 million. Tax form 1040 ez See Dollar Limits under Section 179 Expense Deduction , later. Tax form 1040 ez Extension of special depreciation allowance for certain qualified property acquired after December 31, 2007. Tax form 1040 ez . Tax form 1040 ez  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. Tax form 1040 ez See Claiming the Special Depreciation Allowance , later. Tax form 1040 ez Expiration of the 3- year recovery period for certain race horses. Tax form 1040 ez  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. Tax form 1040 ez 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. Tax form 1040 ez Instead, you must spread the cost over the time you use the property and deduct part of it each year. Tax form 1040 ez For most types of property, this is called depreciation. Tax form 1040 ez This chapter gives information on depreciation methods that generally apply to property placed in service after 1986. Tax form 1040 ez For information on depreciating pre-1987 property, see Publication 534, Depreciating Property Placed in Service Before 1987. Tax form 1040 ez 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. Tax form 1040 ez It is important to keep good records for property you depreciate. Tax form 1040 ez Do not file these records with your return. Tax form 1040 ez Instead, you should keep them as part of the permanent records of the depreciated property. Tax form 1040 ez They will help you verify the accuracy of the depreciation of assets placed in service in the current and previous tax years. Tax form 1040 ez For general information on recordkeeping, see Publication 583, Starting a Business and Keeping Records. Tax form 1040 ez For specific information on keeping records for section 179 property and listed property, see Publication 946, How To Depreciate Property. Tax form 1040 ez Overview of Depreciation This overview discusses basic information on the following. Tax form 1040 ez What property can be depreciated. Tax form 1040 ez What property cannot be depreciated. Tax form 1040 ez When depreciation begins and ends. Tax form 1040 ez Whether MACRS can be used to figure depreciation. Tax form 1040 ez What is the basis of your depreciable property. Tax form 1040 ez How to treat repairs and improvements. Tax form 1040 ez When you must file Form 4562. Tax form 1040 ez How you can correct depreciation claimed incorrectly. Tax form 1040 ez 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. Tax form 1040 ez You can also depreciate certain intangible property, such as copyrights, patents, and computer software. Tax form 1040 ez To be depreciable, the property must meet all the following requirements. Tax form 1040 ez It must be property you own. Tax form 1040 ez It must be used in your business or income-producing activity. Tax form 1040 ez It must have a determinable useful life. Tax form 1040 ez It must have a useful life that extends substantially beyond the year you place it in service. Tax form 1040 ez Property You Own To claim depreciation, you usually must be the owner of the property. Tax form 1040 ez You are considered as owning property even if it is subject to a debt. Tax form 1040 ez Leased property. Tax form 1040 ez   You can depreciate leased property only if you retain the incidents of ownership in the property. Tax form 1040 ez This means you bear the burden of exhaustion of the capital investment in the property. Tax form 1040 ez 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. Tax form 1040 ez You can, however, depreciate any capital improvements you make to the leased property. Tax form 1040 ez See Additions and Improvements under Which Recovery Period Applies in chapter 4 of Publication 946. Tax form 1040 ez   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. Tax form 1040 ez 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. Tax form 1040 ez Life tenant. Tax form 1040 ez   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. Tax form 1040 ez See Certain term interests in property , later, for an exception. Tax form 1040 ez 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. Tax form 1040 ez If you use property to produce income (investment use), the income must be taxable. Tax form 1040 ez You cannot depreciate property that you use solely for personal activities. Tax form 1040 ez 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. Tax form 1040 ez Example 1. Tax form 1040 ez   If you use your car for farm business, you can deduct depreciation based on its percentage of use in farming. Tax form 1040 ez If you also use it for investment purposes, you can depreciate it based on its percentage of investment use. Tax form 1040 ez Example 2. Tax form 1040 ez   If you use part of your home for business, you may be able to deduct depreciation on that part based on its business use. Tax form 1040 ez For more information, see Business Use of Your Home in chapter 4. Tax form 1040 ez Inventory. Tax form 1040 ez   You can never depreciate inventory because it is not held for use in your business. Tax form 1040 ez Inventory is any property you hold primarily for sale to customers in the ordinary course of your business. Tax form 1040 ez Livestock. Tax form 1040 ez   Livestock purchased for draft, breeding, or dairy purposes can be depreciated only if they are not kept in an inventory account. Tax form 1040 ez Livestock you raise usually has no depreciable basis because the costs of raising them are deducted and not added to their basis. Tax form 1040 ez However, see Immature livestock under When Does Depreciation Begin and End , later, for a special rule. Tax form 1040 ez Property Having a Determinable Useful Life To be depreciable, your property must have a determinable useful life. Tax form 1040 ez This means it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Tax form 1040 ez Irrigation systems and water wells. Tax form 1040 ez   Irrigation systems and wells used in a trade or business can be depreciated if their useful life can be determined. Tax form 1040 ez You can depreciate irrigation systems and wells composed of masonry, concrete, tile, metal, or wood. Tax form 1040 ez In addition, you can depreciate costs for moving dirt to construct irrigation systems and water wells composed of these materials. Tax form 1040 ez However, land preparation costs for center pivot irrigation systems are not depreciable. Tax form 1040 ez Dams, ponds, and terraces. Tax form 1040 ez   In general, you cannot depreciate earthen dams, ponds, and terraces unless the structures have a determinable useful life. Tax form 1040 ez What Property Cannot Be Depreciated? Certain property cannot be depreciated, even if the requirements explained earlier are met. Tax form 1040 ez This includes the following. Tax form 1040 ez Land. Tax form 1040 ez You can never depreciate the cost of land because land does not wear out, become obsolete, or get used up. Tax form 1040 ez The cost of land generally includes the cost of clearing, grading, planting, and landscaping. Tax form 1040 ez Although you cannot depreciate land, you can depreciate certain costs incurred in preparing land for business use. Tax form 1040 ez See chapter 1 of Publication 946. Tax form 1040 ez Property placed in service and disposed of in the same year. Tax form 1040 ez Determining when property is placed in service is explained later. Tax form 1040 ez Equipment used to build capital improvements. Tax form 1040 ez You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Tax form 1040 ez Intangible property such as section 197 intangibles. Tax form 1040 ez This property does not have a determinable useful life and generally cannot be depreciated. Tax form 1040 ez However, see Amortization , later. Tax form 1040 ez Special rules apply to computer software (discussed below). Tax form 1040 ez Certain term interests (discussed below). Tax form 1040 ez Computer software. Tax form 1040 ez   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. Tax form 1040 ez It is readily available for purchase by the general public. Tax form 1040 ez It is subject to a nonexclusive license. Tax form 1040 ez It has not been substantially modified. Tax form 1040 ez   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. Tax form 1040 ez Certain term interests in property. Tax form 1040 ez   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. Tax form 1040 ez This rule does not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. Tax form 1040 ez For more information, see chapter 1 of Publication 946. Tax form 1040 ez 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. Tax form 1040 ez 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. Tax form 1040 ez 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. Tax form 1040 ez Even if you are not using the property, it is in service when it is ready and available for its specific use. Tax form 1040 ez Example. Tax form 1040 ez You bought a planter for use in your farm business. Tax form 1040 ez The planter was delivered in December 2012 after harvest was over. Tax form 1040 ez 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. Tax form 1040 ez If your planter comes unassembled in December 2012 and is put together in February 2013, it is not placed in service until 2013. Tax form 1040 ez You begin to depreciate it in 2013. Tax form 1040 ez 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. Tax form 1040 ez You begin to depreciate it in 2013. Tax form 1040 ez Fruit or nut trees and vines. Tax form 1040 ez   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). Tax form 1040 ez See chapter 6 for information about the uniform capitalization rules. Tax form 1040 ez 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). Tax form 1040 ez Immature livestock. Tax form 1040 ez   Depreciation for livestock begins when the livestock reaches the age of maturity. Tax form 1040 ez If you bought immature livestock for drafting purposes, depreciation begins when they can be worked. Tax form 1040 ez If you bought immature livestock for dairy purposes, depreciation begins when they can be milked. Tax form 1040 ez If you bought immature livestock for breeding purposes, depreciation begins when they can be bred. Tax form 1040 ez Your basis for depreciation is your initial cost for the immature livestock. Tax form 1040 ez 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. Tax form 1040 ez 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. Tax form 1040 ez Cost or Other Basis Fully Recovered You stop depreciating property when you have fully recovered your cost or other basis. Tax form 1040 ez This happens when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property. Tax form 1040 ez 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. Tax form 1040 ez 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. Tax form 1040 ez You sell or exchange the property. Tax form 1040 ez You convert the property to personal use. Tax form 1040 ez You abandon the property. Tax form 1040 ez You transfer the property to a supplies or scrap account. Tax form 1040 ez The property is destroyed. Tax form 1040 ez For information on abandonment of property, see chapter 8. Tax form 1040 ez For information on destroyed property, see chapter 11 and Publication 547, Casualties, Disasters, and Thefts. Tax form 1040 ez 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. Tax form 1040 ez MACRS is explained later under Figuring Depreciation Under MACRS . Tax form 1040 ez You cannot use MACRS to depreciate the following property. Tax form 1040 ez Property you placed in service before 1987. Tax form 1040 ez Use the methods discussed in Publication 534. Tax form 1040 ez Certain property owned or used in 1986. Tax form 1040 ez See chapter 1 of Publication 946. Tax form 1040 ez Intangible property. Tax form 1040 ez Films, video tapes, and recordings. Tax form 1040 ez Certain corporate or partnership property acquired in a nontaxable transfer. Tax form 1040 ez Property you elected to exclude from MACRS. Tax form 1040 ez For more information, see chapter 1 of Publication 946. Tax form 1040 ez What Is the Basis of Your Depreciable Property? To figure your depreciation deduction, you must determine the basis of your property. Tax form 1040 ez To determine basis, you need to know the cost or other basis of your property. Tax form 1040 ez Cost or other basis. Tax form 1040 ez   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. Tax form 1040 ez The cost includes the amount you pay in cash, debt obligations, other property, or services. Tax form 1040 ez   There are times when you cannot use cost as basis. Tax form 1040 ez In these situations, the fair market value (FMV) or the adjusted basis of the property may be used. Tax form 1040 ez Adjusted basis. Tax form 1040 ez   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. Tax form 1040 ez Basis adjustment for depreciation allowed or allowable. Tax form 1040 ez   After you place your property in service, you must reduce the basis of the property by the depreciation allowed or allowable, whichever is greater. Tax form 1040 ez Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). Tax form 1040 ez Depreciation allowable is depreciation you are entitled to deduct. Tax form 1040 ez   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. Tax form 1040 ez   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). Tax form 1040 ez   For more information, see chapter 6. Tax form 1040 ez 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. Tax form 1040 ez 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. Tax form 1040 ez Treat improvements as separate depreciable property. Tax form 1040 ez See chapter 1 of Publication 946 for more information. Tax form 1040 ez Example. Tax form 1040 ez You repair a small section on a corner of the roof of a barn that you rent to others. Tax form 1040 ez You deduct the cost of the repair as a business expense. Tax form 1040 ez 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. Tax form 1040 ez You depreciate the cost of the new roof. Tax form 1040 ez Improvements to rented property. Tax form 1040 ez   You can depreciate permanent improvements you make to business property you rent from someone else. Tax form 1040 ez Do You Have To File Form 4562? Use Form 4562 to claim your deduction for depreciation and amortization. Tax form 1040 ez You must complete and attach Form 4562 to your tax return if you are claiming any of the following. Tax form 1040 ez A section 179 expense deduction for the current year or a section 179 carryover from a prior year. Tax form 1040 ez Depreciation for property placed in service during the current year. Tax form 1040 ez Depreciation on any vehicle or other listed property, regardless of when it was placed in service. Tax form 1040 ez Amortization of costs that began in the current year. Tax form 1040 ez For more information, see the Instructions for Form 4562. Tax form 1040 ez 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. Tax form 1040 ez You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. Tax form 1040 ez You claimed the incorrect amount because of a mathematical error made in any year. Tax form 1040 ez You claimed the incorrect amount because of a posting error made in any year, for example, omitting an asset from the depreciation schedule. Tax form 1040 ez You have not adopted a method of accounting for the property placed in service by you in tax years ending after December 29, 2003. Tax form 1040 ez You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. Tax form 1040 ez Note. Tax form 1040 ez You have adopted a method of accounting if you used the same incorrect method of depreciation for two or more consecutively filed returns. Tax form 1040 ez 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. Tax form 1040 ez See the Instructions for Form 3115. Tax form 1040 ez 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. Tax form 1040 ez This is the section 179 expense deduction. Tax form 1040 ez You can elect the section 179 expense deduction instead of recovering the cost by taking depreciation deductions. Tax form 1040 ez This part of the chapter explains the rules for the section 179 expense deduction. Tax form 1040 ez 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. Tax form 1040 ez For more information, see chapter 2 of Publication 946. Tax form 1040 ez What Property Qualifies? To qualify for the section 179 expense deduction, your property must meet all the following requirements. Tax form 1040 ez It must be eligible property. Tax form 1040 ez It must be acquired for business use. Tax form 1040 ez It must have been acquired by purchase. Tax form 1040 ez Eligible Property To qualify for the section 179 expense deduction, your property must be one of the following types of depreciable property. Tax form 1040 ez Tangible personal property. Tax form 1040 ez Qualified real property. Tax form 1040 ez (Special rules apply to qualified real property that you elect to treat as qualified section 179 real property. Tax form 1040 ez For more information, see chapter 2 of Publication 946 and section 179(f) of the Internal Revenue Code. Tax form 1040 ez ) 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. Tax form 1040 ez Single purpose agricultural (livestock) or horticultural structures. Tax form 1040 ez Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum. Tax form 1040 ez 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. Tax form 1040 ez Tangible personal property. Tax form 1040 ez   Tangible personal property is any tangible property that is not real property. Tax form 1040 ez It includes the following property. Tax form 1040 ez Machinery and equipment. Tax form 1040 ez Property contained in or attached to a building (other than structural components), such as milk tanks, automatic feeders, barn cleaners, and office equipment. Tax form 1040 ez Gasoline storage tanks and pumps at retail service stations. Tax form 1040 ez Livestock, including horses, cattle, hogs, sheep, goats, and mink and other fur-bearing animals. Tax form 1040 ez Facility used for the bulk storage of fungible commodities. Tax form 1040 ez   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). Tax form 1040 ez Bulk storage means the storage of a commodity in a large mass before it is used. Tax form 1040 ez Grain bins. Tax form 1040 ez   A grain bin is an example of a storage facility that is qualifying section 179 property. Tax form 1040 ez It is a facility used in connection with the production of grain or livestock for the bulk storage of fungible commodities. Tax form 1040 ez Single purpose agricultural or horticultural structures. Tax form 1040 ez   A single purpose agricultural (livestock) or horticultural structure is qualifying property for purposes of the section 179 expense deduction. Tax form 1040 ez Agricultural structure. Tax form 1040 ez   A single purpose agricultural (livestock) structure is any building or enclosure specifically designed, constructed, and used for both the following reasons. Tax form 1040 ez To house, raise, and feed a particular type of livestock and its produce. Tax form 1040 ez To house the equipment, including any replacements, needed to house, raise, or feed the livestock. Tax form 1040 ez For this purpose, livestock includes poultry. Tax form 1040 ez   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. Tax form 1040 ez The facility must include, as an integral part of the structure or enclosure, equipment necessary to house, raise, and feed the livestock. Tax form 1040 ez Horticultural structure. Tax form 1040 ez   A single purpose horticultural structure is either of the following. Tax form 1040 ez A greenhouse specifically designed, constructed, and used for the commercial production of plants. Tax form 1040 ez A structure specifically designed, constructed, and used for the commercial production of mushrooms. Tax form 1040 ez Use of structure. Tax form 1040 ez   A structure must be used only for the purpose that qualified it. Tax form 1040 ez For example, a hog barn will not be qualifying property if you use it to house poultry. Tax form 1040 ez Similarly, using part of your greenhouse to sell plants will make the greenhouse nonqualifying property. Tax form 1040 ez   If a structure includes work space, the work space can be used only for the following activities. Tax form 1040 ez Stocking, caring for, or collecting livestock or plants or their produce. Tax form 1040 ez Maintaining the enclosure or structure. Tax form 1040 ez Maintaining or replacing the equipment or stock enclosed or housed in the structure. Tax form 1040 ez Property Acquired by Purchase To qualify for the section 179 expense deduction, your property must have been acquired by purchase. Tax form 1040 ez For example, property acquired by gift or inheritance does not qualify. Tax form 1040 ez Property acquired from a related person (that is, your spouse, ancestors, or lineal descendants) is not considered acquired by purchase. Tax form 1040 ez Example. Tax form 1040 ez Ken is a farmer. Tax form 1040 ez He purchased two tractors, one from his brother and one from his father. Tax form 1040 ez He placed both tractors in service in the same year he bought them. Tax form 1040 ez The tractor purchased from his father does not qualify for the section 179 expense deduction because he is a related person (as defined above). Tax form 1040 ez The tractor purchased from his brother does qualify for the deduction because Ken is not a related person (as defined above). Tax form 1040 ez What Property Does Not Qualify? Land and improvements. Tax form 1040 ez   Land and land improvements, do not qualify as section 179 property. Tax form 1040 ez Land improvements include nonagricultural fences, swimming pools, paved parking areas, wharves, docks, bridges, and fences. Tax form 1040 ez However, agricultural fences do qualify as section 179 property. Tax form 1040 ez Similarly, field drainage tile also qualifies as section 179 property. Tax form 1040 ez Excepted property. Tax form 1040 ez   Even if the requirements explained in the preceding discussions are met, farmers cannot elect the section 179 expense deduction for the following property. Tax form 1040 ez Certain property you lease to others (if you are a noncorporate lessor). Tax form 1040 ez Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging. Tax form 1040 ez 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. Tax form 1040 ez Property used by governmental units or foreign persons or entities (except property used under a lease with a term of less than 6 months). Tax form 1040 ez How Much Can You Deduct? Your section 179 expense deduction is generally the cost of the qualifying property. Tax form 1040 ez However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. Tax form 1040 ez These limits apply to each taxpayer, not to each business. Tax form 1040 ez However, see Married individuals under Dollar Limits , later. Tax form 1040 ez See also the special rules for applying the limits for partnerships and S corporations under Partnerships and S Corporations , later. Tax form 1040 ez 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. Tax form 1040 ez Use Part I of Form 4562 to figure your section 179 expense deduction. Tax form 1040 ez Partial business use. Tax form 1040 ez   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. Tax form 1040 ez If you used the property more than 50% for business, multiply the cost of the property by the percentage of business use. Tax form 1040 ez Use the resulting business cost to figure your section 179 expense deduction. Tax form 1040 ez Trade-in of other property. Tax form 1040 ez   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. Tax form 1040 ez 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. Tax form 1040 ez It does not include the adjusted basis of the old tractor you trade for the new tractor. Tax form 1040 ez Example. Tax form 1040 ez J-Bar Farms traded two cultivators having a total adjusted basis of $6,800 for a new cultivator costing $13,200. Tax form 1040 ez They received an $8,000 trade-in allowance for the old cultivators and paid $5,200 cash for the new cultivator. Tax form 1040 ez J-Bar also traded a used pickup truck with an adjusted basis of $8,000 for a new pickup truck costing $35,000. Tax form 1040 ez They received a $5,000 trade-in allowance and paid $30,000 cash for the new pickup truck. Tax form 1040 ez Only the cash paid by J-Bar qualifies for the section 179 expense deduction. Tax form 1040 ez J-Bar's business costs that qualify for a section 179 expense deduction are $35,200 ($5,200 + $30,000). Tax form 1040 ez Dollar Limits The total amount you can elect to deduct under section 179 for most property placed in service in 2013 is $500,000. Tax form 1040 ez 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. Tax form 1040 ez 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. Tax form 1040 ez You do not have to claim the full $500,000. Tax form 1040 ez For specific information on the section 179 dollar limits, see chapter 2 of Publication 946. Tax form 1040 ez Reduced dollar limit for cost exceeding $2 million. Tax form 1040 ez   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. Tax form 1040 ez 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. Tax form 1040 ez Example. Tax form 1040 ez This year, James Smith placed in service machinery costing $2,050,000. Tax form 1040 ez Because this cost is $50,000 more than $2 million, he must reduce his dollar limit to $450,000 ($500,000 − $50,000). Tax form 1040 ez Limits for sport utility vehicles. Tax form 1040 ez   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. Tax form 1040 ez 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. Tax form 1040 ez   For more information, see chapter 2 of Publication 946. Tax form 1040 ez Limits for passenger automobiles. Tax form 1040 ez   For a passenger automobile that is placed in service in 2013, the total section 179 and depreciation deduction is limited. Tax form 1040 ez See Do the Passenger Automobile Limits Apply , later. Tax form 1040 ez Married individuals. Tax form 1040 ez   If you are married, how you figure your section 179 expense deduction depends on whether you file jointly or separately. Tax form 1040 ez 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. Tax form 1040 ez 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. Tax form 1040 ez You must allocate the dollar limit (after any reduction) equally between you, unless you both elect a different allocation. Tax form 1040 ez If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you. Tax form 1040 ez Joint return after separate returns. Tax form 1040 ez   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. Tax form 1040 ez The dollar limit (after reduction for any cost of section 179 property over $2 million). Tax form 1040 ez The total cost of section 179 property you and your spouse elected to expense on your separate returns. Tax form 1040 ez 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. Tax form 1040 ez 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. Tax form 1040 ez Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. Tax form 1040 ez See Carryover of disallowed deduction , later. Tax form 1040 ez Taxable income. Tax form 1040 ez   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. Tax form 1040 ez 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. Tax form 1040 ez Section 1231 gains (or losses) as discussed in chapter 9. Tax form 1040 ez Interest from working capital of your trade or business. Tax form 1040 ez Wages, salaries, tips, or other pay earned by you (or your spouse if you file a joint return) as an employee of any employer. Tax form 1040 ez   In addition, figure taxable income without regard to any of the following. Tax form 1040 ez The section 179 expense deduction. Tax form 1040 ez The self-employment tax deduction. Tax form 1040 ez Any net operating loss carryback or carryforward. Tax form 1040 ez Any unreimbursed employee business expenses. Tax form 1040 ez Two different taxable income limits. Tax form 1040 ez   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). Tax form 1040 ez You may have to figure the limit for this other deduction taking into account the section 179 expense deduction. Tax form 1040 ez If so, complete the following steps. Tax form 1040 ez Step Action 1 Figure taxable income without the section 179 expense deduction or the other deduction. Tax form 1040 ez 2 Figure a hypothetical section 179 expense deduction using the taxable income figured in Step 1. Tax form 1040 ez 3 Subtract the hypothetical section 179 expense deduction figured in Step 2 from the taxable income figured in Step 1. Tax form 1040 ez 4 Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income. Tax form 1040 ez 5 Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in  Step 1. Tax form 1040 ez 6 Figure your actual section 179 expense deduction using the taxable income figured in Step 5. Tax form 1040 ez 7 Subtract your actual section 179 expense deduction figured in Step 6 from the taxable income figured in Step 1. Tax form 1040 ez 8 Figure your actual other deduction using the taxable income figured in Step 7. Tax form 1040 ez Example. Tax form 1040 ez On February 1, 2013, the XYZ farm corporation purchased and placed in service qualifying section 179 property that cost $500,000. Tax form 1040 ez It elects to expense the entire $500,000 cost under section 179. Tax form 1040 ez In June, the corporation gave a charitable contribution of $10,000. Tax form 1040 ez A corporation's limit on charitable contributions is figured after subtracting any section 179 expense deduction. Tax form 1040 ez The business income limit for the section 179 expense deduction is figured after subtracting any allowable charitable contributions. Tax form 1040 ez XYZ's taxable income figured without the section 179 expense deduction or the deduction for charitable contributions is $520,000. Tax form 1040 ez XYZ figures its section 179 expense deduction and its deduction for charitable contributions as follows. Tax form 1040 ez Step 1. Tax form 1040 ez Taxable income figured without either deduction is $520,000. Tax form 1040 ez Step 2. Tax form 1040 ez Using $520,000 as taxable income, XYZ's hypothetical section 179 expense deduction is $500,000. Tax form 1040 ez Step 3. Tax form 1040 ez $20,000 ($520,000 − $500,000). Tax form 1040 ez Step 4. Tax form 1040 ez Using $20,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable income) is $2,000. Tax form 1040 ez Step 5. Tax form 1040 ez $518,000 ($520,000 − $2,000). Tax form 1040 ez Step 6. Tax form 1040 ez Using $518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 expense deduction. Tax form 1040 ez Because the taxable income is at least $500,000, XYZ can take a $500,000 section 179 expense deduction. Tax form 1040 ez Step 7. Tax form 1040 ez $20,000 ($520,000 − $500,000). Tax form 1040 ez Step 8. Tax form 1040 ez Using $20,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable income) is $2,000. Tax form 1040 ez Carryover of disallowed deduction. Tax form 1040 ez   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. Tax form 1040 ez   The amount you carry over is used in determining your section 179 expense deduction in the next year. Tax form 1040 ez However, it is subject to the limits in that year. Tax form 1040 ez 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. Tax form 1040 ez Your selections must be shown in your books and records. Tax form 1040 ez Example. Tax form 1040 ez Last year, Joyce Jones placed in service a machine that cost $8,000 and elected to deduct all $8,000 under section 179. Tax form 1040 ez 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. Tax form 1040 ez Her section 179 expense deduction was limited to $6,000. Tax form 1040 ez 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. Tax form 1040 ez This year, Joyce placed another machine in service that cost $9,000. Tax form 1040 ez 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. Tax form 1040 ez 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. Tax form 1040 ez She can carry over the balance of $1,000 to next year. Tax form 1040 ez Partnerships and S Corporations The section 179 expense deduction limits apply both to the partnership or S corporation and to each partner or shareholder. Tax form 1040 ez The partnership or S corporation determines its section 179 expense deduction subject to the limits. Tax form 1040 ez It then allocates the deduction among its partners or shareholders. Tax form 1040 ez 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. Tax form 1040 ez 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. Tax form 1040 ez After you apply the dollar limit, you apply the business income limit to any remaining section 179 costs. Tax form 1040 ez For more information, see chapter 2 of Publication 946. Tax form 1040 ez Example. Tax form 1040 ez In 2013, Partnership P placed in service section 179 property with a total cost of $2,160,000. Tax form 1040 ez P must reduce its dollar limit by $160,000 ($2,160,000 − $2,000,000). Tax form 1040 ez Its maximum section 179 expense deduction is $340,000 ($500,000 − $160,000), and it elects to expense that amount. Tax form 1040 ez 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. Tax form 1040 ez P allocates $100,000 of its section 179 expense deduction and $110,000 of its taxable income to John, one of its partners. Tax form 1040 ez John also conducts a business as a sole proprietor and in 2013, placed in service in that business, section 179 property costing $28,000. Tax form 1040 ez John's taxable income from that business was $10,000. Tax form 1040 ez In addition to the $100,000 allocated from P, he elects to expense the $28,000 of his sole proprietorship's section 179 costs. Tax form 1040 ez 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). Tax form 1040 ez He carries over $8,000 ($128,000 − $120,000) of the elected section 179 costs to 2014. Tax form 1040 ez How Do You Elect the Deduction? You elect to take the section 179 expense deduction by completing Part I of Form 4562. Tax form 1040 ez If you elect the deduction for listed property, complete Part V of  Form 4562 before completing Part I. Tax form 1040 ez   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. Tax form 1040 ez 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. Tax form 1040 ez The amended return must also include any resulting adjustments to taxable income. Tax form 1040 ez Revoking an election. Tax form 1040 ez   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. Tax form 1040 ez The amended return must be filed within the time prescribed by law. Tax form 1040 ez 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. Tax form 1040 ez ) Once made, the revocation is irrevocable. Tax form 1040 ez 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. Tax form 1040 ez In the year the business use drops to 50% or less, you include the recapture amount as ordinary income. Tax form 1040 ez You also increase the basis of the property by the recapture amount. Tax form 1040 ez Recovery periods for property are discussed later. Tax form 1040 ez If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. Tax form 1040 ez Instead, use the rules for recapturing depreciation explained in  chapter 9 under Section 1245 Property. Tax form 1040 ez   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. Tax form 1040 ez Instead, use the rules for recapturing depreciation explained in chapter 5 of Publication 946 under Recapture of Excess Depreciation. Tax form 1040 ez Figuring the recapture amount. Tax form 1040 ez   To figure the amount to recapture, take the following steps. Tax form 1040 ez Figure the allowable depreciation for the section 179 expense deduction you claimed. Tax form 1040 ez Begin with the year you placed the property in service and include the year of recapture. Tax form 1040 ez Subtract the depreciation figured in (1) from the section 179 expense deduction you actually claimed. Tax form 1040 ez The result is the amount you must recapture. Tax form 1040 ez Example. Tax form 1040 ez In January 2011, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. Tax form 1040 ez The property is not listed property. Tax form 1040 ez He elected a $5,000 section 179 expense deduction for the property and also elected not to claim a special depreciation allowance. Tax form 1040 ez He used the property only for business in 2011 and 2012. Tax form 1040 ez During 2013, he used the property 40% for business and 60% for personal use. Tax form 1040 ez He figures his recapture amount as follows. Tax form 1040 ez 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. Tax form 1040 ez Where to report recapture. Tax form 1040 ez   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). Tax form 1040 ez Recapture for qualified section 179 GO Zone property. Tax form 1040 ez   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. Tax form 1040 ez ” Claiming the Special Depreciation Allowance For qualified property (defined below) placed in service in 2013, you can take an additional 50% special depreciation allowance. Tax form 1040 ez The allowance is an additional deduction you can take after any section 179 expense deduction and before you figure regular depreciation under MACRS. Tax form 1040 ez Figure the special depreciation allowance by multiplying the depreciable basis of the qualified property by 50%. Tax form 1040 ez 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. Tax form 1040 ez Certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Tax form 1040 ez   Certain qualified property (defined below) acquired after December 31, 2007, and before January 1, 2014, is eligible for a 50% special depreciation allowance. Tax form 1040 ez   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. Tax form 1040 ez Water utility property. Tax form 1040 ez Off-the-shelf computer software. Tax form 1040 ez Qualified leasehold improvement property. Tax form 1040 ez   Qualified property must also meet all of the following tests: You must have acquired qualified property by purchase after December 31, 2007. Tax form 1040 ez If a binding contract to acquire the property existed before January 1, 2008, the property does not qualify. Tax form 1040 ez 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). Tax form 1040 ez The original use of the property must begin with you after December 31, 2007. Tax form 1040 ez For more information, see chapter 3 of Publication 946. Tax form 1040 ez 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. Tax form 1040 ez To make the election, attach a statement to your return indicating the class of property for which you are making the election. Tax form 1040 ez 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. Tax form 1040 ez 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). Tax form 1040 ez Attach the election statement to the amended return. Tax form 1040 ez On the amended return, write “Filed pursuant to section 301. Tax form 1040 ez 9100-2. Tax form 1040 ez ” Once made, the election may not be revoked without IRS consent. Tax form 1040 ez If you elect not to have the special depreciation allowance apply, the property may be subject to an alternative minimum tax adjustment for depreciation. Tax form 1040 ez 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. Tax form 1040 ez For more information, see chapter 3 of Publication 946. Tax form 1040 ez 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. Tax form 1040 ez MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Tax form 1040 ez Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. Tax form 1040 ez To be sure you can use MACRS to figure depreciation for your property, see Can You Use MACRS To Depreciate Your Property, earlier. Tax form 1040 ez This part explains how to determine which MACRS depreciation system applies to your property. Tax form 1040 ez It also discusses the following information that you need to know before you can figure depreciation under MACRS. Tax form 1040 ez Property's recovery class. Tax form 1040 ez Placed-in-service date. Tax form 1040 ez Basis for depreciation. Tax form 1040 ez Recovery period. Tax form 1040 ez Convention. Tax form 1040 ez Depreciation method. Tax form 1040 ez Finally, this part explains how to use this information to figure your depreciation deduction. Tax form 1040 ez 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. Tax form 1040 ez You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Tax form 1040 ez Required use of ADS. Tax form 1040 ez   You must use ADS for the following property. Tax form 1040 ez 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. Tax form 1040 ez Listed property used 50% or less in a qualified business use. Tax form 1040 ez See Additional Rules for Listed Property , later. Tax form 1040 ez Any tax-exempt use property. Tax form 1040 ez Any tax-exempt bond-financed property. Tax form 1040 ez 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. Tax form 1040 ez Any tangible property used predominantly outside the United States during the year. Tax form 1040 ez If you are required to use ADS to depreciate your property, you cannot claim the special depreciation allowance. Tax form 1040 ez Electing ADS. Tax form 1040 ez   Although your property may qualify for GDS, you can elect to use ADS. Tax form 1040 ez The election generally must cover all property in the same property class you placed in service during the year. Tax form 1040 ez However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. Tax form 1040 ez Once you make this election, you can never revoke it. Tax form 1040 ez   You make the election by completing line 20 in Part III of Form 4562. Tax form 1040 ez Which Property Class Applies Under GDS? The following is a list of the nine property classes under GDS. Tax form 1040 ez 3-year property. Tax form 1040 ez 5-year property. Tax form 1040 ez 7-year property. Tax form 1040 ez 10-year property. Tax form 1040 ez 15-year property. Tax form 1040 ez 20-year property. Tax form 1040 ez 25-year property. Tax form 1040 ez Residential rental property. Tax form 1040 ez Nonresidential real property. Tax form 1040 ez See Which Property Class Applies Under GDS in chapter 4 of Publication 946 for examples of the types of property included in each class. Tax form 1040 ez 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. Tax form 1040 ez The placed-in-service date for your property is the date the property is ready and available for a specific use. Tax form 1040 ez It is therefore not necessarily the date it is first used. Tax form 1040 ez 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. Tax form 1040 ez See Placed in Service under When Does Depreciation Begin and End , earlier, for examples illustrating when property is placed in service. Tax form 1040 ez 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. Tax form 1040 ez Reduce that amount by any credits and deductions allocable to the property. Tax form 1040 ez The following are examples of some of the credits and deductions that reduce basis. Tax form 1040 ez Any deduction for section 179 property. Tax form 1040 ez Any deduction for removal of barriers to the disabled and the elderly. Tax form 1040 ez Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. Tax form 1040 ez Any special depreciation allowance. Tax form 1040 ez Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. Tax form 1040 ez For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property , earlier. Tax form 1040 ez Also, see chapter 6. Tax form 1040 ez For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. Tax form 1040 ez Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. Tax form 1040 ez It is determined based on the depreciation system (GDS or ADS) used. Tax form 1040 ez See Table 7-1 for recovery periods under both GDS and ADS for some commonly used assets. Tax form 1040 ez For a complete list of recovery periods, see the Table of Class Lives and Recovery Periods in Appendix B of Publication 946. Tax form 1040 ez House trailers for farm laborers. Tax form 1040 ez   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). Tax form 1040 ez A 7-year recovery period under GDS. Tax form 1040 ez A 10-year recovery period under ADS. Tax form 1040 ez   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. Tax form 1040 ez A 20-year recovery period under GDS. Tax form 1040 ez A 25-year recovery period under ADS. Tax form 1040 ez Water wells. Tax form 1040 ez   Water wells used to provide water for raising poultry and livestock are land improvements. Tax form 1040 ez If they are depreciable, use one of the following recovery periods. Tax form 1040 ez A 15-year recovery period under GDS. Tax form 1040 ez A 20-year recovery period under ADS. Tax form 1040 ez   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 . Tax form 1040 ez Table 7-1. Tax form 1040 ez 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. Tax form 1040 ez 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. Tax form 1040 ez 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. Tax form 1040 ez 2 Not including single purpose agricultural or horticultural structures. Tax form 1040 ez 3 Used by logging and sawmill operators for cutting of timber. Tax form 1040 ez 4 For property placed in service after May 12, 1993; for property placed in service before May 13, 1993,  the recovery period is 31. Tax form 1040 ez 5 years. Tax form 1040 ez Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. Tax form 1040 ez 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. Tax form 1040 ez Use one of the following conventions. Tax form 1040 ez The half-year convention. Tax form 1040 ez The mid-month convention. Tax form 1040 ez The mid-quarter convention. Tax form 1040 ez For a detailed explanation of each convention, see Which Convention Applies in chapter 4 of Publication 946. Tax form 1040 ez Also, see the Instructions for Form 4562. Tax form 1040 ez Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. Tax form 1040 ez The 200% declining balance method over a GDS recovery period. Tax form 1040 ez The 150% declining balance method over a GDS recovery period. Tax form 1040 ez The straight line method over a GDS recovery period. Tax form 1040 ez The straight line method over an ADS recovery period. Tax form 1040 ez Depreciation Table. Tax form 1040 ez   The following table lists the types of property you can depreciate under each method. Tax form 1040 ez The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. Tax form 1040 ez 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. Tax form 1040 ez   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. Tax form 1040 ez The straight line method over a GDS recovery period. Tax form 1040 ez The straight line method over an ADS recovery period. Tax form 1040 ez 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. Tax form 1040 ez If you made this election, continue to use the same method and recovery period for that property. Tax form 1040 ez Real property. Tax form 1040 ez   You can depreciate real property using the straight line method under either GDS or ADS. Tax form 1040 ez Switching to straight line. Tax form 1040 ez   If you use a declining balance method, you switch to the straight line method in the year it provides an equal or greater deduction. Tax form 1040 ez 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. Tax form 1040 ez The tables have the switch to the straight line method built into their rates. Tax form 1040 ez Fruit or nut trees and vines. Tax form 1040 ez   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a 10-year recovery period. Tax form 1040 ez ADS required for some farmers. Tax form 1040 ez   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. Tax form 1040 ez See chapter 6 for a discussion of the application of the uniform capitalization rules to farm property. Tax form 1040 ez Electing a different method. Tax form 1040 ez   As shown in the Depreciation Table , you can elect a different method for depreciation for certain types of property. Tax form 1040 ez You must make the election by the due date of the return (including extensions) for the year you placed the property in service. Tax form 1040 ez 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). Tax form 1040 ez Attach the election to the amended return and write “Filed pursuant to section 301. Tax form 1040 ez 9100-2” on the election statement. Tax form 1040 ez File the amended return at the same address you filed the original return. Tax form 1040 ez Once you make the election, you cannot change it. Tax form 1040 ez    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. Tax form 1040 ez However, you can make the election on a property-by-property basis for residential rental and nonresidential real property. Tax form 1040 ez Straight line election. Tax form 1040 ez   Instead of using the declining balance method, you can elect to use the straight line method over the GDS recovery period. Tax form 1040 ez Make the election by entering “S/L” under column (f) in Part III of Form 4562. Tax form 1040 ez ADS election. Tax form 1040 ez   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. Tax form 1040 ez ADS uses the straight line method of depreciation over the ADS recovery periods, which are generally longer than the GDS recovery periods. Tax form 1040 ez The ADS recovery periods for many assets used in the business of farming are listed in Table 7–1. Tax form 1040 ez 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. Tax form 1040 ez 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. Tax form 1040 ez Then you are ready to figure your depreciation deduction. Tax form 1040 ez You can figure it in one of two ways. Tax form 1040 ez You can use the percentage tables provided by the IRS. Tax form 1040 ez You can figure your own deduction without using the tables. Tax form 1040 ez Figuring your own MACRS deduction will generally result in a slightly different amount than using the tables. Tax form 1040 ez 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. Tax form 1040 ez These percentage tables are in Appendix A of Publication 946. Tax form 1040 ez Rules for using the tables. Tax form 1040 ez   The following rules cover the use of the percentage tables. Tax form 1040 ez You must apply the rates in the percentage tables to your property's unadjusted basis. Tax form 1040 ez 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. Tax form 1040 ez You cannot use the percentage tables for a short tax year. Tax form 1040 ez See chapter 4 of Publication 946 for information on how to figure the deduction for a short tax year. Tax form 1040 ez You generally must continue to use them for the entire recovery period of the property. Tax form 1040 ez 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. Tax form 1040 ez Basis adjustment due to casualty loss. Tax form 1040 ez   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. Tax form 1040 ez 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. Tax form 1040 ez See Figuring the Deduction Without Using the Tables in chapter 4 of Publication 946. Tax form 1040 ez Figuring depreciation using the 150% DB method and half-year convention. Tax form 1040 ez    Table 7-2 has the percentages for 3-, 5-, 7-, and 20-year property. Tax form 1040 ez The percentages are based on the 150% declining balance method with a change to the straight line method. Tax form 1040 ez This table covers only the half-year convention and the first 8 years for 20-year property. Tax form 1040 ez See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. Tax form 1040 ez   The following examples show how to figure depreciation under MACRS using the percentages in Table 7-2 . Tax form 1040 ez Example 1. Tax form 1040 ez During the year, you bought an item of 7-year property for $10,000 and placed it in service. Tax form 1040 ez You do not elect a section 179 expense deduction for this property. Tax form 1040 ez In addition, the property is not qualified property for purposes of the special depreciation allowance. Tax form 1040 ez The unadjusted basis of the property is $10,000. Tax form 1040 ez You use the percentages in Table 7-2 to figure your deduction. Tax form 1040 ez Since this is 7-year property, you multiply $10,000 by 10. Tax form 1040 ez 71% to get this year's depreciation of $1,071. Tax form 1040 ez For next year, your depreciation will be $1,913 ($10,000 × 19. Tax form 1040 ez 13%). Tax form 1040 ez Example 2. Tax form 1040 ez You had a barn constructed on your farm at a cost of $20,000. Tax form 1040 ez You placed the barn in service this year. Tax form 1040 ez You elect not to claim the special depreciation allowance. Tax form 1040 ez The barn is 20-year property and you use the table percentages to figure your deduction. Tax form 1040 ez You figure this year's depreciation by multiplying $20,000 (unadjusted basis) by 3. Tax form 1040 ez 75% to get $750. Tax form 1040 ez For next year, your depreciation will be $1,443. Tax form 1040 ez 80 ($20,000 × 7. Tax form 1040 ez 219%). Tax form 1040 ez Table 7-2. Tax form 1040 ez 150% Declining Balance Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 25. Tax form 1040 ez 0 % 15. Tax form 1040 ez 00 % 10. Tax form 1040 ez 71 % 3. Tax form 1040 ez 750 % 2 37. Tax form 1040 ez 5   25. Tax form 1040 ez 50   19. Tax form 1040 ez 13   7. Tax form 1040 ez 219   3 25. Tax form 1040 ez 0   17. Tax form 1040 ez 85   15. Tax form 1040 ez 03   6. Tax form 1040 ez 677   4 12. Tax form 1040 ez 5   16. Tax form 1040 ez 66   12. Tax form 1040 ez 25   6. Tax form 1040 ez 177   5     16. Tax form 1040 ez 66   12. Tax form 1040 ez 25   5. Tax form 1040 ez 713   6     8. Tax form 1040 ez 33   12. Tax form 1040 ez 25   5. Tax form 1040 ez 285   7         12. Tax form 1040 ez 25   4. Tax form 1040 ez 888   8         6. Tax form 1040 ez 13   4. Tax form 1040 ez 522   Figuring depreciation using the straight line method and half-year convention. Tax form 1040 ez   The following table has the straight line percentages for 3-, 5-, 7-, and 20-year property using the half-year convention. Tax form 1040 ez The table covers only the first 8 years for 20-year property. Tax form 1040 ez See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. Tax form 1040 ez Table 7-3. Tax form 1040 ez Straight Line Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 16. Tax form 1040 ez 67 % 10 % 7. Tax form 1040 ez 14 % 2. Tax form 1040 ez 5 % 2 33. Tax form 1040 ez 33   20   14. Tax form 1040 ez 29   5. Tax form 1040 ez 0   3 33. Tax form 1040 ez 33   20   14. Tax form 1040 ez 29   5. Tax form 1040 ez 0   4 16. Tax form 1040 ez 67   20   14. Tax form 1040 ez 28   5. Tax form 1040 ez 0   5     20   14. Tax form 1040 ez 29   5. Tax form 1040 ez 0   6     10   14. Tax form 1040 ez 28   5. Tax form 1040 ez 0   7         14. Tax form 1040 ez 29   5. Tax form 1040 ez 0   8         7. Tax form 1040 ez 14   5. Tax form 1040 ez 0    
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Consumer Protection Offices

City, county, regional, and state consumer offices offer a variety of important services. They might mediate complaints, conduct investigations, prosecute offenders of consumer laws, license and regulate professional service providers, provide educational materials and advocate for consumer rights. To save time, call before sending a written complaint. Ask if the office handles the type of complaint you have and if complaint forms are provided.

State Consumer Protection Offices

Department of Consumer Protection

Website: Department of Consumer Protection

Address: Department of Consumer Protection
165 Capitol Ave.
Hartford, CT 06106-1630

Phone Number: 860-713-6300

Toll-free: 1-800-842-2649

TTY: 860-713-7240

Connecticut Attorney General's Office

Website: Connecticut Attorney General's Office

Address: Connecticut Attorney General's Office
Consumer Assistance Unit
55 Elm St.
Hartford, CT 06106

Phone Number: 860-808-5420

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Banking Authorities

The officials listed in this section regulate and supervise state-chartered banks. Many of them handle or refer problems and complaints about other types of financial institutions as well. Some also answer general questions about banking and consumer credit. If you are dealing with a federally chartered bank, check Federal Agencies.

Department of Banking

Website: Department of Banking

Address: Department of Banking
Government Relations and Consumer Affairs
260 Constitution Plaza
Hartford, CT 06103-1800

Phone Number: 860-240-8299

Toll-free: 1-800-831-7225
1-877-472-8313 (Foreclosure Assistance) 1-877-472-8313 (Foreclosure Assistance)

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Insurance Regulators

Each state has its own laws and regulations for each type of insurance. The officials listed in this section enforce these laws. Many of these offices can also provide you with information to help you make informed insurance buying decisions.

Insurance Department

Website: Insurance Department

Address: Insurance Department
Consumer Affairs Division
PO Box 816
Hartford, CT 06142-0816

Phone Number: 860-297-3900

Toll-free: 1-800-203-3447 (CT)

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Securities Administrators

Each state has its own laws and regulations for securities brokers and securities - including stocks, mutual funds, commodities, real estate, etc. The officials and agencies listed in this section enforce these laws and regulations. Many of these offices can also provide information to help you make informed investment decisions.

Department of Banking

Website: Department of Banking

Address: Department of Banking
Securities and Business Investments Division
260 Constitution Plaza
Hartford, CT 06103-1800

Phone Number: 860-240-8230

Toll-free: 1-800-831-7225

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Utility Commissions

State Utility Commissions regulate services and rates for gas, electricity and telephones within your state. In some states, the utility commissions regulate other services such as water, transportation, and the moving of household goods. Many utility commissions handle consumer complaints. Sometimes, if a number of complaints are received about the same utility matter, they will conduct investigations.

Department of Energy and Environmental Protection

Website: Department of Energy and Environmental Protection

Address: Department of Energy and Environmental Protection
Public Utilities Regulatory Authority
Consumer Services Unit

10 Franklin Square
New Britain, CT 06051

Phone Number: 860-827-1553

Toll-free: 1-800-382-4586 (CT)

TTY: 860-827-2837

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The Tax Form 1040 Ez

Tax form 1040 ez 3. Tax form 1040 ez   Gifts Table of Contents If you give gifts in the course of your trade or business, you can deduct all or part of the cost. Tax form 1040 ez This chapter explains the limits and rules for deducting the costs of gifts. Tax form 1040 ez $25 limit. Tax form 1040 ez   You can deduct no more than $25 for business gifts you give directly or indirectly to each person during your tax year. Tax form 1040 ez A gift to a company that is intended for the eventual personal use or benefit of a particular person or a limited class of people will be considered an indirect gift to that particular person or to the individuals within that class of people who receive the gift. Tax form 1040 ez   If you give a gift to a member of a customer's family, the gift is generally considered to be an indirect gift to the customer. Tax form 1040 ez This rule does not apply if you have a bona fide, independent business connection with that family member and the gift is not intended for the customer's eventual use. Tax form 1040 ez   If you and your spouse both give gifts, both of you are treated as one taxpayer. Tax form 1040 ez It does not matter whether you have separate businesses, are separately employed, or whether each of you has an independent connection with the recipient. Tax form 1040 ez If a partnership gives gifts, the partnership and the partners are treated as one taxpayer. Tax form 1040 ez Example. Tax form 1040 ez Bob Jones sells products to Local Company. Tax form 1040 ez He and his wife, Jan, gave Local Company three gourmet gift baskets to thank them for their business. Tax form 1040 ez They paid $80 for each gift basket, or $240 total. Tax form 1040 ez Three of Local Company's executives took the gift baskets home for their families' use. Tax form 1040 ez Bob and Jan have no independent business relationship with any of the executives' other family members. Tax form 1040 ez They can deduct a total of $75 ($25 limit × 3) for the gift baskets. Tax form 1040 ez Incidental costs. Tax form 1040 ez   Incidental costs, such as engraving on jewelry, or packaging, insuring, and mailing, are generally not included in determining the cost of a gift for purposes of the $25 limit. Tax form 1040 ez   A cost is incidental only if it does not add substantial value to the gift. Tax form 1040 ez For example, the cost of gift wrapping is an incidental cost. Tax form 1040 ez However, the purchase of an ornamental basket for packaging fruit is not an incidental cost if the value of the basket is substantial compared to the value of the fruit. Tax form 1040 ez Exceptions. Tax form 1040 ez   The following items are not considered gifts for purposes of the $25 limit. Tax form 1040 ez An item that costs $4 or less and: Has your name clearly and permanently imprinted on the gift, and Is one of a number of identical items you widely distribute. Tax form 1040 ez Examples include pens, desk sets, and plastic bags and cases. Tax form 1040 ez Signs, display racks, or other promotional material to be used on the business premises of the recipient. Tax form 1040 ez    Figure B. Tax form 1040 ez When Are Transportation Expenses Deductible? Most employees and self-employed persons can use this chart. Tax form 1040 ez (Do not use this chart if your home is your principal place of business. Tax form 1040 ez See Office in the home . Tax form 1040 ez ) Please click here for the text description of the image. Tax form 1040 ez Figure B. Tax form 1040 ez When Are Local Transportation Expenses Deductible?TAs for Figure B are: Reg 1. Tax form 1040 ez 162-1(a); RR 55–109; RR 94–47 Gift or entertainment. Tax form 1040 ez   Any item that might be considered either a gift or entertainment generally will be considered entertainment. Tax form 1040 ez However, if you give a customer packaged food or beverages you intend the customer to use at a later date, treat it as a gift. Tax form 1040 ez    If you give a customer tickets to a theater performance or sporting event and you do not go with the customer to the performance or event, you have a choice. Tax form 1040 ez You can treat the cost of the tickets as either a gift expense or an entertainment expense, whichever is to your advantage. Tax form 1040 ez   You can change your treatment of the tickets at a later date by filing an amended return. Tax form 1040 ez Generally, an amended return must be filed within 3 years from the date the original return was filed or within 2 years from the time the tax was paid, whichever is later. Tax form 1040 ez    If you go with the customer to the event, you must treat the cost of the tickets as an entertainment expense. Tax form 1040 ez You cannot choose, in this case, to treat the cost of the tickets as a gift expense. Tax form 1040 ez Prev  Up  Next   Home   More Online Publications