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Taxs 2012

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Taxs 2012

Taxs 2012 Publication 515 - Main Content Table of Contents Withholding of TaxWithholding Agent Withholding and Reporting Obligations Persons Subject to NRA WithholdingIdentifying the Payee Foreign Persons DocumentationBeneficial Owners Foreign Intermediaries and Foreign Flow-Through Entities Standards of Knowledge Presumption Rules Income Subject to NRA WithholdingSource of Income Fixed or Determinable Annual or Periodical Income (FDAP) Withholding on Specific IncomeEffectively Connected Income Income Not Effectively Connected Pay for Personal Services Performed Artists and Athletes (Income Codes 42 and 43) Other Income Foreign Governments and Certain Other Foreign Organizations U. Taxs 2012 S. Taxs 2012 Taxpayer Identification NumbersUnexpected payment. Taxs 2012 Depositing Withheld TaxesWhen Deposits Are Required Adjustment for Overwithholding Returns RequiredJoint owners. Taxs 2012 Electronic reporting. Taxs 2012 Partnership Withholding on Effectively Connected IncomeWho Must Withhold Foreign Partner Publicly Traded Partnerships U. Taxs 2012 S. Taxs 2012 Real Property InterestForeign corporations. Taxs 2012 Domestic corporations. Taxs 2012 U. Taxs 2012 S. Taxs 2012 real property holding corporations. Taxs 2012 Partnerships. Taxs 2012 Trusts and estates. Taxs 2012 Domestically controlled QIE. Taxs 2012 Late filing of certifications or notices. Taxs 2012 Certifications. Taxs 2012 Liability of agent or qualified substitute. Taxs 2012 Reporting and Paying the Tax Withholding Certificates Tax Treaty TablesTable 1 Table 2 Table 3 How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). Taxs 2012 Withholding of Tax In most cases, a foreign person is subject to U. Taxs 2012 S. Taxs 2012 tax on its U. Taxs 2012 S. Taxs 2012 source income. Taxs 2012 Most types of U. Taxs 2012 S. Taxs 2012 source income received by a foreign person are subject to U. Taxs 2012 S. Taxs 2012 tax of 30%. Taxs 2012 A reduced rate, including exemption, may apply if there is a tax treaty between the foreign person's country of residence and the United States. Taxs 2012 The tax is generally withheld (NRA withholding) from the payment made to the foreign person. Taxs 2012 The term “NRA withholding” is used in this publication descriptively to refer to withholding required under sections 1441, 1442, and 1443 of the Internal Revenue Code. Taxs 2012 In most cases, NRA withholding describes the withholding regime that requires withholding on a payment of U. Taxs 2012 S. Taxs 2012 source income. Taxs 2012 Payments to foreign persons, including nonresident alien individuals, foreign entities, and governments, may be subject to NRA withholding. Taxs 2012 NRA withholding does not include withholding under section 1445 of the Code (see U. Taxs 2012 S. Taxs 2012 Real Property Interest, later) or under section 1446 of the Code (see Partnership Withholding on Effectively Connected Income , later). Taxs 2012 A withholding agent (defined next) is the person responsible for withholding on payments made to a foreign person. Taxs 2012 However, a withholding agent that can reliably associate the payment with documentation (discussed later) from a U. Taxs 2012 S. Taxs 2012 person is not required to withhold. Taxs 2012 In addition, a withholding agent may apply a reduced rate of withholding (including an exemption from withholding) if it can reliably associate the payment with documentation from a beneficial owner that is a foreign person entitled to a reduced rate of withholding. Taxs 2012 Withholding Agent You are a withholding agent if you are a U. Taxs 2012 S. Taxs 2012 or foreign person that has control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding. Taxs 2012 A withholding agent may be an individual, corporation, partnership, trust, association, nominee (under section 1446 of the Code), or any other entity, including any foreign intermediary, foreign partnership, or U. Taxs 2012 S. Taxs 2012 branch of certain foreign banks and insurance companies. Taxs 2012 You may be a withholding agent even if there is no requirement to withhold from a payment or even if another person has withheld the required amount from the payment. Taxs 2012 Although several persons may be withholding agents for a single payment, the full tax is required to be withheld only once. Taxs 2012 In most cases, the U. Taxs 2012 S. Taxs 2012 person who pays an amount subject to NRA withholding is the person responsible for withholding. Taxs 2012 However, other persons may be required to withhold. Taxs 2012 For example, a payment made by a flow-through entity or nonqualified intermediary that knows, or has reason to know, that the full amount of NRA withholding was not done by the person from which it receives a payment is required to do the appropriate withholding since it also falls within the definition of a withholding agent. Taxs 2012 In addition, withholding must be done by any qualified intermediary, withholding foreign partnership, or withholding foreign trust in accordance with the terms of its withholding agreement, discussed later. Taxs 2012 Liability for tax. Taxs 2012   As a withholding agent, you are personally liable for any tax required to be withheld. Taxs 2012 This liability is independent of the tax liability of the foreign person to whom the payment is made. Taxs 2012 If you fail to withhold and the foreign payee fails to satisfy its U. Taxs 2012 S. Taxs 2012 tax liability, then both you and the foreign person are liable for tax, as well as interest and any applicable penalties. Taxs 2012   The applicable tax will be collected only once. Taxs 2012 If the foreign person satisfies its U. Taxs 2012 S. Taxs 2012 tax liability, you are not liable for the tax but remain liable for any interest and penalties for failure to withhold. Taxs 2012 Determination of amount to withhold. Taxs 2012   You must withhold on the gross amount subject to NRA withholding. Taxs 2012 You cannot reduce the gross amount by any deductions. Taxs 2012 However, see Scholarships and Fellowship Grants and Pay for Personal Services Performed , later, for when a deduction for a personal exemption may be allowed. Taxs 2012   If the determination of the source of the income or the amount subject to tax depends on facts that are not known at the time of payment, you must withhold an amount sufficient to ensure that at least 30% of the amount subsequently determined to be subject to withholding is withheld. Taxs 2012 In no case, however, should you withhold more than 30% of the total amount paid. Taxs 2012 Or, you may make a reasonable estimate of the amount from U. Taxs 2012 S. Taxs 2012 sources and put a corresponding part of the amount due in escrow until the amount from U. Taxs 2012 S. Taxs 2012 sources can be determined, at which time withholding becomes due. Taxs 2012 When to withhold. Taxs 2012   Withholding is required at the time you make a payment of an amount subject to withholding. Taxs 2012 A payment is made to a person if that person realizes income, whether or not there is an actual transfer of cash or other property. Taxs 2012 A payment is considered made to a person if it is paid for that person's benefit. Taxs 2012 For example, a payment made to a creditor of a person in satisfaction of that person's debt to the creditor is considered made to the person. Taxs 2012 A payment also is considered made to a person if it is made to that person's agent. Taxs 2012   A U. Taxs 2012 S. Taxs 2012 partnership should withhold when any distributions that include amounts subject to withholding are made. Taxs 2012 However, if a foreign partner's distributive share of income subject to withholding is not actually distributed, the U. Taxs 2012 S. Taxs 2012 partnership must withhold on the foreign partner's distributive share of the income on the earlier of the date that a Schedule K-1 (Form 1065) is provided or mailed to the partner or the due date for furnishing that schedule. Taxs 2012 If the distributable amount consists of effectively connected income, see Partnership Withholding on Effectively Connected Income , later. Taxs 2012 A U. Taxs 2012 S. Taxs 2012 trust is required to withhold on the amount includible in the gross income of a foreign beneficiary to the extent the trust's distributable net income consists of an amount subject to withholding. Taxs 2012 To the extent a U. Taxs 2012 S. Taxs 2012 trust is required to distribute an amount subject to withholding but does not actually distribute the amount, it must withhold on the foreign beneficiary's allocable share at the time the income is required to be reported on Form 1042-S. Taxs 2012 Withholding and Reporting Obligations You are required to report payments subject to NRA withholding on Form 1042-S and to file a tax return on Form 1042. Taxs 2012 (See Returns Required , later. Taxs 2012 ) An exception from reporting may apply to individuals who are not required to withhold from a payment and who do not make the payment in the course of their trade or business. Taxs 2012 Form 1099 reporting and backup withholding. Taxs 2012    You also may be responsible as a payer for reporting on Form 1099 payments made to a U. Taxs 2012 S. Taxs 2012 person. Taxs 2012 You must withhold 28% (backup withholding rate) from a reportable payment made to a U. Taxs 2012 S. Taxs 2012 person that is subject to Form 1099 reporting if any of the following apply. Taxs 2012 The U. Taxs 2012 S. Taxs 2012 person has not provided its taxpayer identification number (TIN) in the manner required. Taxs 2012 The IRS notifies you that the TIN furnished by the payee is incorrect. Taxs 2012 There has been a notified payee underreporting. Taxs 2012 There has been a payee certification failure. Taxs 2012 In most cases, a TIN must be provided by a U. Taxs 2012 S. Taxs 2012 non-exempt recipient on Form W-9, Request for Taxpayer Identification Number and Certification. Taxs 2012 A payer files a tax return on Form 945, Annual Return of Withheld Federal Income Tax, for backup withholding. Taxs 2012 You may be required to file Form 1099 and, if appropriate, backup withhold, even if you do not make the payments directly to that U. Taxs 2012 S. Taxs 2012 person. Taxs 2012 For example, you are required to report income paid to a foreign intermediary or flow-through entity that collects for a U. Taxs 2012 S. Taxs 2012 person subject to Form 1099 reporting. Taxs 2012 See Identifying the Payee , later, for more information. Taxs 2012 Also see Section S. Taxs 2012 Special Rules for Reporting Payments Made Through Foreign Intermediaries and Foreign Flow-Through Entities on Form 1099 in the General Instructions for Certain Information Returns. Taxs 2012 Foreign persons who provide Form W-8BEN, Form W-8ECI, or Form W-8EXP (or applicable documentary evidence) are exempt from backup withholding and Form 1099 reporting. Taxs 2012 Wages paid to employees. Taxs 2012   If you are the employer of a nonresident alien, you generally must withhold taxes at graduated rates. Taxs 2012 See Pay for Personal Services Performed , later. Taxs 2012 Effectively connected income by partnerships. Taxs 2012   A withholding agent that is a partnership (whether U. Taxs 2012 S. Taxs 2012 or foreign) is also responsible for withholding on its income effectively connected with a U. Taxs 2012 S. Taxs 2012 trade or business that is allocable to foreign partners. Taxs 2012 See Partnership Withholding on Effectively Connected Income , later, for more information. Taxs 2012 U. Taxs 2012 S. Taxs 2012 real property interest. Taxs 2012   A withholding agent also may be responsible for withholding if a foreign person transfers a U. Taxs 2012 S. Taxs 2012 real property interest to the agent, or if it is a corporation, partnership, trust, or estate that distributes a U. Taxs 2012 S. Taxs 2012 real property interest to a shareholder, partner, or beneficiary that is a foreign person. Taxs 2012 See U. Taxs 2012 S. Taxs 2012 Real Property Interest , later. Taxs 2012 Persons Subject to NRA Withholding NRA withholding applies only to payments made to a payee that is a foreign person. Taxs 2012 It does not apply to payments made to U. Taxs 2012 S. Taxs 2012 persons. Taxs 2012 Usually, you determine the payee's status as a U. Taxs 2012 S. Taxs 2012 or foreign person based on the documentation that person provides. Taxs 2012 See Documentation , later. Taxs 2012 However, if you have received no documentation or you cannot reliably associate all or a part of a payment with documentation, then you must apply certain presumption rules, discussed later. Taxs 2012 Identifying the Payee In most cases, the payee is the person to whom you make the payment, regardless of whether that person is the beneficial owner of the income. Taxs 2012 However, there are situations in which the payee is a person other than the one to whom you actually make a payment. Taxs 2012 U. Taxs 2012 S. Taxs 2012 agent of foreign person. Taxs 2012   If you make a payment to a U. Taxs 2012 S. Taxs 2012 person and you have actual knowledge that the U. Taxs 2012 S. Taxs 2012 person is receiving the payment as an agent of a foreign person, you must treat the payment as made to the foreign person. Taxs 2012 However, if the U. Taxs 2012 S. Taxs 2012 person is a financial institution, you may treat the institution as the payee provided you have no reason to believe that the institution will not comply with its own obligation to withhold. Taxs 2012   If the payment is not subject to NRA withholding (for example, gross proceeds from the sales of securities), you must treat the payment as made to a U. Taxs 2012 S. Taxs 2012 person and not as a payment to a foreign person. Taxs 2012 You may be required to report the payment on Form 1099 and, if applicable, backup withhold. Taxs 2012 Disregarded entities. Taxs 2012   A business entity that is not a corporation and that has a single owner may be disregarded as an entity separate from its owner (a disregarded entity) for federal tax purposes. Taxs 2012 The payee of a payment made to a disregarded entity is the owner of the entity. Taxs 2012   If the owner of the entity is a foreign person, you must apply NRA withholding unless you can treat the foreign owner as a beneficial owner entitled to a reduced rate of withholding. Taxs 2012   If the owner is a U. Taxs 2012 S. Taxs 2012 person, you do not apply NRA withholding. Taxs 2012 However, you may be required to report the payment on Form 1099 and, if applicable, backup withhold. Taxs 2012 You may assume that a foreign entity is not a disregarded entity unless you can reliably associate the payment with documentation provided by the owner or you have actual knowledge or reason to know that the foreign entity is a disregarded entity. Taxs 2012 Flow-Through Entities The payees of payments (other than income effectively connected with a U. Taxs 2012 S. Taxs 2012 trade or business) made to a foreign flow-through entity are the owners or beneficiaries of the flow-through entity. Taxs 2012 This rule applies for purposes of NRA withholding and for Form 1099 reporting and backup withholding. Taxs 2012 Income that is, or is deemed to be, effectively connected with the conduct of a U. Taxs 2012 S. Taxs 2012 trade or business of a flow-through entity is treated as paid to the entity. Taxs 2012 All of the following are flow-through entities. Taxs 2012 A foreign partnership (other than a withholding foreign partnership). Taxs 2012 A foreign simple or foreign grantor trust (other than a withholding foreign trust). Taxs 2012 A fiscally transparent entity receiving income for which treaty benefits are claimed. Taxs 2012 See Fiscally transparent entity , later. Taxs 2012 In most cases, you treat a payee as a flow-through entity if it provides you with a Form W-8IMY (see Documentation , later) on which it claims such status. Taxs 2012 You also may be required to treat the entity as a flow-through entity under the presumption rules, discussed later. Taxs 2012 You must determine whether the owners or beneficiaries of a flow-through entity are U. Taxs 2012 S. Taxs 2012 or foreign persons, how much of the payment relates to each owner or beneficiary, and, if the owner or beneficiary is foreign, whether a reduced rate of NRA withholding applies. Taxs 2012 You make these determinations based on the documentation and other information (contained in a withholding statement) that is associated with the flow-through entity's Form W-8IMY. Taxs 2012 If you do not have all of the information that is required to reliably associate a payment with a specific payee, you must apply the presumption rules. Taxs 2012 See Documentation and Presumption Rules , later. Taxs 2012 Withholding foreign partnerships and withholding foreign trusts are not flow-through entities. Taxs 2012 Foreign partnerships. Taxs 2012    A foreign partnership is any partnership that is not organized under the laws of any state of the United States or the District of Columbia or any partnership that is treated as foreign under the income tax regulations. Taxs 2012 If a foreign partnership is not a withholding foreign partnership, the payees of income are the partners of the partnership, provided the partners are not themselves a flow-through entity or a foreign intermediary. Taxs 2012 However, the payee is the partnership itself if the partnership is claiming treaty benefits on the basis that it is not fiscally transparent and that it meets all the other requirements for claiming treaty benefits. Taxs 2012 If a partner is a foreign flow-through entity or a foreign intermediary, you apply the payee determination rules to that partner to determine the payees. Taxs 2012 Example 1. Taxs 2012 A nonwithholding foreign partnership has three partners: a nonresident alien individual; a foreign corporation; and a U. Taxs 2012 S. Taxs 2012 citizen. Taxs 2012 You make a payment of U. Taxs 2012 S. Taxs 2012 source interest to the partnership. Taxs 2012 It gives you a Form W-8IMY with which it associates Form W-8BEN from the nonresident alien; Form W-8BEN from the foreign corporation; and Form W-9 from the U. Taxs 2012 S. Taxs 2012 citizen. Taxs 2012 The partnership also gives you a complete withholding statement that enables you to associate a part of the interest payment to each partner. Taxs 2012 You must treat all three partners as the payees of the interest payment as if the payment were made directly to them. Taxs 2012 Report the payment to the nonresident alien and the foreign corporation on Forms 1042-S. Taxs 2012 Report the payment to the U. Taxs 2012 S. Taxs 2012 citizen on Form 1099-INT. Taxs 2012 Example 2. Taxs 2012 A nonwithholding foreign partnership has two partners: a foreign corporation and a nonwithholding foreign partnership. Taxs 2012 The second partnership has two partners, both nonresident alien individuals. Taxs 2012 You make a payment of U. Taxs 2012 S. Taxs 2012 source interest to the first partnership. Taxs 2012 It gives you a valid Form W-8IMY with which it associates a Form W-8BEN from the foreign corporation and a Form W-8IMY from the second partnership. Taxs 2012 In addition, Forms W-8BEN from the partners are associated with the Form W-8IMY from the second partnership. Taxs 2012 The Forms W-8IMY from the partnerships have complete withholding statements associated with them. Taxs 2012 Because you can reliably associate a part of the interest payment with the Form W-8BEN provided by the foreign corporation and the Forms W-8BEN provided by the nonresident alien individual partners as a result of the withholding statements, you must treat them as the payees of the interest. Taxs 2012 Example 3. Taxs 2012 You make a payment of U. Taxs 2012 S. Taxs 2012 source dividends to a withholding foreign partnership. Taxs 2012 The partnership has two partners, both foreign corporations. Taxs 2012 You can reliably associate the payment with a valid Form W-8IMY from the partnership on which it represents that it is a withholding foreign partnership. Taxs 2012 You must treat the partnership as the payee of the dividends. Taxs 2012 Foreign simple and grantor trust. Taxs 2012   A trust is foreign unless it meets both of the following tests. Taxs 2012 A court within the United States is able to exercise primary supervision over the administration of the trust. Taxs 2012 One or more U. Taxs 2012 S. Taxs 2012 persons have the authority to control all substantial decisions of the trust. Taxs 2012   In most cases, a foreign simple trust is a foreign trust that is required to distribute all of its income annually. Taxs 2012 A foreign grantor trust is a foreign trust that is treated as a grantor trust under sections 671 through 679 of the Code. Taxs 2012   The payees of a payment made to a foreign simple trust are the beneficiaries of the trust. Taxs 2012 The payees of a payment made to a foreign grantor trust are the owners of the trust. Taxs 2012 However, the payee is the foreign simple or grantor trust itself if the trust is claiming treaty benefits on the basis that it is not fiscally transparent and that it meets all the other requirements for claiming treaty benefits. Taxs 2012 If the beneficiaries or owners are themselves flow-through entities or foreign intermediaries, you apply the payee determination rules to that beneficiary or owner to determine the payees. Taxs 2012 Example. Taxs 2012 A foreign simple trust has three beneficiaries: two nonresident alien individuals and a U. Taxs 2012 S. Taxs 2012 citizen. Taxs 2012 You make a payment of interest to the foreign trust. Taxs 2012 It gives you a Form W-8IMY with which it associates Forms W-8BEN from the nonresident aliens and a Form W-9 from the U. Taxs 2012 S. Taxs 2012 citizen. Taxs 2012 The trust also gives you a complete withholding statement that enables you to associate a part of the interest payment with the forms provided by each beneficiary. Taxs 2012 You must treat all three beneficiaries as the payees of the interest payment as if the payment were made directly to them. Taxs 2012 Report the payment to the nonresident aliens on Forms 1042-S. Taxs 2012 Report the payment to the U. Taxs 2012 S. Taxs 2012 citizen on Form 1099-INT. Taxs 2012 Fiscally transparent entity. Taxs 2012   If a reduced rate of withholding under an income tax treaty is claimed, a flow-through entity includes any entity in which the interest holder must treat the entity as fiscally transparent. Taxs 2012 The determination of whether an entity is fiscally transparent is made on an item of income basis (that is, the determination is made separately for interest, dividends, royalties, etc. Taxs 2012 ). Taxs 2012 The interest holder in an entity makes the determination by applying the laws of the jurisdiction where the interest holder is organized, incorporated, or otherwise considered a resident. Taxs 2012 An entity is considered to be fiscally transparent for the income to the extent the laws of that jurisdiction require the interest holder to separately take into account on a current basis the interest holder's share of the income, whether or not distributed to the interest holder, and the character and source of the income to the interest holder are determined as if the income was realized directly from the source that paid it to the entity. Taxs 2012 Subject to the standards of knowledge rules discussed later, you generally make the determination that an entity is fiscally transparent based on a Form W-8IMY provided by the entity. Taxs 2012   The payees of a payment made to a fiscally transparent entity are the interest holders of the entity. Taxs 2012 Example. Taxs 2012 Entity A is a business organization organized under the laws of country X that has an income tax treaty in force with the United States. Taxs 2012 A has two interest holders, B and C. Taxs 2012 B is a corporation organized under the laws of country Y. Taxs 2012 C is a corporation organized under the laws of country Z. Taxs 2012 Both countries Y and Z have an income tax treaty in force with the United States. Taxs 2012 A receives royalty income from U. Taxs 2012 S. Taxs 2012 sources that is not effectively connected with the conduct of a trade or business in the United States. Taxs 2012 For U. Taxs 2012 S. Taxs 2012 income tax purposes, A is treated as a partnership. Taxs 2012 Country X treats A as a partnership and requires the interest holders in A to separately take into account on a current basis their respective shares of the income paid to A even if the income is not distributed. Taxs 2012 The laws of country X provide that the character and source of the income to A's interest holders are determined as if the income was realized directly from the source that paid it to A. Taxs 2012 Accordingly, A is fiscally transparent in its jurisdiction, country X. Taxs 2012 B and C are not fiscally transparent under the laws of their respective countries of incorporation. Taxs 2012 Country Y requires B to separately take into account on a current basis B's share of the income paid to A, and the character and source of the income to B is determined as if the income was realized directly from the source that paid it to A. Taxs 2012 Accordingly, A is fiscally transparent for that income under the laws of country Y, and B is treated as deriving its share of the U. Taxs 2012 S. Taxs 2012 source royalty income for purposes of the U. Taxs 2012 S. Taxs 2012 -Y income tax treaty. Taxs 2012 Country Z, on the other hand, treats A as a corporation and does not require C to take into account its share of A's income on a current basis whether or not distributed. Taxs 2012 Therefore, A is not treated as fiscally transparent under the laws of country Z. Taxs 2012 Accordingly, C is not treated as deriving its share of the U. Taxs 2012 S. Taxs 2012 source royalty income for purposes of the U. Taxs 2012 S. Taxs 2012 -Z income tax treaty. Taxs 2012 Foreign Intermediaries In most cases, if you make payments to a foreign intermediary, the payees are the persons for whom the foreign intermediary collects the payment, such as account holders or customers, not the intermediary itself. Taxs 2012 This rule applies for purposes of NRA withholding and for Form 1099 reporting and backup withholding. Taxs 2012 You may, however, treat a qualified intermediary that has assumed primary withholding responsibility for a payment as the payee, and you are not required to withhold. Taxs 2012 An intermediary is a custodian, broker, nominee, or any other person that acts as an agent for another person. Taxs 2012 A foreign intermediary is either a qualified intermediary or a nonqualified intermediary. Taxs 2012 In most cases, you determine whether an entity is a qualified intermediary or a nonqualified intermediary based on the representations the intermediary makes on Form W-8IMY. Taxs 2012 You must determine whether the customers or account holders of a foreign intermediary are U. Taxs 2012 S. Taxs 2012 or foreign persons and, if the account holder or customer is foreign, whether a reduced rate of NRA withholding applies. Taxs 2012 You make these determinations based on the foreign intermediary's Form W-8IMY and associated information and documentation. Taxs 2012 If you do not have all of the information or documentation that is required to reliably associate a payment with a payee, you must apply the presumption rules. Taxs 2012 See Documentation and Presumption Rules , later. Taxs 2012 Nonqualified intermediary. Taxs 2012   A nonqualified intermediary (NQI) is any intermediary that is a foreign person and that is not a qualified intermediary. Taxs 2012 The payees of a payment made to an NQI are the customers or account holders on whose behalf the NQI is acting. Taxs 2012 Example. Taxs 2012 You make a payment of interest to a foreign bank that is a nonqualified intermediary. Taxs 2012 The bank gives you a Form W-8IMY and the Forms W-8BEN of two foreign persons, and a Form W-9 from a U. Taxs 2012 S. Taxs 2012 person for whom the bank is collecting the payments. Taxs 2012 The bank also associates with its Form W-8IMY a withholding statement on which it allocates the interest payment to each account holder and provides all other information required to be on the withholding statement. Taxs 2012 The account holders are the payees of the interest payment. Taxs 2012 You should report the part of the interest paid to the two foreign persons on Forms 1042-S and the part paid to the U. Taxs 2012 S. Taxs 2012 person on Form 1099-INT. Taxs 2012 Qualified intermediary. Taxs 2012   A qualified intermediary (QI) is any foreign intermediary (or foreign branch of a U. Taxs 2012 S. Taxs 2012 intermediary) that has entered into a qualified intermediary withholding agreement (discussed later) with the IRS. Taxs 2012 You may treat a QI as a payee to the extent the QI assumes primary withholding responsibility or primary Form 1099 reporting and backup withholding responsibility for a payment. Taxs 2012 In this situation, the QI is required to withhold the tax. Taxs 2012 You can determine whether a QI has assumed responsibility from the Form W-8IMY provided by the QI. Taxs 2012   A payment to a QI to the extent it does not assume primary NRA withholding responsibility is considered made to the person on whose behalf the QI acts. Taxs 2012 If a QI does not assume Form 1099 reporting and backup withholding responsibility, you must report on Form 1099 and, if applicable, backup withhold as if you were making the payment directly to the U. Taxs 2012 S. Taxs 2012 person. Taxs 2012 Branches of financial institutions. Taxs 2012   Branches of financial institutions are not permitted to operate as QIs if they are located outside of countries having approved “know-your-customer” (KYC) rules. Taxs 2012 The countries with approved KYC rules are listed on IRS. Taxs 2012 gov. Taxs 2012 QI withholding agreement. Taxs 2012   Foreign financial institutions and foreign branches of U. Taxs 2012 S. Taxs 2012 financial institutions can enter into an agreement with the IRS to be a qualified intermediary. Taxs 2012   A QI is entitled to certain simplified withholding and reporting rules. Taxs 2012 In general, there are three major areas whereby intermediaries with QI status are afforded such simplified treatment. Taxs 2012   To apply for QI status, complete Form 14345, Qualified Intermediary Application, and Form SS-4, Application for Employer Identification Number. Taxs 2012 These forms, and the procedures required to obtain a QI withholding agreement are available at www. Taxs 2012 irs. Taxs 2012 gov/Businesses/Corporations/Qualified-Intermediaries-(QI). Taxs 2012 Documentation. Taxs 2012   A QI is not required to forward documentation obtained from foreign account holders to the U. Taxs 2012 S. Taxs 2012 withholding agent from whom the QI receives a payment of U. Taxs 2012 S. Taxs 2012 source income. Taxs 2012 The QI maintains such documentation at its location and provides the U. Taxs 2012 S. Taxs 2012 withholding agent with withholding rate pools. Taxs 2012 A withholding rate pool is a payment of a single type of income that is subject to a single rate of withholding. Taxs 2012   A QI is required to provide the U. Taxs 2012 S. Taxs 2012 withholding agent with information regarding U. Taxs 2012 S. Taxs 2012 persons subject to Form 1099 information reporting unless the QI assumes the primary obligation to do Form 1099 reporting and backup withholding. Taxs 2012   If a QI obtains documentary evidence under the “know-your-customer” rules that apply to the QI under local law, and the documentary evidence is of a type specified in an attachment to the QI agreement, the documentary evidence remains valid until there is a change in circumstances or the QI knows the information is incorrect. Taxs 2012 This indefinite validity period rule does not apply to Forms W-8 or to documentary evidence that is not of the type specified in the attachment to the agreement. Taxs 2012 Form 1042-S reporting. Taxs 2012   A QI is permitted to report payments made to its direct foreign account holders on a pooled basis rather than reporting payments to each direct account holder specifically. Taxs 2012 Pooled basis reporting is not available for payments to certain account holders, such as a nonqualified intermediary or a flow-through entity (discussed earlier). Taxs 2012 Collective refund procedures. Taxs 2012   A QI may seek a refund on behalf of its direct account holders. Taxs 2012 The direct account holders, therefore, are not required to file returns with the IRS to obtain refunds, but rather may obtain them from the QI. Taxs 2012 U. Taxs 2012 S. Taxs 2012 branches of foreign banks and foreign insurance companies. Taxs 2012   Special rules apply to a U. Taxs 2012 S. Taxs 2012 branch of a foreign bank subject to Federal Reserve Board supervision or a foreign insurance company subject to state regulatory supervision. Taxs 2012 If you agree to treat the branch as a U. Taxs 2012 S. Taxs 2012 person, you may treat the branch as a U. Taxs 2012 S. Taxs 2012 payee for a payment subject to NRA withholding provided you receive a Form W-8IMY from the U. Taxs 2012 S. Taxs 2012 branch on which the agreement is evidenced. Taxs 2012 If you treat the branch as a U. Taxs 2012 S. Taxs 2012 payee, you are not required to withhold. Taxs 2012 Even though you agree to treat the branch as a U. Taxs 2012 S. Taxs 2012 person, you must report the payment on Form 1042-S. Taxs 2012   A financial institution organized in a U. Taxs 2012 S. Taxs 2012 possession is treated as a U. Taxs 2012 S. Taxs 2012 branch. Taxs 2012 The special rules discussed in this section apply to a possessions financial institution. Taxs 2012   If you are paying a U. Taxs 2012 S. Taxs 2012 branch an amount that is not subject to NRA withholding, treat the payment as made to a foreign person, irrespective of any agreement to treat the branch as a U. Taxs 2012 S. Taxs 2012 person for amounts subject to NRA withholding. Taxs 2012 Consequently, amounts not subject to NRA withholding that are paid to a U. Taxs 2012 S. Taxs 2012 branch are not subject to Form 1099 reporting or backup withholding. Taxs 2012   Alternatively, a U. Taxs 2012 S. Taxs 2012 branch may provide you with a Form W-8IMY with which it associates the documentation of the persons on whose behalf it acts. Taxs 2012 In this situation, the payees are the persons on whose behalf the branch acts provided you can reliably associate the payment with valid documentation from those persons. Taxs 2012 See Nonqualified Intermediaries under  Documentation, later. Taxs 2012   If the U. Taxs 2012 S. Taxs 2012 branch does not provide you with a Form W-8IMY, then you should treat a payment subject to NRA withholding as made to the foreign person of which the branch is a part and the income as effectively connected with the conduct of a trade or business in the United States. Taxs 2012 Withholding foreign partnership and foreign trust. Taxs 2012   A withholding foreign partnership (WP) is any foreign partnership that has entered into a WP withholding agreement with the IRS and is acting in that capacity. Taxs 2012 A withholding foreign trust (WT) is a foreign simple or grantor trust that has entered into a WT withholding agreement with the IRS and is acting in that capacity. Taxs 2012   A WP or WT may act in that capacity only for payments of amounts subject to NRA withholding that are distributed to, or included in the distributive share of, its direct partners, beneficiaries, or owners. Taxs 2012 A WP or WT acting in that capacity must assume NRA withholding responsibility for these amounts. Taxs 2012 You may treat a WP or WT as a payee if it has provided you with documentation (discussed later) that represents that it is acting as a WP or WT for such amounts. Taxs 2012 WP and WT withholding agreements. Taxs 2012   The WP and WT withholding agreements and the application procedures for the agreements are in Revenue Procedure 2003-64. Taxs 2012 Also see the following items. Taxs 2012 Revenue Procedure 2004-21. Taxs 2012 Revenue Procedure 2005-77. Taxs 2012 Employer identification number (EIN). Taxs 2012   A completed Form SS-4 must be submitted with the application for being a WP or WT. Taxs 2012 The WP or WT will be assigned a WP-EIN or WT-EIN to be used only when acting in that capacity. Taxs 2012 Documentation. Taxs 2012   A WP or WT must provide you with a Form W-8IMY that certifies that the WP or WT is acting in that capacity and a written statement identifying the amounts for which it is so acting. Taxs 2012 The statement is not required to contain withholding rate pool information or any information relating to the identity of a direct partner, beneficiary, or owner. Taxs 2012 The Form W-8IMY must contain the WP-EIN or WT-EIN. Taxs 2012 Foreign Persons A payee is subject to NRA withholding only if it is a foreign person. Taxs 2012 A foreign person includes a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, foreign estate, and any other person that is not a U. Taxs 2012 S. Taxs 2012 person. Taxs 2012 It also includes a foreign branch of a U. Taxs 2012 S. Taxs 2012 financial institution if the foreign branch is a qualified intermediary. Taxs 2012 In most cases, the U. Taxs 2012 S. Taxs 2012 branch of a foreign corporation or partnership is treated as a foreign person. Taxs 2012 Nonresident alien. Taxs 2012   A nonresident alien is an individual who is not a U. Taxs 2012 S. Taxs 2012 citizen or a resident alien. Taxs 2012 A resident of a foreign country under the residence article of an income tax treaty is a nonresident alien individual for purposes of withholding. Taxs 2012 Married to U. Taxs 2012 S. Taxs 2012 citizen or resident alien. Taxs 2012   Nonresident alien individuals married to U. Taxs 2012 S. Taxs 2012 citizens or resident aliens may choose to be treated as resident aliens for certain income tax purposes. Taxs 2012 However, these individuals are still subject to the NRA withholding rules that apply to nonresident aliens for all income except wages. Taxs 2012 Wages paid to these individuals are subject to graduated withholding. Taxs 2012 See Wages Paid to Employees—Graduated Withholding . Taxs 2012 Resident alien. Taxs 2012   A resident alien is an individual who is not a citizen or national of the United States and who meets either the green card test or the substantial presence test for the calendar year. Taxs 2012 Green card test. Taxs 2012 An alien is a resident alien if the individual was a lawful permanent resident of the United States at any time during the calendar year. Taxs 2012 This is known as the green card test because these aliens hold immigrant visas (also known as green cards). Taxs 2012 Substantial presence test. Taxs 2012 An alien is considered a resident alien if the individual meets the substantial presence test for the calendar year. Taxs 2012 Under this test, the individual must be physically present in the United States on at least: 31 days during the current calendar year, and 183 days during the current year and the 2 preceding years, counting all the days of physical presence in the current year, but only 1/3 the number of days of presence in the first preceding year, and only 1/6 the number of days in the second preceding year. Taxs 2012   In most cases, the days the alien is in the United States as a teacher, student, or trainee on an “F,” “J,” “M,” or “Q” visa are not counted. Taxs 2012 This exception is for a limited period of time. Taxs 2012   For more information on resident and nonresident status, the tests for residence, and the exceptions to them, see Publication 519. Taxs 2012 Note. Taxs 2012   If your employee is late in notifying you that his or her status changed from nonresident alien to resident alien, you may have to make an adjustment to Form 941 if that employee was exempt from withholding of social security and Medicare taxes as a nonresident alien. Taxs 2012 For more information on making adjustments, see chapter 13 of Publication 15 (Circular E). Taxs 2012 Resident of a U. Taxs 2012 S. Taxs 2012 possession. Taxs 2012   A bona fide resident of Puerto Rico, the U. Taxs 2012 S. Taxs 2012 Virgin Islands, Guam, the Commonwealth of the Northern Mariana Islands (CNMI), or American Samoa who is not a U. Taxs 2012 S. Taxs 2012 citizen or a U. Taxs 2012 S. Taxs 2012 national is treated as a nonresident alien for the withholding rules explained here. Taxs 2012 A bona fide resident of a possession is someone who: Meets the presence test, Does not have a tax home outside the possession, and Does not have a closer connection to the United States or to a foreign country than to the possession. Taxs 2012   For more information, see Publication 570, Tax Guide for Individuals With Income From U. Taxs 2012 S. Taxs 2012 Possessions. Taxs 2012 Foreign corporations. Taxs 2012   A foreign corporation is one that does not fit the definition of a domestic corporation. Taxs 2012 A domestic corporation is one that was created or organized in the United States or under the laws of the United States, any of its states, or the District of Columbia. Taxs 2012 Guam or Northern Mariana Islands corporations. Taxs 2012   A corporation created or organized in, or under the laws of, Guam or the CNMI is not considered a foreign corporation for the purpose of withholding tax for the tax year if: At all times during the tax year less than 25% in value of the corporation's stock is owned, directly or indirectly, by foreign persons; and At least 20% of the corporation's gross income is derived from sources within Guam or the CNMI for the 3-year period ending with the close of the preceding tax year of the corporation (or the period the corporation has been in existence, if less). Taxs 2012 Note. Taxs 2012   The provisions discussed below under U. Taxs 2012 S. Taxs 2012 Virgin Islands and American Samoa corporations will apply to Guam or CNMI corporations when an implementing agreement is in effect between the United States and that possession. Taxs 2012 U. Taxs 2012 S. Taxs 2012 Virgin Islands and American Samoa corporations. Taxs 2012   A corporation created or organized in, or under the laws of, the U. Taxs 2012 S. Taxs 2012 Virgin Islands or American Samoa is not considered a foreign corporation for the purposes of withholding tax for the tax year if: At all times during the tax year less than 25% in value of the corporation's stock is owned, directly or indirectly, by foreign persons, At least 65% of the corporation's gross income is effectively connected with the conduct of a trade or business in the U. Taxs 2012 S. Taxs 2012 Virgin Islands, American Samoa, Guam, the CNMI, or the United States for the 3-year period ending with the close of the tax year of the corporation (or the period the corporation or any predecessor has been in existence, if less), and No substantial part of the income of the corporation is used, directly or indirectly, to satisfy obligations to a person who is not a bona fide resident of the U. Taxs 2012 S. Taxs 2012 Virgin Islands, American Samoa, Guam, the CNMI, or the United States. Taxs 2012 Foreign private foundations. Taxs 2012   A private foundation that was created or organized under the laws of a foreign country is a foreign private foundation. Taxs 2012 Gross investment income from sources within the United States paid to a qualified foreign private foundation is subject to NRA withholding at a 4% rate (unless exempted by a treaty) rather than the ordinary statutory 30% rate. Taxs 2012 Other foreign organizations, associations, and charitable institutions. Taxs 2012   An organization may be exempt from income tax under section 501(a) of the Internal Revenue Code even if it was formed under foreign law. Taxs 2012 In most cases, you do not have to withhold tax on payments of income to these foreign tax-exempt organizations unless the IRS has determined that they are foreign private foundations. Taxs 2012   Payments to these organizations, however, must be reported on Form 1042-S, even though no tax is withheld. Taxs 2012   You must withhold tax on the unrelated business income (as described in Publication 598, Tax on Unrelated Business Income of Exempt Organizations) of foreign tax-exempt organizations in the same way that you would withhold tax on similar income of nonexempt organizations. Taxs 2012 U. Taxs 2012 S. Taxs 2012 branches of foreign persons. Taxs 2012   In most cases, a payment to a U. Taxs 2012 S. Taxs 2012 branch of a foreign person is a payment made to the foreign person. Taxs 2012 However, you may treat payments to U. Taxs 2012 S. Taxs 2012 branches of foreign banks and foreign insurance companies (discussed earlier) that are subject to U. Taxs 2012 S. Taxs 2012 regulatory supervision as payments made to a U. Taxs 2012 S. Taxs 2012 person, if you and the U. Taxs 2012 S. Taxs 2012 branch have agreed to do so, and if their agreement is evidenced by a withholding certificate, Form W-8IMY. Taxs 2012 For this purpose, a financial institution organized under the laws of a U. Taxs 2012 S. Taxs 2012 possession is treated as a U. Taxs 2012 S. Taxs 2012 branch. Taxs 2012 Documentation In most cases, you must withhold 30% from the gross amount paid to a foreign payee unless you can reliably associate the payment with valid documentation that establishes either of the following. Taxs 2012 The payee is a U. Taxs 2012 S. Taxs 2012 person. Taxs 2012 The payee is a foreign person that is the beneficial owner of the income and is entitled to a reduced rate of withholding. Taxs 2012 In most cases, you must get the documentation before you make the payment. Taxs 2012 The documentation is not valid if you know, or have reason to know, that it is unreliable or incorrect. Taxs 2012 See Standards of Knowledge , later. Taxs 2012 If you cannot reliably associate a payment with valid documentation, you must use the presumption rules discussed later. Taxs 2012 For example, if you do not have documentation or you cannot determine the part of a payment that is allocable to specific documentation, you must use the presumption rules. Taxs 2012 The specific types of documentation are discussed in this section. Taxs 2012 However, see Withholding on Specific Income , later, as well as the instructions to the particular forms. Taxs 2012 As the withholding agent, you also may want to see the Instructions for the Requester of Forms W-8BEN, W-8ECI, W-8EXP, and W-8IMY. Taxs 2012 Section 1446 withholding. Taxs 2012   Under section 1446 of the Code, a partnership must withhold tax on its effectively connected income allocable to a foreign partner. Taxs 2012 In most cases, a partnership determines if a partner is a foreign partner and the partner's tax classification based on the withholding certificate provided by the partner. Taxs 2012 This is the same documentation that is filed for NRA withholding, but may require additional information as discussed under each of the forms in this section. Taxs 2012 Joint owners. Taxs 2012    If you make a payment to joint owners, you need to get documentation from each owner. Taxs 2012 Form W-9. Taxs 2012   In most cases, you can treat the payee as a U. Taxs 2012 S. Taxs 2012 person if the payee gives you a Form W-9. Taxs 2012 The Form W-9 can be used only by a U. Taxs 2012 S. Taxs 2012 person and must contain the payee's taxpayer identification number (TIN). Taxs 2012 If there is more than one owner, you may treat the total amount as paid to a U. Taxs 2012 S. Taxs 2012 person if any one of the owners gives you a Form W-9. Taxs 2012 See U. Taxs 2012 S. Taxs 2012 Taxpayer Identification Numbers , later. Taxs 2012 U. Taxs 2012 S. Taxs 2012 persons are not subject to NRA withholding, but may be subject to Form 1099 reporting and backup withholding. Taxs 2012 Form W-8. Taxs 2012   In most cases, a foreign payee of the income should give you a form in the Form W-8 series. Taxs 2012 Until further notice, you can rely upon Forms W-8 that contain a P. Taxs 2012 O. Taxs 2012 box as a permanent residence address provided you do not know, or have reason to know, that the person providing the form is a U. Taxs 2012 S. Taxs 2012 person and that a street address is available. Taxs 2012 You may rely on Forms W-8 for which there is a U. Taxs 2012 S. Taxs 2012 mailing address provided you received the form prior to December 31, 2001. Taxs 2012   If certain requirements are met, the foreign person can give you documentary evidence, rather than a Form W-8. Taxs 2012 You can rely on documentary evidence in lieu of a Form W-8 for a payment made in a U. Taxs 2012 S. Taxs 2012 possession. Taxs 2012 Other documentation. Taxs 2012   Other documentation may be required to claim an exemption from, or a reduced rate of, withholding on pay for personal services. Taxs 2012 The nonresident alien individual may have to give you a Form W-4 or a Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual. Taxs 2012 These forms are discussed in Pay for Personal Services Performed under Withholding on Specific Income. Taxs 2012 Beneficial Owners If all the appropriate requirements have been established on a Form W-8BEN, W-8ECI, W-8EXP or, if applicable, on documentary evidence, you may treat the payee as a foreign beneficial owner. Taxs 2012 Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. Taxs 2012   This form is used by a foreign person to: Establish foreign status; Claim that such person is the beneficial owner of the income for which the form is being furnished or a partner in a partnership subject to section 1446 withholding; and If applicable, claim a reduced rate of, or exemption from, withholding under an income tax treaty. Taxs 2012   Form W-8BEN also may be used to claim that the foreign person is exempt from Form 1099 reporting and backup withholding for income that is not subject to NRA withholding. Taxs 2012 For example, a foreign person may provide a Form W-8BEN to a broker to establish that the gross proceeds from the sale of securities are not subject to Form 1099 reporting or backup withholding. Taxs 2012 Claiming treaty benefits. Taxs 2012   You may apply a reduced rate of withholding to a foreign person that provides a Form W-8BEN claiming a reduced rate of withholding under an income tax treaty only if the person provides a U. Taxs 2012 S. Taxs 2012 TIN and certifies that: It is a resident of a treaty country; It is the beneficial owner of the income; If it is an entity, it derives the income within the meaning of section 894 of the Internal Revenue Code (it is not fiscally transparent); and It meets any limitation on benefits provision contained in the treaty, if applicable. Taxs 2012   If the foreign beneficial owner claiming a treaty benefit is related to you, the foreign beneficial owner also must certify on Form W-8BEN that it will file Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), if the amount subject to NRA withholding received during a calendar year exceeds, in the aggregate, $500,000. Taxs 2012   An entity derives income for which it is claiming treaty benefits only if the entity is not treated as fiscally transparent for that income. Taxs 2012 See Fiscally transparent entity discussed earlier under Flow-Through Entities. Taxs 2012   Limitations on benefits provisions generally prohibit third country residents from obtaining treaty benefits. Taxs 2012 For example, a foreign corporation may not be entitled to a reduced rate of withholding unless a minimum percentage of its owners are citizens or residents of the United States or the treaty country. Taxs 2012   The exemptions from, or reduced rates of, U. Taxs 2012 S. Taxs 2012 tax vary under each treaty. Taxs 2012 You must check the provisions of the tax treaty that apply. Taxs 2012 Tables at the end of this publication show the countries with which the United States has income tax treaties and the rates of withholding that apply in cases where all conditions of the particular treaty articles are satisfied. Taxs 2012   If you know, or have reason to know, that an owner of income is not eligible for treaty benefits claimed, you must not apply the treaty rate. Taxs 2012 You are not, however, responsible for misstatements on a Form W-8, documentary evidence, or statements accompanying documentary evidence for which you did not have actual knowledge, or reason to know, that the statements were incorrect. Taxs 2012 Exceptions to TIN requirement. Taxs 2012   A foreign person does not have to provide a TIN to claim a reduced rate of withholding under a treaty if the requirements for the following exceptions are met. Taxs 2012 Income from marketable securities (discussed next). Taxs 2012 Unexpected payments to an individual (discussed under U. Taxs 2012 S. Taxs 2012 Taxpayer Identification Numbers ). Taxs 2012 Marketable securities. Taxs 2012   A Form W-8BEN provided to claim treaty benefits does not need a U. Taxs 2012 S. Taxs 2012 TIN if the foreign beneficial owner is claiming the benefits on income from marketable securities. Taxs 2012 For this purpose, income from a marketable security consists of the following items. Taxs 2012 Dividends and interest from stocks and debt obligations that are actively traded. Taxs 2012 Dividends from any redeemable security issued by an investment company registered under the Investment Company Act of 1940 (mutual fund). Taxs 2012 Dividends, interest, or royalties from units of beneficial interest in a unit investment trust that are (or were upon issuance) publicly offered and are registered with the SEC under the Securities Act of 1933. Taxs 2012 Income related to loans of any of the above securities. Taxs 2012 Offshore accounts. Taxs 2012   If a payment is made outside the United States to an offshore account, a payee may give you documentary evidence, rather than Form W-8BEN. Taxs 2012   In most cases, a payment is made outside the United States if you complete the acts necessary to effect the payment outside the United States. Taxs 2012 However, an amount paid by a bank or other financial institution on a deposit or account usually will be treated as paid at the branch or office where the amount is credited. Taxs 2012 An offshore account is an account maintained at an office or branch of a U. Taxs 2012 S. Taxs 2012 or foreign bank or other financial institution at any location outside the United States. Taxs 2012   You may rely on documentary evidence given to you by a nonqualified intermediary or a flow-through entity with its Form W-8IMY. Taxs 2012 This rule applies even though you make the payment to a nonqualified intermediary or flow-through entity in the United States. Taxs 2012 In most cases, the nonqualified intermediary or flow-through entity that gives you documentary evidence also will have to give you a withholding statement, discussed later. Taxs 2012 Documentary evidence. Taxs 2012   You may apply a reduced rate of withholding to income from marketable securities (discussed earlier) paid outside the United States to an offshore account if the beneficial owner gives you documentary evidence in place of a Form W-8BEN. Taxs 2012 To claim treaty benefits, the documentary evidence must be one of the following: A certificate of residence that: Is issued by a tax official of the treaty country of which the foreign beneficial owner claims to be a resident, States that the person has filed its most recent income tax return as a resident of that country, and Is issued within 3 years prior to being presented to you. Taxs 2012 Documentation for an individual that: Includes the individual's name, address, and photograph, Is an official document issued by an authorized governmental body, and Is issued no more than 3 years prior to being presented to you. Taxs 2012 Documentation for an entity that: Includes the name of the entity, Includes the address of its principal office in the treaty country, and Is an official document issued by an authorized governmental body. Taxs 2012 In addition to the documentary evidence, a foreign beneficial owner that is an entity must provide a statement that it derives the income for which it claims treaty benefits and that it meets one or more of the conditions set forth in a limitation on benefits article, if any, (or similar provision) contained in the applicable treaty. Taxs 2012 Form W-8ECI, Certificate of Foreign Person's Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States. Taxs 2012   This form is used by a foreign person to: Establish foreign status, Claim that such person is the beneficial owner of the income for which the form is being furnished, and Claim that the income is effectively connected with the conduct of a trade or business in the United States. Taxs 2012 (See Effectively Connected Income , later. Taxs 2012 )   Effectively connected income for which a valid Form W-8ECI has been provided is generally not subject to NRA withholding. Taxs 2012   If a partner submits this form to a partnership, the income claimed to be effectively connected with the conduct of a U. Taxs 2012 S. Taxs 2012 trade or business is subject to withholding under section 1446. Taxs 2012 If the partner has made, or will make, an election under section 871(d) or 882(d), the partner must submit Form W-8ECI, and attach a copy of the election, or a statement of intent to elect, to the form. Taxs 2012    If the partner's only effectively connected income is the income allocated from the partnership and the partner is not making the election under section 871(d) or 882(d), the partner should provide Form W-8BEN to the partnership. Taxs 2012 Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding. Taxs 2012   This form is used by a foreign government, international organization, foreign central bank of issue, foreign tax-exempt organization, foreign private foundation, or government of a U. Taxs 2012 S. Taxs 2012 possession to: Establish foreign status, Claim that such person is the beneficial owner of the income for which the form is being furnished, and Claim a reduced rate of, or an exemption from, withholding as such an entity. Taxs 2012   If the government or organization is a partner in a partnership carrying on a trade or business in the United States, the effectively connected income allocable to the partner is subject to withholding under section 1446. Taxs 2012   See Foreign Governments and Certain Other Foreign Organizations , later. Taxs 2012 Foreign Intermediaries and Foreign Flow-Through Entities Payments made to a foreign intermediary or foreign flow-through entity are treated as made to the payees on whose behalf the intermediary or entity acts. Taxs 2012 The Form W-8IMY provided by a foreign intermediary or flow-through entity must be accompanied by additional information for you to be able to reliably associate the payment with a payee. Taxs 2012 The additional information required depends on the type of intermediary or flow-through entity and the extent of the withholding responsibilities it assumes. Taxs 2012 Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U. Taxs 2012 S. Taxs 2012 Branches for United States Tax Withholding. Taxs 2012   This form is used by foreign intermediaries and foreign flow-through entities, as well as certain U. Taxs 2012 S. Taxs 2012 branches, to: Represent that a foreign person is a qualified intermediary or nonqualified intermediary, Represent, if applicable, that the qualified intermediary is assuming primary NRA withholding responsibility and/or primary Form 1099 reporting and backup withholding responsibility, Represent that a foreign partnership or a foreign simple or grantor trust is a withholding foreign partnership or a withholding foreign trust, Represent that a foreign flow-through entity is a nonwithholding foreign partnership, or a nonwithholding foreign trust and that the income is not effectively connected with the conduct of a trade or business in the United States, Represent that the provider is a U. Taxs 2012 S. Taxs 2012 branch of a foreign bank or insurance company and either is agreeing to be treated as a U. Taxs 2012 S. Taxs 2012 person or is transmitting documentation of the persons on whose behalf it is acting, or Represent that, for purposes of section 1446, it is an upper-tier foreign partnership or a foreign grantor trust and that the form is being used to transmit the required documentation. Taxs 2012 For information on qualifying as an upper-tier foreign partnership, see Regulations section 1. Taxs 2012 1446-5. Taxs 2012 Qualified Intermediaries In most cases, a QI is any foreign intermediary that has entered into a QI withholding agreement (discussed earlier) with the IRS. Taxs 2012 A foreign intermediary that has received a QI employer identification number (QI-EIN) may represent on Form W-8IMY that it is a QI before it receives a fully executed agreement. Taxs 2012 The intermediary can claim that it is a QI until the IRS revokes its QI-EIN. Taxs 2012 The IRS will revoke a QI-EIN if the QI agreement is not executed and returned to the IRS within a reasonable period of time after the agreement was sent to the intermediary for signature. Taxs 2012 Responsibilities. Taxs 2012   Payments made to a QI that does not assume NRA withholding responsibility are treated as paid to its account holders and customers. Taxs 2012 However, a QI is not required to provide you with documentation it obtains from its foreign account holders and customers. Taxs 2012 Instead, it provides you with a withholding statement that contains withholding rate pool information. Taxs 2012 A withholding rate pool is a payment of a single type of income, determined in accordance with the categories of income reported on Form 1042-S that is subject to a single rate of withholding. Taxs 2012 A qualified intermediary is required to provide you with information regarding U. Taxs 2012 S. Taxs 2012 persons subject to Form 1099 reporting and to provide you withholding rate pool information separately for each such U. Taxs 2012 S. Taxs 2012 person unless it has assumed Form 1099 reporting and backup withholding responsibility. Taxs 2012 For the alternative procedure for providing rate pool information for U. Taxs 2012 S. Taxs 2012 non-exempt persons, see the Form W-8IMY instructions. Taxs 2012   The withholding statement must: Designate those accounts for which it acts as a qualified intermediary, Designate those accounts for which it assumes primary NRA withholding responsibility and/or primary Form 1099 and backup withholding responsibility, and Provide sufficient information for you to allocate the payment to a withholding rate pool. Taxs 2012   The extent to which you must have withholding rate pool information depends on the withholding and reporting obligations assumed by the QI. Taxs 2012 Primary responsibility not assumed. Taxs 2012   If a QI does not assume primary NRA withholding responsibility or primary Form 1099 reporting and backup withholding responsibility for the payment, you can reliably associate the payment with valid documentation only to the extent you can reliably determine the part of the payment that relates to each withholding rate pool for foreign payees. Taxs 2012 Unless the alternative procedure applies, the qualified intermediary must provide you with a separate withholding rate pool for each U. Taxs 2012 S. Taxs 2012 person subject to Form 1099 reporting and/or backup withholding. Taxs 2012 The QI must provide a Form W-9 or, in the absence of the form, the name, address, and TIN, if available, for such person. Taxs 2012 Primary NRA withholding responsibility assumed. Taxs 2012   If you make a payment to a QI that assumes primary NRA withholding responsibility (but not primary Form 1099 reporting and backup withholding responsibility), you can reliably associate the payment with valid documentation only to the extent you can reliably determine the part of the payment that relates to the withholding rate pool for which the QI assumes primary NRA withholding responsibility and the part of the payment attributable to withholding rate pools for each U. Taxs 2012 S. Taxs 2012 person, unless the alternative procedure applies, subject to Form 1099 reporting and/or backup withholding. Taxs 2012 The QI must provide a Form W-9 or, in the absence of the form, the name, address, and TIN, if available, for such person. Taxs 2012 Primary NRA and Form 1099 responsibility assumed. Taxs 2012   If you make a payment to a QI that assumes both primary NRA withholding responsibility and primary Form 1099 reporting and backup withholding responsibility, you can reliably associate a payment with valid documentation provided that you receive a valid Form W-8IMY. Taxs 2012 It is not necessary to associate the payment with withholding rate pools. Taxs 2012 Example. Taxs 2012 You make a payment of dividends to a QI. Taxs 2012 It has five customers: two are foreign persons who have provided documentation entitling them to a 15% rate of withholding on dividends; two are foreign persons subject to a 30% rate of withholding on dividends; and one is a U. Taxs 2012 S. Taxs 2012 individual who provides it with a Form W-9. Taxs 2012 Each customer is entitled to 20% of the dividend payment. Taxs 2012 The QI does not assume any primary withholding responsibility. Taxs 2012 The QI gives you a Form W-8IMY with which it associates the Form W-9 and a withholding statement that allocates 40% of the dividend to a 15% withholding rate pool, 40% to a 30% withholding rate pool, and 20% to the U. Taxs 2012 S. Taxs 2012 individual. Taxs 2012 You should report on Forms 1042-S 40% of the payment as made to a 15% rate dividend pool and 40% of the payment as made to a 30% rate dividend pool. Taxs 2012 The part of the payment allocable to the U. Taxs 2012 S. Taxs 2012 individual (20%) is reportable on Form 1099-DIV. Taxs 2012 Smaller partnerships and trusts. Taxs 2012   A QI may apply special rules to a smaller partnership or trust (Joint Account Provision) only if the partnership or trust meets the following conditions. Taxs 2012 It is a foreign partnership or foreign simple or grantor trust. Taxs 2012 It is a direct account holder of the QI. Taxs 2012 It does not have any partner, beneficiary, or owner that is a U. Taxs 2012 S. Taxs 2012 person or a pass- through partner, beneficiary, or owner. Taxs 2012   For information on these rules, see section 4A. Taxs 2012 01 of the QI agreement. Taxs 2012 This is found in Appendix 3 of Revenue Procedure 2003-64. Taxs 2012 Also see Revenue Procedure 2004-21. Taxs 2012 Related partnerships and trusts. Taxs 2012    A QI may apply special rules to a related partnership or trust only if the partnership or trust meets the following conditions. Taxs 2012 It is a foreign partnership or foreign simple or grantor trust. Taxs 2012 It is either: A direct account holder of the QI, or An indirect account holder of the QI that is a direct partner, beneficiary, or owner of a partnership or trust to which the QI has applied this rule. Taxs 2012 For information on these rules, see section 4A. Taxs 2012 02 of the QI agreement. Taxs 2012 This is found in Appendix 3 of Revenue Procedure 2003-64. Taxs 2012 Also see Revenue Procedure 2005-77. Taxs 2012 Nonqualified Intermediaries If you are making a payment to an NQI, foreign flow-through entity, or U. Taxs 2012 S. Taxs 2012 branch that is using Form W-8IMY to transmit information about the branch's account holders or customers, you can treat the payment (or a part of the payment) as reliably associated with valid documentation from a specific payee only if, prior to making the payment: You can allocate the payment to a valid Form W-8IMY, You can reliably determine how much of the payment relates to valid documentation provided by a payee (a person that is not itself a foreign intermediary, flow- through entity, or U. Taxs 2012 S. Taxs 2012 branch), and You have sufficient information to report the payment on Form 1042-S or Form 1099, if reporting is required. Taxs 2012 The NQI, flow-through entity, or U. Taxs 2012 S. Taxs 2012 branch must give you certain information on a withholding statement that is associated with the Form W-8IMY. Taxs 2012 A withholding statement must be updated to keep the information accurate prior to each payment. Taxs 2012 Withholding statement. Taxs 2012   In most cases, a withholding statement must contain the following information. Taxs 2012 The name, address, and TIN (if any, or if required) of each person for whom documentation is provided. Taxs 2012 The type of documentation (documentary evidence, Form W-8, or Form W-9) for every person for whom documentation has been provided. Taxs 2012 The status of the person for whom the documentation has been provided, such as whether the person is a U. Taxs 2012 S. Taxs 2012 exempt recipient (U. Taxs 2012 S. Taxs 2012 person exempt from Form 1099 reporting), U. Taxs 2012 S. Taxs 2012 non-exempt recipient (U. Taxs 2012 S. Taxs 2012 person subject to Form 1099 reporting), or a foreign person. Taxs 2012 For a foreign person, the statement must indicate whether the person is a beneficial owner or a foreign intermediary, flow-through entity, or a U. Taxs 2012 S. Taxs 2012 branch. Taxs 2012 The type of recipient the person is, based on the recipient codes used on Form 1042-S. Taxs 2012 Information allocating each payment, by income type, to each payee (including U. Taxs 2012 S. Taxs 2012 exempt and U. Taxs 2012 S. Taxs 2012 non-exempt recipients) for whom documentation has been provided. Taxs 2012 The rate of withholding that applies to each foreign person to whom a payment is allocated. Taxs 2012 A foreign payee's country of residence. Taxs 2012 If a reduced rate of withholding is claimed, the basis for a reduced rate of withholding (for example, portfolio interest, treaty benefit, etc. Taxs 2012 ). Taxs 2012 In the case of treaty benefits claimed by entities, whether the applicable limitation on benefits statement and the statement that the foreign person derives the income for which treaty benefits are claimed, have been made. Taxs 2012 The name, address, and TIN (if any) of any other NQI, flow-through entity, or U. Taxs 2012 S. Taxs 2012 branch from which the payee will directly receive a payment. Taxs 2012 Any other information a withholding agent requests to fulfill its reporting and withholding obligations. Taxs 2012 Alternative procedure. Taxs 2012   Under this alternative procedure the NQI can give you the information that allocates each payment to each foreign and U. Taxs 2012 S. Taxs 2012 exempt recipient by January 31 following the calendar year of payment, rather than prior to the payment being made as otherwise required. Taxs 2012 To take advantage of this procedure, the NQI must: (a) inform you, on its withholding statement, that it is using the alternative procedure; and (b) obtain your consent. Taxs 2012 You must receive the withholding statement with all the required information (other than item 5) prior to making the payment. Taxs 2012    This alternative procedure cannot be used for payments to U. Taxs 2012 S. Taxs 2012 non-exempt recipients. Taxs 2012 Therefore, an NQI must always provide you with allocation information for all U. Taxs 2012 S. Taxs 2012 non-exempt recipients prior to a payment being made. Taxs 2012 Pooled withholding information. Taxs 2012   If an NQI uses the alternative procedure, it must provide you with withholding rate pool information, as opposed to individual allocation information, prior to the payment of a reportable amount. Taxs 2012 A withholding rate pool is a payment of a single type of income (as determined by the income categories on Form 1042-S) that is subject to a single rate of withholding. Taxs 2012 For example, an NQI that has foreign account holders receiving royalties and dividends, both subject to the 15% rate, will provide you with information for two withholding rate pools (one for royalties and one for dividends). Taxs 2012 The NQI must provide you with the payee specific allocation information (information allocating each payment to each payee) by January 31 following the calendar year of payment. Taxs 2012 Failure to provide allocation information. Taxs 2012   If an NQI fails to provide you with the payee specific allocation information for a withholding rate pool by January 31, you must not apply the alternative procedure to any of the NQI's withholding rate pools from that date forward. Taxs 2012 You must treat the payees as undocumented and apply the presumption rules, discussed later in Presumption Rules . Taxs 2012 An NQI is deemed to have f
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Use This Checklist to Plan Your Purchase:

  • Decide in advance exactly what you want and what you can afford.
  • Do your research. Ask family, friends and others you trust for advice based on their experience. Gather information about the seller and the item or service you are purchasing.
  • Review product test results and other information from consumer experts.
  • Get advice and price quotes from several sellers.
  • Make sure that the seller has all appropriate licenses. Doctors, lawyers, contractors and other service providers must register with a state or local licensing agency.
  • Check out a company's complaint record with your local consumer affairs office and Better Business Bureau.
  • Get a written copy of guarantees and warranties. Compare their features.
  • Get the seller's refund, return and cancellation policies.
  • Sometimes retailers do not update cash register scanners with updated prices. If you think the price displayed isn't right, speak up.
  • Ask whom to contact if you have a question or problem.
  • Read and understand any contract or legal document you are asked to sign. Make sure there are no blank spaces. Insist that any extras you are promised be put in writing.
  • Consider paying by credit card. If you have a problem, you can dispute a charge made on your credit card.
  • Don't buy on impulse or under pressure. This includes donating to charity.

The Taxs 2012

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