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Vita tax services 4. Vita tax services   Figuring Depreciation Under MACRS Table of Contents Introduction Useful Items - You may want to see: Which Depreciation System (GDS or ADS) Applies? Which Property Class Applies Under GDS?Rent-to-own dealer. Vita tax services Rent-to-own contract. Vita tax services What Is the Placed in Service Date? What Is the Basis for Depreciation? Which Recovery Period Applies?Recovery Periods Under GDS Recovery Periods Under ADS Additions and Improvements Which Convention Applies? Which Depreciation Method Applies?Depreciation Methods for Farm Property Electing a Different Method How Is the Depreciation Deduction Figured?Using the MACRS Percentage Tables Figuring the Deduction Without Using the Tables Figuring the Deduction for Property Acquired in a Nontaxable Exchange Figuring the Deduction for a Short Tax Year How Do You Use General Asset Accounts?Grouping Property Figuring Depreciation for a GAA Disposing of GAA Property Terminating GAA Treatment Electing To Use a GAA When Do You Recapture MACRS Depreciation? Introduction The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. Vita tax services MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Vita tax services Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. Vita tax services To be sure you can use MACRS to figure depreciation for your property, see What Method Can You Use To Depreciate Your Property in chapter 1. Vita tax services This chapter explains how to determine which MACRS depreciation system applies to your property. Vita tax services It also discusses other information you need to know before you can figure depreciation under MACRS. Vita tax services This information includes the property's recovery class, placed in service date, and basis, as well as the applicable recovery period, convention, and depreciation method. Vita tax services It explains how to use this information to figure your depreciation deduction and how to use a general asset account to depreciate a group of properties. Vita tax services Finally, it explains when and how to recapture MACRS depreciation. Vita tax services Useful Items - You may want to see: Publication 225 Farmer's Tax Guide 463 Travel, Entertainment, Gift, and Car  Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 587 Business Use of Your Home (Including Use by Daycare Providers) Form (and Instructions) 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 4562 Depreciation and Amortization See chapter 6 for information about getting publications and forms. Vita tax services 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. Vita tax services You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Vita tax services If you placed your property in service in 2013, complete Part III of Form 4562 to report depreciation using MACRS. Vita tax services Complete section B of Part III to report depreciation using GDS, and complete section C of Part III to report depreciation using ADS. Vita tax services If you placed your property in service before 2013 and are required to file Form 4562, report depreciation using either GDS or ADS on line 17 in Part III. Vita tax services Required use of ADS. Vita tax services   You must use ADS for the following property. Vita tax services Listed property used 50% or less in a qualified business use. Vita tax services See chapter 5 for information on listed property. Vita tax services Any tangible property used predominantly outside the United States during the year. Vita tax services Any tax-exempt use property. Vita tax services Any tax-exempt bond-financed property. Vita tax services 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. Vita tax services 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. Vita tax services If you are required to use ADS to depreciate your property, you cannot claim any special depreciation allowance (discussed in chapter 3) for the property. Vita tax services Electing ADS. Vita tax services   Although your property may qualify for GDS, you can elect to use ADS. Vita tax services The election generally must cover all property in the same property class that you placed in service during the year. Vita tax services However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. Vita tax services Once you make this election, you can never revoke it. Vita tax services   You make the election by completing line 20 in Part III of Form 4562. Vita tax services Which Property Class Applies Under GDS? The following is a list of the nine property classifications under GDS and examples of the types of property included in each class. Vita tax services These property classes are also listed under column (a) in section B, Part III, of Form 4562. Vita tax services For detailed information on property classes, see Appendix B, Table of Class Lives and Recovery Periods, in this publication. Vita tax services 3-year property. Vita tax services Tractor units for over-the-road use. Vita tax services Any race horse over 2 years old when placed in service. Vita tax services (All race horses placed in service after December 31, 2008, and before January 1, 2014, are deemed to be 3-year property, regardless of age. Vita tax services ) Any other horse (other than a race horse) over 12 years old when placed in service. Vita tax services Qualified rent-to-own property (defined later). Vita tax services 5-year property. Vita tax services Automobiles, taxis, buses, and trucks. Vita tax services Computers and peripheral equipment. Vita tax services Office machinery (such as typewriters, calculators, and copiers). Vita tax services Any property used in research and experimentation. Vita tax services Breeding cattle and dairy cattle. Vita tax services Appliances, carpets, furniture, etc. Vita tax services , used in a residential rental real estate activity. Vita tax services Certain geothermal, solar, and wind energy property. Vita tax services 7-year property. Vita tax services Office furniture and fixtures (such as desks, files, and safes). Vita tax services Agricultural machinery and equipment. Vita tax services Any property that does not have a class life and has not been designated by law as being in any other class. Vita tax services Certain motorsports entertainment complex property (defined later) placed in service before January 1, 2014. Vita tax services Any natural gas gathering line placed in service after April 11, 2005. Vita tax services See Natural gas gathering line and electric transmission property , later. Vita tax services 10-year property. Vita tax services Vessels, barges, tugs, and similar water transportation equipment. Vita tax services Any single purpose agricultural or horticultural structure. Vita tax services Any tree or vine bearing fruits or nuts. Vita tax services Qualified small electric meter and qualified smart electric grid system (defined later) placed in service on or after October 3, 2008. Vita tax services 15-year property. Vita tax services Certain improvements made directly to land or added to it (such as shrubbery, fences, roads, sidewalks, and bridges). Vita tax services Any retail motor fuels outlet (defined later), such as a convenience store. Vita tax services Any municipal wastewater treatment plant. Vita tax services Any qualified leasehold improvement property (defined later) placed in service before January 1, 2014. Vita tax services Any qualified restaurant property (defined later) placed in service before January 1, 2014. Vita tax services Initial clearing and grading land improvements for gas utility property. Vita tax services Electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity placed in service after April 11, 2005. Vita tax services See Natural gas gathering line and electric transmission property , later. Vita tax services Any natural gas distribution line placed in service after April 11, 2005 and before January 1, 2011. Vita tax services Any qualified retail improvement property placed in service before January 1, 2014. Vita tax services 20-year property. Vita tax services Farm buildings (other than single purpose agricultural or horticultural structures). Vita tax services Municipal sewers not classified as 25-year property. Vita tax services Initial clearing and grading land improvements for electric utility transmission and distribution plants. Vita tax services 25-year property. Vita tax services This class is water utility property, which is either of the following. Vita tax services Property that is an integral part of the gathering, treatment, or commercial distribution of water, and that, without regard to this provision, would be 20-year property. Vita tax services Municipal sewers other than property placed in service under a binding contract in effect at all times since June 9, 1996. Vita tax services Residential rental property. Vita tax services This is any building or structure, such as a rental home (including a mobile home), if 80% or more of its gross rental income for the tax year is from dwelling units. Vita tax services A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. Vita tax services It does not include a unit in a hotel, motel, or other establishment where more than half the units are used on a transient basis. Vita tax services If you occupy any part of the building or structure for personal use, its gross rental income includes the fair rental value of the part you occupy. Vita tax services Nonresidential real property. Vita tax services This is section 1250 property, such as an office building, store, or warehouse, that is neither residential rental property nor property with a class life of less than 27. Vita tax services 5 years. Vita tax services Qualified rent-to-own property. Vita tax services   Qualified rent-to-own property is property held by a rent-to-own dealer for purposes of being subject to a rent-to-own contract. Vita tax services It is tangible personal property generally used in the home for personal use. Vita tax services It includes computers and peripheral equipment, televisions, videocassette recorders, stereos, camcorders, appliances, furniture, washing machines and dryers, refrigerators, and other similar consumer durable property. Vita tax services Consumer durable property does not include real property, aircraft, boats, motor vehicles, or trailers. Vita tax services   If some of the property you rent to others under a rent-to-own agreement is of a type that may be used by the renters for either personal or business purposes, you still can treat this property as qualified property as long as it does not represent a significant portion of your leasing property. Vita tax services However, if this dual-use property does represent a significant portion of your leasing property, you must prove that this property is qualified rent-to-own property. Vita tax services Rent-to-own dealer. Vita tax services   You are a rent-to-own dealer if you meet all the following requirements. Vita tax services You regularly enter into rent-to-own contracts (defined below) in the ordinary course of your business for the use of consumer property. Vita tax services A substantial portion of these contracts end with the customer returning the property before making all the payments required to transfer ownership. Vita tax services The property is tangible personal property of a type generally used within the home for personal use. Vita tax services Rent-to-own contract. Vita tax services   This is any lease for the use of consumer property between a rent-to-own dealer and a customer who is an individual which— Is titled “Rent-to-Own Agreement,” “Lease Agreement with Ownership Option,” or other similar language. Vita tax services Provides a beginning date and a maximum period of time, not to exceed 156 weeks or 36 months from the beginning date, for which the contract can be in effect (including renewals or options to extend). Vita tax services Provides for regular periodic (weekly or monthly) payments that can be either level or decreasing. Vita tax services If the payments are decreasing, no payment can be less than 40% of the largest payment. Vita tax services Provides for total payments that generally exceed the normal retail price of the property plus interest. Vita tax services Provides for total payments that do not exceed $10,000 for each item of property. Vita tax services Provides that the customer has no legal obligation to make all payments outlined in the contract and that, at the end of each weekly or monthly payment period, the customer can either continue to use the property by making the next payment or return the property in good working order with no further obligations and no entitlement to a return of any prior payments. Vita tax services Provides that legal title to the property remains with the rent-to-own dealer until the customer makes either all the required payments or the early purchase payments required under the contract to acquire legal title. Vita tax services Provides that the customer has no right to sell, sublease, mortgage, pawn, pledge, or otherwise dispose of the property until all contract payments have been made. Vita tax services Motorsports entertainment complex. Vita tax services   This is a racing track facility permanently situated on land that hosts one or more racing events for automobiles, trucks, or motorcycles during the 36-month period after the first day of the month in which the facility is placed in service. Vita tax services The events must be open to the public for the price of admission. Vita tax services Qualified smart electric grid system. Vita tax services   A qualified smart electric grid system means any smart grid property used as part of a system for electric distribution grid communications, monitoring, and management placed in service after October 3, 2008, by a taxpayer who is a supplier of electrical energy or a provider of electrical energy services. Vita tax services Smart grid property includes electronics and related equipment that is capable of: Sensing, collecting, and monitoring data of or from all portions of a utility's electric distribution grid, Providing real-time, two-way communications to monitor or to manage the grid, and Providing real-time analysis of an event prediction based on collected data that can be used to provide electric distribution system reliability, quality, and performance. Vita tax services Retail motor fuels outlet. Vita tax services   Real property is a retail motor fuels outlet if it is used to a substantial extent in the retail marketing of petroleum or petroleum products (whether or not it is also used to sell food or other convenience items) and meets any one of the following three tests. Vita tax services It is not larger than 1,400 square feet. Vita tax services 50% or more of the gross revenues generated from the property are derived from petroleum sales. Vita tax services 50% or more of the floor space in the property is devoted to petroleum marketing sales. Vita tax services A retail motor fuels outlet does not include any facility related to petroleum and natural gas trunk pipelines. Vita tax services Qualified leasehold improvement property. Vita tax services    Generally, this is any improvement to an interior part of a building (placed in service before January 1, 2014) that is nonresidential real property, provided all of the requirements discussed in chapter 3 under Qualified leasehold improvement property are met. Vita tax services   In addition, an improvement made by the lessor does not qualify as qualified leasehold improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor's death or in any of the following types of transactions. Vita tax services A transaction to which section 381(a) applies, A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business, A like-kind exchange, involuntary conversion, or reacquisition of real property to the extent that the basis in the property represents the carryover basis, or Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor's or distributor's basis in the property. Vita tax services Examples include the following. Vita tax services A complete liquidation of a subsidiary. Vita tax services A transfer to a corporation controlled by the transferor. Vita tax services An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. Vita tax services Qualified restaurant property. Vita tax services   Qualified restaurant property is any section 1250 property that is a building placed in service after December 31, 2008, and before January 1, 2014. Vita tax services Also, more than 50% of the building's square footage must be devoted to preparation of meals and seating for on-premises consumption of prepared meals. Vita tax services Qualified smart electric meter. Vita tax services   A qualified smart electric meter is any time-based meter and related communication equipment which is placed in service by a supplier of electric energy or a provider of electric energy services and which is capable of being used by you as part of a system that: Measures and records electricity usage data on a time-differentiated basis in at least 24 separate time segments per day; Provides for the exchange of information between the supplier or provider and the customer's smart electric meter in support of time-based rates or other forms of demand response; Provides data to the supplier or provider so that the supplier or provider can provide energy usage information to customers electronically, and Provides all commercial and residential customers of such supplier or provider with net metering. Vita tax services Net metering means allowing a customer a credit, if any, as complies with applicable federal and state laws and regulations for providing electricity to the supplier or provider. Vita tax services Natural gas gathering line and electric transmission property. Vita tax services   Any natural gas gathering line placed in service after April 11, 2005, is treated as 7-year property, and electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity and any natural gas distribution line placed in service after April 11, 2005, are treated as 15-year property, if the following requirements are met. Vita tax services The original use of the property must have begun with you after April 11, 2005. Vita tax services Original use means the first use to which the property is put, whether or not by you. Vita tax services Therefore, property used by any person before April 12, 2005, is not original use. Vita tax services Original use includes additional capital expenditures you incurred to recondition or rebuild your property. Vita tax services However, original use does not include the cost of reconditioned or rebuilt property you acquired. Vita tax services Property containing used parts will not be treated as reconditioned or rebuilt if the cost of the used parts is not more than 20% of the total cost of the property. Vita tax services The property must not be placed in service under a binding contract in effect before April 12, 2005. Vita tax services The property must not be self-constructed property (property you manufacture, construct, or produce for your own use), if you began the manufacture, construction, or production of the property before April 12, 2005. Vita tax services Property that is manufactured, constructed, or produced for your use by another person under a written binding contract entered into by you or a related party before the manufacture, construction, or production of the property is considered to be manufactured, constructed, or produced by you. Vita tax services What Is the Placed in Service Date? You begin to claim depreciation when your property is placed in service for either use in a trade or business or the production of income. Vita tax services The placed in service date for your property is the date the property is ready and available for a specific use. Vita tax services It is therefore not necessarily the date it is first used. Vita tax services 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. Vita tax services See Placed in Service under When Does Depreciation Begin and End in chapter 1 for examples illustrating when property is placed in service. Vita tax services 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. Vita tax services For a discussion of business/investment use, see Partial business or investment use under Property Used in Your Business or Income-Producing Activity in chapter 1 . Vita tax services Reduce that amount by any credits and deductions allocable to the property. Vita tax services The following are examples of some credits and deductions that reduce basis. Vita tax services Any deduction for section 179 property. Vita tax services Any deduction under section 179B of the Internal Revenue Code for capital costs to comply with Environmental Protection Agency sulfur regulations. Vita tax services Any deduction under section 179C of the Internal Revenue Code for certain qualified refinery property placed in service after August 8, 2005, and before January 1, 2014. Vita tax services Any deduction under section 179D of the Internal Revenue Code for certain energy efficient commercial building property placed in service after December 31, 2005, and before January 1, 2014. Vita tax services Any deduction under section 179E of the Internal Revenue Code for qualified advanced mine safety equipment property placed in service after December 20, 2006, and before January 1, 2014 . Vita tax services Any deduction for removal of barriers to the disabled and the elderly. Vita tax services Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. Vita tax services Any special depreciation allowance. Vita tax services Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. Vita tax services For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. Vita tax services Enter the basis for depreciation under column (c) in Part III of Form 4562. Vita tax services For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property in chapter 1 . Vita tax services Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. Vita tax services It is determined based on the depreciation system (GDS or ADS) used. Vita tax services Recovery Periods Under GDS Under GDS, property that is not qualified Indian reservation property is depreciated over one of the following recovery periods. Vita tax services Property Class Recovery Period 3-year property   3 years 1   5-year property   5 years     7-year property   7 years     10-year property   10 years     15-year property   15 years 2   20-year property   20 years     25-year property   25 years 3   Residential rental property   27. Vita tax services 5 years     Nonresidential real property   39 years 4   15 years for qualified rent-to-own property placed in service before August 6, 1997. Vita tax services 239 years for property that is a retail motor fuels outlet placed in service before August 20, 1996 (31. Vita tax services 5 years if placed in service before May 13, 1993), unless you elected to depreciate it over 15 years. Vita tax services 320 years for property placed in service before June 13, 1996, or under a binding contract in effect before June 10, 1996. Vita tax services 431. Vita tax services 5 years for property placed in service before May 13, 1993 (or before January 1, 1994, if the purchase or construction of the property is under a binding contract in effect before May 13, 1993, or if construction began before May 13, 1993). Vita tax services The GDS recovery periods for property not listed above can be found in Appendix B, Table of Class Lives and Recovery Periods. Vita tax services Residential rental property and nonresidential real property are defined earlier under Which Depreciation System (GDS or ADS) Applies. Vita tax services Enter the appropriate recovery period on Form 4562 under column (d) in section B of Part III, unless already shown (for 25-year property, residential rental property, and nonresidential real property). Vita tax services Office in the home. Vita tax services   If your home is a personal-use single family residence and you begin to use part of your home as an office, depreciate that part of your home as nonresidential real property over 39 years (31. Vita tax services 5 years if you began using it for business before May 13, 1993). Vita tax services However, if your home is an apartment in an apartment building that you own and the building is residential rental property as defined earlier under Which Depreciation System (GDS or ADS) Applies , depreciate the part used as an office as residential rental property over 27. Vita tax services 5 years. Vita tax services See Publication 587 for a discussion of the tests you must meet to claim expenses, including depreciation, for the business use of your home. Vita tax services Home changed to rental use. Vita tax services   If you begin to rent a home that was your personal home before 1987, you depreciate it as residential rental property over 27. Vita tax services 5 years. Vita tax services Indian Reservation Property The recovery periods for qualified property you placed in service on an Indian reservation after 1993 and before 2014 are shorter than those listed earlier. Vita tax services The following table shows these shorter recovery periods. Vita tax services Property Class Recovery  Period 3-year property 2 years 5-year property 3 years 7-year property 4 years 10-year property 6 years 15-year property 9 years 20-year property 12 years Nonresidential real property 22 years Nonresidential real property is defined earlier under Which Property Class Applies Under GDS . Vita tax services Use this chart to find the correct percentage table to use for qualified Indian reservation property. Vita tax services IF your recovery period is: THEN use the following table in Appendix A: 2 years A-21 3 years A-1, A-2, A-3, A-4, or A-5 4 years A-22 6 years A-23 9 years A-14, A-15, A-16, A-17, or A-18 12 years A-14, A-15, A-16, A-17, or A-18 22 years A-24 Qualified property. Vita tax services   Property eligible for the shorter recovery periods are 3-, 5-, 7-, 10-, 15-, and 20-year property and nonresidential real property. Vita tax services You must use this property predominantly in the active conduct of a trade or business within an Indian reservation. Vita tax services The rental of real property that is located on an Indian reservation is treated as the active conduct of a trade or business within an Indian reservation. Vita tax services   The following property is not qualified property. Vita tax services Property used or located outside an Indian reservation on a regular basis, other than qualified infrastructure property. Vita tax services Property acquired directly or indirectly from a related person. Vita tax services Property placed in service for purposes of conducting or housing class I, II, or III gaming activities. Vita tax services These activities are defined in section 4 of the Indian Regulatory Act (25 U. Vita tax services S. Vita tax services C. Vita tax services 2703). Vita tax services Any property you must depreciate under ADS. Vita tax services Determine whether property is qualified without regard to the election to use ADS and after applying the special rules for listed property not used predominantly for qualified business use (discussed in chapter 5). Vita tax services Qualified infrastructure property. Vita tax services   Item (1) above does not apply to qualified infrastructure property located outside the reservation that is used to connect with qualified infrastructure property within the reservation. Vita tax services Qualified infrastructure property is property that meets all the following rules. Vita tax services It is qualified property, as defined earlier, except that it is outside the reservation. Vita tax services It benefits the tribal infrastructure. Vita tax services It is available to the general public. Vita tax services It is placed in service in connection with the active conduct of a trade or business within a reservation. Vita tax services Infrastructure property includes, but is not limited to, roads, power lines, water systems, railroad spurs, and communications facilities. Vita tax services Related person. Vita tax services   For purposes of item (2) above, see Related persons in the discussion on property owned or used in 1986 under What Method Can You Use To Depreciate Your Property in chapter 1 for a description of related persons. Vita tax services Indian reservation. Vita tax services   The term Indian reservation means a reservation as defined in section 3(d) of the Indian Financing Act of 1974 (25 U. Vita tax services S. Vita tax services C. Vita tax services 1452(d)) or section 4(10) of the Indian Child Welfare Act of 1978 (25 U. Vita tax services S. Vita tax services C. Vita tax services 1903(10)). Vita tax services Section 3(d) of the Indian Financing Act of 1974 defines reservation to include former Indian reservations in Oklahoma. Vita tax services For a definition of the term “former Indian reservations in Oklahoma,” see Notice 98-45 in Internal Revenue Bulletin 1998-35. Vita tax services Recovery Periods Under ADS The recovery periods for most property generally are longer under ADS than they are under GDS. Vita tax services The following table shows some of the ADS recovery periods. Vita tax services Property Recovery  Period Rent-to-own property 4 years Automobiles and light duty trucks 5 years Computers and peripheral equipment 5 years High technology telephone station equipment installed on customer premises 5 years High technology medical equipment 5 years Personal property with no class life 12 years Natural gas gathering lines 14 years Single purpose agricultural and horticultural structures 15 years Any tree or vine bearing fruit or nuts 20 years Initial clearing and grading land  improvements for gas utility property 20 years Initial clearing and grading land  improvements for electric utility  transmission and distribution plants 25 years Electric transmission property used in the transmission at 69 or more kilovolts of electricity 30 years Natural gas distribution lines 35 years Any qualified leasehold improvement property 39 years Any qualified restaurant property 39 years Nonresidential real property 40 years Residential rental property 40 years Section 1245 real property not listed in Appendix B 40 years Railroad grading and tunnel bore 50 years The ADS recovery periods for property not listed above can be found in the tables in Appendix B. Vita tax services Rent-to-own property, qualified leasehold improvement property, qualified restaurant property, residential rental property, and nonresidential real property are defined earlier under Which Property Class Applies Under GDS . Vita tax services Tax-exempt use property subject to a lease. Vita tax services   The ADS recovery period for any property leased under a lease agreement to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership) cannot be less than 125% of the lease term. Vita tax services Additions and Improvements An addition or improvement you make to depreciable property is treated as separate depreciable property. Vita tax services See How Do You Treat Repairs and Improvements in chapter 1 for a definition of improvements. Vita tax services Its property class and recovery period are the same as those that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. Vita tax services The recovery period begins on the later of the following dates. Vita tax services The date you place the addition or improvement in service. Vita tax services The date you place in service the property to which you made the addition or improvement. Vita tax services If the improvement you make is qualified leasehold improvement property, qualified restaurant property, or qualified retail improvement property, the GDS recovery period is 15 years (39 years under ADS). Vita tax services Example. Vita tax services You own a rental home that you have been renting out since 1981. Vita tax services If you put an addition on the home and place the addition in service this year, you would use MACRS to figure your depreciation deduction for the addition. Vita tax services Under GDS, the property class for the addition is residential rental property and its recovery period is 27. Vita tax services 5 years because the home to which the addition is made would be residential rental property if you had placed it in service this year. Vita tax services Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. Vita tax services 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. Vita tax services The mid-month convention. Vita tax services   Use this convention for nonresidential real property, residential rental property, and any railroad grading or tunnel bore. Vita tax services   Under this convention, you treat all property placed in service or disposed of during a month as placed in service or disposed of at the midpoint of the month. Vita tax services This means that a one-half month of depreciation is allowed for the month the property is placed in service or disposed of. Vita tax services   Your use of the mid-month convention is indicated by the “MM” already shown under column (e) in Part III of Form 4562. Vita tax services The mid-quarter convention. Vita tax services   Use this convention if the mid-month convention does not apply and the total depreciable bases of MACRS property you placed in service during the last 3 months of the tax year (excluding nonresidential real property, residential rental property, any railroad grading or tunnel bore, property placed in service and disposed of in the same year, and property that is being depreciated under a method other than MACRS) are more than 40% of the total depreciable bases of all MACRS property you placed in service during the entire year. Vita tax services   Under this convention, you treat all property placed in service or disposed of during any quarter of the tax year as placed in service or disposed of at the midpoint of that quarter. Vita tax services This means that 1½ months of depreciation is allowed for the quarter the property is placed in service or disposed of. Vita tax services   If you use this convention, enter “MQ” under column (e) in Part III of Form 4562. Vita tax services    For purposes of determining whether the mid-quarter convention applies, the depreciable basis of property you placed in service during the tax year reflects the reduction in basis for amounts expensed under section 179 and the part of the basis of property attributable to personal use. Vita tax services However, it does not reflect any reduction in basis for any special depreciation allowance. Vita tax services The half-year convention. Vita tax services   Use this convention if neither the mid-quarter convention nor the mid-month convention applies. Vita tax services   Under this convention, you treat all property placed in service or disposed of during a tax year as placed in service or disposed of at the midpoint of the year. Vita tax services This means that a one-half year of depreciation is allowed for the year the property is placed in service or disposed of. Vita tax services   If you use this convention, enter “HY” under column (e) in Part III of Form 4562. Vita tax services Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. Vita tax services The 200% declining balance method over a GDS recovery period. Vita tax services The 150% declining balance method over a GDS recovery period. Vita tax services The straight line method over a GDS recovery period. Vita tax services The straight line method over an ADS recovery period. Vita tax services For property placed in service before 1999, you could have elected the 150% declining balance method using the ADS recovery periods for certain property classes. Vita tax services If you made this election, continue to use the same method and recovery period for that property. Vita tax services Table 4–1 lists the types of property you can depreciate under each method. Vita tax services It also gives a brief explanation of the method, including any benefits that may apply. Vita tax services Depreciation Methods for Farm Property If you place personal property in service in a farming business after 1988, you generally must depreciate it under GDS using the 150% declining balance method unless you are a farmer who must depreciate the property under ADS using the straight line method or you elect to depreciate the property under GDS or ADS using the straight line method. Vita tax services You can depreciate real property using the straight line method under either GDS or ADS. Vita tax services Fruit or nut trees and vines. Vita tax services   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a recovery period of 10 years. Vita tax services ADS required for some farmers. Vita tax services   If you elect not to apply the uniform capitalization rules to any plant produced in your farming business, you must use ADS. Vita tax services You must use ADS for all property you place in service in any year the election is in effect. Vita tax services See the regulations under section 263A of the Internal Revenue Code for information on the uniform capitalization rules that apply to farm property. Vita tax services Electing a Different Method As shown in Table 4–1 , you can elect a different method for depreciation for certain types of property. Vita tax services You must make the election by the due date of the return (including extensions) for the year you placed the property in service. Vita tax services 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 return (excluding extensions). Vita tax services Attach the election to the amended return and write “Filed pursuant to section 301. Vita tax services 9100-2” on the election statement. Vita tax services File the amended return at the same address you filed the original return. Vita tax services Once you make the election, you cannot change it. Vita tax services 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. Vita tax services However, you can make the election on a property-by-property basis for nonresidential real and residential rental property. Vita tax services 150% election. Vita tax services   Instead of using the 200% declining balance method over the GDS recovery period for nonfarm property in the 3-, 5-, 7-, and 10-year property classes, you can elect to use the 150% declining balance method. Vita tax services Make the election by entering “150 DB” under column (f) in Part III of Form 4562. Vita tax services Straight line election. Vita tax services   Instead of using either the 200% or 150% declining balance methods over the GDS recovery period, you can elect to use the straight line method over the GDS recovery period. Vita tax services Make the election by entering  “S/L” under column (f) in Part III of Form 4562. Vita tax services Election of ADS. Vita tax services   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. Vita tax services ADS uses the straight line method of depreciation over fixed ADS recovery periods. Vita tax services Most ADS recovery periods are listed in Appendix B, or see the table under Recovery Periods Under ADS , earlier. Vita tax services   Make the election by completing line 20 in Part III of Form 4562. Vita tax services Farm property. Vita tax services   Instead of using the 150% declining balance method over a GDS recovery period for property you use in a farming business (other than real property), you can elect to depreciate it using either of the following methods. Vita tax services The straight line method over a GDS recovery period. Vita tax services The straight line method over an ADS recovery period. Vita tax services Table 4-1. Vita tax services Depreciation Methods Note. Vita tax services The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. Vita tax services Method Type of Property Benefit GDS using 200% DB • Nonfarm 3-, 5-, 7-, and 10-year property • Provides a greater deduction during the earlier recovery years • Changes to SL when that method provides an equal or greater deduction GDS using 150% DB • All farm property (except real property) • All 15- and 20-year property (except qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property placed in service before January 1, 2014) • Nonfarm 3-, 5-, 7-, and 10-year property • Provides a greater deduction during the earlier recovery years • Changes to SL when that method provides an equal or greater deduction1 GDS using SL • Nonresidential real property • Qualified leasehold improvement property placed in service before January 1, 2014 • Qualified restaurant property placed in service before January 1, 2014 • Qualified retail improvement property placed in service before January 1, 2014 • Residential rental property • Trees or vines bearing fruit or nuts • Water utility property • All 3-, 5-, 7-, 10-, 15-, and 20-year property2 • Property for which you elected section 168(k)(4) • Provides for equal yearly deductions (except for the first and last years) ADS using SL • Listed property used 50% or less for business • Property used predominantly outside the U. Vita tax services S. Vita tax services  • Tax-exempt property • Tax-exempt bond-financed property • Farm property used when an election not to apply the uniform capitalization rules is in effect • Imported property3 • Any property for which you elect to use this method4 • Provides for equal yearly deductions (except for the first and last years) 1The MACRS percentage tables in Appendix A have the switch to the straight line method built into their rates 2See section 168(b)(5) of the Internal Revenue Code. Vita tax services 3See section 168(g)(6) of the Internal Revenue Code 4See section 168(g)(7) of the Internal Revenue Code 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. Vita tax services Then, you are ready to figure your depreciation deduction. Vita tax services You can figure it using a percentage table provided by the IRS, or you can figure it yourself without using the table. Vita tax services 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. Vita tax services These percentage tables are in Appendix A near the end of this publication. Vita tax services Which table to use. Vita tax services    Appendix A contains the MACRS Percentage Table Guide, which is designed to help you locate the correct percentage table to use for depreciating your property. Vita tax services The percentage tables immediately follow the guide. Vita tax services Rules Covering the Use of the Tables The following rules cover the use of the percentage tables. Vita tax services You must apply the rates in the percentage tables to your property's unadjusted basis. Vita tax services You cannot use the percentage tables for a short tax year. Vita tax services See Figuring the Deduction for a Short Tax Year, later, for information on the short tax year rules. Vita tax services Once you start using the percentage tables for any item of property, you generally must continue to use them for the entire recovery period of the property. Vita tax services 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 that property that is depreciated as a separate item of property. Vita tax services Basis adjustments other than those made due to the items listed in (4) include an increase in basis for the recapture of a clean-fuel deduction or credit and a reduction in basis for a casualty loss. Vita tax services Basis adjustment due to recapture of clean-fuel vehicle deduction or credit. Vita tax services   If you increase the basis of your property because of the recapture of part or all of a deduction for clean-fuel vehicles or the credit for clean-fuel vehicle refueling property placed in service before January 1, 2006, you cannot continue to use the percentage tables. Vita tax services For the year of the adjustment and the remaining recovery period, you must figure the depreciation deduction yourself using the property's adjusted basis at the end of the year. Vita tax services See Figuring the Deduction Without Using the Tables, later. Vita tax services Basis adjustment due to casualty loss. Vita tax services   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. Vita tax services 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. Vita tax services See Figuring the Deduction Without Using the Tables, later. Vita tax services Example. Vita tax services On October 26, 2012, Sandra Elm, a calendar year taxpayer, bought and placed in service in her business a new item of 7-year property. Vita tax services It cost $39,000 and she elected a section 179 deduction of $24,000. Vita tax services She also took a special depreciation allowance of $7,500 [50% of $15,000 ($39,000 − $24,000)]. Vita tax services Her unadjusted basis after the section 179 deduction and special depreciation allowance was $7,500 ($15,000 − $7,500). Vita tax services She figured her MACRS depreciation deduction using the percentage tables. Vita tax services For 2012, her MACRS depreciation deduction was $268. Vita tax services In July 2013, the property was vandalized and Sandra had a deductible casualty loss of $3,000. Vita tax services She must adjust the property's basis for the casualty loss, so she can no longer use the percentage tables. Vita tax services Her adjusted basis at the end of 2013, before figuring her 2013 depreciation, is $4,232. Vita tax services She figures that amount by subtracting the 2012 MACRS depreciation of $268 and the casualty loss of $3,000 from the unadjusted basis of $7,500. Vita tax services She must now figure her depreciation for 2013 without using the percentage tables. Vita tax services Figuring the Unadjusted Basis of Your Property You must apply the table rates to your property's unadjusted basis each year of the recovery period. Vita tax services Unadjusted basis is the same basis amount you would use to figure gain on a sale, but you figure it without reducing your original basis by any MACRS depreciation taken in earlier years. Vita tax services However, you do reduce your original basis by other amounts, including the following. Vita tax services Any amortization taken on the property. Vita tax services Any section 179 deduction claimed. Vita tax services Any special depreciation allowance taken on the property. Vita tax services For business property you purchase during the year, the unadjusted basis is its cost minus these and other applicable adjustments. Vita tax services If you trade property, your unadjusted basis in the property received is the cash paid plus the adjusted basis of the property traded minus these adjustments. Vita tax services MACRS Worksheet You can use this worksheet to help you figure your depreciation deduction using the percentage tables. Vita tax services Use a separate worksheet for each item of property. Vita tax services Then, use the information from this worksheet to prepare Form 4562. Vita tax services Do not use this worksheet for automobiles. Vita tax services Use the Depreciation Worksheet for Passenger Automobiles in chapter 5. Vita tax services MACRS Worksheet Part I   1. Vita tax services MACRS system (GDS or ADS)   2. Vita tax services Property class   3. Vita tax services Date placed in service   4. Vita tax services Recovery period   5. Vita tax services Method and convention   6. Vita tax services Depreciation rate (from tables)   Part II   7. Vita tax services Cost or other basis* $     8. Vita tax services Business/investment use   %   9. Vita tax services Multiply line 7 by line 8   $ 10. Vita tax services Total claimed for section 179 deduction and other items   $ 11. Vita tax services Subtract line 10 from line 9. Vita tax services This is your tentative basis for depreciation   $ 12. Vita tax services Multiply line 11 by . Vita tax services 50 if the 50% special depreciation allowance applies. Vita tax services This is your special depreciation allowance. Vita tax services Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance   $ 13. Vita tax services Subtract line 12 from line 11. Vita tax services This is your basis for depreciation     14. Vita tax services Depreciation rate (from line 6)     15. Vita tax services Multiply line 13 by line 14. Vita tax services This is your MACRS depreciation deduction   $ *If real estate, do not include cost (basis) of land. Vita tax services The following example shows how to figure your MACRS depreciation deduction using the percentage tables and the MACRS worksheet. Vita tax services Example. Vita tax services You bought office furniture (7-year property) for $10,000 and placed it in service on August 11, 2013. Vita tax services You use the furniture only for business. Vita tax services This is the only property you placed in service this year. Vita tax services You did not elect a section 179 deduction and the property is not qualified property for purposes of claiming a special depreciation allowance so your property's unadjusted basis is its cost, $10,000. Vita tax services You use GDS and the half-year convention to figure your depreciation. Vita tax services You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-1. Vita tax services Multiply your property's unadjusted basis each year by the percentage for 7-year property given in Table A-1. Vita tax services You figure your depreciation deduction using the MACRS worksheet as follows. Vita tax services MACRS Worksheet Part I 1. Vita tax services MACRS system (GDS or ADS) GDS 2. Vita tax services Property class 7-year 3. Vita tax services Date placed in service 8/11/13 4. Vita tax services Recovery period 7-Year 5. Vita tax services Method and convention 200%DB/Half-Year 6. Vita tax services Depreciation rate (from tables) . Vita tax services 1429 Part II 7. Vita tax services Cost or other basis* $10,000     8. Vita tax services Business/investment use 100 %   9. Vita tax services Multiply line 7 by line 8   $10,000 10. Vita tax services Total claimed for section 179 deduction and other items   -0- 11. Vita tax services Subtract line 10 from line 9. Vita tax services This is your tentative basis for depreciation   $10,000 12. Vita tax services Multiply line 11 by . Vita tax services 50 if the 50% special depreciation allowance applies. Vita tax services This is your special depreciation allowance. Vita tax services Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance   -0- 13. Vita tax services Subtract line 12 from line 11. Vita tax services This is your basis for depreciation   $10,000 14. Vita tax services Depreciation rate (from line 6)   . Vita tax services 1429 15. Vita tax services Multiply line 13 by line 14. Vita tax services This is your MACRS depreciation deduction   $1,429 *If real estate, do not include cost (basis) of land. Vita tax services If there are no adjustments to the basis of the property other than depreciation, your depreciation deduction for each subsequent year of the recovery period will be as follows. Vita tax services Year   Basis Percentage Deduction 2014 $ 10,000 24. Vita tax services 49%   $2,449   2015   10,000 17. Vita tax services 49   1,749   2016   10,000 12. Vita tax services 49   1,249   2017   10,000 8. Vita tax services 93   893   2018   10,000 8. Vita tax services 92   892   2019   10,000 8. Vita tax services 93   893   2020   10,000 4. Vita tax services 46   446   Examples The following examples are provided to show you how to use the percentage tables. Vita tax services In both examples, assume the following. Vita tax services You use the property only for business. Vita tax services You use the calendar year as your tax year. Vita tax services You use GDS for all the properties. Vita tax services Example 1. Vita tax services You bought a building and land for $120,000 and placed it in service on March 8. Vita tax services The sales contract showed that the building cost $100,000 and the land cost $20,000. Vita tax services It is nonresidential real property. Vita tax services The building's unadjusted basis is its original cost, $100,000. Vita tax services You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-7a. Vita tax services March is the third month of your tax year, so multiply the building's unadjusted basis, $100,000, by the percentages for the third month in Table A-7a. Vita tax services Your depreciation deduction for each of the first 3 years is as follows: Year   Basis Percentage Deduction 1st $ 100,000 2. Vita tax services 033%   $2,033   2nd   100,000 2. Vita tax services 564   2,564   3rd   100,000 2. Vita tax services 564   2,564   Example 2. Vita tax services During the year, you bought a machine (7-year property) for $4,000, office furniture (7-year property) for $1,000, and a computer (5-year property) for $5,000. Vita tax services You placed the machine in service in January, the furniture in September, and the computer in October. Vita tax services You do not elect a section 179 deduction and none of these items is qualified property for purposes of claiming a special depreciation allowance. Vita tax services You placed property in service during the last 3 months of the year, so you must first determine if you have to use the mid-quarter convention. Vita tax services The total bases of all property you placed in service during the year is $10,000. Vita tax services The $5,000 basis of the computer, which you placed in service during the last 3 months (the fourth quarter) of your tax year, is more than 40% of the total bases of all property ($10,000) you placed in service during the year. Vita tax services Therefore, you must use the mid-quarter convention for all three items. Vita tax services You refer to the MACRS Percentage Table Guide in Appendix A to determine which table you should use under the mid-quarter convention. Vita tax services The machine is 7-year property placed in service in the first quarter, so you use Table A-2. Vita tax services The furniture is 7-year property placed in service in the third quarter, so you use Table A-4. Vita tax services Finally, because the computer is 5-year property placed in service in the fourth quarter, you use Table A-6. Vita tax services Knowing what table to use for each property, you figure the depreciation for the first 2 years as follows. Vita tax services Year Property Basis Percentage Deduction 1st Machine $4,000 25. Vita tax services 00 $1,000   2nd Machine 4,000 21. Vita tax services 43 857   1st Furniture 1,000 10. Vita tax services 71 107   2nd Furniture 1,000 25. Vita tax services 51 255   1st Computer 5,000 5. Vita tax services 00 250   2nd Computer 5,000 38. Vita tax services 00 1,900   Sale or Other Disposition Before the Recovery Period Ends If you sell or otherwise dispose of your property before the end of its recovery period, your depreciation deduction for the year of the disposition will be only part of the depreciation amount for the full year. Vita tax services You have disposed of your property if you have permanently withdrawn it from use in your business or income-producing activity because of its sale, exchange, retirement, abandonment, involuntary conversion, or destruction. Vita tax services After you figure the full-year depreciation amount, figure the deductible part using the convention that applies to the property. Vita tax services Half-year convention used. Vita tax services   For property for which you used a half-year convention, the depreciation deduction for the year of the disposition is half the depreciation determined for the full year. Vita tax services Mid-quarter convention used. Vita tax services   For property for which you used the mid-quarter convention, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter in which you disposed of the property. Vita tax services Quarter Percentage First 12. Vita tax services 5% Second 37. Vita tax services 5 Third 62. Vita tax services 5 Fourth 87. Vita tax services 5 Example. Vita tax services On December 2, 2010, you placed in service an item of 5-year property costing $10,000. Vita tax services You did not claim a section 179 deduction and the property does not qualify for a special depreciation allowance. Vita tax services Your unadjusted basis for the property was $10,000. Vita tax services You used the mid-quarter convention because this was the only item of business property you placed in service in 2010 and it was placed in service during the last 3 months of your tax year. Vita tax services Your property is in the 5-year property class, so you used Table A-5 to figure your depreciation deduction. Vita tax services Your deductions for 2010, 2011, and 2012 were $500 (5% of $10,000), $3,800 (38% of $10,000), and $2,280 (22. Vita tax services 80% of $10,000). Vita tax services You disposed of the property on April 6, 2013. Vita tax services To determine your depreciation deduction for 2013, first figure the deduction for the full year. Vita tax services This is $1,368 (13. Vita tax services 68% of $10,000). Vita tax services April is in the second quarter of the year, so you multiply $1,368 by 37. Vita tax services 5% to get your depreciation deduction of $513 for 2013. Vita tax services Mid-month convention used. Vita tax services   If you dispose of residential rental or nonresidential real property, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by a fraction. Vita tax services The numerator of the fraction is the number of months (including partial months) in the year that the property is considered in service. Vita tax services The denominator is 12. Vita tax services Example. Vita tax services On July 2, 2011, you purchased and placed in service residential rental property. Vita tax services The property cost $100,000, not including the cost of land. Vita tax services You used Table A-6 to figure your MACRS depreciation for this property. Vita tax services You sold the property on March 2, 2013. Vita tax services You file your tax return based on the calendar year. Vita tax services A full year of depreciation for 2013 is $3,636. Vita tax services This is $100,000 multiplied by . Vita tax services 03636 (the percentage for the seventh month of the third recovery year) from Table A-6 . Vita tax services You then apply the mid-month convention for the 2½ months of use in 2013. Vita tax services Treat the month of disposition as one-half month of use. Vita tax services Multiply $3,636 by the fraction, 2. Vita tax services 5 over 12, to get your 2013 depreciation deduction of $757. Vita tax services 50. Vita tax services Figuring the Deduction Without Using the Tables Instead of using the rates in the percentage tables to figure your depreciation deduction, you can figure it yourself. Vita tax services Before making the computation each year, you must reduce your adjusted basis in the property by the depreciation claimed the previous year. Vita tax services Figuring MACRS deductions without using the tables generally will result in a slightly different amount than using the tables. Vita tax services Declining Balance Method When using a declining balance method, you apply the same depreciation rate each year to the adjusted basis of your property. Vita tax services You must use the applicable convention for the first tax year and you must switch to the straight line method beginning in the first year for which it will give an equal or greater deduction. Vita tax services The straight line method is explained later. Vita tax services You figure depreciation for the year you place property in service as follows. Vita tax services Multiply your adjusted basis in the property by the declining balance rate. Vita tax services Apply the applicable convention. Vita tax services You figure depreciation for all other years (before the year you switch to the straight line method) as follows. Vita tax services Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years. Vita tax services Multiply this new adjusted basis by the same declining balance rate used in earlier years. Vita tax services If you dispose of property before the end of its recovery period, see Using the Applicable Convention, later, for information on how to figure depreciation for the year you dispose of it. Vita tax services Figuring depreciation under the declining balance method and switching to the straight line method is illustrated in Example 1 , later, under Examples. Vita tax services Declining balance rate. Vita tax services   You figure your declining balance rate by dividing the specified declining balance percentage (150% or 200% changed to a decimal) by the number of years in the property's recovery period. Vita tax services For example, for 3-year property depreciated using the 200% declining balance method, divide 2. Vita tax services 00 (200%) by 3 to get 0. Vita tax services 6667, or a 66. Vita tax services 67% declining balance rate. Vita tax services For 15-year property depreciated using the 150% declining balance method, divide 1. Vita tax services 50 (150%) by 15 to get 0. Vita tax services 10, or a 10% declining balance rate. Vita tax services   The following table shows the declining balance rate for each property class and the first year for which the straight line method gives an equal or greater deduction. Vita tax services Property Class Method Declining Balance Rate Year 3-year 200% DB 66. Vita tax services 667% 3rd 5-year 200% DB 40. Vita tax services 0 4th 7-year 200% DB 28. Vita tax services 571 5th 10-year 200% DB 20. Vita tax services 0 7th 15-year 150% DB 10. Vita tax services 0 7th 20-year 150% DB 7. Vita tax services 5 9th Straight Line Method When using the straight line method, you apply a different depreciation rate each year to the adjusted basis of your property. Vita tax services You must use the applicable convention in the year you place the property in service and the year you dispose of the property. Vita tax services You figure depreciation for the year you place property in service as follows. Vita tax services Multiply your adjusted basis in the property by the straight line rate. Vita tax services Apply the applicable convention. Vita tax services You figure depreciation for all other years (including the year you switch from the declining balance method to the straight line method) as follows. Vita tax services Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years (under any method). Vita tax services Determine the depreciation rate for the year. Vita tax services Multiply the adjusted basis figured in (1) by the depreciation rate figured in (2). Vita tax services If you dispose of property before the end of its recovery period, see Using the Applicable Convention , later, for information on how to figure depreciation for the year you dispose of it. Vita tax services Straight line rate. Vita tax services   You determine the straight line depreciation rate for any tax year by dividing the number 1 by the years remaining in the recovery period at the beginning of that year. Vita tax services When figuring the number of years remaining, you must take into account the convention used in the year you placed the property in service. Vita tax services If the number of years remaining is less than 1, the depreciation rate for that tax year is 1. Vita tax services 0 (100%). Vita tax services Using the Applicable Convention The applicable convention (discussed earlier under Which Convention Applies ) affects how you figure your depreciation deduction for the year you place your property in service and for the year you dispose of it. Vita tax services It determines how much of the recovery period remains at the beginning of each year, so it also affects the depreciation rate for property you depreciate under the straight line method. Vita tax services See Straight line rate in the previous discussion. Vita tax services Use the applicable convention as explained in the following discussions. Vita tax services Half-year convention. Vita tax services   If this convention applies, you deduct a half-year of depreciation for the first year and the last year that you depreciate the property. Vita tax services You deduct a full year of depreciation for any other year during the recovery period. Vita tax services   Figure your depreciation deduction for the year you place the property in service by dividing the depreciation for a full year by 2. Vita tax services If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. Vita tax services If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final 6 months of the recovery period is the amount of your unrecovered basis in the property. Vita tax services Mid-quarter convention. Vita tax services   If this convention applies, the depreciation you can deduct for the first year you depreciate the property depends on the quarter in which you place the property in service. Vita tax services   A quarter of a full 12-month tax year is a period of 3 months. Vita tax services The first quarter in a year begins on the first day of the tax year. Vita tax services The second quarter begins on the first day of the fourth month of the tax year. Vita tax services The third quarter begins on the first day of the seventh month of the tax year. Vita tax services The fourth quarter begins on the first day of the tenth month of the tax year. Vita tax services A calendar year is divided into the following quarters. Vita tax services Quarter Months First January, February, March Second April, May, June Third July, August, September Fourth October, November, December   Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by the percentage listed below for the quarter you place the property in service. Vita tax services Quarter Percentage First 87. Vita tax services 5% Second 62. Vita tax services 5 Third 37. Vita tax services 5 Fourth 12. Vita tax services 5   If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter you dispose of the property. Vita tax services Quarter Percentage First 12. Vita tax services 5% Second 37. Vita tax services 5 Third 62. Vita tax services 5 Fourth 87. Vita tax services 5   If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final quarter of the recovery period is the amount of your unrecovered basis in the property. Vita tax services Mid-month convention. Vita tax services   If this convention applies, the depreciation you can deduct for the first year that you depreciate the property depends on the month in which you place the property in service. Vita tax services Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by a fraction. Vita tax services The numerator of the fraction is the number of full months in the year that the property is in service plus ½ (or 0. Vita tax services 5). Vita tax services The denominator is 12. Vita tax services   If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. Vita tax services If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final month of the recovery period is the amount of your unrecovered basis in the property. Vita tax services Example. Vita tax services You use the calendar year and place nonresidential real property in service in August. Vita tax services The property is in service 4 full months (September, October, November, and December). Vita tax services Your numerator is 4. Vita tax services 5 (4 full months plus 0. Vita tax services 5). Vita tax services You multiply the depreciation for a full year by 4. Vita tax services 5/12, or 0. Vita tax services 375. Vita tax services Examples The following examples show how to figure depreciation under MACRS without using the percentage tables. Vita tax services Figures are rounded for purposes of the examples. Vita tax services Assume for all the examples that you use a calendar year as your tax year. Vita tax services Example 1—200% DB method and half-year convention. Vita tax services In February, you placed in service depreciable property with a 5-year recovery period and a basis of $1,000. Vita tax services You do not elect to take the section 179 deduction and the property does not qualify for a special depreciation allowance. Vita tax services You use GDS and the 200% declining balance (DB) method to figure your depreciation. Vita tax services When the straight line (SL) method results in an equal or larger deduction, you switch to the SL method. Vita tax services You did not place any property in service in the last 3 months of the year, so you must use the half-year convention. Vita tax services First year. Vita tax services You figure the depreciation rate under the 200% DB method by dividing 2 (200%) by 5 (the number of years in the recovery period). Vita tax services The result is 40%. Vita tax services You multiply the adjusted basis of the property ($1,000) by the 40% DB rate. Vita tax services You apply the half-year convention by dividing the result ($400) by 2. Vita tax services Depreciation for the first year under the 200% DB method is $200. Vita tax services You figure the depreciation rate under the straight line (SL) method by dividing 1 by 5, the number of years in the recovery period. Vita tax services The result is 20%. Vita tax services You multiply the adjusted basis of the property ($1,000) by the 20% SL rate. Vita tax services You apply the half-year convention by dividing the result ($200) by 2. Vita tax services Depreciation for the first year under the SL method is $100. Vita tax services The DB method provides a larger deduction, so you deduct the $200 figured under the 200% DB method. Vita tax services Second year. Vita tax services You reduce the adjusted basis ($1,000) by the depreciation claimed in the first year ($200). Vita tax services You multiply the result ($800) by the DB rate (40%). Vita tax services Depreciation for the second year under the 200% DB method is $320. Vita tax services You figure the SL depreciation rate by dividing 1 by 4. Vita tax services 5, the number of years remaining in the recovery period. Vita tax services (Based on the half-year convention, you used only half a year of the recovery period in the first year. Vita tax services ) You multiply the reduced adjusted basis ($800) by the result (22. Vita tax services 22%). Vita tax services Depreciation under the SL method for the second year is $178. Vita tax services The DB method provides a larger deduction, so you deduct the $320 figured under the 200% DB method. Vita tax services Third year. Vita tax services You reduce the adjusted basis ($800) by the depreciation claimed in the second year ($320). Vita tax services You multiply the result ($480) by the DB rate (40%). Vita tax services Depreciation for the third year under the 200% DB method is $192. Vita tax services You figure the SL depreciation rate by dividing 1 by 3. Vita tax services 5. Vita tax services You multiply the reduced adjusted basis ($480) by the result (28. Vita tax services 57%). Vita tax services Depreciation under the SL method for the third year is $137. Vita tax services The DB method provides a larger deduction, so you deduct the $192 figured under the 200% DB method. Vita tax services Fourth year. Vita tax services You reduce the adjusted basis ($480) by the de