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Www myfreetaxes com philly 18. Www myfreetaxes com philly   Alimony Table of Contents IntroductionSpouse or former spouse. Www myfreetaxes com philly Divorce or separation instrument. Www myfreetaxes com philly Useful Items - You may want to see: General RulesMortgage payments. Www myfreetaxes com philly Taxes and insurance. Www myfreetaxes com philly Other payments to a third party. Www myfreetaxes com philly Instruments Executed After 1984Payments to a third party. Www myfreetaxes com philly Exception. Www myfreetaxes com philly Substitute payments. Www myfreetaxes com philly Specifically designated as child support. Www myfreetaxes com philly Contingency relating to your child. Www myfreetaxes com philly Clearly associated with a contingency. Www myfreetaxes com philly How To Deduct Alimony Paid How To Report Alimony Received Recapture Rule Introduction This chapter discusses the rules that apply if you pay or receive alimony. Www myfreetaxes com philly It covers the following topics. Www myfreetaxes com philly What payments are alimony. Www myfreetaxes com philly What payments are not alimony, such as child support. Www myfreetaxes com philly How to deduct alimony you paid. Www myfreetaxes com philly How to report alimony you received as income. Www myfreetaxes com philly Whether you must recapture the tax benefits of alimony. Www myfreetaxes com philly Recapture means adding back in your income all or part of a deduction you took in a prior year. Www myfreetaxes com philly Alimony is a payment to or for a spouse or former spouse under a divorce or separation instrument. Www myfreetaxes com philly It does not include voluntary payments that are not made under a divorce or separation instrument. Www myfreetaxes com philly Alimony is deductible by the payer and must be included in the spouse's or former spouse's income. Www myfreetaxes com philly Although this chapter is generally written for the payer of the alimony, the recipient can use the information to determine whether an amount received is alimony. Www myfreetaxes com philly To be alimony, a payment must meet certain requirements. Www myfreetaxes com philly Different requirements generally apply to payments under instruments executed after 1984 and to payments under instruments executed before 1985. Www myfreetaxes com philly This chapter discusses the rules for payments under instruments executed after 1984. Www myfreetaxes com philly If you need the rules for payments under pre-1985 instruments, get and keep a copy of the 2004 version of Publication 504. Www myfreetaxes com philly That was the last year the information on pre-1985 instruments was included in Publication 504. Www myfreetaxes com philly Use Table 18-1 in this chapter as a guide to determine whether certain payments are considered alimony. Www myfreetaxes com philly Definitions. Www myfreetaxes com philly   The following definitions apply throughout this chapter. Www myfreetaxes com philly Spouse or former spouse. Www myfreetaxes com philly   Unless otherwise stated, the term “spouse” includes former spouse. Www myfreetaxes com philly Divorce or separation instrument. Www myfreetaxes com philly   The term “divorce or separation instrument” means: A decree of divorce or separate maintenance or a written instrument incident to that decree, A written separation agreement, or A decree or any type of court order requiring a spouse to make payments for the support or maintenance of the other spouse. Www myfreetaxes com philly This includes a temporary decree, an interlocutory (not final) decree, and a decree of alimony pendente lite (while awaiting action on the final decree or agreement). Www myfreetaxes com philly Useful Items - You may want to see: Publication 504 Divorced or Separated Individuals General Rules The following rules apply to alimony regardless of when the divorce or separation instrument was executed. Www myfreetaxes com philly Payments not alimony. Www myfreetaxes com philly   Not all payments under a divorce or separation instrument are alimony. Www myfreetaxes com philly Alimony does not include: Child support, Noncash property settlements, Payments that are your spouse's part of community income, as explained under Community Property in Publication 504, Payments to keep up the payer's property, or Use of the payer's property. Www myfreetaxes com philly Payments to a third party. Www myfreetaxes com philly   Cash payments, checks, or money orders to a third party on behalf of your spouse under the terms of your divorce or separation instrument can be alimony, if they otherwise qualify. Www myfreetaxes com philly These include payments for your spouse's medical expenses, housing costs (rent, utilities, etc. Www myfreetaxes com philly ), taxes, tuition, etc. Www myfreetaxes com philly The payments are treated as received by your spouse and then paid to the third party. Www myfreetaxes com philly Life insurance premiums. Www myfreetaxes com philly   Alimony includes premiums you must pay under your divorce or separation instrument for insurance on your life to the extent your spouse owns the policy. Www myfreetaxes com philly Payments for jointly-owned home. Www myfreetaxes com philly   If your divorce or separation instrument states that you must pay expenses for a home owned by you and your spouse, some of your payments may be alimony. Www myfreetaxes com philly Mortgage payments. Www myfreetaxes com philly   If you must pay all the mortgage payments (principal and interest) on a jointly-owned home, and they otherwise qualify as alimony, you can deduct one-half of the total payments as alimony. Www myfreetaxes com philly If you itemize deductions and the home is a qualified home, you can claim one-half of the interest in figuring your deductible interest. Www myfreetaxes com philly Your spouse must report one-half of the payments as alimony received. Www myfreetaxes com philly If your spouse itemizes deductions and the home is a qualified home, he or she can claim one-half of the interest on the mortgage in figuring deductible interest. Www myfreetaxes com philly Taxes and insurance. Www myfreetaxes com philly   If you must pay all the real estate taxes or insurance on a home held as tenants in common, you can deduct one-half of these payments as alimony. Www myfreetaxes com philly Your spouse must report one-half of these payments as alimony received. Www myfreetaxes com philly If you and your spouse itemize deductions, you can each claim one-half of the real estate taxes and none of the home insurance. Www myfreetaxes com philly    If your home is held as tenants by the entirety or joint tenants, none of your payments for taxes or insurance are alimony. Www myfreetaxes com philly But if you itemize deductions, you can claim all of the real estate taxes and none of the home insurance. Www myfreetaxes com philly Other payments to a third party. Www myfreetaxes com philly   If you made other third-party payments, see Publication 504 to see whether any part of the payments qualifies as alimony. Www myfreetaxes com philly Instruments Executed After 1984 The following rules for alimony apply to payments under divorce or separation instruments executed after 1984. Www myfreetaxes com philly Exception for instruments executed before 1985. Www myfreetaxes com philly   There are two situations where the rules for instruments executed after 1984 apply to instruments executed before 1985. Www myfreetaxes com philly A divorce or separation instrument executed before 1985 and then modified after 1984 to specify that the after-1984 rules will apply. Www myfreetaxes com philly A temporary divorce or separation instrument executed before 1985 and incorporated into, or adopted by, a final decree executed after 1984 that: Changes the amount or period of payment, or Adds or deletes any contingency or condition. Www myfreetaxes com philly   For the rules for alimony payments under pre-1985 instruments not meeting these exceptions, get the 2004 version of Publication 504 at www. Www myfreetaxes com philly irs. Www myfreetaxes com philly gov/pub504. Www myfreetaxes com philly Example 1. Www myfreetaxes com philly In November 1984, you and your former spouse executed a written separation agreement. Www myfreetaxes com philly In February 1985, a decree of divorce was substituted for the written separation agreement. Www myfreetaxes com philly The decree of divorce did not change the terms for the alimony you pay your former spouse. Www myfreetaxes com philly The decree of divorce is treated as executed before 1985. Www myfreetaxes com philly Alimony payments under this decree are not subject to the rules for payments under instruments executed after 1984. Www myfreetaxes com philly Example 2. Www myfreetaxes com philly Assume the same facts as in Example 1 except that the decree of divorce changed the amount of the alimony. Www myfreetaxes com philly In this example, the decree of divorce is not treated as executed before 1985. Www myfreetaxes com philly The alimony payments are subject to the rules for payments under instruments executed after 1984. Www myfreetaxes com philly Alimony requirements. Www myfreetaxes com philly   A payment to or for a spouse under a divorce or separation instrument is alimony if the spouses do not file a joint return with each other and all the following requirements are met. Www myfreetaxes com philly The payment is in cash. Www myfreetaxes com philly The instrument does not designate the payment as not alimony. Www myfreetaxes com philly Spouses legally separated under a decree of divorce or separate maintenance are not members of the same household. Www myfreetaxes com philly There is no liability to make any payment (in cash or property) after the death of the recipient spouse. Www myfreetaxes com philly The payment is not treated as child support. Www myfreetaxes com philly Each of these requirements is discussed below. Www myfreetaxes com philly Cash payment requirement. Www myfreetaxes com philly   Only cash payments, including checks and money orders, qualify as alimony. Www myfreetaxes com philly The following do not qualify as alimony. Www myfreetaxes com philly Transfers of services or property (including a debt instrument of a third party or an annuity contract). Www myfreetaxes com philly Execution of a debt instrument by the payer. Www myfreetaxes com philly The use of the payer's property. Www myfreetaxes com philly Payments to a third party. Www myfreetaxes com philly   Cash payments to a third party under the terms of your divorce or separation instrument can qualify as cash payments to your spouse. Www myfreetaxes com philly See Payments to a third party under General Rules, earlier. Www myfreetaxes com philly   Also, cash payments made to a third party at the written request of your spouse may qualify as alimony if all the following requirements are met. Www myfreetaxes com philly The payments are in lieu of payments of alimony directly to your spouse. Www myfreetaxes com philly The written request states that both spouses intend the payments to be treated as alimony. Www myfreetaxes com philly You receive the written request from your spouse before you file your return for the year you made the payments. Www myfreetaxes com philly Payments designated as not alimony. Www myfreetaxes com philly   You and your spouse can designate that otherwise qualifying payments are not alimony. Www myfreetaxes com philly You do this by including a provision in your divorce or separation instrument that states the payments are not deductible as alimony by you and are excludable from your spouse's income. Www myfreetaxes com philly For this purpose, any instrument (written statement) signed by both of you that makes this designation and that refers to a previous written separation agreement is treated as a written separation agreement (and therefore a divorce or separation instrument). Www myfreetaxes com philly If you are subject to temporary support orders, the designation must be made in the original or a later temporary support order. Www myfreetaxes com philly   Your spouse can exclude the payments from income only if he or she attaches a copy of the instrument designating them as not alimony to his or her return. Www myfreetaxes com philly The copy must be attached each year the designation applies. Www myfreetaxes com philly Spouses cannot be members of the same household. Www myfreetaxes com philly    Payments to your spouse while you are members of the same household are not alimony if you are legally separated under a decree of divorce or separate maintenance. Www myfreetaxes com philly A home you formerly shared is considered one household, even if you physically separate yourselves in the home. Www myfreetaxes com philly   You are not treated as members of the same household if one of you is preparing to leave the household and does leave no later than 1 month after the date of the payment. Www myfreetaxes com philly Exception. Www myfreetaxes com philly   If you are not legally separated under a decree of divorce or separate maintenance, a payment under a written separation agreement, support decree, or other court order may qualify as alimony even if you are members of the same household when the payment is made. Www myfreetaxes com philly Table 18-1. Www myfreetaxes com philly Alimony Requirements (Instruments Executed After 1984) Payments ARE alimony if all of the following are true: Payments are NOT alimony if any of the following are true: Payments are required by a divorce or separation instrument. Www myfreetaxes com philly Payments are not required by a divorce or separation instrument. Www myfreetaxes com philly Payer and recipient spouse do not file a joint return with each other. Www myfreetaxes com philly Payer and recipient spouse file a joint return with each other. Www myfreetaxes com philly Payment is in cash (including checks or money orders). Www myfreetaxes com philly Payment is: Not in cash, A noncash property settlement, Spouse's part of community income, or To keep up the payer's property. Www myfreetaxes com philly Payment is not designated in the instrument as not alimony. Www myfreetaxes com philly Payment is designated in the instrument as not alimony. Www myfreetaxes com philly Spouses legally separated under a decree of divorce or separate maintenance are not members of the same household. Www myfreetaxes com philly Spouses legally separated under a decree of divorce or separate maintenance are members of the same household. Www myfreetaxes com philly Payments are not required after death of the recipient spouse. Www myfreetaxes com philly Payments are required after death of the recipient spouse. Www myfreetaxes com philly Payment is not treated as child support. Www myfreetaxes com philly Payment is treated as child support. Www myfreetaxes com philly These payments are deductible by the payer and includible in income by the recipient. Www myfreetaxes com philly These payments are neither deductible by the payer nor includible in income by the recipient. Www myfreetaxes com philly Liability for payments after death of recipient spouse. Www myfreetaxes com philly   If any part of payments you make must continue to be made for any period after your spouse's death, that part of your payments is not alimony, whether made before or after the death. Www myfreetaxes com philly If all of the payments would continue, then none of the payments made before or after the death are alimony. Www myfreetaxes com philly   The divorce or separation instrument does not have to expressly state that the payments cease upon the death of your spouse if, for example, the liability for continued payments would end under state law. Www myfreetaxes com philly Example. Www myfreetaxes com philly You must pay your former spouse $10,000 in cash each year for 10 years. Www myfreetaxes com philly Your divorce decree states that the payments will end upon your former spouse's death. Www myfreetaxes com philly You must also pay your former spouse or your former spouse's estate $20,000 in cash each year for 10 years. Www myfreetaxes com philly The death of your spouse would not terminate these payments under state law. Www myfreetaxes com philly The $10,000 annual payments may qualify as alimony. Www myfreetaxes com philly The $20,000 annual payments that do not end upon your former spouse's death are not alimony. Www myfreetaxes com philly Substitute payments. Www myfreetaxes com philly   If you must make any payments in cash or property after your spouse's death as a substitute for continuing otherwise qualifying payments before the death, the otherwise qualifying payments are not alimony. Www myfreetaxes com philly To the extent that your payments begin, accelerate, or increase because of the death of your spouse, otherwise qualifying payments you made may be treated as payments that were not alimony. Www myfreetaxes com philly Whether or not such payments will be treated as not alimony depends on all the facts and circumstances. Www myfreetaxes com philly Example 1. Www myfreetaxes com philly Under your divorce decree, you must pay your former spouse $30,000 annually. Www myfreetaxes com philly The payments will stop at the end of 6 years or upon your former spouse's death, if earlier. Www myfreetaxes com philly Your former spouse has custody of your minor children. Www myfreetaxes com philly The decree provides that if any child is still a minor at your spouse's death, you must pay $10,000 annually to a trust until the youngest child reaches the age of majority. Www myfreetaxes com philly The trust income and corpus (principal) are to be used for your children's benefit. Www myfreetaxes com philly These facts indicate that the payments to be made after your former spouse's death are a substitute for $10,000 of the $30,000 annual payments. Www myfreetaxes com philly Of each of the $30,000 annual payments, $10,000 is not alimony. Www myfreetaxes com philly Example 2. Www myfreetaxes com philly Under your divorce decree, you must pay your former spouse $30,000 annually. Www myfreetaxes com philly The payments will stop at the end of 15 years or upon your former spouse's death, if earlier. Www myfreetaxes com philly The decree provides that if your former spouse dies before the end of the 15-year period, you must pay the estate the difference between $450,000 ($30,000 × 15) and the total amount paid up to that time. Www myfreetaxes com philly For example, if your spouse dies at the end of the tenth year, you must pay the estate $150,000 ($450,000 − $300,000). Www myfreetaxes com philly These facts indicate that the lump-sum payment to be made after your former spouse's death is a substitute for the full amount of the $30,000 annual payments. Www myfreetaxes com philly None of the annual payments are alimony. Www myfreetaxes com philly The result would be the same if the payment required at death were to be discounted by an appropriate interest factor to account for the prepayment. Www myfreetaxes com philly Child support. Www myfreetaxes com philly   A payment that is specifically designated as child support or treated as specifically designated as child support under your divorce or separation instrument is not alimony. Www myfreetaxes com philly The amount of child support may vary over time. Www myfreetaxes com philly Child support payments are not deductible by the payer and are not taxable to the recipient. Www myfreetaxes com philly Specifically designated as child support. Www myfreetaxes com philly   A payment will be treated as specifically designated as child support to the extent that the payment is reduced either: On the happening of a contingency relating to your child, or At a time that can be clearly associated with the contingency. Www myfreetaxes com philly A payment may be treated as specifically designated as child support even if other separate payments are specifically designated as child support. Www myfreetaxes com philly Contingency relating to your child. Www myfreetaxes com philly   A contingency relates to your child if it depends on any event relating to that child. Www myfreetaxes com philly It does not matter whether the event is certain or likely to occur. Www myfreetaxes com philly Events relating to your child include the child's: Becoming employed, Dying, Leaving the household, Leaving school, Marrying, or Reaching a specified age or income level. Www myfreetaxes com philly Clearly associated with a contingency. Www myfreetaxes com philly   Payments that would otherwise qualify as alimony are presumed to be reduced at a time clearly associated with the happening of a contingency relating to your child only in the following situations. Www myfreetaxes com philly The payments are to be reduced not more than 6 months before or after the date the child will reach 18, 21, or local age of majority. Www myfreetaxes com philly The payments are to be reduced on two or more occasions that occur not more than 1 year before or after a different one of your children reaches a certain age from 18 to 24. Www myfreetaxes com philly This certain age must be the same for each child, but need not be a whole number of years. Www myfreetaxes com philly In all other situations, reductions in payments are not treated as clearly associated with the happening of a contingency relating to your child. Www myfreetaxes com philly   Either you or the IRS can overcome the presumption in the two situations above. Www myfreetaxes com philly This is done by showing that the time at which the payments are to be reduced was determined independently of any contingencies relating to your children. Www myfreetaxes com philly For example, if you can show that the period of alimony payments is customary in the local jurisdiction, such as a period equal to one-half of the duration of the marriage, you can overcome the presumption and may be able to treat the amount as alimony. Www myfreetaxes com philly How To Deduct Alimony Paid You can deduct alimony you paid, whether or not you itemize deductions on your return. Www myfreetaxes com philly You must file Form 1040. Www myfreetaxes com philly You cannot use Form 1040A or Form 1040EZ. Www myfreetaxes com philly Enter the amount of alimony you paid on Form 1040, line 31a. Www myfreetaxes com philly In the space provided on line 31b, enter your spouse's social security number (SSN) or individual taxpayer identification number (ITIN). Www myfreetaxes com philly If you paid alimony to more than one person, enter the SSN or ITIN of one of the recipients. Www myfreetaxes com philly Show the SSN or ITIN and amount paid to each other recipient on an attached statement. Www myfreetaxes com philly Enter your total payments on line 31a. Www myfreetaxes com philly You must provide your spouse's SSN or ITIN. Www myfreetaxes com philly If you do not, you may have to pay a $50 penalty and your deduction may be disallowed. Www myfreetaxes com philly For more information on SSNs and ITINs, see Social Security Number (SSN) in chapter 1. Www myfreetaxes com philly How To Report Alimony Received Report alimony you received as income on Form 1040, line 11. Www myfreetaxes com philly You cannot use Form 1040A or Form 1040EZ. Www myfreetaxes com philly You must give the person who paid the alimony your SSN or ITIN. Www myfreetaxes com philly If you do not, you may have to pay a $50 penalty. Www myfreetaxes com philly Recapture Rule If your alimony payments decrease or end during the first 3 calendar years, you may be subject to the recapture rule. Www myfreetaxes com philly If you are subject to this rule, you have to include in income in the third year part of the alimony payments you previously deducted. Www myfreetaxes com philly Your spouse can deduct in the third year part of the alimony payments he or she previously included in income. Www myfreetaxes com philly The 3-year period starts with the first calendar year you make a payment qualifying as alimony under a decree of divorce or separate maintenance or a written separation agreement. Www myfreetaxes com philly Do not include any time in which payments were being made under temporary support orders. Www myfreetaxes com philly The second and third years are the next 2 calendar years, whether or not payments are made during those years. Www myfreetaxes com philly The reasons for a reduction or end of alimony payments that can require a recapture include: A change in your divorce or separation instrument, A failure to make timely payments, A reduction in your ability to provide support, or A reduction in your spouse's support needs. Www myfreetaxes com philly When to apply the recapture rule. Www myfreetaxes com philly   You are subject to the recapture rule in the third year if the alimony you pay in the third year decreases by more than $15,000 from the second year or the alimony you pay in the second and third years decreases significantly from the alimony you pay in the first year. Www myfreetaxes com philly   When you figure a decrease in alimony, do not include the following amounts. Www myfreetaxes com philly Payments made under a temporary support order. Www myfreetaxes com philly Payments required over a period of at least 3 calendar years that vary because they are a fixed part of your income from a business or property, or from compensation for employment or self-employment. Www myfreetaxes com philly Payments that decrease because of the death of either spouse or the remarriage of the spouse receiving the payments before the end of the third year. Www myfreetaxes com philly Figuring the recapture. Www myfreetaxes com philly   You can use Worksheet 1 in Publication 504 to figure recaptured alimony. Www myfreetaxes com philly Including the recapture in income. Www myfreetaxes com philly   If you must include a recapture amount in income, show it on Form 1040, line 11 (“Alimony received”). Www myfreetaxes com philly Cross out “received” and enter “recapture. Www myfreetaxes com philly ” On the dotted line next to the amount, enter your spouse's last name and SSN or ITIN. Www myfreetaxes com philly Deducting the recapture. Www myfreetaxes com philly   If you can deduct a recapture amount, show it on Form 1040, line 31a (“Alimony paid”). Www myfreetaxes com philly Cross out “paid” and enter “recapture. Www myfreetaxes com philly ” In the space provided, enter your spouse's SSN or ITIN. Www myfreetaxes com philly Prev  Up  Next   Home   More Online Publications
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Www myfreetaxes com philly 4. Www myfreetaxes com philly   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. Www myfreetaxes com philly Rent-to-own contract. Www myfreetaxes com philly 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. Www myfreetaxes com philly MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Www myfreetaxes com philly Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. Www myfreetaxes com philly 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. Www myfreetaxes com philly This chapter explains how to determine which MACRS depreciation system applies to your property. Www myfreetaxes com philly It also discusses other information you need to know before you can figure depreciation under MACRS. Www myfreetaxes com philly 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. Www myfreetaxes com philly 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. Www myfreetaxes com philly Finally, it explains when and how to recapture MACRS depreciation. Www myfreetaxes com philly 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. Www myfreetaxes com philly 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. Www myfreetaxes com philly You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Www myfreetaxes com philly If you placed your property in service in 2013, complete Part III of Form 4562 to report depreciation using MACRS. Www myfreetaxes com philly Complete section B of Part III to report depreciation using GDS, and complete section C of Part III to report depreciation using ADS. Www myfreetaxes com philly 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. Www myfreetaxes com philly Required use of ADS. Www myfreetaxes com philly   You must use ADS for the following property. Www myfreetaxes com philly Listed property used 50% or less in a qualified business use. Www myfreetaxes com philly See chapter 5 for information on listed property. Www myfreetaxes com philly Any tangible property used predominantly outside the United States during the year. Www myfreetaxes com philly Any tax-exempt use property. Www myfreetaxes com philly Any tax-exempt bond-financed property. Www myfreetaxes com philly 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. Www myfreetaxes com philly 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. Www myfreetaxes com philly 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. Www myfreetaxes com philly Electing ADS. Www myfreetaxes com philly   Although your property may qualify for GDS, you can elect to use ADS. Www myfreetaxes com philly The election generally must cover all property in the same property class that you placed in service during the year. Www myfreetaxes com philly However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. Www myfreetaxes com philly Once you make this election, you can never revoke it. Www myfreetaxes com philly   You make the election by completing line 20 in Part III of Form 4562. Www myfreetaxes com philly 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. Www myfreetaxes com philly These property classes are also listed under column (a) in section B, Part III, of Form 4562. Www myfreetaxes com philly For detailed information on property classes, see Appendix B, Table of Class Lives and Recovery Periods, in this publication. Www myfreetaxes com philly 3-year property. Www myfreetaxes com philly Tractor units for over-the-road use. Www myfreetaxes com philly Any race horse over 2 years old when placed in service. Www myfreetaxes com philly (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. Www myfreetaxes com philly ) Any other horse (other than a race horse) over 12 years old when placed in service. Www myfreetaxes com philly Qualified rent-to-own property (defined later). Www myfreetaxes com philly 5-year property. Www myfreetaxes com philly Automobiles, taxis, buses, and trucks. Www myfreetaxes com philly Computers and peripheral equipment. Www myfreetaxes com philly Office machinery (such as typewriters, calculators, and copiers). Www myfreetaxes com philly Any property used in research and experimentation. Www myfreetaxes com philly Breeding cattle and dairy cattle. Www myfreetaxes com philly Appliances, carpets, furniture, etc. Www myfreetaxes com philly , used in a residential rental real estate activity. Www myfreetaxes com philly Certain geothermal, solar, and wind energy property. Www myfreetaxes com philly 7-year property. Www myfreetaxes com philly Office furniture and fixtures (such as desks, files, and safes). Www myfreetaxes com philly Agricultural machinery and equipment. Www myfreetaxes com philly Any property that does not have a class life and has not been designated by law as being in any other class. Www myfreetaxes com philly Certain motorsports entertainment complex property (defined later) placed in service before January 1, 2014. Www myfreetaxes com philly Any natural gas gathering line placed in service after April 11, 2005. Www myfreetaxes com philly See Natural gas gathering line and electric transmission property , later. Www myfreetaxes com philly 10-year property. Www myfreetaxes com philly Vessels, barges, tugs, and similar water transportation equipment. Www myfreetaxes com philly Any single purpose agricultural or horticultural structure. Www myfreetaxes com philly Any tree or vine bearing fruits or nuts. Www myfreetaxes com philly Qualified small electric meter and qualified smart electric grid system (defined later) placed in service on or after October 3, 2008. Www myfreetaxes com philly 15-year property. Www myfreetaxes com philly Certain improvements made directly to land or added to it (such as shrubbery, fences, roads, sidewalks, and bridges). Www myfreetaxes com philly Any retail motor fuels outlet (defined later), such as a convenience store. Www myfreetaxes com philly Any municipal wastewater treatment plant. Www myfreetaxes com philly Any qualified leasehold improvement property (defined later) placed in service before January 1, 2014. Www myfreetaxes com philly Any qualified restaurant property (defined later) placed in service before January 1, 2014. Www myfreetaxes com philly Initial clearing and grading land improvements for gas utility property. Www myfreetaxes com philly 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. Www myfreetaxes com philly See Natural gas gathering line and electric transmission property , later. Www myfreetaxes com philly Any natural gas distribution line placed in service after April 11, 2005 and before January 1, 2011. Www myfreetaxes com philly Any qualified retail improvement property placed in service before January 1, 2014. Www myfreetaxes com philly 20-year property. Www myfreetaxes com philly Farm buildings (other than single purpose agricultural or horticultural structures). Www myfreetaxes com philly Municipal sewers not classified as 25-year property. Www myfreetaxes com philly Initial clearing and grading land improvements for electric utility transmission and distribution plants. Www myfreetaxes com philly 25-year property. Www myfreetaxes com philly This class is water utility property, which is either of the following. Www myfreetaxes com philly 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. Www myfreetaxes com philly Municipal sewers other than property placed in service under a binding contract in effect at all times since June 9, 1996. Www myfreetaxes com philly Residential rental property. Www myfreetaxes com philly 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. Www myfreetaxes com philly A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. Www myfreetaxes com philly 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. Www myfreetaxes com philly 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. Www myfreetaxes com philly Nonresidential real property. Www myfreetaxes com philly 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. Www myfreetaxes com philly 5 years. Www myfreetaxes com philly Qualified rent-to-own property. Www myfreetaxes com philly   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. Www myfreetaxes com philly It is tangible personal property generally used in the home for personal use. Www myfreetaxes com philly It includes computers and peripheral equipment, televisions, videocassette recorders, stereos, camcorders, appliances, furniture, washing machines and dryers, refrigerators, and other similar consumer durable property. Www myfreetaxes com philly Consumer durable property does not include real property, aircraft, boats, motor vehicles, or trailers. Www myfreetaxes com philly   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. Www myfreetaxes com philly 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. Www myfreetaxes com philly Rent-to-own dealer. Www myfreetaxes com philly   You are a rent-to-own dealer if you meet all the following requirements. Www myfreetaxes com philly You regularly enter into rent-to-own contracts (defined below) in the ordinary course of your business for the use of consumer property. Www myfreetaxes com philly A substantial portion of these contracts end with the customer returning the property before making all the payments required to transfer ownership. Www myfreetaxes com philly The property is tangible personal property of a type generally used within the home for personal use. Www myfreetaxes com philly Rent-to-own contract. Www myfreetaxes com philly   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. Www myfreetaxes com philly 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). Www myfreetaxes com philly Provides for regular periodic (weekly or monthly) payments that can be either level or decreasing. Www myfreetaxes com philly If the payments are decreasing, no payment can be less than 40% of the largest payment. Www myfreetaxes com philly Provides for total payments that generally exceed the normal retail price of the property plus interest. Www myfreetaxes com philly Provides for total payments that do not exceed $10,000 for each item of property. Www myfreetaxes com philly 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. Www myfreetaxes com philly 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. Www myfreetaxes com philly 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. Www myfreetaxes com philly Motorsports entertainment complex. Www myfreetaxes com philly   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. Www myfreetaxes com philly The events must be open to the public for the price of admission. Www myfreetaxes com philly Qualified smart electric grid system. Www myfreetaxes com philly   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. Www myfreetaxes com philly 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. Www myfreetaxes com philly Retail motor fuels outlet. Www myfreetaxes com philly   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. Www myfreetaxes com philly It is not larger than 1,400 square feet. Www myfreetaxes com philly 50% or more of the gross revenues generated from the property are derived from petroleum sales. Www myfreetaxes com philly 50% or more of the floor space in the property is devoted to petroleum marketing sales. Www myfreetaxes com philly A retail motor fuels outlet does not include any facility related to petroleum and natural gas trunk pipelines. Www myfreetaxes com philly Qualified leasehold improvement property. Www myfreetaxes com philly    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. Www myfreetaxes com philly   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. Www myfreetaxes com philly 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. Www myfreetaxes com philly Examples include the following. Www myfreetaxes com philly A complete liquidation of a subsidiary. Www myfreetaxes com philly A transfer to a corporation controlled by the transferor. Www myfreetaxes com philly An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. Www myfreetaxes com philly Qualified restaurant property. Www myfreetaxes com philly   Qualified restaurant property is any section 1250 property that is a building placed in service after December 31, 2008, and before January 1, 2014. Www myfreetaxes com philly 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. Www myfreetaxes com philly Qualified smart electric meter. Www myfreetaxes com philly   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. Www myfreetaxes com philly 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. Www myfreetaxes com philly Natural gas gathering line and electric transmission property. Www myfreetaxes com philly   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. Www myfreetaxes com philly The original use of the property must have begun with you after April 11, 2005. Www myfreetaxes com philly Original use means the first use to which the property is put, whether or not by you. Www myfreetaxes com philly Therefore, property used by any person before April 12, 2005, is not original use. Www myfreetaxes com philly Original use includes additional capital expenditures you incurred to recondition or rebuild your property. Www myfreetaxes com philly However, original use does not include the cost of reconditioned or rebuilt property you acquired. Www myfreetaxes com philly 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. Www myfreetaxes com philly The property must not be placed in service under a binding contract in effect before April 12, 2005. Www myfreetaxes com philly 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. Www myfreetaxes com philly 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. Www myfreetaxes com philly 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. Www myfreetaxes com philly The placed in service date for your property is the date the property is ready and available for a specific use. Www myfreetaxes com philly It is therefore not necessarily the date it is first used. Www myfreetaxes com philly 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. Www myfreetaxes com philly See Placed in Service under When Does Depreciation Begin and End in chapter 1 for examples illustrating when property is placed in service. Www myfreetaxes com philly 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. Www myfreetaxes com philly 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 . Www myfreetaxes com philly Reduce that amount by any credits and deductions allocable to the property. Www myfreetaxes com philly The following are examples of some credits and deductions that reduce basis. Www myfreetaxes com philly Any deduction for section 179 property. Www myfreetaxes com philly Any deduction under section 179B of the Internal Revenue Code for capital costs to comply with Environmental Protection Agency sulfur regulations. Www myfreetaxes com philly 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. Www myfreetaxes com philly 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. Www myfreetaxes com philly 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 . Www myfreetaxes com philly Any deduction for removal of barriers to the disabled and the elderly. Www myfreetaxes com philly Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. Www myfreetaxes com philly Any special depreciation allowance. Www myfreetaxes com philly Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. Www myfreetaxes com philly For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. Www myfreetaxes com philly Enter the basis for depreciation under column (c) in Part III of Form 4562. Www myfreetaxes com philly 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 . Www myfreetaxes com philly Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. Www myfreetaxes com philly It is determined based on the depreciation system (GDS or ADS) used. Www myfreetaxes com philly Recovery Periods Under GDS Under GDS, property that is not qualified Indian reservation property is depreciated over one of the following recovery periods. Www myfreetaxes com philly 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. Www myfreetaxes com philly 5 years     Nonresidential real property   39 years 4   15 years for qualified rent-to-own property placed in service before August 6, 1997. Www myfreetaxes com philly 239 years for property that is a retail motor fuels outlet placed in service before August 20, 1996 (31. Www myfreetaxes com philly 5 years if placed in service before May 13, 1993), unless you elected to depreciate it over 15 years. Www myfreetaxes com philly 320 years for property placed in service before June 13, 1996, or under a binding contract in effect before June 10, 1996. Www myfreetaxes com philly 431. Www myfreetaxes com philly 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). Www myfreetaxes com philly The GDS recovery periods for property not listed above can be found in Appendix B, Table of Class Lives and Recovery Periods. Www myfreetaxes com philly Residential rental property and nonresidential real property are defined earlier under Which Depreciation System (GDS or ADS) Applies. Www myfreetaxes com philly 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). Www myfreetaxes com philly Office in the home. Www myfreetaxes com philly   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. Www myfreetaxes com philly 5 years if you began using it for business before May 13, 1993). Www myfreetaxes com philly 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. Www myfreetaxes com philly 5 years. Www myfreetaxes com philly See Publication 587 for a discussion of the tests you must meet to claim expenses, including depreciation, for the business use of your home. Www myfreetaxes com philly Home changed to rental use. Www myfreetaxes com philly   If you begin to rent a home that was your personal home before 1987, you depreciate it as residential rental property over 27. Www myfreetaxes com philly 5 years. Www myfreetaxes com philly 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. Www myfreetaxes com philly The following table shows these shorter recovery periods. Www myfreetaxes com philly 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 . Www myfreetaxes com philly Use this chart to find the correct percentage table to use for qualified Indian reservation property. Www myfreetaxes com philly 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. Www myfreetaxes com philly   Property eligible for the shorter recovery periods are 3-, 5-, 7-, 10-, 15-, and 20-year property and nonresidential real property. Www myfreetaxes com philly You must use this property predominantly in the active conduct of a trade or business within an Indian reservation. Www myfreetaxes com philly 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. Www myfreetaxes com philly   The following property is not qualified property. Www myfreetaxes com philly Property used or located outside an Indian reservation on a regular basis, other than qualified infrastructure property. Www myfreetaxes com philly Property acquired directly or indirectly from a related person. Www myfreetaxes com philly Property placed in service for purposes of conducting or housing class I, II, or III gaming activities. Www myfreetaxes com philly These activities are defined in section 4 of the Indian Regulatory Act (25 U. Www myfreetaxes com philly S. Www myfreetaxes com philly C. Www myfreetaxes com philly 2703). Www myfreetaxes com philly Any property you must depreciate under ADS. Www myfreetaxes com philly 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). Www myfreetaxes com philly Qualified infrastructure property. Www myfreetaxes com philly   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. Www myfreetaxes com philly Qualified infrastructure property is property that meets all the following rules. Www myfreetaxes com philly It is qualified property, as defined earlier, except that it is outside the reservation. Www myfreetaxes com philly It benefits the tribal infrastructure. Www myfreetaxes com philly It is available to the general public. Www myfreetaxes com philly It is placed in service in connection with the active conduct of a trade or business within a reservation. Www myfreetaxes com philly Infrastructure property includes, but is not limited to, roads, power lines, water systems, railroad spurs, and communications facilities. Www myfreetaxes com philly Related person. Www myfreetaxes com philly   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. Www myfreetaxes com philly Indian reservation. Www myfreetaxes com philly   The term Indian reservation means a reservation as defined in section 3(d) of the Indian Financing Act of 1974 (25 U. Www myfreetaxes com philly S. Www myfreetaxes com philly C. Www myfreetaxes com philly 1452(d)) or section 4(10) of the Indian Child Welfare Act of 1978 (25 U. Www myfreetaxes com philly S. Www myfreetaxes com philly C. Www myfreetaxes com philly 1903(10)). Www myfreetaxes com philly Section 3(d) of the Indian Financing Act of 1974 defines reservation to include former Indian reservations in Oklahoma. Www myfreetaxes com philly For a definition of the term “former Indian reservations in Oklahoma,” see Notice 98-45 in Internal Revenue Bulletin 1998-35. Www myfreetaxes com philly Recovery Periods Under ADS The recovery periods for most property generally are longer under ADS than they are under GDS. Www myfreetaxes com philly The following table shows some of the ADS recovery periods. Www myfreetaxes com philly 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. Www myfreetaxes com philly 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 . Www myfreetaxes com philly Tax-exempt use property subject to a lease. Www myfreetaxes com philly   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. Www myfreetaxes com philly Additions and Improvements An addition or improvement you make to depreciable property is treated as separate depreciable property. Www myfreetaxes com philly See How Do You Treat Repairs and Improvements in chapter 1 for a definition of improvements. Www myfreetaxes com philly 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. Www myfreetaxes com philly The recovery period begins on the later of the following dates. Www myfreetaxes com philly The date you place the addition or improvement in service. Www myfreetaxes com philly The date you place in service the property to which you made the addition or improvement. Www myfreetaxes com philly 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). Www myfreetaxes com philly Example. Www myfreetaxes com philly You own a rental home that you have been renting out since 1981. Www myfreetaxes com philly 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. Www myfreetaxes com philly Under GDS, the property class for the addition is residential rental property and its recovery period is 27. Www myfreetaxes com philly 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. Www myfreetaxes com philly Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. Www myfreetaxes com philly 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. Www myfreetaxes com philly The mid-month convention. Www myfreetaxes com philly   Use this convention for nonresidential real property, residential rental property, and any railroad grading or tunnel bore. Www myfreetaxes com philly   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. Www myfreetaxes com philly This means that a one-half month of depreciation is allowed for the month the property is placed in service or disposed of. Www myfreetaxes com philly   Your use of the mid-month convention is indicated by the “MM” already shown under column (e) in Part III of Form 4562. Www myfreetaxes com philly The mid-quarter convention. Www myfreetaxes com philly   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. Www myfreetaxes com philly   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. Www myfreetaxes com philly This means that 1½ months of depreciation is allowed for the quarter the property is placed in service or disposed of. Www myfreetaxes com philly   If you use this convention, enter “MQ” under column (e) in Part III of Form 4562. Www myfreetaxes com philly    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. Www myfreetaxes com philly However, it does not reflect any reduction in basis for any special depreciation allowance. Www myfreetaxes com philly The half-year convention. Www myfreetaxes com philly   Use this convention if neither the mid-quarter convention nor the mid-month convention applies. Www myfreetaxes com philly   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. Www myfreetaxes com philly This means that a one-half year of depreciation is allowed for the year the property is placed in service or disposed of. Www myfreetaxes com philly   If you use this convention, enter “HY” under column (e) in Part III of Form 4562. Www myfreetaxes com philly Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. Www myfreetaxes com philly The 200% declining balance method over a GDS recovery period. Www myfreetaxes com philly The 150% declining balance method over a GDS recovery period. Www myfreetaxes com philly The straight line method over a GDS recovery period. Www myfreetaxes com philly The straight line method over an ADS recovery period. Www myfreetaxes com philly 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. Www myfreetaxes com philly If you made this election, continue to use the same method and recovery period for that property. Www myfreetaxes com philly Table 4–1 lists the types of property you can depreciate under each method. Www myfreetaxes com philly It also gives a brief explanation of the method, including any benefits that may apply. Www myfreetaxes com philly 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. Www myfreetaxes com philly You can depreciate real property using the straight line method under either GDS or ADS. Www myfreetaxes com philly Fruit or nut trees and vines. Www myfreetaxes com philly   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a recovery period of 10 years. Www myfreetaxes com philly ADS required for some farmers. Www myfreetaxes com philly   If you elect not to apply the uniform capitalization rules to any plant produced in your farming business, you must use ADS. Www myfreetaxes com philly You must use ADS for all property you place in service in any year the election is in effect. Www myfreetaxes com philly See the regulations under section 263A of the Internal Revenue Code for information on the uniform capitalization rules that apply to farm property. Www myfreetaxes com philly Electing a Different Method As shown in Table 4–1 , you can elect a different method for depreciation for certain types of property. Www myfreetaxes com philly You must make the election by the due date of the return (including extensions) for the year you placed the property in service. Www myfreetaxes com philly 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). Www myfreetaxes com philly Attach the election to the amended return and write “Filed pursuant to section 301. Www myfreetaxes com philly 9100-2” on the election statement. Www myfreetaxes com philly File the amended return at the same address you filed the original return. Www myfreetaxes com philly Once you make the election, you cannot change it. Www myfreetaxes com philly 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. Www myfreetaxes com philly However, you can make the election on a property-by-property basis for nonresidential real and residential rental property. Www myfreetaxes com philly 150% election. Www myfreetaxes com philly   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. Www myfreetaxes com philly Make the election by entering “150 DB” under column (f) in Part III of Form 4562. Www myfreetaxes com philly Straight line election. Www myfreetaxes com philly   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. Www myfreetaxes com philly Make the election by entering  “S/L” under column (f) in Part III of Form 4562. Www myfreetaxes com philly Election of ADS. Www myfreetaxes com philly   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. Www myfreetaxes com philly ADS uses the straight line method of depreciation over fixed ADS recovery periods. Www myfreetaxes com philly Most ADS recovery periods are listed in Appendix B, or see the table under Recovery Periods Under ADS , earlier. Www myfreetaxes com philly   Make the election by completing line 20 in Part III of Form 4562. Www myfreetaxes com philly Farm property. Www myfreetaxes com philly   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. Www myfreetaxes com philly The straight line method over a GDS recovery period. Www myfreetaxes com philly The straight line method over an ADS recovery period. Www myfreetaxes com philly Table 4-1. Www myfreetaxes com philly Depreciation Methods Note. Www myfreetaxes com philly The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. Www myfreetaxes com philly 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. Www myfreetaxes com philly S. Www myfreetaxes com philly  • 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. Www myfreetaxes com philly 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. Www myfreetaxes com philly Then, you are ready to figure your depreciation deduction. Www myfreetaxes com philly You can figure it using a percentage table provided by the IRS, or you can figure it yourself without using the table. Www myfreetaxes com philly 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. Www myfreetaxes com philly These percentage tables are in Appendix A near the end of this publication. Www myfreetaxes com philly Which table to use. Www myfreetaxes com philly    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. Www myfreetaxes com philly The percentage tables immediately follow the guide. Www myfreetaxes com philly Rules Covering the Use of the Tables The following rules cover the use of the percentage tables. Www myfreetaxes com philly You must apply the rates in the percentage tables to your property's unadjusted basis. Www myfreetaxes com philly You cannot use the percentage tables for a short tax year. Www myfreetaxes com philly See Figuring the Deduction for a Short Tax Year, later, for information on the short tax year rules. Www myfreetaxes com philly 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. Www myfreetaxes com philly 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. Www myfreetaxes com philly 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. Www myfreetaxes com philly Basis adjustment due to recapture of clean-fuel vehicle deduction or credit. Www myfreetaxes com philly   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. Www myfreetaxes com philly 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. Www myfreetaxes com philly See Figuring the Deduction Without Using the Tables, later. Www myfreetaxes com philly Basis adjustment due to casualty loss. Www myfreetaxes com philly   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. Www myfreetaxes com philly 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. Www myfreetaxes com philly See Figuring the Deduction Without Using the Tables, later. Www myfreetaxes com philly Example. Www myfreetaxes com philly 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. Www myfreetaxes com philly It cost $39,000 and she elected a section 179 deduction of $24,000. Www myfreetaxes com philly She also took a special depreciation allowance of $7,500 [50% of $15,000 ($39,000 − $24,000)]. Www myfreetaxes com philly Her unadjusted basis after the section 179 deduction and special depreciation allowance was $7,500 ($15,000 − $7,500). Www myfreetaxes com philly She figured her MACRS depreciation deduction using the percentage tables. Www myfreetaxes com philly For 2012, her MACRS depreciation deduction was $268. Www myfreetaxes com philly In July 2013, the property was vandalized and Sandra had a deductible casualty loss of $3,000. Www myfreetaxes com philly She must adjust the property's basis for the casualty loss, so she can no longer use the percentage tables. Www myfreetaxes com philly Her adjusted basis at the end of 2013, before figuring her 2013 depreciation, is $4,232. Www myfreetaxes com philly 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. Www myfreetaxes com philly She must now figure her depreciation for 2013 without using the percentage tables. Www myfreetaxes com philly 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. Www myfreetaxes com philly 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. Www myfreetaxes com philly However, you do reduce your original basis by other amounts, including the following. Www myfreetaxes com philly Any amortization taken on the property. Www myfreetaxes com philly Any section 179 deduction claimed. Www myfreetaxes com philly Any special depreciation allowance taken on the property. Www myfreetaxes com philly For business property you purchase during the year, the unadjusted basis is its cost minus these and other applicable adjustments. Www myfreetaxes com philly 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. Www myfreetaxes com philly MACRS Worksheet You can use this worksheet to help you figure your depreciation deduction using the percentage tables. Www myfreetaxes com philly Use a separate worksheet for each item of property. Www myfreetaxes com philly Then, use the information from this worksheet to prepare Form 4562. Www myfreetaxes com philly Do not use this worksheet for automobiles. Www myfreetaxes com philly Use the Depreciation Worksheet for Passenger Automobiles in chapter 5. Www myfreetaxes com philly MACRS Worksheet Part I   1. Www myfreetaxes com philly MACRS system (GDS or ADS)   2. Www myfreetaxes com philly Property class   3. Www myfreetaxes com philly Date placed in service   4. Www myfreetaxes com philly Recovery period   5. Www myfreetaxes com philly Method and convention   6. Www myfreetaxes com philly Depreciation rate (from tables)   Part II   7. Www myfreetaxes com philly Cost or other basis* $     8. Www myfreetaxes com philly Business/investment use   %   9. Www myfreetaxes com philly Multiply line 7 by line 8   $ 10. Www myfreetaxes com philly Total claimed for section 179 deduction and other items   $ 11. Www myfreetaxes com philly Subtract line 10 from line 9. Www myfreetaxes com philly This is your tentative basis for depreciation   $ 12. Www myfreetaxes com philly Multiply line 11 by . Www myfreetaxes com philly 50 if the 50% special depreciation allowance applies. Www myfreetaxes com philly This is your special depreciation allowance. Www myfreetaxes com philly 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. Www myfreetaxes com philly Subtract line 12 from line 11. Www myfreetaxes com philly This is your basis for depreciation     14. Www myfreetaxes com philly Depreciation rate (from line 6)     15. Www myfreetaxes com philly Multiply line 13 by line 14. Www myfreetaxes com philly This is your MACRS depreciation deduction   $ *If real estate, do not include cost (basis) of land. Www myfreetaxes com philly The following example shows how to figure your MACRS depreciation deduction using the percentage tables and the MACRS worksheet. Www myfreetaxes com philly Example. Www myfreetaxes com philly You bought office furniture (7-year property) for $10,000 and placed it in service on August 11, 2013. Www myfreetaxes com philly You use the furniture only for business. Www myfreetaxes com philly This is the only property you placed in service this year. Www myfreetaxes com philly 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. Www myfreetaxes com philly You use GDS and the half-year convention to figure your depreciation. Www myfreetaxes com philly You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-1. Www myfreetaxes com philly Multiply your property's unadjusted basis each year by the percentage for 7-year property given in Table A-1. Www myfreetaxes com philly You figure your depreciation deduction using the MACRS worksheet as follows. Www myfreetaxes com philly MACRS Worksheet Part I 1. Www myfreetaxes com philly MACRS system (GDS or ADS) GDS 2. Www myfreetaxes com philly Property class 7-year 3. Www myfreetaxes com philly Date placed in service 8/11/13 4. Www myfreetaxes com philly Recovery period 7-Year 5. Www myfreetaxes com philly Method and convention 200%DB/Half-Year 6. Www myfreetaxes com philly Depreciation rate (from tables) . Www myfreetaxes com philly 1429 Part II 7. Www myfreetaxes com philly Cost or other basis* $10,000     8. Www myfreetaxes com philly Business/investment use 100 %   9. Www myfreetaxes com philly Multiply line 7 by line 8   $10,000 10. Www myfreetaxes com philly Total claimed for section 179 deduction and other items   -0- 11. Www myfreetaxes com philly Subtract line 10 from line 9. Www myfreetaxes com philly This is your tentative basis for depreciation   $10,000 12. Www myfreetaxes com philly Multiply line 11 by . Www myfreetaxes com philly 50 if the 50% special depreciation allowance applies. Www myfreetaxes com philly This is your special depreciation allowance. Www myfreetaxes com philly 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. Www myfreetaxes com philly Subtract line 12 from line 11. Www myfreetaxes com philly This is your basis for depreciation   $10,000 14. Www myfreetaxes com philly Depreciation rate (from line 6)   . Www myfreetaxes com philly 1429 15. Www myfreetaxes com philly Multiply line 13 by line 14. Www myfreetaxes com philly This is your MACRS depreciation deduction   $1,429 *If real estate, do not include cost (basis) of land. Www myfreetaxes com philly 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. Www myfreetaxes com philly Year   Basis Percentage Deduction 2014 $ 10,000 24. Www myfreetaxes com philly 49%   $2,449   2015   10,000 17. Www myfreetaxes com philly 49   1,749   2016   10,000 12. Www myfreetaxes com philly 49   1,249   2017   10,000 8. Www myfreetaxes com philly 93   893   2018   10,000 8. Www myfreetaxes com philly 92   892   2019   10,000 8. Www myfreetaxes com philly 93   893   2020   10,000 4. Www myfreetaxes com philly 46   446   Examples The following examples are provided to show you how to use the percentage tables. Www myfreetaxes com philly In both examples, assume the following. Www myfreetaxes com philly You use the property only for business. Www myfreetaxes com philly You use the calendar year as your tax year. Www myfreetaxes com philly You use GDS for all the properties. Www myfreetaxes com philly Example 1. Www myfreetaxes com philly You bought a building and land for $120,000 and placed it in service on March 8. Www myfreetaxes com philly The sales contract showed that the building cost $100,000 and the land cost $20,000. Www myfreetaxes com philly It is nonresidential real property. Www myfreetaxes com philly The building's unadjusted basis is its original cost, $100,000. Www myfreetaxes com philly You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-7a. Www myfreetaxes com philly 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. Www myfreetaxes com philly Your depreciation deduction for each of the first 3 years is as follows: Year   Basis Percentage Deduction 1st $ 100,000 2. Www myfreetaxes com philly 033%   $2,033   2nd   100,000 2. Www myfreetaxes com philly 564   2,564   3rd   100,000 2. Www myfreetaxes com philly 564   2,564   Example 2. Www myfreetaxes com philly 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. Www myfreetaxes com philly You placed the machine in service in January, the furniture in September, and the computer in October. Www myfreetaxes com philly You do not elect a section 179 deduction and none of these items is qualified property for purposes of claiming a special depreciation allowance. Www myfreetaxes com philly 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. Www myfreetaxes com philly The total bases of all property you placed in service during the year is $10,000. Www myfreetaxes com philly 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. Www myfreetaxes com philly Therefore, you must use the mid-quarter convention for all three items. Www myfreetaxes com philly You refer to the MACRS Percentage Table Guide in Appendix A to determine which table you should use under the mid-quarter convention. Www myfreetaxes com philly The machine is 7-year property placed in service in the first quarter, so you use Table A-2. Www myfreetaxes com philly The furniture is 7-year property placed in service in the third quarter, so you use Table A-4. Www myfreetaxes com philly Finally, because the computer is 5-year property placed in service in the fourth quarter, you use Table A-6. Www myfreetaxes com philly Knowing what table to use for each property, you figure the depreciation for the first 2 years as follows. Www myfreetaxes com philly Year Property Basis Percentage Deduction 1st Machine $4,000 25. Www myfreetaxes com philly 00 $1,000   2nd Machine 4,000 21. Www myfreetaxes com philly 43 857   1st Furniture 1,000 10. Www myfreetaxes com philly 71 107   2nd Furniture 1,000 25. Www myfreetaxes com philly 51 255   1st Computer 5,000 5. Www myfreetaxes com philly 00 250   2nd Computer 5,000 38. Www myfreetaxes com philly 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. Www myfreetaxes com philly 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. Www myfreetaxes com philly After you figure the full-year depreciation amount, figure the deductible part using the convention that applies to the property. Www myfreetaxes com philly Half-year convention used. Www myfreetaxes com philly   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. Www myfreetaxes com philly Mid-quarter convention used. Www myfreetaxes com philly   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. Www myfreetaxes com philly Quarter Percentage First 12. Www myfreetaxes com philly 5% Second 37. Www myfreetaxes com philly 5 Third 62. Www myfreetaxes com philly 5 Fourth 87. Www myfreetaxes com philly 5 Example. Www myfreetaxes com philly On December 2, 2010, you placed in service an item of 5-year property costing $10,000. Www myfreetaxes com philly You did not claim a section 179 deduction and the property does not qualify for a special depreciation allowance. Www myfreetaxes com philly Your unadjusted basis for the property was $10,000. Www myfreetaxes com philly 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. Www myfreetaxes com philly Your property is in the 5-year property class, so you used Table A-5 to figure your depreciation deduction. Www myfreetaxes com philly Your deductions for 2010, 2011, and 2012 were $500 (5% of $10,000), $3,800 (38% of $10,000), and $2,280 (22. Www myfreetaxes com philly 80% of $10,000). Www myfreetaxes com philly You disposed of the property on April 6, 2013. Www myfreetaxes com philly To determine your depreciation deduction for 2013, first figure the deduction for the full year. Www myfreetaxes com philly This is $1,368 (13. Www myfreetaxes com philly 68% of $10,000). Www myfreetaxes com philly April is in the second quarter of the year, so you multiply $1,368 by 37. Www myfreetaxes com philly 5% to get your depreciation deduction of $513 for 2013. Www myfreetaxes com philly Mid-month convention used. Www myfreetaxes com philly   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. Www myfreetaxes com philly The numerator of the fraction is the number of months (including partial months) in the year that the property is considered in service. Www myfreetaxes com philly The denominator is 12. Www myfreetaxes com philly Example. Www myfreetaxes com philly On July 2, 2011, you purchased and placed in service residential rental property. Www myfreetaxes com philly The property cost $100,000, not including the cost of land. Www myfreetaxes com philly You used Table A-6 to figure your MACRS depreciation for this property. Www myfreetaxes com philly You sold the property on March 2, 2013. Www myfreetaxes com philly You file your tax return based on the calendar year. Www myfreetaxes com philly A full year of depreciation for 2013 is $3,636. Www myfreetaxes com philly This is $100,000 multiplied by . Www myfreetaxes com philly 03636 (the percentage for the seventh month of the third recovery year) from Table A-6 . Www myfreetaxes com philly You then apply the mid-month convention for the 2½ months of use in 2013. Www myfreetaxes com philly Treat the month of disposition as one-half month of use. Www myfreetaxes com philly Multiply $3,636 by the fraction, 2. Www myfreetaxes com philly 5 over 12, to get your 2013 depreciation deduction of $757. Www myfreetaxes com philly 50. Www myfreetaxes com philly 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. Www myfreetaxes com philly Before making the computation each year, you must reduce your adjusted basis in the property by the depreciation claimed the previous year. Www myfreetaxes com philly Figuring MACRS deductions without using the tables generally will result in a slightly different amount than using the tables. Www myfreetaxes com philly Declining Balance Method When using a declining balance method, you apply the same depreciation rate each year to the adjusted basis of your property. Www myfreetaxes com philly 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. Www myfreetaxes com philly The straight line method is explained later. Www myfreetaxes com philly You figure depreciation for the year you place property in service as follows. Www myfreetaxes com philly Multiply your adjusted basis in the property by the declining balance rate. Www myfreetaxes com philly Apply the applicable convention. Www myfreetaxes com philly You figure depreciation for all other years (before the year you switch to the straight line method) as follows. Www myfreetaxes com philly Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years. Www myfreetaxes com philly Multiply this new adjusted basis by the same declining balance rate used in earlier years. Www myfreetaxes com philly 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. Www myfreetaxes com philly Figuring depreciation under the declining balance method and switching to the straight line method is illustrated in Example 1 , later, under Examples. Www myfreetaxes com philly Declining balance rate. Www myfreetaxes com philly   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. Www myfreetaxes com philly For example, for 3-year property depreciated using the 200% declining balance method, divide 2. Www myfreetaxes com philly 00 (200%) by 3 to get 0. Www myfreetaxes com philly 6667, or a 66. Www myfreetaxes com philly 67% declining balance rate. Www myfreetaxes com philly For 15-year property depreciated using the 150% declining balance method, divide 1. Www myfreetaxes com philly 50 (150%) by 15 to get 0. Www myfreetaxes com philly 10, or a 10% declining balance rate. Www myfreetaxes com philly   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. Www myfreetaxes com philly Property Class Method Declining Balance Rate Year 3-year 200% DB 66. Www myfreetaxes com philly 667% 3rd 5-year 200% DB 40. Www myfreetaxes com philly 0 4th 7-year 200% DB 28. Www myfreetaxes com philly 571 5th 10-year 200% DB 20. Www myfreetaxes com philly 0 7th 15-year 150% DB 10. Www myfreetaxes com philly 0 7th 20-year 150% DB 7. Www myfreetaxes com philly 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. Www myfreetaxes com philly You must use the applicable convention in the year you place the property in service and the year you dispose of the property. Www myfreetaxes com philly You figure depreciation for the year you place property in service as follows. Www myfreetaxes com philly Multiply your adjusted basis in the property by the straight line rate. Www myfreetaxes com philly Apply the applicable convention. Www myfreetaxes com philly You figure depreciation for all other years (including the year you switch from the declining balance method to the straight line method) as follows. Www myfreetaxes com philly Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years (under any method). Www myfreetaxes com philly Determine the depreciation rate for the year. Www myfreetaxes com philly Multiply the adjusted basis figured in (1) by the depreciation rate figured in (2). Www myfreetaxes com philly 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. Www myfreetaxes com philly Straight line rate. Www myfreetaxes com philly   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. Www myfreetaxes com philly When figuring the number of years remaining, you must take into account the convention used in the year you placed the property in service. Www myfreetaxes com philly If the number of years remaining is less than 1, the depreciation rate for that tax year is 1. Www myfreetaxes com philly 0 (100%). Www myfreetaxes com philly 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. Www myfreetaxes com philly 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. Www myfreetaxes com philly See Straight line rate in the previous discussion. Www myfreetaxes com philly Use the applicable convention as explained in the following discussions. Www myfreetaxes com philly Half-year convention. Www myfreetaxes com philly   If this convention applies, you deduct a half-year of depreciation for the first year and the last year that you depreciate the property. Www myfreetaxes com philly You deduct a full year of depreciation for any other year during the recovery period. Www myfreetaxes com philly   Figure your depreciation deduction for the year you place the property in service by dividing the depreciation for a full year by 2. Www myfreetaxes com philly 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. Www myfreetaxes com philly 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. Www myfreetaxes com philly Mid-quarter convention. Www myfreetaxes com philly   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. Www myfreetaxes com philly   A quarter of a full 12-month tax year is a period of 3 months. Www myfreetaxes com philly The first quarter in a year begins on the first day of the tax year. Www myfreetaxes com philly The second quarter begins on the first day of the fourth month of the tax year. Www myfreetaxes com philly The third quarter begins on the first day of the seventh month of the tax year. Www myfreetaxes com philly The fourth quarter begins on the first day of the tenth month of the tax year. Www myfreetaxes com philly A calendar year is divided into the following quarters. Www myfreetaxes com philly 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. Www myfreetaxes com philly Quarter Percentage First 87. Www myfreetaxes com philly 5% Second 62. Www myfreetaxes com philly 5 Third 37. Www myfreetaxes com philly 5 Fourth 12. Www myfreetaxes com philly 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. Www myfreetaxes com philly Quarter Percentage First 12. Www myfreetaxes com philly 5% Second 37. Www myfreetaxes com philly 5 Third 62. Www myfreetaxes com philly 5 Fourth 87. Www myfreetaxes com philly 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. Www myfreetaxes com philly Mid-month convention. Www myfreetaxes com philly   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. Www myfreetaxes com philly Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by a fraction. Www myfreetaxes com philly The numerator of the fraction is the number of full months in the year that the property is in service plus ½ (or 0. Www myfreetaxes com philly 5). Www myfreetaxes com philly The denominator is 12. Www myfreetaxes com philly   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. Www myfreetaxes com philly 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. Www myfreetaxes com philly Example. Www myfreetaxes com philly You use the calendar year and place nonresidential real property in service in August. Www myfreetaxes com philly The property is in service 4 full months (September, October, November, and December). Www myfreetaxes com philly Your numerator is 4. Www myfreetaxes com philly 5 (4 full months plus 0. Www myfreetaxes com philly 5). Www myfreetaxes com philly You multiply the depreciation for a full year by 4. Www myfreetaxes com philly 5/12, or 0. Www myfreetaxes com philly 375. Www myfreetaxes com philly Examples The following examples show how to figure depreciation under MACRS without using the percentage tables. Www myfreetaxes com philly Figures are rounded for purposes of the examples. Www myfreetaxes com philly Assume for all the examples that you use a calendar year as your tax year. Www myfreetaxes com philly Example 1—200% DB method and half-year convention. Www myfreetaxes com philly In February, you placed in service depreciable property with a 5-year recovery period and a basis of $1,000. Www myfreetaxes com philly You do not elect to take the section 179 deduction and the property does not qualify for a special depreciation allowance. Www myfreetaxes com philly You use GDS and the 200% declining balance (DB) method to figure your depreciation. Www myfreetaxes com philly When the straight line (SL) method results in an equal or larger deduction, you switch to the SL method. Www myfreetaxes com philly You did not place any property in service in the last 3 months of the year, so you must use the half-year convention. Www myfreetaxes com philly First year. Www myfreetaxes com philly You figure the depreciation rate under the 200% DB method by dividing 2 (200%) by 5 (the number of years in the recovery period). Www myfreetaxes com philly The result is 40%. Www myfreetaxes com philly You multiply the adjusted basis of the property ($1,000) by the 40% DB rate. Www myfreetaxes com philly You apply the half-year convention by dividing the result ($400) by 2. Www myfreetaxes com philly Depreciation for the first year under the 200% DB method is $200. Www myfreetaxes com philly You figure the depreciation rate under the straight line (SL) method by dividing 1 by 5, the number of years in the recovery period. Www myfreetaxes com philly The result is 20%. Www myfreetaxes com philly You multiply the adjusted basis of the property ($1,000) by the 20% SL rate. Www myfreetaxes com philly You apply the half-year convention by dividing the result ($200) by 2. Www myfreetaxes com philly Depreciation for the first year under the SL method is $100. Www myfreetaxes com philly The DB method provides a larger deduction, so you deduct the $200 figured under the 200% DB method. Www myfreetaxes com philly Second year. Www myfreetaxes com philly You reduce the adjusted basis ($1,000) by the depreciation claimed in the first year ($200). Www myfreetaxes com philly You multiply the result ($800) by the DB rate (40%). Www myfreetaxes com philly Depreciation for the second year under the 200% DB method is $320. Www myfreetaxes com philly You figure the SL depreciation rate by dividing 1 by 4. Www myfreetaxes com philly 5, the number of years remaining in the recovery period. Www myfreetaxes com philly (Based on the half-year convention, you used only half a year of the recovery period in the first year. Www myfreetaxes com philly ) You multiply the reduced adjusted basis ($800) by the result (22. Www myfreetaxes com philly 22%). Www myfreetaxes com philly Depreciation under the SL method for the second year is $178. Www myfreetaxes com philly The DB method provides a larger deduction, so you deduct the $320 figured under the 200% DB method. Www myfreetaxes com philly Third year. Www myfreetaxes com philly You reduce the adjusted basis ($800) by the depreciation claimed in the second year ($320). Www myfreetaxes com philly You multiply the result ($480) by the DB rate (40%). Www myfreetaxes com philly Depreciation for the third year under the 200% DB method is $192. Www myfreetaxes com philly You figure the SL depreciation rate by dividing 1 by 3. Www myfreetaxes com philly 5. Www myfreetaxes com philly You multiply the reduced adjusted basis ($480) by the result (28. Www myfreetaxes com philly 57%). Www myfreetaxes com philly Depreciation under the SL method for the third year is $137. Www myfreetaxes com philly The DB method provides a larger deduction, so you deduct the $192 figured under the 200% DB method. Www myfreetaxes com philly Fourth year. Www myfreetaxes com philly You reduce the adjusted basis ($480) by the de