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Sale of Assets Financed with Tax-Exempt Bonds by State and Local Governments and 501(c)(3) Organizations

Tax Exempt Bonds (“TEB”) focuses on providing participants in the municipal bond industry with quality service to assist issuers and conduit borrowers in understanding their tax responsibilities. TEB has initiated an outreach and educational services program to increase understanding and compliance with tax law applicable to tax-exempt bonds. As part of this service TEB is providing the following information with respect to the sale of property financed by tax-exempt bonds. Governmental issuers and 501(c)(3) organizations may use this information to establish practices to monitor tax compliance throughout the period that their bonds are outstanding. This information is not intended to be cited as an authoritative source. TEB recommends that issuers and 501(c)(3) organizations review this basic information concerning remedial actions in consultation with their counsel.

For remedial action with respect to exempt facility bonds, see section 1.142-2 of the Income Tax Regulations (the “Regulations”), and for build America bonds, see IRM 7.2.3.1.2.3.

Generally

To raise needed funds, state and local governments and 501(c)(3) organizations may plan to sell property financed with tax-exempt bonds. The sale of such property could cause the bond issue to become taxable. A timely remedial action, if necessary, will help ensure that the interest on the bond issue remains tax-exempt.

There are three basic remedial action options as generally described below:

  • Redemption or defeasance of nonqualified bonds
  • Alternative use of disposition proceeds
  • Alternative use of facility

Governmental Bonds Example

A governmental bond is one that is not a private activity bond. A bond is a private activity bond if both: (i) more than 10% of the proceeds of a bond issue are used for a private business use (the private business use test); and (ii) more than 10% of the debt service on the bonds is directly or indirectly secured by an interest in property or payments with respect to property used for a private business use or derived from payments in respect of property used for a private business use (the private security or payment test). The sale of bond-financed property, a “deliberate action,” may cause the bond issue to meet both of these tests.

Private business use, generally, is use directly or indirectly in a trade or business carried on by any person other than a governmental unit. The result of meeting both the private business use test and the private security or payment test (together, the private business tests) is that the tax-exempt bond issue becomes a taxable private activity bond.

An example of when governmental bonds are likely to meet the private business tests is the sale of a tax-exempt bond financed facility to a corporation. The sale is a deliberate action because the sale was within the issuer’s control. Depending on how much of the proceeds of the bond issue that the issuer used to construct or acquire the facility and how long after the bonds are issued that the sale occurs, the private business use test may be met since the purchaser is not a governmental entity. If the present value of the sales price is greater than 10% of the present value of the debt service on the bonds, the private security or payment test is met. If the revenues from the facility were pledged as security for the payment of debt service on the bonds and are expected to be more than 10% of the present value of the debt service, the private security or payment test is met (regardless of the sales price to the new purchaser). If the bond issue meets both the private business use test and the private security or payment test, the bonds are taxable unless remedial action is taken as described below.

Qualified 501(c)(3) Bonds Example

If the bonds financing the property are qualified 501(c)(3) bonds, the private business use test threshold of 10% is reduced to 5%. The 5% is further reduced by the percentage of proceeds of the bonds used to pay costs of issuance. (Up to 2% of the proceeds may be used for costs of issuance.) Additionally, use of tax-exempt bond financed property in an unrelated trade or business of any 501(c)(3) organization, as described in section 513 of the Internal Revenue Code (the “Code”), is considered private business use and counts toward the 5% limit.

An example of qualified 501(c)(3) bonds likely to meet the private business tests is the sale of tax-exempt bond financed land to a taxable corporation. The sale is a deliberate action because the sale was within the issuer’s (or 501(c)(3) borrower’s) control. Depending on how much of the proceeds of the bond issue that the issuer or 501(c)(3) borrower used to construct or acquire the facility and how long after the bonds are issued that the sale occurs, the private business use test may be met since the purchaser is not a governmental entity or a 501(c)(3) organization. If the parcel of land sold was pledged as security for the payment of debt service on the bonds, the private security or payment test is met if the sales price is more than 5% of the present value of the debt service on the bonds. If the revenues from the facility were pledged as security for the payment of debt service on the bonds and are expected to be more than 5% of the present value of the debt service, the private security or payment test is met (regardless of the sales price to the new purchaser). If the bond issue meets both the private business use test and the private security or payment test, the bonds are taxable unless remedial action is taken as described below.

A qualified 501(c)(3) bond is one where, among other requirements, the tax-exempt bond financed property is owned by a 501(c)(3) organization or a governmental unit. An example of qualified 501(c)(3) bonds failing to meet this requirement is the sale of the tax-exempt bond financed land to a taxable corporation. Accordingly, the bonds are taxable unless remedial action is taken as described below.

Remedial Action under the Treasury Regulations

The Regulations permit an issuer to take remedial action to preclude the sale of tax-exempt bond financed assets from causing the bonds to become taxable bonds. There are five basic conditions that an issuer must meet to qualify to take a remedial action. The conditions are:

  • The issuer must have reasonably expected on the issue date that the bonds would not meet either the applicable private business tests (including the ownership test for qualified 501(c)(3) bonds) or the private loan financing test for the entire term of the bonds.
  • The term of the bonds must not be longer than reasonably necessary for the qualified purposes of the issue (as a guideline, the term is not greater than 120% of the average reasonably expected economic life of the financed property).
  • Generally, the terms of a sale must be a bona fide and arm’s-length arrangement for fair market value.
  • Disposition proceeds must be treated as gross proceeds for arbitrage and rebate purposes. Disposition proceeds are any amounts, including property, derived from the sale, exchange or other disposition of the tax-exempt bond financed property.
  • Except for a remedial action involving the redemption or defeasance of nonqualified bonds, the proceeds must have been spent on a qualified purpose before the date of the deliberate action, that is, the sale of the bond-financed assets.

Redemption or Defeasance of Nonqualified Bonds

Generally, in the case of a sale of bond-financed property, the nonqualified bonds are the portion of the outstanding bonds equal to the percentage of the proceeds of the bond issue that financed that property. For example, if 50% of the proceeds of a bond issue financed the sold property, the nonqualified bonds equal 50% of the outstanding bonds of the issue at the time of the sale.

The first type of remedial action available is the redemption or defeasance of all of the nonqualified bonds within 90 days of the deliberate action. (Generally, proceeds of another issue of tax-exempt bonds may not be used for this redemption.) If the disposition proceeds are all cash, the issuer need not redeem or defease all of the nonqualified bonds, but must use all of the disposition proceeds to redeem a pro rata portion of nonqualified bonds. The redemption must be on the earliest call date after the deliberate action, or if the earliest call date is more than 90 days after the deliberate action, the issuer must establish a defeasance escrow within 90 days of the deliberate action. Defeasance is only permitted as a remedial action if the first call date is no more than 10 ½ years from the issue date of the bonds. The issuer must provide written notice to the Commissioner of the escrow within 90 days of its establishment.

Alternative Use of Disposition Proceeds

The second type of remedial action, available when the seller receives only cash, allows the issuer to spend the disposition proceeds within two years of the date of the sale for an alternative qualifying use. The issuer must treat the disposition proceeds as proceeds of the bonds, and must not take any action after the date of the sale to cause either the applicable private business use tests or the private loan financing test to be met. (If the bonds are qualified 501(c)(3) bonds, the disposition proceeds must be used for a qualified purpose under section 145 of the Code.) If the issuer does not expect the full amount of the disposition proceeds to be spent for a qualifying purpose within the two year period, it must use the balance of disposition proceeds to redeem (or defease) nonqualified bonds as allowed for the first type of remedial action described above.

Note: If the proceeds of a governmental bond issue are to be subsequently used by a 501(c)(3) organization, remediation by spending the disposition proceeds for an alternate use requires that the nonqualified bonds satisfy all the requirements for qualified 501(c)(3) bonds beginning on the date of the sale.

Alternative Use of Facility

The third type of remedial action available to the issuer is when the tax-exempt financed facility will be used after the sale for a purpose that is a qualifying purpose for another type of tax-exempt bonds (provided that the purchaser of the facility does not use tax-exempt bond proceeds for its purchase). The nonqualified bonds must satisfy all the requirements for the alternate type of tax-exempt bonds beginning on the date of the sale. The issuer must either apply any disposition proceeds resulting from the sale to pay the debt service on the bonds on the next available payment date or deposit the proceeds into an escrow within 90 days of their receipt. If the issuer must establish an escrow, the investment yield on the disposition proceeds must be restricted to the yield on the bonds and the escrow used to pay debt service on the next available payment date.

Allocation of Disposition Proceeds

For all three remedial actions, if the property was financed by different sources, the issuer must first allocate disposition proceeds to the outstanding bonds in proportion to the principal amounts of the outstanding bonds. If the disposition proceeds are not greater than the principal amount of outstanding bonds allocated to the sold property, the proceeds must first be allocated to the outstanding bonds before allocating to bonds no longer outstanding or to sources not derived from borrowing (such as revenues of the issuer).

Remedial Actions-Examples

The following examples assume that the above-described five conditions for remedial action are satisfied. Also, in these examples, no bond proceeds were used for costs of issuance or to fund a reserve fund.


Example 1. - Disposition proceeds are less than the principal amount of the outstanding bonds allocated to the sold property.

Issuer issues $10 million of bonds to finance the construction of a community center. Issuer later sells the center for $5 million, its fair market value. At this time, all $10 million of the bonds are still outstanding. The issuer may choose to remediate by using all $5 million of disposition proceeds to redeem within 90 days or establish a defeasance escrow for a pro rata portion of the $10 million of nonqualified bonds. The remaining outstanding $5 million of bonds would not be private activity bonds because the issuer has remediated as required by the Regulations.

Or, the issuer could remediate by using the alternative use of disposition proceeds option. Under this option, the issuer must apply the total amount of disposition proceeds, $5 million, to a qualifying alternative use within two years (or use a combination of the alternative use of disposition proceeds and redemption or defeasance options).

The disposition proceeds are considered gross proceeds of the bonds and as such are subject to the applicable yield restriction and arbitrage rebate rules pending their use as described above.

Example 2.- Disposition proceeds are greater than the principal amount of the outstanding bonds allocated to the sold property.

Issuer issues $10 million of bonds to finance a school and land. Issuer subsequently sells a portion of the land for $3 million. At this time, all $10 million of the bonds are still outstanding. The principal amount of outstanding bonds allocated to the sold property is $2 million. If the issuer chooses to remediate by redeeming bonds, it must redeem $2 million of outstanding bonds leaving the issuer with $1 million of gross proceeds.

Or, the issuer could remediate by using the alternative use of disposition proceeds option. If so, the Issuer must apply the total amount of the disposition proceeds, $3 million, to a qualifying use within two years (or use a combination of the alternative use of disposition proceeds and redemption or defeasance options).

The disposition proceeds are considered gross proceeds of the bonds and as such are subject to the applicable yield restriction and arbitrage rebate rules pending their use as described above.

Example 3. - Disposition proceeds are greater than the principal amount of the outstanding bonds allocated to the sold property and the conduit borrower finances the project in part with tax-exempt bond proceeds and in part with an equity contribution.

A 501(c)(3) conduit borrower contributed $4 million of cash from its revenues and used $6 million of tax-exempt bonds to finance a $10 million acquisition of a continuing care facility. Subsequently, the conduit borrower sells the facility for $12 million. At this time, all $6 million of the bonds are still outstanding. Thus the issuer has $6 million of nonqualified bonds. The issuer may remediate by either redeeming all of the $6 million nonqualified bonds or by requiring the conduit borrower to use $12 million of disposition proceeds for an alternative use within two years (provided all requirements of qualified 501(c)(3) bonds are met).

Of the $12 million of disposition proceeds, $6 million are considered gross proceeds of the bonds and as such are subject to the applicable yield restriction and arbitrage rebate rules pending their use as described above.

Gross Proceeds - Example 2 versus Example 3

When the tax-exempt bond financed property is sold for an amount in excess of the principal amount of the outstanding bonds allocated to that property, a different result occurs with respect to that excess amount depending on whether all the bonds of the issue have been redeemed. In Example 3, where the issuer redeemed all of the outstanding bonds, the remaining disposition proceeds are not gross proceeds of the bonds and, therefore, are no longer subject to the federal tax restrictions. This is because the amount of gross proceeds cannot exceed the amount of the outstanding bonds of the issue. Whereas in Example 2, although the issuer has redeemed the nonqualified bonds, the issuer still has bonds of the issue outstanding and thus the additional disposition proceeds are gross proceeds of the bonds and subject to the applicable yield restriction and arbitrage rebate rules pending their use.

Correction of Violations Using TEB Voluntary Closing Agreement Program (VCAP)

If an issuer or conduit borrower discovers that it has sold bond financed assets causing the applicable private business tests to be met but is ineligible to self-correct through a remedial action provision, TEB encourages the issuer to take advantage of its Voluntary Closing Agreement Program (TEB VCAP) to resolve federal tax violations relating to bonds as described in Notice 2008-31 and IRM section 7.2.3.

Page Last Reviewed or Updated: 04-Sep-2013

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lessee. 1040ez forms free download However, a binding commitment between related persons is not treated as a lease. 1040ez forms free download Related persons. 1040ez forms free download   For this purpose, the following are related persons. 1040ez forms free download Members of an affiliated group. 1040ez forms free download The persons listed in items (1) through (9) under Related persons on page 8 of Publication 946 (except that “80% or more” should be substituted for “more than 10%” each place it appears). 1040ez forms free download An executor and a beneficiary of the same estate. 1040ez forms free download Tests To Be Met To qualify for the special depreciation allowance, the property must meet all of the following tests. 1040ez forms free download Acquisition date test. 1040ez forms free download    Generally, you must have acquired the property either: After September 10, 2001, and before September 11, 2004, but only if no written binding contract for the acquisition was in effect before September 11, 2001, or Pursuant to a written binding contract entered into after September 10, 2001, and before September 11, 2004. 1040ez forms free download   Property you manufacture, construct, or produce for your own use meets this test if you began the manufacture, construction, or production of the property after September 10, 2001, and before September 11, 2004. 1040ez forms free download Placed in service date test. 1040ez forms free download   Generally, the property must be placed in service for use in your trade or business or for the production of income after September 10, 2001, and before January 1, 2005. 1040ez forms free download   If you sold property you placed in service after September 10, 2001, and you leased it back within 3 months after the property was originally placed in service, the property is treated as placed in service no earlier than the date it is used under the leaseback. 1040ez forms free download Original use test. 1040ez forms free download   The original use of the property must have begun with you after September 10, 2001. 1040ez forms free download “Original use” means the first use to which the property is put, whether or not by you. 1040ez forms free download Additional capital expenditures you incurred after September 10, 2001, to recondition or rebuild your property meet the original use test. 1040ez forms free download Excepted Property The following property does not qualify for the special depreciation allowance. 1040ez forms free download Property used by any person before September 11, 2001. 1040ez forms free download Property required to be depreciated using ADS. 1040ez forms free download This includes listed property used 50% or less in a qualified business use. 1040ez forms free download Qualified New York Liberty Zone leasehold improvement property (defined next). 1040ez forms free download Qualified New York Liberty Zone leasehold improvement property. 1040ez forms free download   This is any qualified leasehold improvement property (as defined earlier) if all of the following requirements are met. 1040ez forms free download The improvement is to a building located in the New York Liberty Zone (defined later under New York Liberty Zone Benefits). 1040ez forms free download The improvement is placed in service after September 10, 2001, and before January 1, 2007. 1040ez forms free download No written binding contract for the improvement was in effect before September 11, 2001. 1040ez forms free download Election Not To Claim the Allowance You can elect not to claim the special depreciation allowance for qualified property. 1040ez forms free download If you make this election for any property, it applies to all property in the same property class placed in service during the year. 1040ez forms free download To make this election, attach a statement to your return indicating you elect not to claim the allowance and the class of property for which you are making the election. 1040ez forms free download When to make election. 1040ez forms free download   Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service. 1040ez forms free download   However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the original return (not including extensions). 1040ez forms free download Attach the election statement to the amended return. 1040ez forms free download At the top of the election statement, write “Filed pursuant to section 301. 1040ez forms free download 9100–2. 1040ez forms free download ” Revoking an election. 1040ez forms free download   Once you elect not to deduct the special depreciation allowance for a class of property, you cannot revoke the election without IRS consent. 1040ez forms free download A request to revoke the election is subject to a user fee. 1040ez forms free download Rules for Returns Filed Before June 1, 2002 The following rules apply if you placed qualified property in service after September 10, 2001, and filed your return before June 1, 2002. 1040ez forms free download The rules apply to returns for the following years. 1040ez forms free download 2000 fiscal years that end after September 10, 2001. 1040ez forms free download 2001 calendar and fiscal years. 1040ez forms free download Claiming the allowance. 1040ez forms free download   If you did not claim the allowance on your return and did not make the election not to claim the allowance, you can do either of the following to claim the allowance. 1040ez forms free download File an amended return by the due date (not including extensions) of your return for the year following the year the property was placed in service. 1040ez forms free download Write “Filed Pursuant to Rev. 1040ez forms free download Proc. 1040ez forms free download 2002–33” at the top of the amended return. 1040ez forms free download File Form 3115, Application for Change in Accounting Method, with your return for the year following the year the property was placed in service. 1040ez forms free download Your return must be filed by the due date (including extensions). 1040ez forms free download Write “Automatic Change Filed Under Rev. 1040ez forms free download Proc. 1040ez forms free download 2002–33” on the appropriate line of Form 3115. 1040ez forms free download You must also file a copy (with signature) of the completed Form 3115 with the IRS National Office no later than when you file the original with your return. 1040ez forms free download For more information about filing Form 3115, including the address to send it to, see Revenue Procedure 2002–9, Revenue Procedure 2002–19, and Revenue Procedure 2002–33. 1040ez forms free download Example 1. 1040ez forms free download You are an individual and you use the calendar year. 1040ez forms free download You placed qualified property in service for your business in December 2001. 1040ez forms free download You filed your 2001 income tax return before April 15, 2002. 1040ez forms free download You did not claim the special depreciation allowance for the property and did not make the election not to claim the allowance. 1040ez forms free download You can claim the special allowance by filing an amended 2001 return by April 15, 2003, with “Filed Pursuant to Rev. 1040ez forms free download Proc. 1040ez forms free download 2002–33” at the top of the amended return. 1040ez forms free download You must file an amended return by April 15, 2003, even if you get an extension of time to file your 2002 tax return. 1040ez forms free download Example 2. 1040ez forms free download The facts concerning your 2001 return are the same as in Example 1. 1040ez forms free download In addition, you got an automatic 4-month extension of time (to August 15, 2003) to file your 2002 return. 1040ez forms free download You can claim the special allowance by filing a Form 3115 (with “Filed Pursuant to Rev. 1040ez forms free download Proc. 1040ez forms free download 2002–33” on the appropriate line) with your 2002 return by August 15, 2003. 1040ez forms free download You must also file a copy of this Form 3115 with the IRS National Office no later than when you file your 2002 return. 1040ez forms free download Electing not to claim the allowance. 1040ez forms free download   Generally, you have elected not to claim the special depreciation allowance for a class of property if you: Filed your return timely (including extensions) for the year you placed qualified property in service and indicated on a statement with the return that you are not claiming the allowance, or Filed your return timely and filed an amended return within 6 months of the due date of the original return (not including extensions) and indicated on a statement with the amended return that you are not claiming the allowance. 1040ez forms free download The statement must indicate that you are not deducting the special depreciation allowance and the class of property to which the election applies. 1040ez forms free download The statement can be either attached to or written on the return. 1040ez forms free download You can, for example, write “not deducting 30%” on Form 4562. 1040ez forms free download Deemed election. 1040ez forms free download   If you have not followed either of the procedures described above to elect not to claim the allowance, you may still be treated as making the election. 1040ez forms free download You will be treated as making the election if you meet both of the following conditions. 1040ez forms free download You filed your return for the year you placed the property in service and claimed depreciation, but not the special allowance, for any class of property. 1040ez forms free download You do not file an amended return or a Form 3115 within the time prescribed for claiming the special allowance. 1040ez forms free download See Claiming the allowance, earlier. 1040ez forms free download Passenger Automobiles The limit on your depreciation deduction (including any section 179 deduction) for any passenger automobile that is qualified property (defined earlier) placed in service after September 10, 2001, and for which you claim the special depreciation allowance is increased. 1040ez forms free download Generally, the limit is increased from $3,060 to $7,660. 1040ez forms free download However, if the automobile is a qualified electric car, the limit is increased from $9,280 to $23,080 ($22,980 if placed in service in 2002). 1040ez forms free download Table 1 shows the maximum deduction amounts for 2001. 1040ez forms free download Table 1. 1040ez forms free download Maximum Deduction for 2001 Qualified Vehicle Placed in Service Before Sept. 1040ez forms free download 11 Placed in Service After Sept. 1040ez forms free download 10 Passenger automobile $3,060 $7,660 Electric car 9,280 23,080 1 1$22,980 if you place an electric car in service in 2002. 1040ez forms free download Election not to claim the allowance. 1040ez forms free download   The increased maximum depreciation deduction does not apply if you elected not to claim the special depreciation allowance as explained earlier under Election Not To Claim the Allowance and Rules for Returns Filed Before June 1, 2002. 1040ez forms free download New York Liberty Zone Benefits Several benefits are available for property you place in service in the New York Liberty Zone (Liberty Zone). 1040ez forms free download They include a special depreciation allowance for the year you place the property in service, an increased section 179 deduction, and the classification of certain leasehold improvement property as 5-year property. 1040ez forms free download Area defined. 1040ez forms free download   The New York Liberty Zone is the area located on or south of Canal Street, East Broadway (east of its intersection with Canal Street), or Grand Street (east of its intersection with East Broadway) in the Borough of Manhattan in the City of New York, New York. 1040ez forms free download Special Liberty Zone Depreciation Allowance You can take a special depreciation allowance for qualified Liberty Zone property you place in service after September 10, 2001. 1040ez forms free download The allowance is an additional deduction of 30% of the property's depreciable basis. 1040ez forms free download To figure the depreciable basis, you must first multiply the property's cost or other basis by the percentage of business/investment use and then reduce that amount by any section 179 deduction and certain other deductions and credits for the property. 1040ez forms free download See What Is the Basis for Depreciation? on page 23 in Publication 946 for more information on figuring depreciable basis. 1040ez forms free download The allowance is deductible for both regular tax and alternative minimum tax (AMT) purposes. 1040ez forms free download There is no AMT adjustment required for any depreciation figured on the remaining basis of the property. 1040ez forms free download In the year you claim the allowance (generally the year you place the property in service), you must reduce the depreciable basis of the property by the allowance before figuring your regular depreciation deduction. 1040ez forms free download You cannot claim the special Liberty Zone depreciation allowance for property eligible for the special depreciation allowance explained earlier in Qualified Property under Special Depreciation Allowance. 1040ez forms free download Qualified property is eligible for only one special depreciation allowance. 1040ez forms free download Example 1. 1040ez forms free download On November 1, 2001, you bought and placed in service in your business, which is in the Liberty Zone, qualified Liberty Zone property that cost $200,000. 1040ez forms free download You did not elect to claim a section 179 deduction. 1040ez forms free download You can deduct 30% of the cost ($60,000) as a special Liberty Zone depreciation allowance for 2001. 1040ez forms free download You use the remaining $140,000 of cost to figure your regular depreciation deduction for 2001 and later years. 1040ez forms free download Example 2. 1040ez forms free download The facts are the same as in Example 1, except that you choose to deduct $59,000 of the property's cost as a section 179 deduction. 1040ez forms free download (See Increased Section 179 Deduction, later, for information concerning how this section 179 deduction amount is figured). 1040ez forms free download You use the remaining $141,000 of cost to figure your special Liberty Zone depreciation allowance of $42,300 ($141,000 × 30%). 1040ez forms free download You use the remaining $98,700 of cost to figure your regular depreciation deduction for 2001 and later years. 1040ez forms free download Qualified Liberty Zone Property For a 2001 calendar or fiscal year and a 2000 fiscal year that ends after September 10, 2001, property qualifies for the special Liberty Zone depreciation allowance if it meets the following requirements. 1040ez forms free download It is one of the following types of property. 1040ez forms free download Used property depreciated under MACRS with a recovery period of 20 years or less. 1040ez forms free download See Can You Use MACRS To Depreciate Your Property and Which Recovery Period Applies? on pages 7 and 23, respectively, in Publication 946. 1040ez forms free download Used water utility property. 1040ez forms free download See 25-year property on page 22 in Publication 946. 1040ez forms free download Used computer software that is not a section 197 intangible as described in Computer software on page 5 in Publication 946. 1040ez forms free download (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS. 1040ez forms free download ) Certain nonresidential real property and residential rental property (defined later). 1040ez forms free download It meets the following tests (explained later under Tests to be met). 1040ez forms free download Acquisition date test. 1040ez forms free download Placed in service date test. 1040ez forms free download Substantial use test. 1040ez forms free download Original use test. 1040ez forms free download It is not excepted property (explained later under Excepted property). 1040ez forms free download Nonresidential real property and residential rental property. 1040ez forms free download   This property is qualifying property only to the extent it rehabilitates real property damaged, or replaces real property destroyed or condemned, as a result of the terrorist attack of September 11, 2001. 1040ez forms free download Property is treated as replacing destroyed or condemned property if, as part of an integrated plan, such property replaces real property included in a continuous area that includes real property destroyed or condemned. 1040ez forms free download   For these purposes, real property is considered destroyed (or condemned) only if an entire building or structure was destroyed (or condemned) as a result of the terrorist attack. 1040ez forms free download Otherwise, the property is considered damaged real property. 1040ez forms free download For example, if certain structural components of a building (such as walls, floors, or plumbing fixtures) are damaged or destroyed as a result of the terrorist attack, but the building is not destroyed (or condemned), then only costs related to replacing the damaged or destroyed structural components qualify for the special Liberty Zone depreciation allowance. 1040ez forms free download Tests to be met. 1040ez forms free download   To qualify for the special Liberty Zone depreciation allowance, your property must meet all of the following tests. 1040ez forms free download Acquisition date test. 1040ez forms free download   You must have acquired the property by purchase after September 10, 2001, and there must not have been a binding written contract for the acquisition in effect before September 11, 2001. 1040ez forms free download   For information on the acquisition of property by purchase, see Property Acquired by Purchase on page 15 of Publication 946. 1040ez forms free download   Property you manufacture, construct, or produce for your own use meets this test if you began the manufacture, construction, or production of the property after September 10, 2001. 1040ez forms free download Placed in service date test. 1040ez forms free download   Generally, the property must be placed in service for use in your trade or business or for the production of income before January 1, 2007 (January 1, 2010, in the case of qualifying nonresidential real property and residential rental property). 1040ez forms free download   If you sold property you placed in service after September 10, 2001, and you leased it back within 3 months after the property was originally placed in service, the property is treated as placed in service no earlier than the date it is used under the leaseback. 1040ez forms free download Substantial use test. 1040ez forms free download   Substantially all use of the property must be in the Liberty Zone and in the active conduct of your trade or business in the Liberty Zone. 1040ez forms free download Original use test. 1040ez forms free download   The original use of the property in the Liberty Zone must have begun with you after September 10, 2001. 1040ez forms free download   Used property can be qualified Liberty Zone property if it has not previously been used within the Liberty Zone. 1040ez forms free download Also, additional capital expenditures you incurred after September 10, 2001, to recondition or rebuild your property meet the original use test if the original use of the property in the Liberty Zone began with you. 1040ez forms free download Excepted property. 1040ez forms free download   The following property does not qualify for the special Liberty Zone depreciation allowance. 1040ez forms free download Property eligible for the special depreciation allowance explained earlier in Qualified Property under Special Depreciation Allowance. 1040ez forms free download Property required to be depreciated using ADS. 1040ez forms free download This includes listed property used 50% or less in a qualified business use. 1040ez forms free download Qualified New York Liberty Zone leasehold improvement property (defined earlier in Excepted Property under Special Depreciation Allowance). 1040ez forms free download Example. 1040ez forms free download In December 2001, you bought and placed in service in your business in the Liberty Zone the following property. 1040ez forms free download New office furniture with a MACRS recovery period of 7 years. 1040ez forms free download A used computer with a MACRS recovery period of 5 years. 1040ez forms free download The computer had not previously been used within the Liberty Zone. 1040ez forms free download Because the office furniture is new property, it qualifies for the special depreciation allowance, but not the special Liberty Zone depreciation allowance. 1040ez forms free download Because the computer is used property that had not previously been used in the Liberty Zone, it qualifies for the special Liberty Zone depreciation allowance, but not the special depreciation allowance. 1040ez forms free download Election Not To Claim the Liberty Zone Allowance You can elect not to claim the special Liberty Zone depreciation allowance for qualified property. 1040ez forms free download If you make this election for any property, it applies to all property in the same property class placed in service during the year. 1040ez forms free download To make this election, attach a statement to your return indicating you elect not to claim the allowance and the class of property for which you are making the election. 1040ez forms free download When to make the election. 1040ez forms free download   Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service. 1040ez forms free download   However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the original return (not including extensions). 1040ez forms free download Attach the election statement to the amended return. 1040ez forms free download At the top of the election statement, write “Filed pursuant to section 301. 1040ez forms free download 9100–2. 1040ez forms free download ” Revoking an election. 1040ez forms free download   Once you elect not to deduct the special Liberty Zone depreciation allowance for a class of property, you cannot revoke the election without IRS consent. 1040ez forms free download A request to revoke the election is subject to a user fee. 1040ez forms free download Returns filed before June 1, 2002. 1040ez forms free download   The rules that apply to the special depreciation allowance discussed earlier in Rules for Returns Filed Before June 1, 2002 under Special Depreciation Allowance also apply to the special Liberty Zone depreciation allowance. 1040ez forms free download Increased Section 179 Deduction Under section 179 of the Internal Revenue Code, you can choose to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. 1040ez forms free download For tax years beginning in 2000, that limit was $20,000. 1040ez forms free download For tax years beginning in 2001 and 2002, that limit is generally $24,000. 1040ez forms free download If the cost of qualifying section 179 property placed in service in a year is over $200,000, you must reduce the dollar limit (but not below zero) by the amount of the cost over $200,000. 1040ez forms free download Increased Dollar Limit The dollar limit on the section 179 deduction is increased for certain property placed in service in the Liberty Zone. 1040ez forms free download The increase is the smaller of the following amounts. 1040ez forms free download $35,000. 1040ez forms free download The cost of section 179 property that is qualified Liberty Zone property placed in service during the year. 1040ez forms free download If you use the revised 2001 Form 4562 (dated March 2002) for a tax year beginning in 2000, you must reduce the section 179 dollar limit to $20,000 before adding the additional amount for qualified property. 1040ez forms free download Qualified property. 1040ez forms free download   To qualify for the increased section 179 deduction, your property must be section 179 property that is either: Qualified Liberty Zone property, or Property that would be qualified Liberty Zone property except that it is eligible for the special depreciation allowance. 1040ez forms free download Qualified Liberty Zone property is explained earlier in Qualified Liberty Zone Property under Special Liberty Zone Depreciation Allowance. 1040ez forms free download Property eligible for the special depreciation allowance is explained earlier in Qualified Property under Special Depreciation Allowance. 1040ez forms free download For information on the requirements that must be met for property to qualify for the section 179 deduction, see What Property Qualifies? on page 14 of Publication 946. 1040ez forms free download Example 1. 1040ez forms free download In 2002, you place in service in your business, which is in the Liberty Zone, qualified property (defined earlier) costing $25,000. 1040ez forms free download Because this cost is less than $35,000, the dollar limit on the section 179 deduction is increased by $25,000 to $49,000 ($24,000 + $25,000). 1040ez forms free download Example 2. 1040ez forms free download In 2002, you place in service in your business, which is in the Liberty Zone, qualified property (defined earlier) costing $75,000. 1040ez forms free download Because $35,000 is less than the cost of the property you place in service, the dollar limit on the section 179 deduction you can claim is increased by $35,000 to $59,000 ($24,000 + $35,000). 1040ez forms free download Reduced Dollar Limit Generally, you must reduce the dollar limit for a year by the cost of qualifying section 179 property placed in service in the year that is more than $200,000. 1040ez forms free download However, if the cost of your Liberty Zone property exceeds $200,000, you take into account only 50% (instead of 100%) of the cost of qualified property placed in service in a year. 1040ez forms free download Example. 1040ez forms free download In 2002, you place in service in your business, which is in the Liberty Zone, qualified property costing $460,000. 1040ez forms free download Your increased dollar limit is $59,000 ($35,000 + $24,000). 1040ez forms free download Because 50% of the cost of the property you place in service ($230,000) is $30,000 more than $200,000, you must reduce your $59,000 dollar limit to $29,000 ($59,000 - $30,000). 1040ez forms free download Recapture Rules Rules similar to those explained on page 20 of Publication 946 under When Must You Recapture the Deduction? apply with respect to any qualified property you stop using in the Liberty Zone. 1040ez forms free download Returns Filed Before June 1, 2002 If you filed a return before June 1, 2002, and did not deduct the increased section 179 amount for qualified property placed in service after September 10, 2001, you can deduct the increased amount by filing an amended return by the due date (not including extensions) of the return for the year after the year the property was placed in service. 1040ez forms free download This rule applies to returns for the following years. 1040ez forms free download 2000 fiscal years that end after September 10, 2001. 1040ez forms free download 2001 calendar and fiscal years. 1040ez forms free download On the amended return, write “Filed Pursuant to Rev. 1040ez forms free download Proc. 1040ez forms free download 2002–33. 1040ez forms free download ” Liberty Zone Leasehold Improvement Property Qualified Liberty Zone leasehold improvement property (described earlier in Qualified Property under Special Depreciation Allowance) is 5-year property. 1040ez forms free download This means that it is depreciated over a recovery period of 5 years. 1040ez forms free download For information about recovery periods, see Which Recovery Period Applies? on page 23 of Publication 946. 1040ez forms free download The straight-line method must be used with respect to qualified Liberty Zone leasehold improvement property. 1040ez forms free download Under ADS, the recovery period for qualified Liberty Zone leasehold improvement property is 9 years. 1040ez forms free download Returns Filed Before June 1, 2002 If you filed either of the following returns before June 1, 2002, and did not depreciate qualified Liberty Zone leasehold improvement property placed in service during the tax year as 5-year property using the straight line method, you should file an amended return before you file your return for the year after the year the property was placed in service. 1040ez forms free download Your 2000 fiscal year return (for a 2000 fiscal year that ends after September 10, 2001). 1040ez forms free download Your 2001 calendar or fiscal year return. 1040ez forms free download On the amended return, write “Filed Pursuant to Rev. 1040ez forms free download Proc. 1040ez forms free download 2002–33. 1040ez forms free download ” Table 2. 1040ez forms free download Rules for Returns Filed Before June 1, 2002 Note:This chart highlights the rules for returns affected by the Job Creation and Worker Assistance Act of 2002 that were filed before June 1, 2002, without accounting for any of the new benefits under the law. 1040ez forms free download See the text for definitions and examples. 1040ez forms free download Do not rely on this chart alone. 1040ez forms free download IF you want to. 1040ez forms free download . 1040ez forms free download . 1040ez forms free download THEN you. 1040ez forms free download . 1040ez forms free download . 1040ez forms free download BY. 1040ez forms free download . 1040ez forms free download . 1040ez forms free download claim the special depreciation allowance or special Liberty Zone depreciation allowance • must file an amended return • the due date (not including extensions) of your return for the year after the year the property was placed in service, or • must file Form 3115, Application for Change in Accounting Method, with your return for the year after the year the property was placed in service • the due date (including extensions) of your return for the year after the year the property was placed in service, and • must file a copy of your completed Form 3115 with the IRS National Office • the date you file the original Form 3115 with your return for the year after the year the property was placed in service. 1040ez forms free download elect not to claim the special depreciation allowance or the special Liberty Zone depreciation allowance 1 • must have filed your return timely for the year the property was placed in service, and   • must file an amended return stating you are not claiming the allowance • the date that is 6 months after the due date of the original return (not including extensions). 1040ez forms free download deduct the increased section 179 amount • must file an amended return • the due date (not including extensions) of your return for the year after the year the property was placed in service. 1040ez forms free download use a 5-year recovery period for depreciating qualified Liberty Zone leasehold improvement property • should file an amended return • the date you file your return for the year after the year the property was placed in service. 1040ez forms free download 1See also Deemed election under Rules for Returns Filed Before June 1, 2002, earlier. 1040ez forms free download Prev  Up  Next   Home   More Online Publications