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2012 1040a Tax Form

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2012 1040a Tax Form

2012 1040a tax form 23. 2012 1040a tax form   Interest Expense Table of Contents Introduction Useful Items - You may want to see: Home Mortgage InterestAmount Deductible Points Mortgage Insurance Premiums Form 1098, Mortgage Interest Statement Investment InterestInvestment Property Allocation of Interest Expense Limit on Deduction Items You Cannot DeductPersonal Interest Allocation of Interest How To ReportMore than one borrower. 2012 1040a tax form Mortgage proceeds used for business or investment. 2012 1040a tax form Introduction This chapter discusses what interest expenses you can deduct. 2012 1040a tax form Interest is the amount you pay for the use of borrowed money. 2012 1040a tax form The following are types of interest you can deduct as itemized deductions on Schedule A (Form 1040). 2012 1040a tax form Home mortgage interest, including certain points and mortgage insurance premiums. 2012 1040a tax form Investment interest. 2012 1040a tax form This chapter explains these deductions. 2012 1040a tax form It also explains where to deduct other types of interest and lists some types of interest you cannot deduct. 2012 1040a tax form Use Table 23-1 to find out where to get more information on various types of interest, including investment interest. 2012 1040a tax form Useful Items - You may want to see: Publication 936 Home Mortgage Interest Deduction 550 Investment Income and Expenses Home Mortgage Interest Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). 2012 1040a tax form The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. 2012 1040a tax form You can deduct home mortgage interest if all the following conditions are met. 2012 1040a tax form You file Form 1040 and itemize deductions on Schedule A (Form 1040). 2012 1040a tax form The mortgage is a secured debt on a qualified home in which you have an ownership interest. 2012 1040a tax form (Generally, your mortgage is a secured debt if you put your home up as collateral to protect the interest of the lender. 2012 1040a tax form The term “qualified home” means your main home or second home. 2012 1040a tax form For details, see Publication 936. 2012 1040a tax form )  Both you and the lender must intend that the loan be repaid. 2012 1040a tax form Amount Deductible In most cases, you can deduct all of your home mortgage interest. 2012 1040a tax form How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. 2012 1040a tax form Fully deductible interest. 2012 1040a tax form   If all of your mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on those mortgages. 2012 1040a tax form (If any one mortgage fits into more than one category, add the debt that fits in each category to your other debt in the same category. 2012 1040a tax form )   The three categories are as follows: Mortgages you took out on or before October 13, 1987 (called grandfathered debt). 2012 1040a tax form Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2013 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately). 2012 1040a tax form Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2013 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2). 2012 1040a tax form The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. 2012 1040a tax form   See Part II of Publication 936 for more detailed definitions of grandfathered, home acquisition, and home equity debt. 2012 1040a tax form    You can use Figure 23-A to check whether your home mortgage interest is fully deductible. 2012 1040a tax form Figure 23-A. 2012 1040a tax form Is My Home Mortgage Interest Fully Deductible? Please click here for the text description of the image. 2012 1040a tax form Figure 23-A. 2012 1040a tax form Is My Interest Fully Deductible? Limits on deduction. 2012 1040a tax form   You cannot fully deduct interest on a mortgage that does not fit into any of the three categories listed earlier. 2012 1040a tax form If this applies to you, see Part II of Publication 936 to figure the amount of interest you can deduct. 2012 1040a tax form Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. 2012 1040a tax form It also describes certain special situations that may affect your deduction. 2012 1040a tax form Late payment charge on mortgage payment. 2012 1040a tax form   You can deduct as home mortgage interest a late payment charge if it was not for a specific service performed in connection with your mortgage loan. 2012 1040a tax form Mortgage prepayment penalty. 2012 1040a tax form   If you pay off your home mortgage early, you may have to pay a penalty. 2012 1040a tax form You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan. 2012 1040a tax form Sale of home. 2012 1040a tax form   If you sell your home, you can deduct your home mortgage interest (subject to any limits that apply) paid up to, but not including, the date of sale. 2012 1040a tax form Example. 2012 1040a tax form John and Peggy Harris sold their home on May 7. 2012 1040a tax form Through April 30, they made home mortgage interest payments of $1,220. 2012 1040a tax form The settlement sheet for the sale of the home showed $50 interest for the 6-day period in May up to, but not including, the date of sale. 2012 1040a tax form Their mortgage interest deduction is $1,270 ($1,220 + $50). 2012 1040a tax form Prepaid interest. 2012 1040a tax form   If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. 2012 1040a tax form You can deduct in each year only the interest that qualifies as home mortgage interest for that year. 2012 1040a tax form However, there is an exception that applies to points, discussed later. 2012 1040a tax form Mortgage interest credit. 2012 1040a tax form   You may be able to claim a mortgage interest credit if you were issued a mortgage credit certificate (MCC) by a state or local government. 2012 1040a tax form Figure the credit on Form 8396, Mortgage Interest Credit. 2012 1040a tax form If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. 2012 1040a tax form   For more information on the credit, see chapter 37. 2012 1040a tax form Ministers' and military housing allowance. 2012 1040a tax form   If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you can still deduct your home mortgage interest. 2012 1040a tax form Hardest Hit Fund and Emergency Homeowners' Loan Programs. 2012 1040a tax form   You can use a special method to compute your deduction for mortgage interest and real estate taxes on your main home if you meet the following two conditions. 2012 1040a tax form You received assistance under: A State Housing Finance Agency (State HFA) Hardest Hit Fund program in which program payments could be used to pay mortgage interest, or An Emergency Homeowners' Loan Program administered by the Department of Housing and Urban Development (HUD) or a state. 2012 1040a tax form You meet the rules to deduct all of the mortgage interest on your loan and all of the real estate taxes on your main home. 2012 1040a tax form If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098-MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received from payer(s) / borrower(s)), box 4 (mortgage insurance premiums) and box 5 (real property taxes). 2012 1040a tax form However, you are not required to use this special method to compute your deduction for mortgage interest and real estate taxes on your main home. 2012 1040a tax form Mortgage assistance payments under section 235 of the National Housing Act. 2012 1040a tax form   If you qualify for mortgage assistance payments for lower-income families under section 235 of the National Housing Act, part or all of the interest on your mortgage may be paid for you. 2012 1040a tax form You cannot deduct the interest that is paid for you. 2012 1040a tax form No other effect on taxes. 2012 1040a tax form   Do not include these mortgage assistance payments in your income. 2012 1040a tax form Also, do not use these payments to reduce other deductions, such as real estate taxes. 2012 1040a tax form Divorced or separated individuals. 2012 1040a tax form   If a divorce or separation agreement requires you or your spouse or former spouse to pay home mortgage interest on a home owned by both of you, the payment of interest may be alimony. 2012 1040a tax form See the discussion of Payments for jointly-owned home in chapter 18. 2012 1040a tax form Redeemable ground rents. 2012 1040a tax form   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. 2012 1040a tax form   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. 2012 1040a tax form For more information, see Publication 936. 2012 1040a tax form Nonredeemable ground rents. 2012 1040a tax form   Payments on a nonredeemable ground rent are not mortgage interest. 2012 1040a tax form You can deduct them as rent if they are a business expense or if they are for rental property. 2012 1040a tax form Reverse mortgages. 2012 1040a tax form   A reverse mortgage is a loan where the lender pays you (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home. 2012 1040a tax form With a reverse mortgage, you retain title to your home. 2012 1040a tax form Depending on the plan, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die. 2012 1040a tax form Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. 2012 1040a tax form Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until the loan is paid in full. 2012 1040a tax form Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Publication 936. 2012 1040a tax form Rental payments. 2012 1040a tax form   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. 2012 1040a tax form This is true even if the settlement papers call them interest. 2012 1040a tax form You cannot deduct these payments as home mortgage interest. 2012 1040a tax form Mortgage proceeds invested in tax-exempt securities. 2012 1040a tax form   You cannot deduct the home mortgage interest on grandfathered debt or home equity debt if you used the proceeds of the mortgage to buy securities or certificates that produce tax-free income. 2012 1040a tax form “Grandfathered debt” and “home equity debt” are defined earlier under Amount Deductible. 2012 1040a tax form Refunds of interest. 2012 1040a tax form   If you receive a refund of interest in the same tax year you paid it, you must reduce your interest expense by the amount refunded to you. 2012 1040a tax form If you receive a refund of interest you deducted in an earlier year, you generally must include the refund in income in the year you receive it. 2012 1040a tax form However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. 2012 1040a tax form This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. 2012 1040a tax form    If you received a refund of interest you overpaid in an earlier year, you generally will receive a Form 1098, Mortgage Interest Statement, showing the refund in box 3. 2012 1040a tax form For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. 2012 1040a tax form   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in chapter 12. 2012 1040a tax form Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. 2012 1040a tax form Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. 2012 1040a tax form A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. 2012 1040a tax form See Points paid by the seller , later. 2012 1040a tax form General Rule You generally cannot deduct the full amount of points in the year paid. 2012 1040a tax form Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. 2012 1040a tax form See Deduction Allowed Ratably , next. 2012 1040a tax form For exceptions to the general rule, see Deduction Allowed in Year Paid , later. 2012 1040a tax form Deduction Allowed Ratably If you do not meet the tests listed under Deduction Allowed in Year Paid , later, the loan is not a home improvement loan, or you choose not to deduct your points in full in the year paid, you can deduct the points ratably (equally) over the life of the loan if you meet all the following tests. 2012 1040a tax form You use the cash method of accounting. 2012 1040a tax form This means you report income in the year you receive it and deduct expenses in the year you pay them. 2012 1040a tax form Most individuals use this method. 2012 1040a tax form Your loan is secured by a home. 2012 1040a tax form (The home does not need to be your main home. 2012 1040a tax form ) Your loan period is not more than 30 years. 2012 1040a tax form If your loan period is more than 10 years, the terms of your loan are the same as other loans offered in your area for the same or longer period. 2012 1040a tax form Either your loan amount is $250,000 or less, or the number of points is not more than: 4, if your loan period is 15 years or less, or 6, if your loan period is more than 15 years. 2012 1040a tax form Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. 2012 1040a tax form (You can use Figure 23-B as a quick guide to see whether your points are fully deductible in the year paid. 2012 1040a tax form ) Your loan is secured by your main home. 2012 1040a tax form (Your main home is the one you ordinarily live in most of the time. 2012 1040a tax form ) Paying points is an established business practice in the area where the loan was made. 2012 1040a tax form The points paid were not more than the points generally charged in that area. 2012 1040a tax form You use the cash method of accounting. 2012 1040a tax form This means you report income in the year you receive it and deduct expenses in the year you pay them. 2012 1040a tax form (If you want more information about this method, see Accounting Methods in chapter 1. 2012 1040a tax form ) The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes. 2012 1040a tax form The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. 2012 1040a tax form The funds you provided are not required to have been applied to the points. 2012 1040a tax form They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. 2012 1040a tax form You cannot have borrowed these funds from your lender or mortgage broker. 2012 1040a tax form You use your loan to buy or build your main home. 2012 1040a tax form The points were computed as a percentage of the principal amount of the mortgage. 2012 1040a tax form The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. 2012 1040a tax form The points may be shown as paid from either your funds or the seller's. 2012 1040a tax form Figure 23-B. 2012 1040a tax form Are My Points Fully Deductible This Year? Please click here for the text description of the image. 2012 1040a tax form Figure 23-B. 2012 1040a tax form Are My Points Fully Deductible This Year? Note. 2012 1040a tax form If you meet all of these tests, you can choose to either fully deduct the points in the year paid, or deduct them over the life of the loan. 2012 1040a tax form Home improvement loan. 2012 1040a tax form   You can also fully deduct in the year paid points paid on a loan to improve your main home, if tests (1) through (6) are met. 2012 1040a tax form Second home. 2012 1040a tax form You cannot fully deduct in the year paid points you pay on loans secured by your second home. 2012 1040a tax form You can deduct these points only over the life of the loan. 2012 1040a tax form Refinancing. 2012 1040a tax form   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. 2012 1040a tax form This is true even if the new mortgage is secured by your main home. 2012 1040a tax form   However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first 6 tests listed under Deduction Allowed in Year Paid , earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. 2012 1040a tax form You can deduct the rest of the points over the life of the loan. 2012 1040a tax form Example 1. 2012 1040a tax form In 1998, Bill Fields got a mortgage to buy a home. 2012 1040a tax form In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. 2012 1040a tax form The mortgage is secured by his home. 2012 1040a tax form To get the new loan, he had to pay three points ($3,000). 2012 1040a tax form Two points ($2,000) were for prepaid interest, and one point ($1,000) was charged for services, in place of amounts that ordinarily are stated separately on the settlement statement. 2012 1040a tax form Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. 2012 1040a tax form The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. 2012 1040a tax form Bill's first payment on the new loan was due July 1. 2012 1040a tax form He made six payments on the loan in 2013 and is a cash basis taxpayer. 2012 1040a tax form Bill used the funds from the new mortgage to repay his existing mortgage. 2012 1040a tax form Although the new mortgage loan was for Bill's continued ownership of his main home, it was not for the purchase or improvement of that home. 2012 1040a tax form He cannot deduct all of the points in 2013. 2012 1040a tax form He can deduct two points ($2,000) ratably over the life of the loan. 2012 1040a tax form He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. 2012 1040a tax form The other point ($1,000) was a fee for services and is not deductible. 2012 1040a tax form Example 2. 2012 1040a tax form The facts are the same as in Example 1, except that Bill used $25,000 of the loan proceeds to improve his home and $75,000 to repay his existing mortgage. 2012 1040a tax form Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. 2012 1040a tax form His deduction is $500 ($2,000 × 25%). 2012 1040a tax form Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. 2012 1040a tax form This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. 2012 1040a tax form The total amount Bill deducts in 2013 is $550 ($500 + $50). 2012 1040a tax form Special Situations This section describes certain special situations that may affect your deduction of points. 2012 1040a tax form Original issue discount. 2012 1040a tax form   If you do not qualify to either deduct the points in the year paid or deduct them ratably over the life of the loan, or if you choose not to use either of these methods, the points reduce the issue price of the loan. 2012 1040a tax form This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. 2012 1040a tax form Amounts charged for services. 2012 1040a tax form   Amounts charged by the lender for specific services connected to the loan are not interest. 2012 1040a tax form Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. 2012 1040a tax form You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. 2012 1040a tax form Points paid by the seller. 2012 1040a tax form   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. 2012 1040a tax form Treatment by seller. 2012 1040a tax form   The seller cannot deduct these fees as interest. 2012 1040a tax form But they are a selling expense that reduces the amount realized by the seller. 2012 1040a tax form See chapter 15 for information on selling your home. 2012 1040a tax form Treatment by buyer. 2012 1040a tax form    The buyer reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them. 2012 1040a tax form If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. 2012 1040a tax form If any of those tests are not met, the buyer deducts the points over the life of the loan. 2012 1040a tax form   For information about basis, see chapter 13. 2012 1040a tax form Funds provided are less than points. 2012 1040a tax form   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the funds you provided were less than the points charged to you (test (6)), you can deduct the points in the year paid, up to the amount of funds you provided. 2012 1040a tax form In addition, you can deduct any points paid by the seller. 2012 1040a tax form Example 1. 2012 1040a tax form When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). 2012 1040a tax form You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. 2012 1040a tax form Of the $1,000 charged for points, you can deduct $750 in the year paid. 2012 1040a tax form You spread the remaining $250 over the life of the mortgage. 2012 1040a tax form Example 2. 2012 1040a tax form The facts are the same as in Example 1, except that the person who sold you your home also paid one point ($1,000) to help you get your mortgage. 2012 1040a tax form In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). 2012 1040a tax form You spread the remaining $250 over the life of the mortgage. 2012 1040a tax form You must reduce the basis of your home by the $1,000 paid by the seller. 2012 1040a tax form Excess points. 2012 1040a tax form   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the points paid were more than generally paid in your area (test (3)), you deduct in the year paid only the points that are generally charged. 2012 1040a tax form You must spread any additional points over the life of the mortgage. 2012 1040a tax form Mortgage ending early. 2012 1040a tax form   If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. 2012 1040a tax form However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. 2012 1040a tax form Instead, deduct the remaining balance over the term of the new loan. 2012 1040a tax form    A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. 2012 1040a tax form Example. 2012 1040a tax form Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. 2012 1040a tax form He deducts $200 points per year. 2012 1040a tax form Through 2012, Dan has deducted $2,200 of the points. 2012 1040a tax form Dan prepaid his mortgage in full in 2013. 2012 1040a tax form He can deduct the remaining $800 of points in 2013. 2012 1040a tax form Limits on deduction. 2012 1040a tax form   You cannot fully deduct points paid on a mortgage unless the mortgage fits into one of the categories listed earlier under Fully deductible interest . 2012 1040a tax form See Publication 936 for details. 2012 1040a tax form Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. 2012 1040a tax form The insurance must be in connection with home acquisition debt and the insurance contract must have been issued after 2006. 2012 1040a tax form Qualified mortgage insurance. 2012 1040a tax form   Qualified mortgage insurance is mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). 2012 1040a tax form   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. 2012 1040a tax form If provided by the Rural Housing Service, it is commonly known as a guarantee fee. 2012 1040a tax form These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. 2012 1040a tax form Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. 2012 1040a tax form Special rules for prepaid mortgage insurance. 2012 1040a tax form   Generally, if you paid premiums for qualified mortgage insurance that are allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. 2012 1040a tax form You must allocate the premiums over the shorter of the stated term of the mortgage or 84 months, beginning with the month the insurance was obtained. 2012 1040a tax form No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. 2012 1040a tax form This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. 2012 1040a tax form See the Example below. 2012 1040a tax form Example. 2012 1040a tax form Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. 2012 1040a tax form Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. 2012 1040a tax form Since the $9,240 in private mortgage insurance is allocable to periods after 2012, Ryan must allocate the $9,240 over the shorter of the life of the mortgage or 84 months. 2012 1040a tax form Ryan's adjusted gross income (AGI) for 2012 is $76,000. 2012 1040a tax form Ryan can deduct $880 ($9,240 ÷ 84 × 8 months) for qualified mortgage insurance premiums in 2012. 2012 1040a tax form For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 × 12 months) if his AGI is $100,000 or less. 2012 1040a tax form In this example, the mortgage insurance premiums are allocated over 84 months, which is shorter than the life of the mortgage of 15 years (180 months). 2012 1040a tax form Limit on deduction. 2012 1040a tax form   If your adjusted gross income on Form 1040, line 38, is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are otherwise deductible is reduced and may be eliminated. 2012 1040a tax form See Line 13 in the instructions for Schedule A (Form 1040) and complete the Mortgage Insurance Premiums Deduction Worksheet to figure the amount you can deduct. 2012 1040a tax form If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. 2012 1040a tax form Form 1098, Mortgage Interest Statement If you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement from the mortgage holder. 2012 1040a tax form You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. 2012 1040a tax form A governmental unit is a person for purposes of furnishing the statement. 2012 1040a tax form The statement for each year should be sent to you by January 31 of the following year. 2012 1040a tax form A copy of this form will also be sent to the IRS. 2012 1040a tax form The statement will show the total interest you paid during the year, any mortgage insurance premiums you paid, and if you purchased a main home during the year, it also will show the deductible points paid during the year, including seller-paid points. 2012 1040a tax form However, it should not show any interest that was paid for you by a government agency. 2012 1040a tax form As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. 2012 1040a tax form However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. 2012 1040a tax form See Points , earlier, to determine whether you can deduct points not shown on Form 1098. 2012 1040a tax form Prepaid interest on Form 1098. 2012 1040a tax form   If you prepaid interest in 2013 that accrued in full by January 15, 2014, this prepaid interest may be included in box 1 of Form 1098. 2012 1040a tax form However, you cannot deduct the prepaid amount for January 2014 in 2013. 2012 1040a tax form (See Prepaid interest , earlier. 2012 1040a tax form ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. 2012 1040a tax form You will include the interest for January 2014 with the other interest you pay for 2014. 2012 1040a tax form See How To Report , later. 2012 1040a tax form Refunded interest. 2012 1040a tax form   If you received a refund of mortgage interest you overpaid in an earlier year, you generally will receive a Form 1098 showing the refund in box 3. 2012 1040a tax form See Refunds of interest , earlier. 2012 1040a tax form Mortgage insurance premiums. 2012 1040a tax form   The amount of mortgage insurance premiums you paid during 2013 may be shown in box 4 of Form 1098. 2012 1040a tax form See Mortgage Insurance Premiums, earlier. 2012 1040a tax form Investment Interest This section discusses interest expenses you may be able to deduct as an investor. 2012 1040a tax form If you borrow money to buy property you hold for investment, the interest you pay is investment interest. 2012 1040a tax form You can deduct investment interest subject to the limit discussed later. 2012 1040a tax form However, you cannot deduct interest you incurred to produce tax-exempt income. 2012 1040a tax form Nor can you deduct interest expenses on straddles. 2012 1040a tax form Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. 2012 1040a tax form Investment Property Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. 2012 1040a tax form It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). 2012 1040a tax form Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). 2012 1040a tax form Partners, shareholders, and beneficiaries. 2012 1040a tax form   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. 2012 1040a tax form Allocation of Interest Expense If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. 2012 1040a tax form Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. 2012 1040a tax form The allocation is not affected by the use of property that secures the debt. 2012 1040a tax form Limit on Deduction Generally, your deduction for investment interest expense is limited to the amount of your net investment income. 2012 1040a tax form You can carry over the amount of investment interest that you could not deduct because of this limit to the next tax year. 2012 1040a tax form The interest carried over is treated as investment interest paid or accrued in that next year. 2012 1040a tax form You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. 2012 1040a tax form Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. 2012 1040a tax form Investment income. 2012 1040a tax form    This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). 2012 1040a tax form Investment income does not include Alaska Permanent Fund dividends. 2012 1040a tax form It also does not include qualified dividends or net capital gain unless you choose to include them. 2012 1040a tax form Choosing to include qualified dividends. 2012 1040a tax form   Investment income generally does not include qualified dividends, discussed in chapter 8. 2012 1040a tax form However, you can choose to include all or part of your qualified dividends in investment income. 2012 1040a tax form   You make this choice by completing Form 4952, line 4g, according to its instructions. 2012 1040a tax form   If you choose to include any amount of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. 2012 1040a tax form Choosing to include net capital gain. 2012 1040a tax form   Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). 2012 1040a tax form However, you can choose to include all or part of your net capital gain in investment income. 2012 1040a tax form    You make this choice by completing Form 4952, line 4g, according to its instructions. 2012 1040a tax form   If you choose to include any amount of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. 2012 1040a tax form    Before making either choice, consider the overall effect on your tax liability. 2012 1040a tax form Compare your tax if you make one or both of these choices with your tax if you do not. 2012 1040a tax form Investment income of child reported on parent's return. 2012 1040a tax form    Investment income includes the part of your child's interest and dividend income that you choose to report on your return. 2012 1040a tax form If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814, Parents' Election To Report Child's Interest and Dividends. 2012 1040a tax form Child's qualified dividends. 2012 1040a tax form   If part of the amount you report is your child's qualified dividends, that part (which is reported on Form 1040, line 9b) generally does not count as investment income. 2012 1040a tax form However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. 2012 1040a tax form   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child's Alaska Permanent Fund dividends). 2012 1040a tax form Child's Alaska Permanent Fund dividends. 2012 1040a tax form   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. 2012 1040a tax form To figure the amount of your child's income that you can consider your investment income, start with the amount on Form 8814, line 6. 2012 1040a tax form Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. 2012 1040a tax form Subtract the result from the amount on Form 8814, line 12. 2012 1040a tax form Child's capital gain distributions. 2012 1040a tax form    If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D, line 13, or Form 1040, line 13) generally does not count as investment income. 2012 1040a tax form However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. 2012 1040a tax form   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends , earlier). 2012 1040a tax form Investment expenses. 2012 1040a tax form   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. 2012 1040a tax form Investment expenses that are included as a miscellaneous itemized deduction on Schedule A (Form 1040) are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. 2012 1040a tax form Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A, line 27. 2012 1040a tax form Losses from passive activities. 2012 1040a tax form   Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). 2012 1040a tax form See Publication 925, Passive Activity and At-Risk Rules, for information about passive activities. 2012 1040a tax form Form 4952 Use Form 4952, Investment Interest Expense Deduction, to figure your deduction for investment interest. 2012 1040a tax form Exception to use of Form 4952. 2012 1040a tax form   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. 2012 1040a tax form Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. 2012 1040a tax form You do not have any other deductible investment expenses. 2012 1040a tax form You have no carryover of investment interest expense from 2012. 2012 1040a tax form If you meet all of these tests, you can deduct all of your investment interest. 2012 1040a tax form More Information For more information on investment interest, see Interest Expenses in chapter 3 of Publication 550. 2012 1040a tax form Items You Cannot Deduct Some interest payments are not deductible. 2012 1040a tax form Certain expenses similar to interest also are not deductible. 2012 1040a tax form Nondeductible expenses include the following items. 2012 1040a tax form Personal interest (discussed later). 2012 1040a tax form Service charges (however, see Other Expenses (Line 23) in chapter 28). 2012 1040a tax form Annual fees for credit cards. 2012 1040a tax form Loan fees. 2012 1040a tax form Credit investigation fees. 2012 1040a tax form Interest to purchase or carry tax-exempt securities. 2012 1040a tax form Penalties. 2012 1040a tax form   You cannot deduct fines and penalties paid to a government for violations of law, regardless of their nature. 2012 1040a tax form Personal Interest Personal interest is not deductible. 2012 1040a tax form Personal interest is any interest that is not home mortgage interest, investment interest, business interest, or other deductible interest. 2012 1040a tax form It includes the following items. 2012 1040a tax form Interest on car loans (unless you use the car for business). 2012 1040a tax form Interest on federal, state, or local income tax. 2012 1040a tax form Finance charges on credit cards, retail installment contracts, and revolving charge accounts incurred for personal expenses. 2012 1040a tax form Late payment charges by a public utility. 2012 1040a tax form You may be able to deduct interest you pay on a qualified student loan. 2012 1040a tax form For details, see Publication 970, Tax Benefits for Education. 2012 1040a tax form Allocation of Interest If you use the proceeds of a loan for more than one purpose (for example, personal and business), you must allocate the interest on the loan to each use. 2012 1040a tax form However, you do not have to allocate home mortgage interest if it is fully deductible, regardless of how the funds are used. 2012 1040a tax form You allocate interest (other than fully deductible home mortgage interest) on a loan in the same way as the loan itself is allocated. 2012 1040a tax form You do this by tracing disbursements of the debt proceeds to specific uses. 2012 1040a tax form For details on how to do this, see chapter 4 of Publication 535. 2012 1040a tax form How To Report You must file Form 1040 to deduct any home mortgage interest expense on your tax return. 2012 1040a tax form Where you deduct your interest expense generally depends on how you use the loan proceeds. 2012 1040a tax form See Table 23-1 for a summary of where to deduct your interest expense. 2012 1040a tax form Home mortgage interest and points. 2012 1040a tax form   Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. 2012 1040a tax form If you paid more deductible interest to the financial institution than the amount shown on Form 1098, show the larger deductible amount on line 10. 2012 1040a tax form Attach a statement explaining the difference and print “See attached” next to line 10. 2012 1040a tax form    Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. 2012 1040a tax form If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and taxpayer identification number (TIN) on the dotted lines next to line 11. 2012 1040a tax form The seller must give you this number and you must give the seller your TIN. 2012 1040a tax form A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. 2012 1040a tax form Failure to meet any of these requirements may result in a $50 penalty for each failure. 2012 1040a tax form The TIN can be either a social security number, an individual taxpayer identification number (issued by the Internal Revenue Service), or an employer identification number. 2012 1040a tax form See Social Security Number (SSN) in chapter 1 for more information about TINs. 2012 1040a tax form    If you can take a deduction for points that were not reported to you on Form 1098, deduct those points on Schedule A (Form 1040), line 12. 2012 1040a tax form   Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. 2012 1040a tax form More than one borrower. 2012 1040a tax form   If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on a mortgage that was for your home, and the other person received a Form 1098 showing the interest that was paid during the year, attach a statement to your return explaining this. 2012 1040a tax form Show how much of the interest each of you paid, and give the name and address of the person who received the form. 2012 1040a tax form Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. 2012 1040a tax form Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. 2012 1040a tax form   Similarly, if you are the payer of record on a mortgage on which there are other borrowers entitled to a deduction for the interest shown on the Form 1098 you received, deduct only your share of the interest on Schedule A (Form 1040), line 10. 2012 1040a tax form You should let each of the other borrowers know what his or her share is. 2012 1040a tax form Mortgage proceeds used for business or investment. 2012 1040a tax form    If your home mortgage interest deduction is limited, but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 23-1. 2012 1040a tax form It shows where to deduct the part of your excess interest that is for those activities. 2012 1040a tax form Investment interest. 2012 1040a tax form    Deduct investment interest, subject to certain limits discussed in Publication 550, on Schedule A (Form 1040), line 14. 2012 1040a tax form Amortization of bond premium. 2012 1040a tax form   There are various ways to treat the premium you pay to buy taxable bonds. 2012 1040a tax form See Bond Premium Amortization in Publication 550. 2012 1040a tax form Income-producing rental or royalty interest. 2012 1040a tax form   Deduct interest on a loan for income-producing rental or royalty property that is not used in your business in Part I of Schedule E (Form 1040). 2012 1040a tax form Example. 2012 1040a tax form You rent out part of your home and borrow money to make repairs. 2012 1040a tax form You can deduct only the interest payment for the rented part in Part I of Schedule E (Form 1040). 2012 1040a tax form Deduct the rest of the interest payment on Schedule A (Form 1040) if it is deductible home mortgage interest. 2012 1040a tax form Table 23-1. 2012 1040a tax form Where To Deduct Your Interest Expense IF you have . 2012 1040a tax form . 2012 1040a tax form . 2012 1040a tax form THEN deduct it on . 2012 1040a tax form . 2012 1040a tax form . 2012 1040a tax form AND for more information go to . 2012 1040a tax form . 2012 1040a tax form . 2012 1040a tax form deductible student loan interest Form 1040, line 33, or Form 1040A, line 18 Publication 970. 2012 1040a tax form deductible home mortgage interest and points reported on Form 1098 Schedule A (Form 1040), line 10 Publication 936. 2012 1040a tax form deductible home mortgage interest not reported on Form 1098 Schedule A (Form 1040), line 11 Publication 936. 2012 1040a tax form deductible points not reported on Form 1098 Schedule A (Form 1040), line 12 Publication 936. 2012 1040a tax form deductible mortgage insurance premiums Schedule A (Form 1040), line 13 Publication 936. 2012 1040a tax form deductible investment interest (other than incurred to produce rents or royalties) Schedule A (Form 1040), line 14 Publication 550. 2012 1040a tax form deductible business interest (non-farm) Schedule C or C-EZ (Form 1040) Publication 535. 2012 1040a tax form deductible farm business interest Schedule F (Form 1040) Publications 225 and 535. 2012 1040a tax form deductible interest incurred to produce rents or royalties Schedule E (Form 1040) Publications 527 and 535. 2012 1040a tax form personal interest not deductible. 2012 1040a tax form Prev  Up  Next   Home   More Online Publications
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The 2012 1040a Tax Form

2012 1040a tax form 7. 2012 1040a tax form   Depreciation, Depletion, and Amortization Table of Contents What's New for 2013 Introduction Topics - This chapter discusses: Useful Items - You may want to see: Overview of DepreciationWhat Property Can Be Depreciated? What Property Cannot Be Depreciated? When Does Depreciation Begin and End? Can You Use MACRS To Depreciate Your Property? What Is the Basis of Your Depreciable Property? How Do You Treat Repairs and Improvements? Do You Have To File Form 4562? How Do You Correct Depreciation Deductions? Section 179 Expense DeductionWhat Property Qualifies? What Property Does Not Qualify? How Much Can You Deduct? How Do You Elect the Deduction? When Must You Recapture the Deduction? Claiming the Special Depreciation AllowanceWhat is Qualified Property? How Can You Elect Not To Claim the Allowance? When Must You Recapture an Allowance Figuring Depreciation Under MACRSWhich Depreciation System (GDS or ADS) Applies? Which Property Class Applies Under GDS? What Is the Placed-in-Service Date? What Is the Basis for Depreciation? Which Recovery Period Applies? Which Convention Applies? Which Depreciation Method Applies? How Is the Depreciation Deduction Figured? How Do You Use General Asset Accounts? When Do You Recapture MACRS Depreciation? Additional Rules for Listed PropertyWhat Is Listed Property? What Is the Business-Use Requirement? Do the Passenger Automobile Limits Apply? Depletion Who Can Claim Depletion? Figuring Depletion AmortizationBusiness Start-Up Costs Reforestation Costs Section 197 Intangibles What's New for 2013 Increased section 179 expense deduction dollar limits. 2012 1040a tax form  The maximum amount you can elect to deduct for most section 179 property you placed in service in 2013 is $500,000. 2012 1040a tax form This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2 million. 2012 1040a tax form See Dollar Limits under Section 179 Expense Deduction , later. 2012 1040a tax form Extension of special depreciation allowance for certain qualified property acquired after December 31, 2007. 2012 1040a tax form . 2012 1040a tax form  You may be able to take a 50% special depreciation allowance for certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. 2012 1040a tax form See Claiming the Special Depreciation Allowance , later. 2012 1040a tax form Expiration of the 3- year recovery period for certain race horses. 2012 1040a tax form  The 3-year recovery period for race horses two years old or younger will expire for such horses placed in service after December 31, 2013. 2012 1040a tax form Introduction If you buy or make improvements to farm property such as machinery, equipment, livestock, or a structure with a useful life of more than a year, you generally cannot deduct its entire cost in one year. 2012 1040a tax form Instead, you must spread the cost over the time you use the property and deduct part of it each year. 2012 1040a tax form For most types of property, this is called depreciation. 2012 1040a tax form This chapter gives information on depreciation methods that generally apply to property placed in service after 1986. 2012 1040a tax form For information on depreciating pre-1987 property, see Publication 534, Depreciating Property Placed in Service Before 1987. 2012 1040a tax form Topics - This chapter discusses: Overview of depreciation Section 179 expense deduction Special depreciation allowance Modified Accelerated Cost Recovery System (MACRS) Listed property Basic information on cost depletion (including timber depletion) and percentage depletion Amortization of the costs of going into business, reforestation costs, the costs of pollution control facilities, and the costs of section 197 intangibles Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) T (Timber), Forest Activities Schedule 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. 2012 1040a tax form It is important to keep good records for property you depreciate. 2012 1040a tax form Do not file these records with your return. 2012 1040a tax form Instead, you should keep them as part of the permanent records of the depreciated property. 2012 1040a tax form They will help you verify the accuracy of the depreciation of assets placed in service in the current and previous tax years. 2012 1040a tax form For general information on recordkeeping, see Publication 583, Starting a Business and Keeping Records. 2012 1040a tax form For specific information on keeping records for section 179 property and listed property, see Publication 946, How To Depreciate Property. 2012 1040a tax form Overview of Depreciation This overview discusses basic information on the following. 2012 1040a tax form What property can be depreciated. 2012 1040a tax form What property cannot be depreciated. 2012 1040a tax form When depreciation begins and ends. 2012 1040a tax form Whether MACRS can be used to figure depreciation. 2012 1040a tax form What is the basis of your depreciable property. 2012 1040a tax form How to treat repairs and improvements. 2012 1040a tax form When you must file Form 4562. 2012 1040a tax form How you can correct depreciation claimed incorrectly. 2012 1040a tax form What Property Can Be Depreciated? You can depreciate most types of tangible property (except land), such as buildings, machinery, equipment, vehicles, certain livestock, and furniture. 2012 1040a tax form You can also depreciate certain intangible property, such as copyrights, patents, and computer software. 2012 1040a tax form To be depreciable, the property must meet all the following requirements. 2012 1040a tax form It must be property you own. 2012 1040a tax form It must be used in your business or income-producing activity. 2012 1040a tax form It must have a determinable useful life. 2012 1040a tax form It must have a useful life that extends substantially beyond the year you place it in service. 2012 1040a tax form Property You Own To claim depreciation, you usually must be the owner of the property. 2012 1040a tax form You are considered as owning property even if it is subject to a debt. 2012 1040a tax form Leased property. 2012 1040a tax form   You can depreciate leased property only if you retain the incidents of ownership in the property. 2012 1040a tax form This means you bear the burden of exhaustion of the capital investment in the property. 2012 1040a tax form Therefore, if you lease property from someone to use in your trade or business or for the production of income, you generally cannot depreciate its cost because you do not retain the incidents of ownership. 2012 1040a tax form You can, however, depreciate any capital improvements you make to the leased property. 2012 1040a tax form See Additions and Improvements under Which Recovery Period Applies in chapter 4 of Publication 946. 2012 1040a tax form   If you lease property to someone, you generally can depreciate its cost even if the lessee (the person leasing from you) has agreed to preserve, replace, renew, and maintain the property. 2012 1040a tax form However, you cannot depreciate the cost of the property if the lease provides that the lessee is to maintain the property and return to you the same property or its equivalent in value at the expiration of the lease in as good condition and value as when leased. 2012 1040a tax form Life tenant. 2012 1040a tax form   Generally, if you hold business or investment property as a life tenant, you can depreciate it as if you were the absolute owner of the property. 2012 1040a tax form See Certain term interests in property , later, for an exception. 2012 1040a tax form Property Used in Your Business or Income-Producing Activity To claim depreciation on property, you must use it in your business or income-producing activity. 2012 1040a tax form If you use property to produce income (investment use), the income must be taxable. 2012 1040a tax form You cannot depreciate property that you use solely for personal activities. 2012 1040a tax form However, if you use property for business or investment purposes and for personal purposes, you can deduct depreciation based only on the percentage of business or investment use. 2012 1040a tax form Example 1. 2012 1040a tax form   If you use your car for farm business, you can deduct depreciation based on its percentage of use in farming. 2012 1040a tax form If you also use it for investment purposes, you can depreciate it based on its percentage of investment use. 2012 1040a tax form Example 2. 2012 1040a tax form   If you use part of your home for business, you may be able to deduct depreciation on that part based on its business use. 2012 1040a tax form For more information, see Business Use of Your Home in chapter 4. 2012 1040a tax form Inventory. 2012 1040a tax form   You can never depreciate inventory because it is not held for use in your business. 2012 1040a tax form Inventory is any property you hold primarily for sale to customers in the ordinary course of your business. 2012 1040a tax form Livestock. 2012 1040a tax form   Livestock purchased for draft, breeding, or dairy purposes can be depreciated only if they are not kept in an inventory account. 2012 1040a tax form Livestock you raise usually has no depreciable basis because the costs of raising them are deducted and not added to their basis. 2012 1040a tax form However, see Immature livestock under When Does Depreciation Begin and End , later, for a special rule. 2012 1040a tax form Property Having a Determinable Useful Life To be depreciable, your property must have a determinable useful life. 2012 1040a tax form This means it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. 2012 1040a tax form Irrigation systems and water wells. 2012 1040a tax form   Irrigation systems and wells used in a trade or business can be depreciated if their useful life can be determined. 2012 1040a tax form You can depreciate irrigation systems and wells composed of masonry, concrete, tile, metal, or wood. 2012 1040a tax form In addition, you can depreciate costs for moving dirt to construct irrigation systems and water wells composed of these materials. 2012 1040a tax form However, land preparation costs for center pivot irrigation systems are not depreciable. 2012 1040a tax form Dams, ponds, and terraces. 2012 1040a tax form   In general, you cannot depreciate earthen dams, ponds, and terraces unless the structures have a determinable useful life. 2012 1040a tax form What Property Cannot Be Depreciated? Certain property cannot be depreciated, even if the requirements explained earlier are met. 2012 1040a tax form This includes the following. 2012 1040a tax form Land. 2012 1040a tax form You can never depreciate the cost of land because land does not wear out, become obsolete, or get used up. 2012 1040a tax form The cost of land generally includes the cost of clearing, grading, planting, and landscaping. 2012 1040a tax form Although you cannot depreciate land, you can depreciate certain costs incurred in preparing land for business use. 2012 1040a tax form See chapter 1 of Publication 946. 2012 1040a tax form Property placed in service and disposed of in the same year. 2012 1040a tax form Determining when property is placed in service is explained later. 2012 1040a tax form Equipment used to build capital improvements. 2012 1040a tax form You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. 2012 1040a tax form Intangible property such as section 197 intangibles. 2012 1040a tax form This property does not have a determinable useful life and generally cannot be depreciated. 2012 1040a tax form However, see Amortization , later. 2012 1040a tax form Special rules apply to computer software (discussed below). 2012 1040a tax form Certain term interests (discussed below). 2012 1040a tax form Computer software. 2012 1040a tax form   Computer software is generally not a section 197 intangible even if acquired in connection with the acquisition of a business, if it meets all of the following tests. 2012 1040a tax form It is readily available for purchase by the general public. 2012 1040a tax form It is subject to a nonexclusive license. 2012 1040a tax form It has not been substantially modified. 2012 1040a tax form   If the software meets the tests above, it can be depreciated and may qualify for the section 179 expense deduction and the special depreciation allowance (if applicable), discussed later. 2012 1040a tax form Certain term interests in property. 2012 1040a tax form   You cannot depreciate a term interest in property created or acquired after July 27, 1989, for any period during which the remainder interest is held, directly or indirectly, by a person related to you. 2012 1040a tax form This rule does not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. 2012 1040a tax form For more information, see chapter 1 of Publication 946. 2012 1040a tax form When Does Depreciation Begin and End? You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income. 2012 1040a tax form You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first. 2012 1040a tax form Placed in Service Property is placed in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. 2012 1040a tax form Even if you are not using the property, it is in service when it is ready and available for its specific use. 2012 1040a tax form Example. 2012 1040a tax form You bought a planter for use in your farm business. 2012 1040a tax form The planter was delivered in December 2012 after harvest was over. 2012 1040a tax form You begin to depreciate the planter for 2012 because it was ready and available for its specific use in 2012, even though it will not be used until the spring of 2013. 2012 1040a tax form If your planter comes unassembled in December 2012 and is put together in February 2013, it is not placed in service until 2013. 2012 1040a tax form You begin to depreciate it in 2013. 2012 1040a tax form If your planter was delivered and assembled in February 2013 but not used until April 2013, it is placed in service in February 2013, because this is when the planter was ready for its specified use. 2012 1040a tax form You begin to depreciate it in 2013. 2012 1040a tax form Fruit or nut trees and vines. 2012 1040a tax form   If you acquire an orchard, grove, or vineyard before the trees or vines have reached the income-producing stage, and they have a preproductive period of more than 2 years, you must capitalize the preproductive-period costs under the uniform capitalization rules (unless you elect not to use these rules). 2012 1040a tax form See chapter 6 for information about the uniform capitalization rules. 2012 1040a tax form Your depreciation begins when the trees and vines reach the income-producing stage (that is, when they bear fruit, nuts, or grapes in quantities sufficient to commercially warrant harvesting). 2012 1040a tax form Immature livestock. 2012 1040a tax form   Depreciation for livestock begins when the livestock reaches the age of maturity. 2012 1040a tax form If you bought immature livestock for drafting purposes, depreciation begins when they can be worked. 2012 1040a tax form If you bought immature livestock for dairy purposes, depreciation begins when they can be milked. 2012 1040a tax form If you bought immature livestock for breeding purposes, depreciation begins when they can be bred. 2012 1040a tax form Your basis for depreciation is your initial cost for the immature livestock. 2012 1040a tax form Idle Property Continue to claim a deduction for depreciation on property used in your business or for the production of income even if it is temporarily idle. 2012 1040a tax form For example, if you stop using a machine because there is a temporary lack of a market for a product made with that machine, continue to deduct depreciation on the machine. 2012 1040a tax form Cost or Other Basis Fully Recovered You stop depreciating property when you have fully recovered your cost or other basis. 2012 1040a tax form This happens when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property. 2012 1040a tax form Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. 2012 1040a tax form You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events. 2012 1040a tax form You sell or exchange the property. 2012 1040a tax form You convert the property to personal use. 2012 1040a tax form You abandon the property. 2012 1040a tax form You transfer the property to a supplies or scrap account. 2012 1040a tax form The property is destroyed. 2012 1040a tax form For information on abandonment of property, see chapter 8. 2012 1040a tax form For information on destroyed property, see chapter 11 and Publication 547, Casualties, Disasters, and Thefts. 2012 1040a tax form Can You Use MACRS To Depreciate Your Property? You must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most business and investment property placed in service after 1986. 2012 1040a tax form MACRS is explained later under Figuring Depreciation Under MACRS . 2012 1040a tax form You cannot use MACRS to depreciate the following property. 2012 1040a tax form Property you placed in service before 1987. 2012 1040a tax form Use the methods discussed in Publication 534. 2012 1040a tax form Certain property owned or used in 1986. 2012 1040a tax form See chapter 1 of Publication 946. 2012 1040a tax form Intangible property. 2012 1040a tax form Films, video tapes, and recordings. 2012 1040a tax form Certain corporate or partnership property acquired in a nontaxable transfer. 2012 1040a tax form Property you elected to exclude from MACRS. 2012 1040a tax form For more information, see chapter 1 of Publication 946. 2012 1040a tax form What Is the Basis of Your Depreciable Property? To figure your depreciation deduction, you must determine the basis of your property. 2012 1040a tax form To determine basis, you need to know the cost or other basis of your property. 2012 1040a tax form Cost or other basis. 2012 1040a tax form   The basis of property you buy is usually its cost plus amounts you paid for items such as sales tax, freight charges, and installation and testing fees. 2012 1040a tax form The cost includes the amount you pay in cash, debt obligations, other property, or services. 2012 1040a tax form   There are times when you cannot use cost as basis. 2012 1040a tax form In these situations, the fair market value (FMV) or the adjusted basis of the property may be used. 2012 1040a tax form Adjusted basis. 2012 1040a tax form   To find your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service. 2012 1040a tax form Basis adjustment for depreciation allowed or allowable. 2012 1040a tax form   After you place your property in service, you must reduce the basis of the property by the depreciation allowed or allowable, whichever is greater. 2012 1040a tax form Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). 2012 1040a tax form Depreciation allowable is depreciation you are entitled to deduct. 2012 1040a tax form   If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the full amount of depreciation allowable. 2012 1040a tax form   If you deduct more depreciation than you should, you must reduce your basis by any amount deducted from which you received a tax benefit (the depreciation allowed). 2012 1040a tax form   For more information, see chapter 6. 2012 1040a tax form How Do You Treat Repairs and Improvements? You generally deduct the cost of repairing business property in the same way as any other business expense. 2012 1040a tax form However, if a repair or replacement increases the value of your property, makes it more useful, or lengthens its life, you must treat it as an improvement and depreciate it. 2012 1040a tax form Treat improvements as separate depreciable property. 2012 1040a tax form See chapter 1 of Publication 946 for more information. 2012 1040a tax form Example. 2012 1040a tax form You repair a small section on a corner of the roof of a barn that you rent to others. 2012 1040a tax form You deduct the cost of the repair as a business expense. 2012 1040a tax form However, if you replace the entire roof, the new roof is considered to be an improvement because it increases the value and lengthens the life for the property. 2012 1040a tax form You depreciate the cost of the new roof. 2012 1040a tax form Improvements to rented property. 2012 1040a tax form   You can depreciate permanent improvements you make to business property you rent from someone else. 2012 1040a tax form Do You Have To File Form 4562? Use Form 4562 to claim your deduction for depreciation and amortization. 2012 1040a tax form You must complete and attach Form 4562 to your tax return if you are claiming any of the following. 2012 1040a tax form A section 179 expense deduction for the current year or a section 179 carryover from a prior year. 2012 1040a tax form Depreciation for property placed in service during the current year. 2012 1040a tax form Depreciation on any vehicle or other listed property, regardless of when it was placed in service. 2012 1040a tax form Amortization of costs that began in the current year. 2012 1040a tax form For more information, see the Instructions for Form 4562. 2012 1040a tax form How Do You Correct Depreciation Deductions? If you deducted an incorrect amount of depreciation in any year, you may be able to make a correction by filing an amended return for that year. 2012 1040a tax form You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. 2012 1040a tax form You claimed the incorrect amount because of a mathematical error made in any year. 2012 1040a tax form You claimed the incorrect amount because of a posting error made in any year, for example, omitting an asset from the depreciation schedule. 2012 1040a tax form You have not adopted a method of accounting for the property placed in service by you in tax years ending after December 29, 2003. 2012 1040a tax form You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. 2012 1040a tax form Note. 2012 1040a tax form You have adopted a method of accounting if you used the same incorrect method of depreciation for two or more consecutively filed returns. 2012 1040a tax form If you are not allowed to make the correction on an amended return, you may be able to change your accounting method to claim the correct amount of depreciation. 2012 1040a tax form See the Instructions for Form 3115. 2012 1040a tax form Section 179 Expense Deduction You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. 2012 1040a tax form This is the section 179 expense deduction. 2012 1040a tax form You can elect the section 179 expense deduction instead of recovering the cost by taking depreciation deductions. 2012 1040a tax form This part of the chapter explains the rules for the section 179 expense deduction. 2012 1040a tax form It explains what property qualifies for the deduction, what property does not qualify for the deduction, the limits that may apply, how to elect the deduction, and when you may have to recapture the deduction. 2012 1040a tax form For more information, see chapter 2 of Publication 946. 2012 1040a tax form What Property Qualifies? To qualify for the section 179 expense deduction, your property must meet all the following requirements. 2012 1040a tax form It must be eligible property. 2012 1040a tax form It must be acquired for business use. 2012 1040a tax form It must have been acquired by purchase. 2012 1040a tax form Eligible Property To qualify for the section 179 expense deduction, your property must be one of the following types of depreciable property. 2012 1040a tax form Tangible personal property. 2012 1040a tax form Qualified real property. 2012 1040a tax form (Special rules apply to qualified real property that you elect to treat as qualified section 179 real property. 2012 1040a tax form For more information, see chapter 2 of Publication 946 and section 179(f) of the Internal Revenue Code. 2012 1040a tax form ) Other tangible property (except buildings and their structural components) used as: An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services; A research facility used in connection with any of the activities in (a) above; or A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities. 2012 1040a tax form Single purpose agricultural (livestock) or horticultural structures. 2012 1040a tax form Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum. 2012 1040a tax form Off-the-shelf computer software that is readily available for purchase by the general public, is subject to a nonexclusive lease, and has not been substantially modified. 2012 1040a tax form Tangible personal property. 2012 1040a tax form   Tangible personal property is any tangible property that is not real property. 2012 1040a tax form It includes the following property. 2012 1040a tax form Machinery and equipment. 2012 1040a tax form Property contained in or attached to a building (other than structural components), such as milk tanks, automatic feeders, barn cleaners, and office equipment. 2012 1040a tax form Gasoline storage tanks and pumps at retail service stations. 2012 1040a tax form Livestock, including horses, cattle, hogs, sheep, goats, and mink and other fur-bearing animals. 2012 1040a tax form Facility used for the bulk storage of fungible commodities. 2012 1040a tax form   A facility used for the bulk storage of fungible commodities is qualifying property for purposes of the section 179 expense deduction if it is used in connection with any of the activities listed earlier in item (3)(a). 2012 1040a tax form Bulk storage means the storage of a commodity in a large mass before it is used. 2012 1040a tax form Grain bins. 2012 1040a tax form   A grain bin is an example of a storage facility that is qualifying section 179 property. 2012 1040a tax form It is a facility used in connection with the production of grain or livestock for the bulk storage of fungible commodities. 2012 1040a tax form Single purpose agricultural or horticultural structures. 2012 1040a tax form   A single purpose agricultural (livestock) or horticultural structure is qualifying property for purposes of the section 179 expense deduction. 2012 1040a tax form Agricultural structure. 2012 1040a tax form   A single purpose agricultural (livestock) structure is any building or enclosure specifically designed, constructed, and used for both the following reasons. 2012 1040a tax form To house, raise, and feed a particular type of livestock and its produce. 2012 1040a tax form To house the equipment, including any replacements, needed to house, raise, or feed the livestock. 2012 1040a tax form For this purpose, livestock includes poultry. 2012 1040a tax form   Single purpose structures are qualifying property if used, for example, to breed chickens or hogs, produce milk from dairy cattle, or produce feeder cattle or pigs, broiler chickens, or eggs. 2012 1040a tax form The facility must include, as an integral part of the structure or enclosure, equipment necessary to house, raise, and feed the livestock. 2012 1040a tax form Horticultural structure. 2012 1040a tax form   A single purpose horticultural structure is either of the following. 2012 1040a tax form A greenhouse specifically designed, constructed, and used for the commercial production of plants. 2012 1040a tax form A structure specifically designed, constructed, and used for the commercial production of mushrooms. 2012 1040a tax form Use of structure. 2012 1040a tax form   A structure must be used only for the purpose that qualified it. 2012 1040a tax form For example, a hog barn will not be qualifying property if you use it to house poultry. 2012 1040a tax form Similarly, using part of your greenhouse to sell plants will make the greenhouse nonqualifying property. 2012 1040a tax form   If a structure includes work space, the work space can be used only for the following activities. 2012 1040a tax form Stocking, caring for, or collecting livestock or plants or their produce. 2012 1040a tax form Maintaining the enclosure or structure. 2012 1040a tax form Maintaining or replacing the equipment or stock enclosed or housed in the structure. 2012 1040a tax form Property Acquired by Purchase To qualify for the section 179 expense deduction, your property must have been acquired by purchase. 2012 1040a tax form For example, property acquired by gift or inheritance does not qualify. 2012 1040a tax form Property acquired from a related person (that is, your spouse, ancestors, or lineal descendants) is not considered acquired by purchase. 2012 1040a tax form Example. 2012 1040a tax form Ken is a farmer. 2012 1040a tax form He purchased two tractors, one from his brother and one from his father. 2012 1040a tax form He placed both tractors in service in the same year he bought them. 2012 1040a tax form The tractor purchased from his father does not qualify for the section 179 expense deduction because he is a related person (as defined above). 2012 1040a tax form The tractor purchased from his brother does qualify for the deduction because Ken is not a related person (as defined above). 2012 1040a tax form What Property Does Not Qualify? Land and improvements. 2012 1040a tax form   Land and land improvements, do not qualify as section 179 property. 2012 1040a tax form Land improvements include nonagricultural fences, swimming pools, paved parking areas, wharves, docks, bridges, and fences. 2012 1040a tax form However, agricultural fences do qualify as section 179 property. 2012 1040a tax form Similarly, field drainage tile also qualifies as section 179 property. 2012 1040a tax form Excepted property. 2012 1040a tax form   Even if the requirements explained in the preceding discussions are met, farmers cannot elect the section 179 expense deduction for the following property. 2012 1040a tax form Certain property you lease to others (if you are a noncorporate lessor). 2012 1040a tax form Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging. 2012 1040a tax form Property used by a tax-exempt organization (other than a tax-exempt farmers' cooperative) unless the property is used mainly in a taxable unrelated trade or business. 2012 1040a tax form Property used by governmental units or foreign persons or entities (except property used under a lease with a term of less than 6 months). 2012 1040a tax form How Much Can You Deduct? Your section 179 expense deduction is generally the cost of the qualifying property. 2012 1040a tax form However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. 2012 1040a tax form These limits apply to each taxpayer, not to each business. 2012 1040a tax form However, see Married individuals under Dollar Limits , later. 2012 1040a tax form See also the special rules for applying the limits for partnerships and S corporations under Partnerships and S Corporations , later. 2012 1040a tax form If you deduct only part of the cost of qualifying property as a section 179 expense deduction, you can generally depreciate the cost you do not deduct. 2012 1040a tax form Use Part I of Form 4562 to figure your section 179 expense deduction. 2012 1040a tax form Partial business use. 2012 1040a tax form   When you use property for business and nonbusiness purposes, you can elect the section 179 expense deduction only if you use it more than 50% for business in the year you place it in service. 2012 1040a tax form If you used the property more than 50% for business, multiply the cost of the property by the percentage of business use. 2012 1040a tax form Use the resulting business cost to figure your section 179 expense deduction. 2012 1040a tax form Trade-in of other property. 2012 1040a tax form   If you buy qualifying property with cash and a trade-in, its cost for purposes of the section 179 expense deduction includes only the cash you paid. 2012 1040a tax form For example, if you buy (for cash and a trade-in) a new tractor for use in your business, your cost for the section 179 expense deduction is the cash you paid. 2012 1040a tax form It does not include the adjusted basis of the old tractor you trade for the new tractor. 2012 1040a tax form Example. 2012 1040a tax form J-Bar Farms traded two cultivators having a total adjusted basis of $6,800 for a new cultivator costing $13,200. 2012 1040a tax form They received an $8,000 trade-in allowance for the old cultivators and paid $5,200 cash for the new cultivator. 2012 1040a tax form J-Bar also traded a used pickup truck with an adjusted basis of $8,000 for a new pickup truck costing $35,000. 2012 1040a tax form They received a $5,000 trade-in allowance and paid $30,000 cash for the new pickup truck. 2012 1040a tax form Only the cash paid by J-Bar qualifies for the section 179 expense deduction. 2012 1040a tax form J-Bar's business costs that qualify for a section 179 expense deduction are $35,200 ($5,200 + $30,000). 2012 1040a tax form Dollar Limits The total amount you can elect to deduct under section 179 for most property placed in service in 2013 is $500,000. 2012 1040a tax form If you acquire and place in service more than one item of qualifying property during the year, you can allocate the section 179 expense deduction among the items in any way, as long as the total deduction is not more than $500,000. 2012 1040a tax form Qualified real property that you elect to treat as section 179 property is limited to $250,000 of the maximum section 179 deduction of $500,000 for 2013. 2012 1040a tax form You do not have to claim the full $500,000. 2012 1040a tax form For specific information on the section 179 dollar limits, see chapter 2 of Publication 946. 2012 1040a tax form Reduced dollar limit for cost exceeding $2 million. 2012 1040a tax form   If the cost of your qualifying section 179 property placed in service in 2013 is over $2 million, you must reduce the dollar limit (but not below zero) by the amount of cost over $2 million. 2012 1040a tax form If the cost of your section 179 property placed in service during 2013 is $2,500,000 or more, you cannot take a section 179 expense deduction and you cannot carry over the cost that is more than $2,500,000. 2012 1040a tax form Example. 2012 1040a tax form This year, James Smith placed in service machinery costing $2,050,000. 2012 1040a tax form Because this cost is $50,000 more than $2 million, he must reduce his dollar limit to $450,000 ($500,000 − $50,000). 2012 1040a tax form Limits for sport utility vehicles. 2012 1040a tax form   The total amount you can elect to deduct for certain sport utility vehicles and certain other vehicles placed in service in 2013 is $25,000. 2012 1040a tax form This rule applies to any 4-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, and highways that is rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight. 2012 1040a tax form   For more information, see chapter 2 of Publication 946. 2012 1040a tax form Limits for passenger automobiles. 2012 1040a tax form   For a passenger automobile that is placed in service in 2013, the total section 179 and depreciation deduction is limited. 2012 1040a tax form See Do the Passenger Automobile Limits Apply , later. 2012 1040a tax form Married individuals. 2012 1040a tax form   If you are married, how you figure your section 179 expense deduction depends on whether you file jointly or separately. 2012 1040a tax form If you file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service. 2012 1040a tax form If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit, including the reduction for costs over $2 million. 2012 1040a tax form You must allocate the dollar limit (after any reduction) equally between you, unless you both elect a different allocation. 2012 1040a tax form If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you. 2012 1040a tax form Joint return after separate returns. 2012 1040a tax form   If you and your spouse elect to amend your separate returns by filing a joint return after the due date for filing your return, the dollar limit on the joint return is the lesser of the following amounts. 2012 1040a tax form The dollar limit (after reduction for any cost of section 179 property over $2 million). 2012 1040a tax form The total cost of section 179 property you and your spouse elected to expense on your separate returns. 2012 1040a tax form Business Income Limit The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. 2012 1040a tax form Generally, you are considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business. 2012 1040a tax form Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. 2012 1040a tax form See Carryover of disallowed deduction , later. 2012 1040a tax form Taxable income. 2012 1040a tax form   In general, figure taxable income for this purpose by totaling the net income and losses from all trades and businesses you actively conducted during the year. 2012 1040a tax form In addition to net income or loss from a sole proprietorship, partnership, or S corporation, net income or loss derived from a trade or business also includes the following items. 2012 1040a tax form Section 1231 gains (or losses) as discussed in chapter 9. 2012 1040a tax form Interest from working capital of your trade or business. 2012 1040a tax form Wages, salaries, tips, or other pay earned by you (or your spouse if you file a joint return) as an employee of any employer. 2012 1040a tax form   In addition, figure taxable income without regard to any of the following. 2012 1040a tax form The section 179 expense deduction. 2012 1040a tax form The self-employment tax deduction. 2012 1040a tax form Any net operating loss carryback or carryforward. 2012 1040a tax form Any unreimbursed employee business expenses. 2012 1040a tax form Two different taxable income limits. 2012 1040a tax form   In addition to the business income limit for your section 179 expense deduction, you may have a taxable income limit for some other deduction (for example, charitable contributions). 2012 1040a tax form You may have to figure the limit for this other deduction taking into account the section 179 expense deduction. 2012 1040a tax form If so, complete the following steps. 2012 1040a tax form Step Action 1 Figure taxable income without the section 179 expense deduction or the other deduction. 2012 1040a tax form 2 Figure a hypothetical section 179 expense deduction using the taxable income figured in Step 1. 2012 1040a tax form 3 Subtract the hypothetical section 179 expense deduction figured in Step 2 from the taxable income figured in Step 1. 2012 1040a tax form 4 Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income. 2012 1040a tax form 5 Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in  Step 1. 2012 1040a tax form 6 Figure your actual section 179 expense deduction using the taxable income figured in Step 5. 2012 1040a tax form 7 Subtract your actual section 179 expense deduction figured in Step 6 from the taxable income figured in Step 1. 2012 1040a tax form 8 Figure your actual other deduction using the taxable income figured in Step 7. 2012 1040a tax form Example. 2012 1040a tax form On February 1, 2013, the XYZ farm corporation purchased and placed in service qualifying section 179 property that cost $500,000. 2012 1040a tax form It elects to expense the entire $500,000 cost under section 179. 2012 1040a tax form In June, the corporation gave a charitable contribution of $10,000. 2012 1040a tax form A corporation's limit on charitable contributions is figured after subtracting any section 179 expense deduction. 2012 1040a tax form The business income limit for the section 179 expense deduction is figured after subtracting any allowable charitable contributions. 2012 1040a tax form XYZ's taxable income figured without the section 179 expense deduction or the deduction for charitable contributions is $520,000. 2012 1040a tax form XYZ figures its section 179 expense deduction and its deduction for charitable contributions as follows. 2012 1040a tax form Step 1. 2012 1040a tax form Taxable income figured without either deduction is $520,000. 2012 1040a tax form Step 2. 2012 1040a tax form Using $520,000 as taxable income, XYZ's hypothetical section 179 expense deduction is $500,000. 2012 1040a tax form Step 3. 2012 1040a tax form $20,000 ($520,000 − $500,000). 2012 1040a tax form Step 4. 2012 1040a tax form Using $20,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable income) is $2,000. 2012 1040a tax form Step 5. 2012 1040a tax form $518,000 ($520,000 − $2,000). 2012 1040a tax form Step 6. 2012 1040a tax form Using $518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 expense deduction. 2012 1040a tax form Because the taxable income is at least $500,000, XYZ can take a $500,000 section 179 expense deduction. 2012 1040a tax form Step 7. 2012 1040a tax form $20,000 ($520,000 − $500,000). 2012 1040a tax form Step 8. 2012 1040a tax form Using $20,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable income) is $2,000. 2012 1040a tax form Carryover of disallowed deduction. 2012 1040a tax form   You can carry over for an unlimited number of years the cost of any section 179 property you elected to expense but were unable to because of the business income limit. 2012 1040a tax form   The amount you carry over is used in determining your section 179 expense deduction in the next year. 2012 1040a tax form However, it is subject to the limits in that year. 2012 1040a tax form If you place more than one property in service in a year, you can select the properties for which all or a part of the cost will be carried forward. 2012 1040a tax form Your selections must be shown in your books and records. 2012 1040a tax form Example. 2012 1040a tax form Last year, Joyce Jones placed in service a machine that cost $8,000 and elected to deduct all $8,000 under section 179. 2012 1040a tax form The taxable income from her business (determined without regard to both a section 179 expense deduction for the cost of the machine and the self-employment tax deduction) was $6,000. 2012 1040a tax form Her section 179 expense deduction was limited to $6,000. 2012 1040a tax form The $2,000 cost that was not allowed as a section 179 expense deduction (because of the business income limit) is carried to this year. 2012 1040a tax form This year, Joyce placed another machine in service that cost $9,000. 2012 1040a tax form Her taxable income from business (determined without regard to both a section 179 expense deduction for the cost of the machine and the self-employment tax deduction) is $10,000. 2012 1040a tax form Joyce can deduct the full cost of the machine ($9,000) but only $1,000 of the carryover from last year because of the business income limit. 2012 1040a tax form She can carry over the balance of $1,000 to next year. 2012 1040a tax form Partnerships and S Corporations The section 179 expense deduction limits apply both to the partnership or S corporation and to each partner or shareholder. 2012 1040a tax form The partnership or S corporation determines its section 179 expense deduction subject to the limits. 2012 1040a tax form It then allocates the deduction among its partners or shareholders. 2012 1040a tax form If you are a partner in a partnership or shareholder of an S corporation, you add the amount allocated from the partnership or S corporation to any section 179 costs not related to the partnership or S corporation and then apply the dollar limit to this total. 2012 1040a tax form To determine any reduction in the dollar limit for costs over $560,000, you do not include any of the cost of section 179 property placed in service by the partnership or S corporation. 2012 1040a tax form After you apply the dollar limit, you apply the business income limit to any remaining section 179 costs. 2012 1040a tax form For more information, see chapter 2 of Publication 946. 2012 1040a tax form Example. 2012 1040a tax form In 2013, Partnership P placed in service section 179 property with a total cost of $2,160,000. 2012 1040a tax form P must reduce its dollar limit by $160,000 ($2,160,000 − $2,000,000). 2012 1040a tax form Its maximum section 179 expense deduction is $340,000 ($500,000 − $160,000), and it elects to expense that amount. 2012 1040a tax form Because P's taxable income from the active conduct of all its trades or businesses for the year was $400,000, it can deduct the full $340,000. 2012 1040a tax form P allocates $100,000 of its section 179 expense deduction and $110,000 of its taxable income to John, one of its partners. 2012 1040a tax form John also conducts a business as a sole proprietor and in 2013, placed in service in that business, section 179 property costing $28,000. 2012 1040a tax form John's taxable income from that business was $10,000. 2012 1040a tax form In addition to the $100,000 allocated from P, he elects to expense the $28,000 of his sole proprietorship's section 179 costs. 2012 1040a tax form However, John's deduction is limited to his business taxable income of $120,000 ($110,000 from P plus $10,000 from his sole proprietorship). 2012 1040a tax form He carries over $8,000 ($128,000 − $120,000) of the elected section 179 costs to 2014. 2012 1040a tax form How Do You Elect the Deduction? You elect to take the section 179 expense deduction by completing Part I of Form 4562. 2012 1040a tax form If you elect the deduction for listed property, complete Part V of  Form 4562 before completing Part I. 2012 1040a tax form   File Form 4562 with either of the following: Your original tax return (whether or not you filed it timely), or An amended return filed within the time prescribed by law. 2012 1040a tax form An election made on an amended return must specify the item of section 179 property to which the election applies and the part of the cost of each such item to be taken into account. 2012 1040a tax form The amended return must also include any resulting adjustments to taxable income. 2012 1040a tax form Revoking an election. 2012 1040a tax form   An election (or any specification made in the election) to take a section 179 expense deduction for 2013 can be revoked without IRS approval by filing an amended return. 2012 1040a tax form The amended return must be filed within the time prescribed by law. 2012 1040a tax form The amended return must also include any resulting adjustments to taxable income (for example, allowable depreciation in that tax year for the item of section 179 property for which the election pertains. 2012 1040a tax form ) Once made, the revocation is irrevocable. 2012 1040a tax form When Must You Recapture the Deduction? You may have to recapture the section 179 expense deduction if, in any year during the property's recovery period, the percentage of business use drops to 50% or less. 2012 1040a tax form In the year the business use drops to 50% or less, you include the recapture amount as ordinary income. 2012 1040a tax form You also increase the basis of the property by the recapture amount. 2012 1040a tax form Recovery periods for property are discussed later. 2012 1040a tax form If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. 2012 1040a tax form Instead, use the rules for recapturing depreciation explained in  chapter 9 under Section 1245 Property. 2012 1040a tax form   If the property is listed property, do not figure the recapture amount under the rules explained in this discussion when the percentage of business use drops to 50% or less. 2012 1040a tax form Instead, use the rules for recapturing depreciation explained in chapter 5 of Publication 946 under Recapture of Excess Depreciation. 2012 1040a tax form Figuring the recapture amount. 2012 1040a tax form   To figure the amount to recapture, take the following steps. 2012 1040a tax form Figure the allowable depreciation for the section 179 expense deduction you claimed. 2012 1040a tax form Begin with the year you placed the property in service and include the year of recapture. 2012 1040a tax form Subtract the depreciation figured in (1) from the section 179 expense deduction you actually claimed. 2012 1040a tax form The result is the amount you must recapture. 2012 1040a tax form Example. 2012 1040a tax form In January 2011, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. 2012 1040a tax form The property is not listed property. 2012 1040a tax form He elected a $5,000 section 179 expense deduction for the property and also elected not to claim a special depreciation allowance. 2012 1040a tax form He used the property only for business in 2011 and 2012. 2012 1040a tax form During 2013, he used the property 40% for business and 60% for personal use. 2012 1040a tax form He figures his recapture amount as follows. 2012 1040a tax form Section 179 expense deduction claimed (2011) $5,000 Minus: Allowable depreciation (instead of section 179 expense deduction):   2011 $1,250   2012 1,875   2013 ($1,250 × 40% (business)) 500 3,625 2013 — Recapture amount $1,375     Paul must include $1,375 in income for 2013. 2012 1040a tax form Where to report recapture. 2012 1040a tax form   Report any recapture of the section 179 expense deduction as ordinary income in Part IV of Form 4797 and include it in income on Schedule F (Form 1040). 2012 1040a tax form Recapture for qualified section 179 GO Zone property. 2012 1040a tax form   If any qualified section 179 GO Zone property ceases to be used in the GO Zone in a later year, you must recapture the benefit of the increased section 179 expense deduction as “other income. 2012 1040a tax form ” Claiming the Special Depreciation Allowance For qualified property (defined below) placed in service in 2013, you can take an additional 50% special depreciation allowance. 2012 1040a tax form The allowance is an additional deduction you can take after any section 179 expense deduction and before you figure regular depreciation under MACRS. 2012 1040a tax form Figure the special depreciation allowance by multiplying the depreciable basis of the qualified property by 50%. 2012 1040a tax form What is Qualified Property? For farmers, qualified property generally is certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. 2012 1040a tax form Certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. 2012 1040a tax form   Certain qualified property (defined below) acquired after December 31, 2007, and before January 1, 2014, is eligible for a 50% special depreciation allowance. 2012 1040a tax form   Qualified property includes the following: Tangible property depreciated under the Modified Accelerated Cost Recovery System (MACRS) with a recovery period of 20 years or less. 2012 1040a tax form Water utility property. 2012 1040a tax form Off-the-shelf computer software. 2012 1040a tax form Qualified leasehold improvement property. 2012 1040a tax form   Qualified property must also meet all of the following tests: You must have acquired qualified property by purchase after December 31, 2007. 2012 1040a tax form If a binding contract to acquire the property existed before January 1, 2008, the property does not qualify. 2012 1040a tax form Qualified property must be placed in service after December 31, 2007 and placed in service before January 1, 2014 (before January 1, 2015 for certain property with a long production period and for certain aircraft). 2012 1040a tax form The original use of the property must begin with you after December 31, 2007. 2012 1040a tax form For more information, see chapter 3 of Publication 946. 2012 1040a tax form How Can You Elect Not To Claim the Allowance? You can elect, for any class of property, not to deduct the special depreciation allowance for all property in such class placed in service during the tax year. 2012 1040a tax form To make the election, attach a statement to your return indicating the class of property for which you are making the election. 2012 1040a tax form 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. 2012 1040a tax form However, if you timely filed your return for the year without making the election, you still can make the election by filing an amended return within 6 months of the due date of the original return (not including extensions). 2012 1040a tax form Attach the election statement to the amended return. 2012 1040a tax form On the amended return, write “Filed pursuant to section 301. 2012 1040a tax form 9100-2. 2012 1040a tax form ” Once made, the election may not be revoked without IRS consent. 2012 1040a tax form If you elect not to have the special depreciation allowance apply, the property may be subject to an alternative minimum tax adjustment for depreciation. 2012 1040a tax form When Must You Recapture an Allowance When you dispose of property for which you claimed a special depreciation allowance, any gain on the disposition is generally recaptured (included in income) as ordinary income up to the amount of the special depreciation allowance previously allowed or allowable. 2012 1040a tax form For more information, see chapter 3 of Publication 946. 2012 1040a tax form Figuring Depreciation Under MACRS The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. 2012 1040a tax form MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). 2012 1040a tax form Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. 2012 1040a tax form To be sure you can use MACRS to figure depreciation for your property, see Can You Use MACRS To Depreciate Your Property, earlier. 2012 1040a tax form This part explains how to determine which MACRS depreciation system applies to your property. 2012 1040a tax form It also discusses the following information that you need to know before you can figure depreciation under MACRS. 2012 1040a tax form Property's recovery class. 2012 1040a tax form Placed-in-service date. 2012 1040a tax form Basis for depreciation. 2012 1040a tax form Recovery period. 2012 1040a tax form Convention. 2012 1040a tax form Depreciation method. 2012 1040a tax form Finally, this part explains how to use this information to figure your depreciation deduction. 2012 1040a tax form 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. 2012 1040a tax form You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. 2012 1040a tax form Required use of ADS. 2012 1040a tax form   You must use ADS for the following property. 2012 1040a tax form 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. 2012 1040a tax form Listed property used 50% or less in a qualified business use. 2012 1040a tax form See Additional Rules for Listed Property , later. 2012 1040a tax form Any tax-exempt use property. 2012 1040a tax form Any tax-exempt bond-financed property. 2012 1040a tax form 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. 2012 1040a tax form Any tangible property used predominantly outside the United States during the year. 2012 1040a tax form If you are required to use ADS to depreciate your property, you cannot claim the special depreciation allowance. 2012 1040a tax form Electing ADS. 2012 1040a tax form   Although your property may qualify for GDS, you can elect to use ADS. 2012 1040a tax form The election generally must cover all property in the same property class you placed in service during the year. 2012 1040a tax form However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. 2012 1040a tax form Once you make this election, you can never revoke it. 2012 1040a tax form   You make the election by completing line 20 in Part III of Form 4562. 2012 1040a tax form Which Property Class Applies Under GDS? The following is a list of the nine property classes under GDS. 2012 1040a tax form 3-year property. 2012 1040a tax form 5-year property. 2012 1040a tax form 7-year property. 2012 1040a tax form 10-year property. 2012 1040a tax form 15-year property. 2012 1040a tax form 20-year property. 2012 1040a tax form 25-year property. 2012 1040a tax form Residential rental property. 2012 1040a tax form Nonresidential real property. 2012 1040a tax form See Which Property Class Applies Under GDS in chapter 4 of Publication 946 for examples of the types of property included in each class. 2012 1040a tax form What Is the Placed-in-Service Date? You begin to claim depreciation when your property is placed in service for use either in a trade or business or for the production of income. 2012 1040a tax form The placed-in-service date for your property is the date the property is ready and available for a specific use. 2012 1040a tax form It is therefore not necessarily the date it is first used. 2012 1040a tax form 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. 2012 1040a tax form See Placed in Service under When Does Depreciation Begin and End , earlier, for examples illustrating when property is placed in service. 2012 1040a tax form 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. 2012 1040a tax form Reduce that amount by any credits and deductions allocable to the property. 2012 1040a tax form The following are examples of some of the credits and deductions that reduce basis. 2012 1040a tax form Any deduction for section 179 property. 2012 1040a tax form Any deduction for removal of barriers to the disabled and the elderly. 2012 1040a tax form Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. 2012 1040a tax form Any special depreciation allowance. 2012 1040a tax form Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. 2012 1040a tax form For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property , earlier. 2012 1040a tax form Also, see chapter 6. 2012 1040a tax form For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. 2012 1040a tax form Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. 2012 1040a tax form It is determined based on the depreciation system (GDS or ADS) used. 2012 1040a tax form See Table 7-1 for recovery periods under both GDS and ADS for some commonly used assets. 2012 1040a tax form For a complete list of recovery periods, see the Table of Class Lives and Recovery Periods in Appendix B of Publication 946. 2012 1040a tax form House trailers for farm laborers. 2012 1040a tax form   To depreciate a house trailer you supply as housing for those who work on your farm, use one of the following recovery periods if the house trailer is mobile (it has wheels and a history of movement). 2012 1040a tax form A 7-year recovery period under GDS. 2012 1040a tax form A 10-year recovery period under ADS. 2012 1040a tax form   However, if the house trailer is not mobile (its wheels have been removed and permanent utilities and pipes attached to it), use one of the following recovery periods. 2012 1040a tax form A 20-year recovery period under GDS. 2012 1040a tax form A 25-year recovery period under ADS. 2012 1040a tax form Water wells. 2012 1040a tax form   Water wells used to provide water for raising poultry and livestock are land improvements. 2012 1040a tax form If they are depreciable, use one of the following recovery periods. 2012 1040a tax form A 15-year recovery period under GDS. 2012 1040a tax form A 20-year recovery period under ADS. 2012 1040a tax form   The types of water wells that can be depreciated were discussed earlier in Irrigation systems and water wells under Property Having a Determinable Useful Life . 2012 1040a tax form Table 7-1. 2012 1040a tax form Farm Property Recovery Periods   Recovery Period in Years Assets GDS ADS Agricultural structures (single purpose) 10 15 Automobiles 5 5 Calculators and copiers 5 6 Cattle (dairy or breeding) 5 7 Communication equipment1 7 10 Computer and peripheral equipment 5 5 Drainage facilities 15 20 Farm buildings2 20 25 Farm machinery and equipment 7 10 Fences (agricultural) 7 10 Goats and sheep (breeding) 5 5 Grain bin 7 10 Hogs (breeding) 3 3 Horses (age when placed in service)     Breeding and working (12 years or less) 7 10 Breeding and working (more than 12 years) 3 10 Racing horses 3 12 Horticultural structures (single purpose) 10 15 Logging machinery and equipment3 5 6 Nonresidential real property 394 40 Office furniture, fixtures, and equipment (not calculators, copiers, or typewriters) 7 10 Paved lots 15 20 Residential rental property 27. 2012 1040a tax form 5 40 Tractor units (over-the-road) 3 4 Trees or vines bearing fruit or nuts 10 20 Truck (heavy duty, unloaded weight 13,000 lbs. 2012 1040a tax form or more) 5 6 Truck (actual weight less than 13,000 lbs) 5 5 Water wells 15 20 1 Not including communication equipment listed in other classes. 2012 1040a tax form 2 Not including single purpose agricultural or horticultural structures. 2012 1040a tax form 3 Used by logging and sawmill operators for cutting of timber. 2012 1040a tax form 4 For property placed in service after May 12, 1993; for property placed in service before May 13, 1993,  the recovery period is 31. 2012 1040a tax form 5 years. 2012 1040a tax form Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. 2012 1040a tax form 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. 2012 1040a tax form Use one of the following conventions. 2012 1040a tax form The half-year convention. 2012 1040a tax form The mid-month convention. 2012 1040a tax form The mid-quarter convention. 2012 1040a tax form For a detailed explanation of each convention, see Which Convention Applies in chapter 4 of Publication 946. 2012 1040a tax form Also, see the Instructions for Form 4562. 2012 1040a tax form Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. 2012 1040a tax form The 200% declining balance method over a GDS recovery period. 2012 1040a tax form The 150% declining balance method over a GDS recovery period. 2012 1040a tax form The straight line method over a GDS recovery period. 2012 1040a tax form The straight line method over an ADS recovery period. 2012 1040a tax form Depreciation Table. 2012 1040a tax form   The following table lists the types of property you can depreciate under each method. 2012 1040a tax form The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. 2012 1040a tax form Depreciation Table System/Method   Type of Property GDS using  150% DB • All property used in a farming business (except real property)   • All 15- and 20-year property   • Nonfarm 3-, 5-, 7-, and 10-year property1 GDS using SL • Nonresidential real property   • Residential rental property   • Trees or vines bearing fruit or nuts   • All 3-, 5-, 7-, 10-, 15-, and 20-year property1 ADS using SL • Property used predomi- nantly outside the United States   • Farm property used when an election not to apply the uniform capitalization rules is in effect   • Tax-exempt property   • Tax-exempt bond-financed property   • Imported property2   • Any property for which you elect to use this method1 GDS using  200% DB • Nonfarm 3-, 5-, 7-, and 10-year property 1Elective method 2See section 168(g)(6) of the Internal Revenue  Code Property used in farming business. 2012 1040a tax form   For personal property placed in service after 1988 in a farming business, you must use the 150% declining balance method over a GDS recovery period or you can elect one of the following methods. 2012 1040a tax form The straight line method over a GDS recovery period. 2012 1040a tax form The straight line method over an ADS recovery period. 2012 1040a tax form For property placed in service before 1999, you could have elected to use the 150% declining balance method using the ADS recovery periods for certain property classes. 2012 1040a tax form If you made this election, continue to use the same method and recovery period for that property. 2012 1040a tax form Real property. 2012 1040a tax form   You can depreciate real property using the straight line method under either GDS or ADS. 2012 1040a tax form Switching to straight line. 2012 1040a tax form   If you use a declining balance method, you switch to the straight line method in the year it provides an equal or greater deduction. 2012 1040a tax form If you use the MACRS percentage tables, discussed later under How Is the Depreciation Deduction Figured , you do not need to determine in which year your deduction is greater using the straight line method. 2012 1040a tax form The tables have the switch to the straight line method built into their rates. 2012 1040a tax form Fruit or nut trees and vines. 2012 1040a tax form   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a 10-year recovery period. 2012 1040a tax form ADS required for some farmers. 2012 1040a tax form   If you elect not to apply the uniform capitalization rules to any plant shown in Table 6-1 of chapter 6 and produced in your farming business, you must use ADS for all property you place in service in any year the election is in effect. 2012 1040a tax form See chapter 6 for a discussion of the application of the uniform capitalization rules to farm property. 2012 1040a tax form Electing a different method. 2012 1040a tax form   As shown in the Depreciation Table , you can elect a different method for depreciation for certain types of property. 2012 1040a tax form You must make the election by the due date of the return (including extensions) for the year you placed the property in service. 2012 1040a tax form However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). 2012 1040a tax form Attach the election to the amended return and write “Filed pursuant to section 301. 2012 1040a tax form 9100-2” on the election statement. 2012 1040a tax form File the amended return at the same address you filed the original return. 2012 1040a tax form Once you make the election, you cannot change it. 2012 1040a tax form    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. 2012 1040a tax form However, you can make the election on a property-by-property basis for residential rental and nonresidential real property. 2012 1040a tax form Straight line election. 2012 1040a tax form   Instead of using the declining balance method, you can elect to use the straight line method over the GDS recovery period. 2012 1040a tax form Make the election by entering “S/L” under column (f) in Part III of Form 4562. 2012 1040a tax form ADS election. 2012 1040a tax form   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. 2012 1040a tax form ADS uses the straight line method of depreciation over the ADS recovery periods, which are generally longer than the GDS recovery periods. 2012 1040a tax form The ADS recovery periods for many assets used in the business of farming are listed in Table 7–1. 2012 1040a tax form Additional ADS recovery periods for other classes of property may be found in the Table of Class Lives and Recovery Periods in Appendix B of Publication 946. 2012 1040a tax form 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. 2012 1040a tax form Then you are ready to figure your depreciation deduction. 2012 1040a tax form You can figure it in one of two ways. 2012 1040a tax form You can use the percentage tables provided by the IRS. 2012 1040a tax form You can figure your own deduction without using the tables. 2012 1040a tax form Figuring your own MACRS deduction will generally result in a slightly different amount than using the tables. 2012 1040a tax form 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. 2012 1040a tax form These percentage tables are in Appendix A of Publication 946. 2012 1040a tax form Rules for using the tables. 2012 1040a tax form   The following rules cover the use of the percentage tables. 2012 1040a tax form You must apply the rates in the percentage tables to your property's unadjusted basis. 2012 1040a tax form Unadjusted basis is the same basis amount you would use to figure gain on a sale but figured without reducing your original basis by any MACRS depreciation taken in earlier years. 2012 1040a tax form You cannot use the percentage tables for a short tax year. 2012 1040a tax form See chapter 4 of Publication 946 for information on how to figure the deduction for a short tax year. 2012 1040a tax form You generally must continue to use them for the entire recovery period of the property. 2012 1040a tax form You must stop using the tables if you adjust the basis of the property for any reason other than— Depreciation allowed or allowable, or An addition or improvement to the property, which is depreciated as a separate property. 2012 1040a tax form Basis adjustment due to casualty loss. 2012 1040a tax form   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. 2012 1040a tax form 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. 2012 1040a tax form See Figuring the Deduction Without Using the Tables in chapter 4 of Publication 946. 2012 1040a tax form Figuring depreciation using the 150% DB method and half-year convention. 2012 1040a tax form    Table 7-2 has the percentages for 3-, 5-, 7-, and 20-year property. 2012 1040a tax form The percentages are based on the 150% declining balance method with a change to the straight line method. 2012 1040a tax form This table covers only the half-year convention and the first 8 years for 20-year property. 2012 1040a tax form See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. 2012 1040a tax form   The following examples show how to figure depreciation under MACRS using the percentages in Table 7-2 . 2012 1040a tax form Example 1. 2012 1040a tax form During the year, you bought an item of 7-year property for $10,000 and placed it in service. 2012 1040a tax form You do not elect a section 179 expense deduction for this property. 2012 1040a tax form In addition, the property is not qualified property for purposes of the special depreciation allowance. 2012 1040a tax form The unadjusted basis of the property is $10,000. 2012 1040a tax form You use the percentages in Table 7-2 to figure your deduction. 2012 1040a tax form Since this is 7-year property, you multiply $10,000 by 10. 2012 1040a tax form 71% to get this year's depreciation of $1,071. 2012 1040a tax form For next year, your depreciation will be $1,913 ($10,000 × 19. 2012 1040a tax form 13%). 2012 1040a tax form Example 2. 2012 1040a tax form You had a barn constructed on your farm at a cost of $20,000. 2012 1040a tax form You placed the barn in service this year. 2012 1040a tax form You elect not to claim the special depreciation allowance. 2012 1040a tax form The barn is 20-year property and you use the table percentages to figure your deduction. 2012 1040a tax form You figure this year's depreciation by multiplying $20,000 (unadjusted basis) by 3. 2012 1040a tax form 75% to get $750. 2012 1040a tax form For next year, your depreciation will be $1,443. 2012 1040a tax form 80 ($20,000 × 7. 2012 1040a tax form 219%). 2012 1040a tax form Table 7-2. 2012 1040a tax form 150% Declining Balance Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 25. 2012 1040a tax form 0 % 15. 2012 1040a tax form 00 % 10. 2012 1040a tax form 71 % 3. 2012 1040a tax form 750 % 2 37. 2012 1040a tax form 5   25. 2012 1040a tax form 50   19. 2012 1040a tax form 13   7. 2012 1040a tax form 219   3 25. 2012 1040a tax form 0   17. 2012 1040a tax form 85   15. 2012 1040a tax form 03   6. 2012 1040a tax form 677   4 12. 2012 1040a tax form 5   16. 2012 1040a tax form 66   12. 2012 1040a tax form 25   6. 2012 1040a tax form 177   5     16. 2012 1040a tax form 66   12. 2012 1040a tax form 25   5. 2012 1040a tax form 713   6     8. 2012 1040a tax form 33   12. 2012 1040a tax form 25   5. 2012 1040a tax form 285   7         12. 2012 1040a tax form 25   4. 2012 1040a tax form 888   8         6. 2012 1040a tax form 13   4. 2012 1040a tax form 522   Figuring depreciation using the straight line method and half-year convention. 2012 1040a tax form   The following table has the straight line percentages for 3-, 5-, 7-, and 20-year property using the half-year convention. 2012 1040a tax form The table covers only the first 8 years for 20-year property. 2012 1040a tax form See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. 2012 1040a tax form Table 7-3. 2012 1040a tax form Straight Line Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 16. 2012 1040a tax form 67 % 10 % 7. 2012 1040a tax form 14 % 2. 2012 1040a tax form 5 % 2 33. 2012 1040a tax form 33   20   14. 2012 1040a tax form 29   5. 2012 1040a tax form 0   3 33. 2012 1040a tax form 33   20   14. 2012 1040a tax form 29   5. 2012 1040a tax form 0   4 16. 2012 1040a tax form 67   20   14. 2012 1040a tax form 28   5. 2012 1040a tax form 0   5     20   14. 2012 1040a tax form 29   5. 2012 1040a tax form 0   6     10   14. 2012 1040a tax form 28   5. 2012 1040a tax form 0   7         14. 2012 1040a tax form 29   5. 2012 1040a tax form 0   8         7. 2012 1040a tax form 14   5. 2012 1040a tax form 0