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2012 Tax Return Filing

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2012 Tax Return Filing

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