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Forma 1040

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Forma 1040

Forma 1040 7. Forma 1040   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. Forma 1040  The maximum amount you can elect to deduct for most section 179 property you placed in service in 2013 is $500,000. Forma 1040 This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2 million. Forma 1040 See Dollar Limits under Section 179 Expense Deduction , later. Forma 1040 Extension of special depreciation allowance for certain qualified property acquired after December 31, 2007. Forma 1040 . Forma 1040  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. Forma 1040 See Claiming the Special Depreciation Allowance , later. Forma 1040 Expiration of the 3- year recovery period for certain race horses. Forma 1040  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. Forma 1040 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. Forma 1040 Instead, you must spread the cost over the time you use the property and deduct part of it each year. Forma 1040 For most types of property, this is called depreciation. Forma 1040 This chapter gives information on depreciation methods that generally apply to property placed in service after 1986. Forma 1040 For information on depreciating pre-1987 property, see Publication 534, Depreciating Property Placed in Service Before 1987. Forma 1040 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. Forma 1040 It is important to keep good records for property you depreciate. Forma 1040 Do not file these records with your return. Forma 1040 Instead, you should keep them as part of the permanent records of the depreciated property. Forma 1040 They will help you verify the accuracy of the depreciation of assets placed in service in the current and previous tax years. Forma 1040 For general information on recordkeeping, see Publication 583, Starting a Business and Keeping Records. Forma 1040 For specific information on keeping records for section 179 property and listed property, see Publication 946, How To Depreciate Property. Forma 1040 Overview of Depreciation This overview discusses basic information on the following. Forma 1040 What property can be depreciated. Forma 1040 What property cannot be depreciated. Forma 1040 When depreciation begins and ends. Forma 1040 Whether MACRS can be used to figure depreciation. Forma 1040 What is the basis of your depreciable property. Forma 1040 How to treat repairs and improvements. Forma 1040 When you must file Form 4562. Forma 1040 How you can correct depreciation claimed incorrectly. Forma 1040 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. Forma 1040 You can also depreciate certain intangible property, such as copyrights, patents, and computer software. Forma 1040 To be depreciable, the property must meet all the following requirements. Forma 1040 It must be property you own. Forma 1040 It must be used in your business or income-producing activity. Forma 1040 It must have a determinable useful life. Forma 1040 It must have a useful life that extends substantially beyond the year you place it in service. Forma 1040 Property You Own To claim depreciation, you usually must be the owner of the property. Forma 1040 You are considered as owning property even if it is subject to a debt. Forma 1040 Leased property. Forma 1040   You can depreciate leased property only if you retain the incidents of ownership in the property. Forma 1040 This means you bear the burden of exhaustion of the capital investment in the property. Forma 1040 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. Forma 1040 You can, however, depreciate any capital improvements you make to the leased property. Forma 1040 See Additions and Improvements under Which Recovery Period Applies in chapter 4 of Publication 946. Forma 1040   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. Forma 1040 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. Forma 1040 Life tenant. Forma 1040   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. Forma 1040 See Certain term interests in property , later, for an exception. Forma 1040 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. Forma 1040 If you use property to produce income (investment use), the income must be taxable. Forma 1040 You cannot depreciate property that you use solely for personal activities. Forma 1040 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. Forma 1040 Example 1. Forma 1040   If you use your car for farm business, you can deduct depreciation based on its percentage of use in farming. Forma 1040 If you also use it for investment purposes, you can depreciate it based on its percentage of investment use. Forma 1040 Example 2. Forma 1040   If you use part of your home for business, you may be able to deduct depreciation on that part based on its business use. Forma 1040 For more information, see Business Use of Your Home in chapter 4. Forma 1040 Inventory. Forma 1040   You can never depreciate inventory because it is not held for use in your business. Forma 1040 Inventory is any property you hold primarily for sale to customers in the ordinary course of your business. Forma 1040 Livestock. Forma 1040   Livestock purchased for draft, breeding, or dairy purposes can be depreciated only if they are not kept in an inventory account. Forma 1040 Livestock you raise usually has no depreciable basis because the costs of raising them are deducted and not added to their basis. Forma 1040 However, see Immature livestock under When Does Depreciation Begin and End , later, for a special rule. Forma 1040 Property Having a Determinable Useful Life To be depreciable, your property must have a determinable useful life. Forma 1040 This means it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Forma 1040 Irrigation systems and water wells. Forma 1040   Irrigation systems and wells used in a trade or business can be depreciated if their useful life can be determined. Forma 1040 You can depreciate irrigation systems and wells composed of masonry, concrete, tile, metal, or wood. Forma 1040 In addition, you can depreciate costs for moving dirt to construct irrigation systems and water wells composed of these materials. Forma 1040 However, land preparation costs for center pivot irrigation systems are not depreciable. Forma 1040 Dams, ponds, and terraces. Forma 1040   In general, you cannot depreciate earthen dams, ponds, and terraces unless the structures have a determinable useful life. Forma 1040 What Property Cannot Be Depreciated? Certain property cannot be depreciated, even if the requirements explained earlier are met. Forma 1040 This includes the following. Forma 1040 Land. Forma 1040 You can never depreciate the cost of land because land does not wear out, become obsolete, or get used up. Forma 1040 The cost of land generally includes the cost of clearing, grading, planting, and landscaping. Forma 1040 Although you cannot depreciate land, you can depreciate certain costs incurred in preparing land for business use. Forma 1040 See chapter 1 of Publication 946. Forma 1040 Property placed in service and disposed of in the same year. Forma 1040 Determining when property is placed in service is explained later. Forma 1040 Equipment used to build capital improvements. Forma 1040 You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Forma 1040 Intangible property such as section 197 intangibles. Forma 1040 This property does not have a determinable useful life and generally cannot be depreciated. Forma 1040 However, see Amortization , later. Forma 1040 Special rules apply to computer software (discussed below). Forma 1040 Certain term interests (discussed below). Forma 1040 Computer software. Forma 1040   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. Forma 1040 It is readily available for purchase by the general public. Forma 1040 It is subject to a nonexclusive license. Forma 1040 It has not been substantially modified. Forma 1040   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. Forma 1040 Certain term interests in property. Forma 1040   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. Forma 1040 This rule does not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. Forma 1040 For more information, see chapter 1 of Publication 946. Forma 1040 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. Forma 1040 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. Forma 1040 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. Forma 1040 Even if you are not using the property, it is in service when it is ready and available for its specific use. Forma 1040 Example. Forma 1040 You bought a planter for use in your farm business. Forma 1040 The planter was delivered in December 2012 after harvest was over. Forma 1040 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. Forma 1040 If your planter comes unassembled in December 2012 and is put together in February 2013, it is not placed in service until 2013. Forma 1040 You begin to depreciate it in 2013. Forma 1040 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. Forma 1040 You begin to depreciate it in 2013. Forma 1040 Fruit or nut trees and vines. Forma 1040   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). Forma 1040 See chapter 6 for information about the uniform capitalization rules. Forma 1040 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). Forma 1040 Immature livestock. Forma 1040   Depreciation for livestock begins when the livestock reaches the age of maturity. Forma 1040 If you bought immature livestock for drafting purposes, depreciation begins when they can be worked. Forma 1040 If you bought immature livestock for dairy purposes, depreciation begins when they can be milked. Forma 1040 If you bought immature livestock for breeding purposes, depreciation begins when they can be bred. Forma 1040 Your basis for depreciation is your initial cost for the immature livestock. Forma 1040 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. Forma 1040 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. Forma 1040 Cost or Other Basis Fully Recovered You stop depreciating property when you have fully recovered your cost or other basis. Forma 1040 This happens when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property. Forma 1040 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. Forma 1040 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. Forma 1040 You sell or exchange the property. Forma 1040 You convert the property to personal use. Forma 1040 You abandon the property. Forma 1040 You transfer the property to a supplies or scrap account. Forma 1040 The property is destroyed. Forma 1040 For information on abandonment of property, see chapter 8. Forma 1040 For information on destroyed property, see chapter 11 and Publication 547, Casualties, Disasters, and Thefts. Forma 1040 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. Forma 1040 MACRS is explained later under Figuring Depreciation Under MACRS . Forma 1040 You cannot use MACRS to depreciate the following property. Forma 1040 Property you placed in service before 1987. Forma 1040 Use the methods discussed in Publication 534. Forma 1040 Certain property owned or used in 1986. Forma 1040 See chapter 1 of Publication 946. Forma 1040 Intangible property. Forma 1040 Films, video tapes, and recordings. Forma 1040 Certain corporate or partnership property acquired in a nontaxable transfer. Forma 1040 Property you elected to exclude from MACRS. Forma 1040 For more information, see chapter 1 of Publication 946. Forma 1040 What Is the Basis of Your Depreciable Property? To figure your depreciation deduction, you must determine the basis of your property. Forma 1040 To determine basis, you need to know the cost or other basis of your property. Forma 1040 Cost or other basis. Forma 1040   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. Forma 1040 The cost includes the amount you pay in cash, debt obligations, other property, or services. Forma 1040   There are times when you cannot use cost as basis. Forma 1040 In these situations, the fair market value (FMV) or the adjusted basis of the property may be used. Forma 1040 Adjusted basis. Forma 1040   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. Forma 1040 Basis adjustment for depreciation allowed or allowable. Forma 1040   After you place your property in service, you must reduce the basis of the property by the depreciation allowed or allowable, whichever is greater. Forma 1040 Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). Forma 1040 Depreciation allowable is depreciation you are entitled to deduct. Forma 1040   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. Forma 1040   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). Forma 1040   For more information, see chapter 6. Forma 1040 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. Forma 1040 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. Forma 1040 Treat improvements as separate depreciable property. Forma 1040 See chapter 1 of Publication 946 for more information. Forma 1040 Example. Forma 1040 You repair a small section on a corner of the roof of a barn that you rent to others. Forma 1040 You deduct the cost of the repair as a business expense. Forma 1040 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. Forma 1040 You depreciate the cost of the new roof. Forma 1040 Improvements to rented property. Forma 1040   You can depreciate permanent improvements you make to business property you rent from someone else. Forma 1040 Do You Have To File Form 4562? Use Form 4562 to claim your deduction for depreciation and amortization. Forma 1040 You must complete and attach Form 4562 to your tax return if you are claiming any of the following. Forma 1040 A section 179 expense deduction for the current year or a section 179 carryover from a prior year. Forma 1040 Depreciation for property placed in service during the current year. Forma 1040 Depreciation on any vehicle or other listed property, regardless of when it was placed in service. Forma 1040 Amortization of costs that began in the current year. Forma 1040 For more information, see the Instructions for Form 4562. Forma 1040 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. Forma 1040 You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. Forma 1040 You claimed the incorrect amount because of a mathematical error made in any year. Forma 1040 You claimed the incorrect amount because of a posting error made in any year, for example, omitting an asset from the depreciation schedule. Forma 1040 You have not adopted a method of accounting for the property placed in service by you in tax years ending after December 29, 2003. Forma 1040 You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. Forma 1040 Note. Forma 1040 You have adopted a method of accounting if you used the same incorrect method of depreciation for two or more consecutively filed returns. Forma 1040 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. Forma 1040 See the Instructions for Form 3115. Forma 1040 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. Forma 1040 This is the section 179 expense deduction. Forma 1040 You can elect the section 179 expense deduction instead of recovering the cost by taking depreciation deductions. Forma 1040 This part of the chapter explains the rules for the section 179 expense deduction. Forma 1040 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. Forma 1040 For more information, see chapter 2 of Publication 946. Forma 1040 What Property Qualifies? To qualify for the section 179 expense deduction, your property must meet all the following requirements. Forma 1040 It must be eligible property. Forma 1040 It must be acquired for business use. Forma 1040 It must have been acquired by purchase. Forma 1040 Eligible Property To qualify for the section 179 expense deduction, your property must be one of the following types of depreciable property. Forma 1040 Tangible personal property. Forma 1040 Qualified real property. Forma 1040 (Special rules apply to qualified real property that you elect to treat as qualified section 179 real property. Forma 1040 For more information, see chapter 2 of Publication 946 and section 179(f) of the Internal Revenue Code. Forma 1040 ) 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. Forma 1040 Single purpose agricultural (livestock) or horticultural structures. Forma 1040 Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum. Forma 1040 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. Forma 1040 Tangible personal property. Forma 1040   Tangible personal property is any tangible property that is not real property. Forma 1040 It includes the following property. Forma 1040 Machinery and equipment. Forma 1040 Property contained in or attached to a building (other than structural components), such as milk tanks, automatic feeders, barn cleaners, and office equipment. Forma 1040 Gasoline storage tanks and pumps at retail service stations. Forma 1040 Livestock, including horses, cattle, hogs, sheep, goats, and mink and other fur-bearing animals. Forma 1040 Facility used for the bulk storage of fungible commodities. Forma 1040   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). Forma 1040 Bulk storage means the storage of a commodity in a large mass before it is used. Forma 1040 Grain bins. Forma 1040   A grain bin is an example of a storage facility that is qualifying section 179 property. Forma 1040 It is a facility used in connection with the production of grain or livestock for the bulk storage of fungible commodities. Forma 1040 Single purpose agricultural or horticultural structures. Forma 1040   A single purpose agricultural (livestock) or horticultural structure is qualifying property for purposes of the section 179 expense deduction. Forma 1040 Agricultural structure. Forma 1040   A single purpose agricultural (livestock) structure is any building or enclosure specifically designed, constructed, and used for both the following reasons. Forma 1040 To house, raise, and feed a particular type of livestock and its produce. Forma 1040 To house the equipment, including any replacements, needed to house, raise, or feed the livestock. Forma 1040 For this purpose, livestock includes poultry. Forma 1040   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. Forma 1040 The facility must include, as an integral part of the structure or enclosure, equipment necessary to house, raise, and feed the livestock. Forma 1040 Horticultural structure. Forma 1040   A single purpose horticultural structure is either of the following. Forma 1040 A greenhouse specifically designed, constructed, and used for the commercial production of plants. Forma 1040 A structure specifically designed, constructed, and used for the commercial production of mushrooms. Forma 1040 Use of structure. Forma 1040   A structure must be used only for the purpose that qualified it. Forma 1040 For example, a hog barn will not be qualifying property if you use it to house poultry. Forma 1040 Similarly, using part of your greenhouse to sell plants will make the greenhouse nonqualifying property. Forma 1040   If a structure includes work space, the work space can be used only for the following activities. Forma 1040 Stocking, caring for, or collecting livestock or plants or their produce. Forma 1040 Maintaining the enclosure or structure. Forma 1040 Maintaining or replacing the equipment or stock enclosed or housed in the structure. Forma 1040 Property Acquired by Purchase To qualify for the section 179 expense deduction, your property must have been acquired by purchase. Forma 1040 For example, property acquired by gift or inheritance does not qualify. Forma 1040 Property acquired from a related person (that is, your spouse, ancestors, or lineal descendants) is not considered acquired by purchase. Forma 1040 Example. Forma 1040 Ken is a farmer. Forma 1040 He purchased two tractors, one from his brother and one from his father. Forma 1040 He placed both tractors in service in the same year he bought them. Forma 1040 The tractor purchased from his father does not qualify for the section 179 expense deduction because he is a related person (as defined above). Forma 1040 The tractor purchased from his brother does qualify for the deduction because Ken is not a related person (as defined above). Forma 1040 What Property Does Not Qualify? Land and improvements. Forma 1040   Land and land improvements, do not qualify as section 179 property. Forma 1040 Land improvements include nonagricultural fences, swimming pools, paved parking areas, wharves, docks, bridges, and fences. Forma 1040 However, agricultural fences do qualify as section 179 property. Forma 1040 Similarly, field drainage tile also qualifies as section 179 property. Forma 1040 Excepted property. Forma 1040   Even if the requirements explained in the preceding discussions are met, farmers cannot elect the section 179 expense deduction for the following property. Forma 1040 Certain property you lease to others (if you are a noncorporate lessor). Forma 1040 Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging. Forma 1040 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. Forma 1040 Property used by governmental units or foreign persons or entities (except property used under a lease with a term of less than 6 months). Forma 1040 How Much Can You Deduct? Your section 179 expense deduction is generally the cost of the qualifying property. Forma 1040 However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. Forma 1040 These limits apply to each taxpayer, not to each business. Forma 1040 However, see Married individuals under Dollar Limits , later. Forma 1040 See also the special rules for applying the limits for partnerships and S corporations under Partnerships and S Corporations , later. Forma 1040 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. Forma 1040 Use Part I of Form 4562 to figure your section 179 expense deduction. Forma 1040 Partial business use. Forma 1040   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. Forma 1040 If you used the property more than 50% for business, multiply the cost of the property by the percentage of business use. Forma 1040 Use the resulting business cost to figure your section 179 expense deduction. Forma 1040 Trade-in of other property. Forma 1040   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. Forma 1040 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. Forma 1040 It does not include the adjusted basis of the old tractor you trade for the new tractor. Forma 1040 Example. Forma 1040 J-Bar Farms traded two cultivators having a total adjusted basis of $6,800 for a new cultivator costing $13,200. Forma 1040 They received an $8,000 trade-in allowance for the old cultivators and paid $5,200 cash for the new cultivator. Forma 1040 J-Bar also traded a used pickup truck with an adjusted basis of $8,000 for a new pickup truck costing $35,000. Forma 1040 They received a $5,000 trade-in allowance and paid $30,000 cash for the new pickup truck. Forma 1040 Only the cash paid by J-Bar qualifies for the section 179 expense deduction. Forma 1040 J-Bar's business costs that qualify for a section 179 expense deduction are $35,200 ($5,200 + $30,000). Forma 1040 Dollar Limits The total amount you can elect to deduct under section 179 for most property placed in service in 2013 is $500,000. Forma 1040 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. Forma 1040 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. Forma 1040 You do not have to claim the full $500,000. Forma 1040 For specific information on the section 179 dollar limits, see chapter 2 of Publication 946. Forma 1040 Reduced dollar limit for cost exceeding $2 million. Forma 1040   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. Forma 1040 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. Forma 1040 Example. Forma 1040 This year, James Smith placed in service machinery costing $2,050,000. Forma 1040 Because this cost is $50,000 more than $2 million, he must reduce his dollar limit to $450,000 ($500,000 − $50,000). Forma 1040 Limits for sport utility vehicles. Forma 1040   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. Forma 1040 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. Forma 1040   For more information, see chapter 2 of Publication 946. Forma 1040 Limits for passenger automobiles. Forma 1040   For a passenger automobile that is placed in service in 2013, the total section 179 and depreciation deduction is limited. Forma 1040 See Do the Passenger Automobile Limits Apply , later. Forma 1040 Married individuals. Forma 1040   If you are married, how you figure your section 179 expense deduction depends on whether you file jointly or separately. Forma 1040 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. Forma 1040 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. Forma 1040 You must allocate the dollar limit (after any reduction) equally between you, unless you both elect a different allocation. Forma 1040 If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you. Forma 1040 Joint return after separate returns. Forma 1040   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. Forma 1040 The dollar limit (after reduction for any cost of section 179 property over $2 million). Forma 1040 The total cost of section 179 property you and your spouse elected to expense on your separate returns. Forma 1040 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. Forma 1040 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. Forma 1040 Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. Forma 1040 See Carryover of disallowed deduction , later. Forma 1040 Taxable income. Forma 1040   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. Forma 1040 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. Forma 1040 Section 1231 gains (or losses) as discussed in chapter 9. Forma 1040 Interest from working capital of your trade or business. Forma 1040 Wages, salaries, tips, or other pay earned by you (or your spouse if you file a joint return) as an employee of any employer. Forma 1040   In addition, figure taxable income without regard to any of the following. Forma 1040 The section 179 expense deduction. Forma 1040 The self-employment tax deduction. Forma 1040 Any net operating loss carryback or carryforward. Forma 1040 Any unreimbursed employee business expenses. Forma 1040 Two different taxable income limits. Forma 1040   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). Forma 1040 You may have to figure the limit for this other deduction taking into account the section 179 expense deduction. Forma 1040 If so, complete the following steps. Forma 1040 Step Action 1 Figure taxable income without the section 179 expense deduction or the other deduction. Forma 1040 2 Figure a hypothetical section 179 expense deduction using the taxable income figured in Step 1. Forma 1040 3 Subtract the hypothetical section 179 expense deduction figured in Step 2 from the taxable income figured in Step 1. Forma 1040 4 Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income. Forma 1040 5 Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in  Step 1. Forma 1040 6 Figure your actual section 179 expense deduction using the taxable income figured in Step 5. Forma 1040 7 Subtract your actual section 179 expense deduction figured in Step 6 from the taxable income figured in Step 1. Forma 1040 8 Figure your actual other deduction using the taxable income figured in Step 7. Forma 1040 Example. Forma 1040 On February 1, 2013, the XYZ farm corporation purchased and placed in service qualifying section 179 property that cost $500,000. Forma 1040 It elects to expense the entire $500,000 cost under section 179. Forma 1040 In June, the corporation gave a charitable contribution of $10,000. Forma 1040 A corporation's limit on charitable contributions is figured after subtracting any section 179 expense deduction. Forma 1040 The business income limit for the section 179 expense deduction is figured after subtracting any allowable charitable contributions. Forma 1040 XYZ's taxable income figured without the section 179 expense deduction or the deduction for charitable contributions is $520,000. Forma 1040 XYZ figures its section 179 expense deduction and its deduction for charitable contributions as follows. Forma 1040 Step 1. Forma 1040 Taxable income figured without either deduction is $520,000. Forma 1040 Step 2. Forma 1040 Using $520,000 as taxable income, XYZ's hypothetical section 179 expense deduction is $500,000. Forma 1040 Step 3. Forma 1040 $20,000 ($520,000 − $500,000). Forma 1040 Step 4. Forma 1040 Using $20,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable income) is $2,000. Forma 1040 Step 5. Forma 1040 $518,000 ($520,000 − $2,000). Forma 1040 Step 6. Forma 1040 Using $518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 expense deduction. Forma 1040 Because the taxable income is at least $500,000, XYZ can take a $500,000 section 179 expense deduction. Forma 1040 Step 7. Forma 1040 $20,000 ($520,000 − $500,000). Forma 1040 Step 8. Forma 1040 Using $20,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable income) is $2,000. Forma 1040 Carryover of disallowed deduction. Forma 1040   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. Forma 1040   The amount you carry over is used in determining your section 179 expense deduction in the next year. Forma 1040 However, it is subject to the limits in that year. Forma 1040 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. Forma 1040 Your selections must be shown in your books and records. Forma 1040 Example. Forma 1040 Last year, Joyce Jones placed in service a machine that cost $8,000 and elected to deduct all $8,000 under section 179. Forma 1040 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. Forma 1040 Her section 179 expense deduction was limited to $6,000. Forma 1040 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. Forma 1040 This year, Joyce placed another machine in service that cost $9,000. Forma 1040 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. Forma 1040 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. Forma 1040 She can carry over the balance of $1,000 to next year. Forma 1040 Partnerships and S Corporations The section 179 expense deduction limits apply both to the partnership or S corporation and to each partner or shareholder. Forma 1040 The partnership or S corporation determines its section 179 expense deduction subject to the limits. Forma 1040 It then allocates the deduction among its partners or shareholders. Forma 1040 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. Forma 1040 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. Forma 1040 After you apply the dollar limit, you apply the business income limit to any remaining section 179 costs. Forma 1040 For more information, see chapter 2 of Publication 946. Forma 1040 Example. Forma 1040 In 2013, Partnership P placed in service section 179 property with a total cost of $2,160,000. Forma 1040 P must reduce its dollar limit by $160,000 ($2,160,000 − $2,000,000). Forma 1040 Its maximum section 179 expense deduction is $340,000 ($500,000 − $160,000), and it elects to expense that amount. Forma 1040 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. Forma 1040 P allocates $100,000 of its section 179 expense deduction and $110,000 of its taxable income to John, one of its partners. Forma 1040 John also conducts a business as a sole proprietor and in 2013, placed in service in that business, section 179 property costing $28,000. Forma 1040 John's taxable income from that business was $10,000. Forma 1040 In addition to the $100,000 allocated from P, he elects to expense the $28,000 of his sole proprietorship's section 179 costs. Forma 1040 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). Forma 1040 He carries over $8,000 ($128,000 − $120,000) of the elected section 179 costs to 2014. Forma 1040 How Do You Elect the Deduction? You elect to take the section 179 expense deduction by completing Part I of Form 4562. Forma 1040 If you elect the deduction for listed property, complete Part V of  Form 4562 before completing Part I. Forma 1040   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. Forma 1040 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. Forma 1040 The amended return must also include any resulting adjustments to taxable income. Forma 1040 Revoking an election. Forma 1040   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. Forma 1040 The amended return must be filed within the time prescribed by law. Forma 1040 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. Forma 1040 ) Once made, the revocation is irrevocable. Forma 1040 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. Forma 1040 In the year the business use drops to 50% or less, you include the recapture amount as ordinary income. Forma 1040 You also increase the basis of the property by the recapture amount. Forma 1040 Recovery periods for property are discussed later. Forma 1040 If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. Forma 1040 Instead, use the rules for recapturing depreciation explained in  chapter 9 under Section 1245 Property. Forma 1040   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. Forma 1040 Instead, use the rules for recapturing depreciation explained in chapter 5 of Publication 946 under Recapture of Excess Depreciation. Forma 1040 Figuring the recapture amount. Forma 1040   To figure the amount to recapture, take the following steps. Forma 1040 Figure the allowable depreciation for the section 179 expense deduction you claimed. Forma 1040 Begin with the year you placed the property in service and include the year of recapture. Forma 1040 Subtract the depreciation figured in (1) from the section 179 expense deduction you actually claimed. Forma 1040 The result is the amount you must recapture. Forma 1040 Example. Forma 1040 In January 2011, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. Forma 1040 The property is not listed property. Forma 1040 He elected a $5,000 section 179 expense deduction for the property and also elected not to claim a special depreciation allowance. Forma 1040 He used the property only for business in 2011 and 2012. Forma 1040 During 2013, he used the property 40% for business and 60% for personal use. Forma 1040 He figures his recapture amount as follows. Forma 1040 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. Forma 1040 Where to report recapture. Forma 1040   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). Forma 1040 Recapture for qualified section 179 GO Zone property. Forma 1040   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. Forma 1040 ” Claiming the Special Depreciation Allowance For qualified property (defined below) placed in service in 2013, you can take an additional 50% special depreciation allowance. Forma 1040 The allowance is an additional deduction you can take after any section 179 expense deduction and before you figure regular depreciation under MACRS. Forma 1040 Figure the special depreciation allowance by multiplying the depreciable basis of the qualified property by 50%. Forma 1040 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. Forma 1040 Certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Forma 1040   Certain qualified property (defined below) acquired after December 31, 2007, and before January 1, 2014, is eligible for a 50% special depreciation allowance. Forma 1040   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. Forma 1040 Water utility property. Forma 1040 Off-the-shelf computer software. Forma 1040 Qualified leasehold improvement property. Forma 1040   Qualified property must also meet all of the following tests: You must have acquired qualified property by purchase after December 31, 2007. Forma 1040 If a binding contract to acquire the property existed before January 1, 2008, the property does not qualify. Forma 1040 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). Forma 1040 The original use of the property must begin with you after December 31, 2007. Forma 1040 For more information, see chapter 3 of Publication 946. Forma 1040 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. Forma 1040 To make the election, attach a statement to your return indicating the class of property for which you are making the election. Forma 1040 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. Forma 1040 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). Forma 1040 Attach the election statement to the amended return. Forma 1040 On the amended return, write “Filed pursuant to section 301. Forma 1040 9100-2. Forma 1040 ” Once made, the election may not be revoked without IRS consent. Forma 1040 If you elect not to have the special depreciation allowance apply, the property may be subject to an alternative minimum tax adjustment for depreciation. Forma 1040 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. Forma 1040 For more information, see chapter 3 of Publication 946. Forma 1040 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. Forma 1040 MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Forma 1040 Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. Forma 1040 To be sure you can use MACRS to figure depreciation for your property, see Can You Use MACRS To Depreciate Your Property, earlier. Forma 1040 This part explains how to determine which MACRS depreciation system applies to your property. Forma 1040 It also discusses the following information that you need to know before you can figure depreciation under MACRS. Forma 1040 Property's recovery class. Forma 1040 Placed-in-service date. Forma 1040 Basis for depreciation. Forma 1040 Recovery period. Forma 1040 Convention. Forma 1040 Depreciation method. Forma 1040 Finally, this part explains how to use this information to figure your depreciation deduction. Forma 1040 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. Forma 1040 You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Forma 1040 Required use of ADS. Forma 1040   You must use ADS for the following property. Forma 1040 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. Forma 1040 Listed property used 50% or less in a qualified business use. Forma 1040 See Additional Rules for Listed Property , later. Forma 1040 Any tax-exempt use property. Forma 1040 Any tax-exempt bond-financed property. Forma 1040 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. Forma 1040 Any tangible property used predominantly outside the United States during the year. Forma 1040 If you are required to use ADS to depreciate your property, you cannot claim the special depreciation allowance. Forma 1040 Electing ADS. Forma 1040   Although your property may qualify for GDS, you can elect to use ADS. Forma 1040 The election generally must cover all property in the same property class you placed in service during the year. Forma 1040 However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. Forma 1040 Once you make this election, you can never revoke it. Forma 1040   You make the election by completing line 20 in Part III of Form 4562. Forma 1040 Which Property Class Applies Under GDS? The following is a list of the nine property classes under GDS. Forma 1040 3-year property. Forma 1040 5-year property. Forma 1040 7-year property. Forma 1040 10-year property. Forma 1040 15-year property. Forma 1040 20-year property. Forma 1040 25-year property. Forma 1040 Residential rental property. Forma 1040 Nonresidential real property. Forma 1040 See Which Property Class Applies Under GDS in chapter 4 of Publication 946 for examples of the types of property included in each class. Forma 1040 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. Forma 1040 The placed-in-service date for your property is the date the property is ready and available for a specific use. Forma 1040 It is therefore not necessarily the date it is first used. Forma 1040 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. Forma 1040 See Placed in Service under When Does Depreciation Begin and End , earlier, for examples illustrating when property is placed in service. Forma 1040 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. Forma 1040 Reduce that amount by any credits and deductions allocable to the property. Forma 1040 The following are examples of some of the credits and deductions that reduce basis. Forma 1040 Any deduction for section 179 property. Forma 1040 Any deduction for removal of barriers to the disabled and the elderly. Forma 1040 Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. Forma 1040 Any special depreciation allowance. Forma 1040 Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. Forma 1040 For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property , earlier. Forma 1040 Also, see chapter 6. Forma 1040 For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. Forma 1040 Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. Forma 1040 It is determined based on the depreciation system (GDS or ADS) used. Forma 1040 See Table 7-1 for recovery periods under both GDS and ADS for some commonly used assets. Forma 1040 For a complete list of recovery periods, see the Table of Class Lives and Recovery Periods in Appendix B of Publication 946. Forma 1040 House trailers for farm laborers. Forma 1040   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). Forma 1040 A 7-year recovery period under GDS. Forma 1040 A 10-year recovery period under ADS. Forma 1040   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. Forma 1040 A 20-year recovery period under GDS. Forma 1040 A 25-year recovery period under ADS. Forma 1040 Water wells. Forma 1040   Water wells used to provide water for raising poultry and livestock are land improvements. Forma 1040 If they are depreciable, use one of the following recovery periods. Forma 1040 A 15-year recovery period under GDS. Forma 1040 A 20-year recovery period under ADS. Forma 1040   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 . Forma 1040 Table 7-1. Forma 1040 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. Forma 1040 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. Forma 1040 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. Forma 1040 2 Not including single purpose agricultural or horticultural structures. Forma 1040 3 Used by logging and sawmill operators for cutting of timber. Forma 1040 4 For property placed in service after May 12, 1993; for property placed in service before May 13, 1993,  the recovery period is 31. Forma 1040 5 years. Forma 1040 Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. Forma 1040 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. Forma 1040 Use one of the following conventions. Forma 1040 The half-year convention. Forma 1040 The mid-month convention. Forma 1040 The mid-quarter convention. Forma 1040 For a detailed explanation of each convention, see Which Convention Applies in chapter 4 of Publication 946. Forma 1040 Also, see the Instructions for Form 4562. Forma 1040 Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. Forma 1040 The 200% declining balance method over a GDS recovery period. Forma 1040 The 150% declining balance method over a GDS recovery period. Forma 1040 The straight line method over a GDS recovery period. Forma 1040 The straight line method over an ADS recovery period. Forma 1040 Depreciation Table. Forma 1040   The following table lists the types of property you can depreciate under each method. Forma 1040 The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. Forma 1040 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. Forma 1040   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. Forma 1040 The straight line method over a GDS recovery period. Forma 1040 The straight line method over an ADS recovery period. Forma 1040 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. Forma 1040 If you made this election, continue to use the same method and recovery period for that property. Forma 1040 Real property. Forma 1040   You can depreciate real property using the straight line method under either GDS or ADS. Forma 1040 Switching to straight line. Forma 1040   If you use a declining balance method, you switch to the straight line method in the year it provides an equal or greater deduction. Forma 1040 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. Forma 1040 The tables have the switch to the straight line method built into their rates. Forma 1040 Fruit or nut trees and vines. Forma 1040   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a 10-year recovery period. Forma 1040 ADS required for some farmers. Forma 1040   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. Forma 1040 See chapter 6 for a discussion of the application of the uniform capitalization rules to farm property. Forma 1040 Electing a different method. Forma 1040   As shown in the Depreciation Table , you can elect a different method for depreciation for certain types of property. Forma 1040 You must make the election by the due date of the return (including extensions) for the year you placed the property in service. Forma 1040 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). Forma 1040 Attach the election to the amended return and write “Filed pursuant to section 301. Forma 1040 9100-2” on the election statement. Forma 1040 File the amended return at the same address you filed the original return. Forma 1040 Once you make the election, you cannot change it. Forma 1040    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. Forma 1040 However, you can make the election on a property-by-property basis for residential rental and nonresidential real property. Forma 1040 Straight line election. Forma 1040   Instead of using the declining balance method, you can elect to use the straight line method over the GDS recovery period. Forma 1040 Make the election by entering “S/L” under column (f) in Part III of Form 4562. Forma 1040 ADS election. Forma 1040   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. Forma 1040 ADS uses the straight line method of depreciation over the ADS recovery periods, which are generally longer than the GDS recovery periods. Forma 1040 The ADS recovery periods for many assets used in the business of farming are listed in Table 7–1. Forma 1040 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. Forma 1040 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. Forma 1040 Then you are ready to figure your depreciation deduction. Forma 1040 You can figure it in one of two ways. Forma 1040 You can use the percentage tables provided by the IRS. Forma 1040 You can figure your own deduction without using the tables. Forma 1040 Figuring your own MACRS deduction will generally result in a slightly different amount than using the tables. Forma 1040 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. Forma 1040 These percentage tables are in Appendix A of Publication 946. Forma 1040 Rules for using the tables. Forma 1040   The following rules cover the use of the percentage tables. Forma 1040 You must apply the rates in the percentage tables to your property's unadjusted basis. Forma 1040 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. Forma 1040 You cannot use the percentage tables for a short tax year. Forma 1040 See chapter 4 of Publication 946 for information on how to figure the deduction for a short tax year. Forma 1040 You generally must continue to use them for the entire recovery period of the property. Forma 1040 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. Forma 1040 Basis adjustment due to casualty loss. Forma 1040   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. Forma 1040 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. Forma 1040 See Figuring the Deduction Without Using the Tables in chapter 4 of Publication 946. Forma 1040 Figuring depreciation using the 150% DB method and half-year convention. Forma 1040    Table 7-2 has the percentages for 3-, 5-, 7-, and 20-year property. Forma 1040 The percentages are based on the 150% declining balance method with a change to the straight line method. Forma 1040 This table covers only the half-year convention and the first 8 years for 20-year property. Forma 1040 See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. Forma 1040   The following examples show how to figure depreciation under MACRS using the percentages in Table 7-2 . Forma 1040 Example 1. Forma 1040 During the year, you bought an item of 7-year property for $10,000 and placed it in service. Forma 1040 You do not elect a section 179 expense deduction for this property. Forma 1040 In addition, the property is not qualified property for purposes of the special depreciation allowance. Forma 1040 The unadjusted basis of the property is $10,000. Forma 1040 You use the percentages in Table 7-2 to figure your deduction. Forma 1040 Since this is 7-year property, you multiply $10,000 by 10. Forma 1040 71% to get this year's depreciation of $1,071. Forma 1040 For next year, your depreciation will be $1,913 ($10,000 × 19. Forma 1040 13%). Forma 1040 Example 2. Forma 1040 You had a barn constructed on your farm at a cost of $20,000. Forma 1040 You placed the barn in service this year. Forma 1040 You elect not to claim the special depreciation allowance. Forma 1040 The barn is 20-year property and you use the table percentages to figure your deduction. Forma 1040 You figure this year's depreciation by multiplying $20,000 (unadjusted basis) by 3. Forma 1040 75% to get $750. Forma 1040 For next year, your depreciation will be $1,443. Forma 1040 80 ($20,000 × 7. Forma 1040 219%). Forma 1040 Table 7-2. Forma 1040 150% Declining Balance Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 25. Forma 1040 0 % 15. Forma 1040 00 % 10. Forma 1040 71 % 3. Forma 1040 750 % 2 37. Forma 1040 5   25. Forma 1040 50   19. Forma 1040 13   7. Forma 1040 219   3 25. Forma 1040 0   17. Forma 1040 85   15. Forma 1040 03   6. Forma 1040 677   4 12. Forma 1040 5   16. Forma 1040 66   12. Forma 1040 25   6. Forma 1040 177   5     16. Forma 1040 66   12. Forma 1040 25   5. Forma 1040 713   6     8. Forma 1040 33   12. Forma 1040 25   5. Forma 1040 285   7         12. Forma 1040 25   4. Forma 1040 888   8         6. Forma 1040 13   4. Forma 1040 522   Figuring depreciation using the straight line method and half-year convention. Forma 1040   The following table has the straight line percentages for 3-, 5-, 7-, and 20-year property using the half-year convention. Forma 1040 The table covers only the first 8 years for 20-year property. Forma 1040 See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. Forma 1040 Table 7-3. Forma 1040 Straight Line Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 16. Forma 1040 67 % 10 % 7. Forma 1040 14 % 2. Forma 1040 5 % 2 33. Forma 1040 33   20   14. Forma 1040 29   5. Forma 1040 0   3 33. Forma 1040 33   20   14. Forma 1040 29   5. Forma 1040 0   4 16. Forma 1040 67   20   14. Forma 1040 28   5. Forma 1040 0   5     20   14. Forma 1040 29   5. Forma 1040 0   6     10   14. Forma 1040 28   5. Forma 1040 0   7         14. Forma 1040 29   5. Forma 1040 0   8         7. Forma 1040 14   5. Forma 1040 0    
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The Forma 1040

Forma 1040 Publication 908 - Introductory Material Table of Contents Future Developments What's New Reminders Introduction Useful Items - You may want to see: Future Developments For the latest information about developments related to Publication 908, such as legislation enacted after it was published, go to www. Forma 1040 irs. Forma 1040 gov/pub908. Forma 1040 What's New Expiration of provision for catch-up contributions for IRC section 401(k) participants whose employer filed bankruptcy. Forma 1040  The Pension Protection Act of 2006, P. Forma 1040 L. Forma 1040 109-280, previously allowed additional contributions of up to $7,000 in a traditional or Roth IRA for employees who participated in an IRC section 401(k) plan of an employer that filed bankruptcy in an earlier year. Forma 1040 This provision was not extended for tax years beginning on or after January 1, 2010. Forma 1040 Automatic 6-month extension of time to file a bankruptcy estate return now available for individuals in Chapter 7 or 11 bankruptcy. Forma 1040  Beginning June 24, 2011, the IRS clarified in T. Forma 1040 D. Forma 1040 9531 that there is available an automatic 6-month extension of time to file a bankruptcy estate income tax return for individuals in Chapter 7 or Chapter 11 bankruptcy proceedings upon filing a required application. Forma 1040 The previous extension of time to file a bankruptcy estate return was 5 months. Forma 1040 Reminders The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005. Forma 1040  The changes to the U. Forma 1040 S. Forma 1040 Bankruptcy Code enacted by BAPCA are incorporated throughout this publication. Forma 1040 Debtors filing under chapters 7, 11, 12, and 13 of the Bankruptcy Code must file all applicable federal, state, and local tax returns that become due after a case commences. Forma 1040 Failure to file tax returns timely or obtain an extension can cause a bankruptcy case to be converted to another chapter or dismissed. Forma 1040 In chapter 13 cases, the debtor must file all required tax returns for tax periods ending within 4 years of the filing of the bankruptcy petition. Forma 1040 Photographs of missing children. Forma 1040  The IRS is a proud partner with the National Center for Missing and Exploited Children. Forma 1040 Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Forma 1040 You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Forma 1040 Introduction This publication is not intended to cover bankruptcy law in general, or to provide detailed discussions of the tax rules for the more complex corporate bankruptcy reorganizations or other highly technical transactions. Forma 1040 Additionally, this publication is not updated on an annual basis and may not reflect recent developments in bankruptcy or tax law. Forma 1040 If you need more guidance on the bankruptcy or tax laws applicable to your case, you should seek professional advice. Forma 1040 This publication explains the basic federal income tax aspects of bankruptcy. Forma 1040 A fundamental goal of the bankruptcy laws enacted by Congress is to give an honest debtor a financial “fresh start”. Forma 1040 This is accomplished through the bankruptcy discharge, which is a permanent injunction (court ordered prohibition) against the collection of certain debts as a personal liability of the debtor. Forma 1040 Bankruptcy proceedings begin with the filing of either a voluntary petition in the United States Bankruptcy Court, or in certain cases an involuntary petition filed by creditors. Forma 1040 This filing creates the bankruptcy estate. Forma 1040 The bankruptcy estate generally consists of all of the assets the individual or entity owns on the date the bankruptcy petition was filed. Forma 1040 The bankruptcy estate is treated as a separate taxable entity for individuals filing bankruptcy petitions under chapter 7 or 11 of the Bankruptcy Code, discussed later. Forma 1040 The tax obligations of taxable bankruptcy estates are discussed later under Individuals in Chapter 7 or 11. Forma 1040 Generally, when a debt owed to another person or entity is canceled, the amount canceled or forgiven is considered income that is taxed to the person owing the debt. Forma 1040 If a debt is canceled under a bankruptcy proceeding, the amount canceled is not income. Forma 1040 However, the canceled debt reduces other tax benefits to which the debtor would otherwise be entitled. Forma 1040 See Debt Cancellation, later. Forma 1040 Useful Items - You may want to see: Publication 225 Farmer's Tax Guide 525 Taxable and Nontaxable Income 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 538 Accounting Periods and Methods 544 Sales and Other Dispositions of Assets 551 Basis of Assets 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Form (and Instructions) SS-4 Application for Employer Identification Number, and separate instructions 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) 1040 U. Forma 1040 S. Forma 1040 Individual Income Tax Return, and separate instructions Schedule SE (Form 1040) Self-Employment Tax 1040X Amended U. Forma 1040 S. Forma 1040 Individual Income Tax Return, and separate instructions 1041 U. Forma 1040 S. Forma 1040 Income Tax Return for Estates and Trusts, and separate instructions 1041-ES Estimated Income Tax for Estates and Trusts 1041-V Payment Voucher 4506 Request for Copy of Tax Return 4506-T Request for Transcript of Tax Return 4852 Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Forma 1040 4868 Application for Automatic Extension of Time To File U. Forma 1040 S. Forma 1040 Individual Income Tax Return 7004 Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns See How To Get Tax Help, later, for information about getting these publications and forms. Forma 1040 Prev  Up  Next   Home   More Online Publications