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