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Income Tax Return 1040ez

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Income Tax Return 1040ez

Income tax return 1040ez Publication 925 - Main Content Table of Contents Passive Activity LimitsWho Must Use These Rules? Passive Activity Loss Passive Activity Credit Publicly Traded Partnership Excess Farm Loss Passive Activities Activities That Are Not Passive Activities Passive Activity Income and Deductions Grouping Your Activities Recharacterization of Passive Income Dispositions How To Report Your Passive Activity Loss Comprehensive ExampleGeneral Information At-Risk LimitsWho Is Affected? Activities Covered by the At-Risk Rules At-Risk Amounts Amounts Not At Risk Reductions of Amounts At Risk Recapture Rule How To Get Tax HelpLow Income Taxpayer Clinics Passive Activity Limits Who Must Use These Rules? The passive activity rules apply to: Individuals, Estates, Trusts (other than grantor trusts), Personal service corporations, and Closely held corporations. Income tax return 1040ez Even though the rules do not apply to grantor trusts, partnerships, and S corporations directly, they do apply to the owners of these entities. Income tax return 1040ez For information about personal service corporations and closely held corporations, including definitions and how the passive activity rules apply to these corporations, see Form 8810 and its instructions. Income tax return 1040ez Before applying the passive activity limits, you must first determine the amount of the deductions disallowed under the basis, excess farm loss, or at-risk rules. Income tax return 1040ez See Passive Activity Deductions, later. Income tax return 1040ez Passive Activity Loss Generally, the passive activity loss for the tax year is not allowed. Income tax return 1040ez However, there is a special allowance under which some or all of your passive activity loss may be allowed. Income tax return 1040ez See Special $25,000 allowance , later. Income tax return 1040ez Definition of passive activity loss. Income tax return 1040ez    Generally, your passive activity loss for the tax year is the excess of your passive activity deductions over your passive activity gross income. Income tax return 1040ez See Passive Activity Income and Deductions , later. Income tax return 1040ez   For a closely held corporation, the passive activity loss is the excess of passive activity deductions over the sum of passive activity gross income and net active income. Income tax return 1040ez For details on net active income, see the Instructions for Form 8810. Income tax return 1040ez For the definition of passive activity gross income, see Passive Activity Income , later. Income tax return 1040ez For the definition of passive activity deductions, see Passive Activity Deductions , later. Income tax return 1040ez Identification of Disallowed Passive Activity Deductions If all or a part of your passive activity loss is disallowed for the tax year, you may need to allocate the disallowed passive activity loss among different passive activities and among different deductions within a passive activity. Income tax return 1040ez Allocation of disallowed passive activity loss among activities. Income tax return 1040ez   If all or any part of your passive activity loss is disallowed for the tax year, a ratable portion of the loss (if any) from each of your passive activities is disallowed. Income tax return 1040ez The ratable portion of a loss from an activity is computed by multiplying the passive activity loss that is disallowed for the tax year by the fraction obtained by dividing: The loss from the activity for the tax year; by The sum of the losses for the tax year from all activities having losses for the tax year. Income tax return 1040ez Use Worksheet 5 of Form 8582 to figure the ratable portion of the loss from each activity that is disallowed. Income tax return 1040ez Loss from an activity. Income tax return 1040ez   The term “loss from an activity” means: The amount by which the passive activity deductions (defined later) from the activity for the tax year exceed the passive activity gross income (defined later) from the activity for the tax year; reduced by Any part of such amount that is allowed under the Special $25,000 Allowance , later. Income tax return 1040ez   If your passive activity gross income from significant participation passive activities (defined later) for the tax year is more than your passive activity deductions from those activities for the tax year, those activities shall be treated, solely for purposes of figuring your loss from the activity, as a single activity that does not have a loss for such taxable year. Income tax return 1040ez See Significant Participation Passive Activities , later. Income tax return 1040ez Example. Income tax return 1040ez John Pine holds interests in three passive activities, A, B, and C. Income tax return 1040ez The gross income and deductions from these activities for the taxable year are as follows:   A B C Total Gross income $7,000 $4,000 $12,000 $23,000 Deductions (16,000) (20,000) (8,000) (44,000)           Net income (loss) ($9,000) ($16,000) $4,000 ($21,000)   John Pine’s $21,000 passive activity loss for the taxable year is disallowed. Income tax return 1040ez Therefore, a ratable portion of the losses from activities A and B is disallowed. Income tax return 1040ez He figures the disallowed portion of each loss as follows: A: $21,000 x $9,000/$25,000 $7,560 B: $21,000 x $16,000/$25,000 13,440     Total $21,000 Allocation within loss activities. Income tax return 1040ez   If all or any part of your loss from an activity is disallowed under Allocation of disallowed passive activity loss among activities for the tax year, a ratable portion of each of your passive activity deductions (defined later), other than an excluded deduction (defined below) from such activity is disallowed. Income tax return 1040ez The ratable portion of a passive activity deduction is the amount of the disallowed portion of the loss from the activity for the tax year multiplied by the fraction obtained by dividing: The amount of such deduction; by The sum of all of your passive activity deductions (other than excluded deductions) from that activity from the tax year. Income tax return 1040ez Excluded deductions. Income tax return 1040ez    “Excluded deduction” means any passive activity deduction that is taken into account in computing your net income from an item of property for a taxable year in which an amount of the taxpayer's gross income from such item of property is treated as not from a passive activity. Income tax return 1040ez See Recharacterization of Passive Income , later. Income tax return 1040ez Separately identified deductions. Income tax return 1040ez   In identifying the deductions from an activity that are disallowed, you do not need to account separately for a deduction unless such deduction may, if separately taken into account, result in an income tax liability for any tax year different from that which would result were such deduction not taken into account separately. Income tax return 1040ez   Use Form 8582, Worksheet 7, for any activity if you have passive activity deductions for that activity that must be separately identified. Income tax return 1040ez   Deductions that must be accounted for separately include (but are not limited to) the following deductions. Income tax return 1040ez Deductions that arise in a rental real estate activity in tax years in which you actively participate in such activity. Income tax return 1040ez See Active participation , later. Income tax return 1040ez Deductions that arise in a rental real estate activity in tax years in which you do not actively participate in such activity. Income tax return 1040ez See Active participation , later. Income tax return 1040ez Losses from sales or exchanges of capital assets. Income tax return 1040ez Section 1231 losses. Income tax return 1040ez See Section 1231 Gains and Losses in Publication 544, Sales and Other Disposition of Assets, for more information. Income tax return 1040ez Carryover of Disallowed Deductions In the case of an activity with respect to which any deductions or credits are disallowed for a taxable year (the loss activity), the disallowed deductions are allocated among your activities for the next tax year in a manner that reasonably reflects the extent to which each activity continues the loss activity. Income tax return 1040ez The disallowed deductions or credits allocated to an activity under the preceding sentence are treated as deductions or credits from the activity for the next tax year. Income tax return 1040ez For more information, see Regulations section 1. Income tax return 1040ez 469-1(f)(4). Income tax return 1040ez Passive Activity Credit Generally, the passive activity credit for the tax year is disallowed. Income tax return 1040ez The passive activity credit is the amount by which the sum of all your credits subject to the passive activity rules exceed your regular tax liability allocable to all passive activities for the tax year. Income tax return 1040ez Credits that are included in figuring the general business credit are subject to the passive activity rules. Income tax return 1040ez See the Instructions for Form 8582-CR for more information. Income tax return 1040ez Publicly Traded Partnership You must apply the rules in this part separately to your income or loss from a passive activity held through a publicly traded partnership (PTP). Income tax return 1040ez You also must apply the limit on passive activity credits separately to your credits from a passive activity held through a PTP. Income tax return 1040ez You can offset deductions from passive activities of a PTP only against income or gain from passive activities of the same PTP. Income tax return 1040ez Likewise, you can offset credits from passive activities of a PTP only against the tax on the net passive income from the same PTP. Income tax return 1040ez This separate treatment rule also applies to a regulated investment company holding an interest in a PTP for the items attributable to that interest. Income tax return 1040ez For more information on how to apply the passive activity loss rules to PTPs, and on how to apply the limit on passive activity credits to PTPs, see Publicly Traded Partnerships (PTPs) in the Instructions for Forms 8582 and 8582-CR, respectively. Income tax return 1040ez Excess Farm Loss If you receive an applicable subsidy for any tax year and you have an excess farm loss for the tax year, special rules apply. Income tax return 1040ez These rules do not apply to C corporations. Income tax return 1040ez For information, see the Instructions for Schedule F (Form 1040), Profit or Loss From Farming. Income tax return 1040ez Passive Activities There are two kinds of passive activities. Income tax return 1040ez Trade or business activities in which you do not materially participate during the year. Income tax return 1040ez Rental activities, even if you do materially participate in them, unless you are a real estate professional. Income tax return 1040ez Material participation in a trade or business is discussed later, under Activities That Are Not Passive Activities . Income tax return 1040ez Treatment of former passive activities. Income tax return 1040ez   A former passive activity is an activity that was a passive activity in any earlier tax year, but is not a passive activity in the current tax year. Income tax return 1040ez You can deduct a prior year's unallowed loss from the activity up to the amount of your current year net income from the activity. Income tax return 1040ez Treat any remaining prior year unallowed loss like you treat any other passive loss. Income tax return 1040ez   In addition, any prior year unallowed passive activity credits from a former passive activity offset the allocable part of your current year tax liability. Income tax return 1040ez The allocable part of your current year tax liability is that part of this year's tax liability that is allocable to the current year net income from the former passive activity. Income tax return 1040ez You figure this after you reduce your net income from the activity by any prior year unallowed loss from that activity (but not below zero). Income tax return 1040ez Trade or Business Activities A trade or business activity is an activity that: Involves the conduct of a trade or business (that is, deductions would be allowable under section 162 of the Internal Revenue Code if other limitations, such as the passive activity rules, did not apply), Is conducted in anticipation of starting a trade or business, or Involves research or experimental expenditures that are deductible under Internal Revenue Code section 174 (or that would be deductible if you chose to deduct rather than capitalize them). Income tax return 1040ez A trade or business activity does not include a rental activity or the rental of property that is incidental to an activity of holding the property for investment. Income tax return 1040ez You generally report trade or business activities on Schedule C, C-EZ, F, or in Part II or III of Schedule E. Income tax return 1040ez Rental Activities A rental activity is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional. Income tax return 1040ez See Real Estate Professional under Activities That Are Not Passive Activities, later. Income tax return 1040ez An activity is a rental activity if tangible property (real or personal) is used by customers or held for use by customers, and the gross income (or expected gross income) from the activity represents amounts paid (or to be paid) mainly for the use of the property. Income tax return 1040ez It does not matter whether the use is under a lease, a service contract, or some other arrangement. Income tax return 1040ez Exceptions. Income tax return 1040ez   Your activity is not a rental activity if any of the following apply. Income tax return 1040ez The average period of customer use of the property is 7 days or less. Income tax return 1040ez You figure the average period of customer use by dividing the total number of days in all rental periods by the number of rentals during the tax year. Income tax return 1040ez If the activity involves renting more than one class of property, multiply the average period of customer use of each class by a fraction. Income tax return 1040ez The numerator of the fraction is the gross rental income from that class of property and the denominator is the activity's total gross rental income. Income tax return 1040ez The activity's average period of customer use will equal the sum of the amounts for each class. Income tax return 1040ez The average period of customer use of the property, as figured in (1) above, is 30 days or less and you provide significant personal services with the rentals. Income tax return 1040ez Significant personal services include only services performed by individuals. Income tax return 1040ez To determine if personal services are significant, all relevant facts and circumstances are taken into consideration, including the frequency of the services, the type and amount of labor required to perform the services, and the value of the services relative to the amount charged for use of the property. Income tax return 1040ez Significant personal services do not include the following. Income tax return 1040ez Services needed to permit the lawful use of the property, Services to repair or improve property that would extend its useful life for a period substantially longer than the average rental, and Services that are similar to those commonly provided with long-term rentals of real estate, such as cleaning and maintenance of common areas or routine repairs. Income tax return 1040ez You provide extraordinary personal services in making the rental property available for customer use. Income tax return 1040ez Services are extraordinary personal services if they are performed by individuals and the customers' use of the property is incidental to their receipt of the services. Income tax return 1040ez The rental is incidental to a nonrental activity. Income tax return 1040ez The rental of property is incidental to an activity of holding property for investment if the main purpose of holding the property is to realize a gain from its appreciation and the gross rental income from the property is less than 2% of the smaller of the property's unadjusted basis or fair market value. Income tax return 1040ez The unadjusted basis of property is its cost not reduced by depreciation or any other basis adjustment. Income tax return 1040ez The rental of property is incidental to a trade or business activity if all of the following apply. Income tax return 1040ez You own an interest in the trade or business activity during the year. Income tax return 1040ez The rental property was used mainly in that trade or business activity during the current year, or during at least 2 of the 5 preceding tax years. Income tax return 1040ez Your gross rental income from the property is less than 2% of the smaller of its unadjusted basis or fair market value. Income tax return 1040ez Lodging provided to an employee or the employee's spouse or dependents is incidental to the activity or activities in which the employee performs services if the lodging is furnished for the employer's convenience. Income tax return 1040ez You customarily make the rental property available during defined business hours for nonexclusive use by various customers. Income tax return 1040ez You provide the property for use in a nonrental activity in your capacity as an owner of an interest in the partnership, S corporation, or joint venture conducting that activity. Income tax return 1040ez    If you meet any of the exceptions listed above, see the instructions for Form 8582 for information about how to report any income or loss from the activity. Income tax return 1040ez Special $25,000 allowance. Income tax return 1040ez   If you or your spouse actively participated in a passive rental real estate activity, the amount of the passive activity loss that is disallowed is decreased and you therefore can deduct up to $25,000 of loss from the activity from your nonpassive income. Income tax return 1040ez This special allowance is an exception to the general rule disallowing the passive activity loss. Income tax return 1040ez Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. Income tax return 1040ez   If you are married, filing a separate return, and lived apart from your spouse for the entire tax year, your special allowance cannot be more than $12,500. Income tax return 1040ez If you lived with your spouse at any time during the year and are filing a separate return, you cannot use the special allowance to reduce your nonpassive income or tax on nonpassive income. Income tax return 1040ez   The maximum special allowance is reduced if your modified adjusted gross income exceeds certain amounts. Income tax return 1040ez See Phaseout rule , later. Income tax return 1040ez Example. Income tax return 1040ez Kate, a single taxpayer, has $70,000 in wages, $15,000 income from a limited partnership, a $26,000 loss from rental real estate activities in which she actively participated, and is not subject to the modified adjusted gross income phaseout rule. Income tax return 1040ez She can use $15,000 of her $26,000 loss to offset her $15,000 passive income from the partnership. Income tax return 1040ez She actively participated in her rental real estate activities, so she can use the remaining $11,000 rental real estate loss to offset $11,000 of her nonpassive income (wages). Income tax return 1040ez Commercial revitalization deduction (CRD). Income tax return 1040ez   The special allowance must first be applied to losses from rental real estate activities figured without the CRD. Income tax return 1040ez Any remaining part of the special allowance is available for the CRD from the rental real estate activities and is not subject to the active participation rules or the phaseout based on modified adjusted gross income. Income tax return 1040ez You cannot claim a CRD for a building placed in service after December 31, 2009. Income tax return 1040ez Active participation. Income tax return 1040ez   Active participation is not the same as material participation (defined later). Income tax return 1040ez Active participation is a less stringent standard than material participation. Income tax return 1040ez For example, you may be treated as actively participating if you make management decisions in a significant and bona fide sense. Income tax return 1040ez Management decisions that count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. Income tax return 1040ez   Only individuals can actively participate in rental real estate activities. Income tax return 1040ez However, a decedent's estate is treated as actively participating for its tax years ending less than 2 years after the decedent's death, if the decedent would have satisfied the active participation requirement for the activity for the tax year the decedent died. Income tax return 1040ez   A decedent's qualified revocable trust can also be treated as actively participating if both the trustee and the executor (if any) of the estate choose to treat the trust as part of the estate. Income tax return 1040ez The choice applies to tax years ending after the decedent's death and before: 2 years after the decedent's death if no estate tax return is required, or 6 months after the estate tax liability is finally determined if an estate tax return is required. Income tax return 1040ez   The choice is irrevocable and cannot be made later than the due date for the estate's first income tax return (including any extensions). Income tax return 1040ez   Limited partners are not treated as actively participating in a partnership's rental real estate activities. Income tax return 1040ez   You are not treated as actively participating in a rental real estate activity unless your interest in the activity (including your spouse's interest) was at least 10% (by value) of all interests in the activity throughout the year. Income tax return 1040ez   Active participation is not required to take the low-income housing credit, the rehabilitation investment credit, or CRD from rental real estate activities. Income tax return 1040ez Example. Income tax return 1040ez Mike, a single taxpayer, had the following income and loss during the tax year: Salary $42,300 Dividends 300 Interest 1,400 Rental loss (4,000) The rental loss came from a house Mike owned. Income tax return 1040ez He advertised and rented the house to the current tenant himself. Income tax return 1040ez He also collected the rents and did the repairs or hired someone to do them. Income tax return 1040ez Even though the rental loss is a loss from a passive activity, Mike can use the entire $4,000 loss to offset his other income because he actively participated. Income tax return 1040ez Phaseout rule. Income tax return 1040ez   The maximum special allowance of $25,000 ($12,500 for married individuals filing separate returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted gross income that is more than $100,000 ($50,000 if you are married filing separately). Income tax return 1040ez If your modified adjusted gross income is $150,000 or more ($75,000 or more if you are married filing separately), you generally cannot use the special allowance. Income tax return 1040ez    Modified adjusted gross income for this purpose is your adjusted gross income figured without the following. Income tax return 1040ez Taxable social security and tier 1 railroad retirement benefits. Income tax return 1040ez Deductible contributions to individual retirement accounts (IRAs) and section 501(c)(18) pension plans. Income tax return 1040ez The exclusion from income of interest from qualified U. Income tax return 1040ez S. Income tax return 1040ez savings bonds used to pay qualified higher education expenses. Income tax return 1040ez The exclusion from income of amounts received from an employer's adoption assistance program. Income tax return 1040ez Passive activity income or loss included on Form 8582. Income tax return 1040ez Any rental real estate loss allowed because you materially participated in the rental activity as a Real Estate Professional (as discussed later, under Activities That Are Not Passive Activities). Income tax return 1040ez Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the instructions for Form 8582). Income tax return 1040ez The deduction for the employer-equivalent portion of self-employment tax. Income tax return 1040ez The deduction for domestic production activities. Income tax return 1040ez The deduction allowed for interest on student loans. Income tax return 1040ez The deduction for qualified tuition and related expenses. Income tax return 1040ez Example. Income tax return 1040ez During 2013, John was unmarried and was not a real estate professional. Income tax return 1040ez For 2013, he had $120,000 in salary and a $31,000 loss from his rental real estate activities in which he actively participated. Income tax return 1040ez His modified adjusted gross income is $120,000. Income tax return 1040ez When he files his 2013 return, he can deduct only $15,000 of his passive activity loss. Income tax return 1040ez He must carry over the remaining $16,000 passive activity loss to 2014. Income tax return 1040ez He figures his deduction and carryover as follows: Adjusted gross income, modified as required $120,000       Minus amount not subject to phaseout 100,000 Amount subject to phaseout rule $20,000 Multiply by 50% × 50% Required reduction to special allowance $10,000 Maximum special allowance $25,000 Minus required reduction (see above) 10,000 Adjusted special allowance $15,000 Passive loss from rental real estate $31,000 Deduction allowable/Adjusted  special allowance (see above) 15,000       Amount that must be carried forward $16,000 Exceptions to the phaseout rules. Income tax return 1040ez   A higher phaseout range applies to rehabilitation investment credits from rental real estate activities. Income tax return 1040ez For those credits, the phaseout of the $25,000 special allowance starts when your modified adjusted gross income exceeds $200,000 ($100,000 if you are a married individual filing a separate return and living apart at all times during the year). Income tax return 1040ez   There is no phaseout of the $25,000 special allowance for low-income housing credits or for the CRD. Income tax return 1040ez Ordering rules. Income tax return 1040ez   If you have more than one of the exceptions to the phaseout rules in the same tax year, you must apply the $25,000 phaseout against your passive activity losses and credits in the following order. Income tax return 1040ez The portion of passive activity losses not attributable to the CRD. Income tax return 1040ez The portion of passive activity losses attributable to the CRD. Income tax return 1040ez The portion of passive activity credits attributable to credits other than the rehabilitation and low-income housing credits. Income tax return 1040ez The portion of passive activity credits attributable to the rehabilitation credit. Income tax return 1040ez The portion of passive activity credits attributable to the low-income housing credit. Income tax return 1040ez Activities That Are Not Passive Activities The following are not passive activities. Income tax return 1040ez Trade or business activities in which you materially participated for the tax year. Income tax return 1040ez A working interest in an oil or gas well which you hold directly or through an entity that does not limit your liability (such as a general partner interest in a partnership). Income tax return 1040ez It does not matter whether you materially participated in the activity for the tax year. Income tax return 1040ez However, if your liability was limited for part of the year (for example, you converted your general partner interest to a limited partner interest during the year) and you had a net loss from the well for the year, some of your income and deductions from the working interest may be treated as passive activity gross income and passive activity deductions. Income tax return 1040ez  See Temporary Regulations section 1. Income tax return 1040ez 469-1T(e)(4)(ii). Income tax return 1040ez The rental of a dwelling unit that you also used for personal purposes during the year for more than the greater of 14 days or 10% of the number of days during the year that the home was rented at a fair rental. Income tax return 1040ez An activity of trading personal property for the account of those who own interests in the activity. Income tax return 1040ez See Temporary Regulations section 1. Income tax return 1040ez 469-1T(e)(6). Income tax return 1040ez Rental real estate activities in which you materially participated as a real estate professional. Income tax return 1040ez See Real Estate Professional , later. Income tax return 1040ez You should not enter income and losses from these activities on Form 8582. Income tax return 1040ez Instead, enter them on the forms or schedules you would normally use. Income tax return 1040ez Material Participation A trade or business activity is not a passive activity if you materially participated in the activity. Income tax return 1040ez Material participation tests. Income tax return 1040ez    You materially participated in a trade or business activity for a tax year if you satisfy any of the following tests. Income tax return 1040ez You participated in the activity for more than 500 hours. Income tax return 1040ez Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who did not own any interest in the activity. Income tax return 1040ez You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who did not own any interest in the activity) for the year. Income tax return 1040ez The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. Income tax return 1040ez A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you did not materially participate under any of the material participation tests, other than this test. Income tax return 1040ez See Significant Participation Passive Activities , under Recharacterization of Passive Income, later. Income tax return 1040ez You materially participated in the activity for any 5 (whether or not consecutive) of the 10 immediately preceding tax years. Income tax return 1040ez The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. Income tax return 1040ez An activity is a personal service activity if it involves the performance of personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital is not a material income-producing factor. Income tax return 1040ez Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year. Income tax return 1040ez   You did not materially participate in the activity under test (7) if you participated in the activity for 100 hours or less during the year. Income tax return 1040ez Your participation in managing the activity does not count in determining whether you materially participated under this test if: Any person other than you received compensation for managing the activity, or Any individual spent more hours during the tax year managing the activity than you did (regardless of whether the individual was compensated for the management services). Income tax return 1040ez Participation. Income tax return 1040ez   In general, any work you do in connection with an activity in which you own an interest is treated as participation in the activity. Income tax return 1040ez Work not usually performed by owners. Income tax return 1040ez   You do not treat the work you do in connection with an activity as participation in the activity if both of the following are true. Income tax return 1040ez The work is not work that is customarily done by the owner of that type of activity. Income tax return 1040ez One of your main reasons for doing the work is to avoid the disallowance of any loss or credit from the activity under the passive activity rules. Income tax return 1040ez Participation as an investor. Income tax return 1040ez   You do not treat the work you do in your capacity as an investor in an activity as participation unless you are directly involved in the day-to-day management or operations of the activity. Income tax return 1040ez Work you do as an investor includes: Studying and reviewing financial statements or reports on operations of the activity, Preparing or compiling summaries or analyses of the finances or operations of the activity for your own use, and Monitoring the finances or operations of the activity in a nonmanagerial capacity. Income tax return 1040ez Spouse's participation. Income tax return 1040ez   Your participation in an activity includes your spouse's participation. Income tax return 1040ez This applies even if your spouse did not own any interest in the activity and you and your spouse do not file a joint return for the year. Income tax return 1040ez Proof of participation. Income tax return 1040ez You can use any reasonable method to prove your participation in an activity for the year. Income tax return 1040ez You do not have to keep contemporaneous daily time reports, logs, or similar documents if you can establish your participation in some other way. Income tax return 1040ez For example, you can show the services you performed and the approximate number of hours spent by using an appointment book, calendar, or narrative summary. Income tax return 1040ez Limited partners. Income tax return 1040ez   If you owned an activity as a limited partner, you generally are not treated as materially participating in the activity. Income tax return 1040ez However, you are treated as materially participating in the activity if you met test (1), (5), or (6) under Material participation tests , discussed earlier, for the tax year. Income tax return 1040ez   You are not treated as a limited partner, however, if you also were a general partner in the partnership at all times during the partnership's tax year ending with or within your tax year (or, if shorter, during that part of the partnership's tax year in which you directly or indirectly owned your limited partner interest). Income tax return 1040ez Retired or disabled farmer and surviving spouse of a farmer. Income tax return 1040ez   If you are a retired or disabled farmer, you are treated as materially participating in a farming activity if you materially participated for 5 or more of the 8 years before your retirement or disability. Income tax return 1040ez Similarly, if you are a surviving spouse of a farmer, you are treated as materially participating in a farming activity if the real property used in the activity meets the estate tax rules for special valuation of farm property passed from a qualifying decedent, and you actively manage the farm. Income tax return 1040ez Corporations. Income tax return 1040ez   A closely held corporation or a personal service corporation is treated as materially participating in an activity only if one or more shareholders holding more than 50% by value of the outstanding stock of the corporation materially participate in the activity. Income tax return 1040ez   A closely held corporation can also satisfy the material participation standard by meeting the first two requirements for the qualifying business exception from the at-risk limits. Income tax return 1040ez See Special exception for qualified corporations under Activities Covered by the At-Risk Rules, later. Income tax return 1040ez Real Estate Professional Generally, rental activities are passive activities even if you materially participated in them. Income tax return 1040ez However, if you qualified as a real estate professional, rental real estate activities in which you materially participated are not passive activities. Income tax return 1040ez For this purpose, each interest you have in a rental real estate activity is a separate activity, unless you choose to treat all interests in rental real estate activities as one activity. Income tax return 1040ez See the Instructions for Schedule E (Form 1040), Supplemental Income and Loss, for information about making this choice. Income tax return 1040ez If you qualified as a real estate professional for 2013, report income or losses from rental real estate activities in which you materially participated as nonpassive income or losses, and complete line 43 of Schedule E (Form 1040). Income tax return 1040ez If you also have an unallowed loss from these activities from an earlier year when you did not qualify, see Treatment of former passive activities under Passive Activities, earlier. Income tax return 1040ez Qualifications. Income tax return 1040ez   You qualified as a real estate professional for the year if you met both of the following requirements. Income tax return 1040ez More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated. Income tax return 1040ez You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated. Income tax return 1040ez   Do not count personal services you performed as an employee in real property trades or businesses unless you were a 5% owner of your employer. Income tax return 1040ez You were a 5% owner if you owned (or are considered to have owned) more than 5% of your employer's outstanding stock, outstanding voting stock, or capital or profits interest. Income tax return 1040ez   If you file a joint return, do not count your spouse's personal services to determine whether you met the preceding requirements. Income tax return 1040ez However, you can count your spouse's participation in an activity in determining if you materially participated. Income tax return 1040ez Real property trades or businesses. Income tax return 1040ez   A real property trade or business is a trade or business that does any of the following with real property. Income tax return 1040ez Develops or redevelops it. Income tax return 1040ez Constructs or reconstructs it. Income tax return 1040ez Acquires it. Income tax return 1040ez Converts it. Income tax return 1040ez Rents or leases it. Income tax return 1040ez Operates or manages it. Income tax return 1040ez Brokers it. Income tax return 1040ez Closely held corporations. Income tax return 1040ez   A closely held corporation can qualify as a real estate professional if more than 50% of the gross receipts for its tax year came from real property trades or businesses in which it materially participated. Income tax return 1040ez Passive Activity Income and Deductions In figuring your net income or loss from a passive activity, take into account only passive activity income and passive activity deductions. Income tax return 1040ez Self-charged interest. Income tax return 1040ez   Certain self-charged interest income or deductions may be treated as passive activity gross income or passive activity deductions if the loan proceeds are used in a passive activity. Income tax return 1040ez   Generally, self-charged interest income and deductions result from loans between you and a partnership or S corporation in which you had a direct or indirect ownership interest. Income tax return 1040ez This includes both loans you made to the partnership or S corporation and loans the partnership or S corporation made to you. Income tax return 1040ez   It also includes loans from one partnership or S corporation to another partnership or S corporation if each owner in the borrowing entity has the same proportional ownership interest in the lending entity. Income tax return 1040ez    Exception. Income tax return 1040ez The self-charged interest rules do not apply to your interest in a partnership or S corporation if the entity made an election under Regulations section 1. Income tax return 1040ez 469-7(g) to avoid the application of these rules. Income tax return 1040ez For more details on the self-charged interest rules, see Regulations section 1. Income tax return 1040ez 469-7. Income tax return 1040ez Passive Activity Income Passive activity income includes all income from passive activities and generally includes gain from disposition of an interest in a passive activity or property used in a passive activity. Income tax return 1040ez Passive activity income does not include the following items. Income tax return 1040ez Income from an activity that is not a passive activity. Income tax return 1040ez These activities are discussed under Activities That Are Not Passive Activities , earlier. Income tax return 1040ez Portfolio income. Income tax return 1040ez This includes interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business. Income tax return 1040ez It includes gain or loss from the disposition of property that produces these types of income or that is held for investment. Income tax return 1040ez The exclusion for portfolio income does not apply to self-charged interest treated as passive activity income. Income tax return 1040ez For more information on self-charged interest, see Self-charged interest , earlier. Income tax return 1040ez Personal service income. Income tax return 1040ez This includes salaries, wages, commissions, self-employment income from trade or business activities in which you materially participated, deferred compensation, taxable social security and other retirement benefits, and payments from partnerships to partners for personal services. Income tax return 1040ez Income from positive section 481 adjustments allocated to activities other than passive activities. Income tax return 1040ez (Section 481 adjustments are adjustments that must be made due to changes in your accounting method. Income tax return 1040ez ) Income or gain from investments of working capital. Income tax return 1040ez Income from an oil or gas property if you treated any loss from a working interest in the property for any tax year beginning after 1986 as a nonpassive loss, as discussed in item (2) under Activities That Are Not Passive Activities , earlier. Income tax return 1040ez This also applies to income from other oil and gas property the basis of which is determined wholly or partly by the basis of the property in the preceding sentence. Income tax return 1040ez Any income from intangible property, such as a patent, copyright, or literary, musical, or artistic composition, if your personal efforts significantly contributed to the creation of the property. Income tax return 1040ez Any other income that must be treated as nonpassive income. Income tax return 1040ez See Recharacterization of Passive Income , later. Income tax return 1040ez Overall gain from any interest in a publicly traded partnership. Income tax return 1040ez See Publicly Traded Partnerships (PTPs) in the instructions for Form 8582. Income tax return 1040ez State, local, and foreign income tax refunds. Income tax return 1040ez Income from a covenant not to compete. Income tax return 1040ez Reimbursement of a casualty or theft loss included in gross income to recover all or part of a prior year loss deduction, if the loss deduction was not a passive activity deduction. Income tax return 1040ez Alaska Permanent Fund dividends. Income tax return 1040ez Cancellation of debt income, if at the time the debt is discharged the debt is not allocated to passive activities under the interest expense allocation rules. Income tax return 1040ez See chapter 4 of Publication 535, Business Expenses, for information about the rules for allocating interest. Income tax return 1040ez Disposition of property interests. Income tax return 1040ez   Gain on the disposition of an interest in property generally is passive activity income if, at the time of the disposition, the property was used in an activity that was a passive activity in the year of disposition. Income tax return 1040ez The gain generally is not passive activity income if, at the time of disposition, the property was used in an activity that was not a passive activity in the year of disposition. Income tax return 1040ez An exception to this general rule may apply if you previously used the property in a different activity. Income tax return 1040ez Exception for more than one use in the preceding 12 months. Income tax return 1040ez   If you used the property in more than one activity during the 12-month period before its disposition, you must allocate the gain between the activities on a basis that reasonably reflects the property's use during that period. Income tax return 1040ez Any gain allocated to a passive activity is passive activity income. Income tax return 1040ez   For this purpose, an allocation of the gain solely to the activity in which the property was mainly used during that period reasonably reflects the property's use if the fair market value of your interest in the property is not more than the lesser of: $10,000, or 10% of the total of the fair market value of your interest in the property and the fair market value of all other property used in that activity immediately before the disposition. Income tax return 1040ez Exception for substantially appreciated property. Income tax return 1040ez   The gain is passive activity income if the fair market value of the property at disposition was more than 120% of its adjusted basis and either of the following conditions applies. Income tax return 1040ez You used the property in a passive activity for 20% of the time you held your interest in the property. Income tax return 1040ez You used the property in a passive activity for the entire 24-month period before its disposition. Income tax return 1040ez If neither condition applies, the gain is not passive activity income. Income tax return 1040ez However, it is treated as portfolio income only if you held the property for investment for more than half of the time you held it in nonpassive activities. Income tax return 1040ez   For this purpose, treat property you held through a corporation (other than an S corporation) or other entity whose owners receive only portfolio income as property held in a nonpassive activity and as property held for investment. Income tax return 1040ez Also, treat the date you agree to transfer your interest for a fixed or determinable amount as the disposition date. Income tax return 1040ez   If you used the property in more than one activity during the 12-month period before its disposition, this exception applies only to the part of the gain allocated to a passive activity under the rules described in the preceding discussion. Income tax return 1040ez Disposition of property converted to inventory. Income tax return 1040ez   If you disposed of property that you had converted to inventory from its use in another activity (for example, you sold condominium units you previously held for use in a rental activity), a special rule may apply. Income tax return 1040ez Under this rule, you disregard the property's use as inventory and treat it as if it were still used in that other activity at the time of disposition. Income tax return 1040ez This rule applies only if you meet all of the following conditions. Income tax return 1040ez At the time of disposition, you held your interest in the property in a dealing activity (an activity that involves holding the property or similar property mainly for sale to customers in the ordinary course of a trade or business). Income tax return 1040ez Your other activities included a nondealing activity (an activity that does not involve holding similar property for sale to customers in the ordinary course of a trade or business) in which you used the property for more than 80% of the period you held it. Income tax return 1040ez You did not acquire or hold your interest in the property for the main purpose of selling it to customers in the ordinary course of a trade or business. Income tax return 1040ez Passive Activity Deductions Generally, a deduction is a passive activity deduction for a taxable year if and only if such deduction either: Arises in connection with the conduct of an activity that is a passive activity for the tax year; or Is treated as a deduction from an activity for the tax year because it was disallowed by the passive activity rules in the preceding year and carried forward to the tax year. Income tax return 1040ez For purposes of item (1), above, an item of deduction arises in the taxable year in which the item would be allowable as a deduction under the taxpayer's method of accounting if taxable income for all taxable years were determined without regard to the passive activity rules and without regard to the basis, excess farm loss, and at-risk limits. Income tax return 1040ez See Coordination with other limitations on deductions that apply before the passive activity rules , later. Income tax return 1040ez Passive activity deductions generally include losses from dispositions of property used in a passive activity at the time of the disposition and losses from a disposition of less than your entire interest in a passive activity. Income tax return 1040ez Exceptions. Income tax return 1040ez   Passive activity deductions do not include the following items. Income tax return 1040ez Deductions for expenses (other than interest expense) that are clearly and directly allocable to portfolio income. Income tax return 1040ez Qualified home mortgage interest, capitalized interest expenses, and other interest expenses (other than self-charged interest) properly allocable to passive activities. Income tax return 1040ez For more information on self-charged interest, see Self-charged interest under Passive Activity Income and Deductions, earlier. Income tax return 1040ez Losses from dispositions of property that produce portfolio income or property held for investment. Income tax return 1040ez State, local, and foreign income taxes. Income tax return 1040ez Miscellaneous itemized deductions that may be disallowed because of the 2%-of-adjusted-gross-income limit. Income tax return 1040ez Charitable contribution deductions. Income tax return 1040ez Net operating loss deductions. Income tax return 1040ez Percentage depletion carryovers for oil and gas wells. Income tax return 1040ez Capital loss carrybacks and carryovers. Income tax return 1040ez Items of deduction from a passive activity that are disallowed under the limits on deductions that apply before the passive activity rules. Income tax return 1040ez See Coordination with other limitations on deductions that apply before the passive activity rules , later. Income tax return 1040ez Deductions and losses that would have been allowed for tax years beginning before 1987 but for basis or at-risk limits. Income tax return 1040ez Net negative section 481 adjustments allocated to activities other than passive activities. Income tax return 1040ez (Section 481 adjustments are adjustments required due to changes in accounting methods. Income tax return 1040ez ) Casualty and theft losses, unless losses similar in cause and severity recur regularly in the activity. Income tax return 1040ez The deduction for the employer-equivalent portion of self-employment tax. Income tax return 1040ez Coordination with other limitations on deductions that apply before the passive activity rules. Income tax return 1040ez   An item of deduction from a passive activity that is disallowed for a tax year under the basis or at-risk limitations is not a passive activity deduction for the tax year. Income tax return 1040ez The following sections provide rules for figuring the extent to which items of deduction from a passive activity are disallowed for a tax year under the basis or at-risk limitations. Income tax return 1040ez Proration of deductions disallowed under basis limitations. Income tax return 1040ez   If any amount of your distributive share of a partnership's loss for the tax year is disallowed under the basis limitation, a ratable portion of your distributive share of each item of deduction or loss of the partnership is disallowed for the tax year. Income tax return 1040ez For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of your distributive share of partnership loss that is disallowed for the taxable year; by The sum of your distributive shares of all items of deduction and loss of the partnership for the tax year. Income tax return 1040ez   If any amount of your pro rata share of an S corporation's loss for the tax year is disallowed under the basis limitation, a ratable portion of your pro rata share of each item of deduction or loss of the S corporation is disallowed for the tax year. Income tax return 1040ez For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of your share of S corporation loss that is disallowed for the tax year; by The sum of your pro rata shares of all items of deduction and loss of the corporation for the tax year. Income tax return 1040ez Proration of deductions disallowed under at-risk limitation. Income tax return 1040ez   If any amount of your loss from an activity (as defined in Activities Covered by the At-Risk Rules , later) is disallowed under the at-risk rules for the tax year, a ratable portion of each item of deduction or loss from the activity is disallowed for the tax year. Income tax return 1040ez For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of the loss from the activity that is disallowed for the tax year; by The sum of all deductions from the activity for the taxable year. Income tax return 1040ez Coordination of basis and at-risk limitations. Income tax return 1040ez   The portion of any item of deduction or loss that is disallowed for the tax year under the basis limitations is not taken into account for the taxable year in determining the loss from an activity (as defined in Activities Covered by the At-Risk Rules , later) for purposes of applying the at-risk rules. Income tax return 1040ez Separately identified items of deduction and loss. Income tax return 1040ez   In identifying the items of deduction and loss from an activity that are not disallowed under the basis and at-risk limitations (and that therefore may be treated as passive activity deductions), you need not account separately for any item of deduction or loss unless such item may, if separately taken into account, result in an income tax liability different from that which would result were such item of deduction or loss taken into account separately. Income tax return 1040ez   Items of deduction or loss that must be accounted for separately include (but are not limited to) items of deduction or loss that: Are attributable to separate activities. Income tax return 1040ez See Grouping Your Activities , later. Income tax return 1040ez Arise in a rental real estate activity in tax years in which you actively participate in such activity; Arise in a rental real estate activity in taxable years in which you do not actively participate in such activity; Arose in a taxable year beginning before 1987 and were not allowed for such taxable year under the basis or at-risk limitations; Are taken into account under section 613A(d) (relating to limitations on certain depletion deductions); Are taken into account under section 1211 (relating to the limitation on capital losses); Are taken into account under section 1231 (relating to property used in a trade or business and involuntary conversions). Income tax return 1040ez See Section 1231 Gains and Losses in Publication 544 for more information. Income tax return 1040ez Are attributable to pre-enactment interests in activities. Income tax return 1040ez See Regulations section 1. Income tax return 1040ez 469-11T(c). Income tax return 1040ez Grouping Your Activities You can treat one or more trade or business activities, or rental activities, as a single activity if those activities form an appropriate economic unit for measuring gain or loss under the passive activity rules. Income tax return 1040ez Grouping is important for a number of reasons. Income tax return 1040ez If you group two activities into one larger activity, you need only show material participation in the activity as a whole. Income tax return 1040ez But if the two activities are separate, you must show material participation in each one. Income tax return 1040ez On the other hand, if you group two activities into one larger activity and you dispose of one of the two, then you have disposed of only part of your entire interest in the activity. Income tax return 1040ez But if the two activities are separate and you dispose of one of them, then you have disposed of your entire interest in that activity. Income tax return 1040ez Grouping can also be important in determining whether you meet the 10% ownership requirement for actively participating in a rental real estate activity. Income tax return 1040ez Appropriate Economic Units Generally, to determine if activities form an appropriate economic unit, you must consider all the relevant facts and circumstances. Income tax return 1040ez You can use any reasonable method of applying the relevant facts and circumstances in grouping activities. Income tax return 1040ez The following factors have the greatest weight in determining whether activities form an appropriate economic unit. Income tax return 1040ez All of the factors do not have to apply to treat more than one activity as a single activity. Income tax return 1040ez The factors that you should consider are: The similarities and differences in the types of trades or businesses, The extent of common control, The extent of common ownership, The geographical location, and The interdependencies between or among activities, which may include the extent to which the activities: Buy or sell goods between or among themselves, Involve products or services that are generally provided together, Have the same customers, Have the same employees, or Use a single set of books and records to account for the activities. Income tax return 1040ez Example 1. Income tax return 1040ez John Jackson owns a bakery and a movie theater at a shopping mall in Baltimore and a bakery and movie theater in Philadelphia. Income tax return 1040ez Based on all the relevant facts and circumstances, there may be more than one reasonable method for grouping John's activities. Income tax return 1040ez For example, John may be able to group the movie theaters and the bakeries into: One activity, A movie theater activity and a bakery activity, A Baltimore activity and a Philadelphia activity, or Four separate activities. Income tax return 1040ez Example 2. Income tax return 1040ez Betty is a partner in ABC partnership, which sells nonfood items to grocery stores. Income tax return 1040ez Betty is also a partner in DEF (a trucking business). Income tax return 1040ez ABC and DEF are under common control. Income tax return 1040ez The main part of DEF's business is transporting goods for ABC. Income tax return 1040ez DEF is the only trucking business in which Betty is involved. Income tax return 1040ez Based on the rules of this section, Betty treats ABC's wholesale activity and DEF's trucking activity as a single activity. Income tax return 1040ez Consistency and disclosure requirement. Income tax return 1040ez   Generally, when you group activities into appropriate economic units, you may not regroup those activities in a later tax year. Income tax return 1040ez You must meet any disclosure requirements of the IRS when you first group your activities and when you add or dispose of any activities in your groupings. Income tax return 1040ez   However, if the original grouping is clearly inappropriate or there is a material change in the facts and circumstances that makes the original grouping clearly inappropriate, you must regroup the activities and comply with any disclosure requirements of the IRS. Income tax return 1040ez   See Disclosure Requirement , later. Income tax return 1040ez Regrouping by the IRS. Income tax return 1040ez   If any of the activities resulting from your grouping is not an appropriate economic unit and one of the primary purposes of your grouping (or failure to regroup) is to avoid the passive activity rules, the IRS may regroup your activities. Income tax return 1040ez Rental activities. Income tax return 1040ez   In general, you cannot group a rental activity with a trade or business activity. Income tax return 1040ez However, you can group them together if the activities form an appropriate economic unit and: The rental activity is insubstantial in relation to the trade or business activity, The trade or business activity is insubstantial in relation to the rental activity, or Each owner of the trade or business activity has the same ownership interest in the rental activity, in which case the part of the rental activity that involves the rental of items of property for use in the trade or business activity may be grouped with the trade or business activity. Income tax return 1040ez Example. Income tax return 1040ez Herbert and Wilma are married and file a joint return. Income tax return 1040ez Healthy Food, an S corporation, is a grocery store business. Income tax return 1040ez Herbert is Healthy Food's only shareholder. Income tax return 1040ez Plum Tower, an S corporation, owns and rents out the building. Income tax return 1040ez Wilma is Plum Tower's only shareholder. Income tax return 1040ez Plum Tower rents part of its building to Healthy Food. Income tax return 1040ez Plum Tower's grocery store rental business and Healthy Food's grocery business are not insubstantial in relation to each other. Income tax return 1040ez Herbert and Wilma file a joint return, so they are treated as one taxpayer for purposes of the passive activity rules. Income tax return 1040ez The same owner (Herbert and Wilma) owns both Healthy Food and Plum Tower with the same ownership interest (100% in each). Income tax return 1040ez If the grouping forms an appropriate economic unit, as discussed earlier, Herbert and Wilma can group Plum Tower's grocery store rental and Healthy Food's grocery business into a single trade or business activity. Income tax return 1040ez Grouping of real and personal property rentals. Income tax return 1040ez   In general, you cannot treat an activity involving the rental of real property and an activity involving the rental of personal property as a single activity. Income tax return 1040ez However, you can treat them as a single activity if you provide the personal property in connection with the real property or the real property in connection with the personal property. Income tax return 1040ez Certain activities may not be grouped. Income tax return 1040ez   In general, if you own an interest as a limited partner or a limited entrepreneur in one of the following activities, you may not group that activity with any other activity in another type of business. Income tax return 1040ez Holding, producing, or distributing motion picture films or video tapes. Income tax return 1040ez Farming. Income tax return 1040ez Leasing any section 1245 property (as defined in section 1245(a)(3) of the Internal Revenue Code). Income tax return 1040ez For a list of section 1245 property, see Section 1245 property under Activities Covered by the At-Risk Rules , later. Income tax return 1040ez Exploring for, or exploiting, oil and gas resources. Income tax return 1040ez Exploring for, or exploiting, geothermal deposits. Income tax return 1040ez   If you own an interest as a limited partner or a limited entrepreneur in an activity described in the list above, you may group that activity with another activity in the same type of business if the grouping forms an appropriate economic unit as discussed earlier. Income tax return 1040ez Limited entrepreneur. Income tax return 1040ez   A limited entrepreneur is a person who: Has an interest in an enterprise other than as a limited partner, and Does not actively participate in the management of the enterprise. Income tax return 1040ez Activities conducted through another entity. Income tax return 1040ez   A personal service corporation, closely held corporation, partnership, or S corporation must group its activities using the rules discussed in this section. Income tax return 1040ez Once the entity groups its activities, you, as the partner or shareholder of the entity, may group those activities (following the rules of this section): With each other, With activities conducted directly by you, or With activities conducted through other entities. Income tax return 1040ez    You may not treat activities grouped together by the entity as separate activities. Income tax return 1040ez Personal service and closely held corporations. Income tax return 1040ez   You may group an activity conducted through a personal service or closely held corporation with your other activities only to determine whether you materially or significantly participated in those other activities. Income tax return 1040ez See Material Participation , earlier, and Significant Participation Passive Activities , later. Income tax return 1040ez Publicly traded partnership (PTP). Income tax return 1040ez   You may not group activities conducted through a PTP with any other activity, including an activity conducted through another PTP. Income tax return 1040ez Partial dispositions. Income tax return 1040ez   If you dispose of substantially all of an activity during your tax year, you may treat the part disposed of as a separate activity. Income tax return 1040ez However, you can do this only if you can show with reasonable certainty: The amount of deductions and credits disallowed in prior years under the passive activity rules that is allocable to the part of the activity disposed of, and The amount of gross income and any other deductions and credits for the current tax year that is allocable to the part of the activity disposed of. Income tax return 1040ez Disclosure Requirement For tax years beginning after January 24, 2010, the following disclosure requirements for groupings apply. Income tax return 1040ez You are required to report certain changes to your groupings that occur during the tax year to the IRS. Income tax return 1040ez If you fail to report these changes, each trade or business activity or rental activity will be treated as a separate activity. Income tax return 1040ez You will be considered to have made a timely disclosure if you filed all affected income tax returns consistent with the claimed grouping and make the required disclosure on the income tax return for the year in which you first discovered the failure to disclose. Income tax return 1040ez If the IRS discovered the failure to disclose, you must have reasonable cause for not making the required disclosure. Income tax return 1040ez New grouping. Income tax return 1040ez   You must file a written statement with your original income tax return for the first tax year in which two or more activities are originally grouped into a single activity. Income tax return 1040ez The statement must provide the names, addresses, and employer identification numbers (EINs), if applicable, for the activities being grouped as a single activity. Income tax return 1040ez In addition, the statement must contain a declaration that the grouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. Income tax return 1040ez Addition to an existing grouping. Income tax return 1040ez   You must file a written statement with your original income tax return for the tax year in which you add a new activity to an existing group. Income tax return 1040ez The statement must provide the name, address, and EIN, if applicable, for the activity that is being added and for the activities in the existing group. Income tax return 1040ez In addition, the statement must contain a declaration that the activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. Income tax return 1040ez Regrouping. Income tax return 1040ez   You must file a written statement with your original income tax return for the tax year in which you regroup the activities. Income tax return 1040ez The statement must provide the names, addresses, and EINs, if applicable, for the activities that are being regrouped. Income tax return 1040ez If two or more activities are being regrouped into a single activity, the statement must contain a declaration that the regrouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. Income tax return 1040ez In addition, the statement must contain an explanation of the material change in the facts and circumstances that made the original grouping clearly inappropriate. Income tax return 1040ez Groupings by partnerships and S corporations. Income tax return 1040ez   Partnerships and S corporations are not subject to the rules for new grouping, addition to an existing grouping, or regrouping. Income tax return 1040ez Instead, they must comply with the disclosure instructions for grouping activities provided in their Form 1065, U. Income tax return 1040ez S. Income tax return 1040ez Return of Partnership Income, or Form 1120S, U. Income tax return 1040ez S. Income tax return 1040ez Income Tax Return for an S Corporation, whichever is applicable. Income tax return 1040ez   The partner or shareholder is not required to make a separate disclosure of the groupings disclosed by the entity unless the partner or shareholder: Groups together any of the activities that the entity does not group together, Groups the entity's activities with activities conducted directly by the partner or shareholder, or Groups an entity's activities with activities conducted through another entity. Income tax return 1040ez   A partner or shareholder may not treat activities grouped together by the entity as separate activities. Income tax return 1040ez Recharacterization of Passive Income Net income from the following passive activities may have to be recharacterized and excluded from passive activity income. Income tax return 1040ez Significant participation passive activities, Rental of property when less than 30% of the unadjusted basis of the property is subject to depreciation, Equity-financed lending activities, Rental of property incidental to development activities, Rental of property to nonpassive activities, and Licensing of intangible property by  pass-through entities. Income tax return 1040ez If you are engaged in or have an interest in one of these activities during the tax year (either directly or through a partnership or an S corporation), combine the income and losses from the activity to determine if you have a net loss or net income from that activity. Income tax return 1040ez If the result is a net loss, treat the income and losses the same as any other income or losses from that type of passive activity (trade or business activity or rental activity). Income tax return 1040ez If the result is net income, do not enter any of the income or losses from the activity or property on Form 8582 or its worksheets. Income tax return 1040ez Instead, enter income or losses on the form and schedules you normally use. Income tax return 1040ez However, see Significant Participation Passive Activities , later, if the activity is a significant participation passive activity and you also have a net loss from a different significant participation passive activity. Income tax return 1040ez Limit on recharacterized passive income. Income tax return 1040ez   The total amount that you treat as nonpassive income under the rules described later in this discussion for significant participation passive activities, rental of nondepreciable property, and equity-financed lending activities cannot exceed the greatest amount that you treat as nonpassive income under any one of these rules. Income tax return 1040ez Investment income and investment expense. Income tax return 1040ez   To figure your investment interest expense limitation on Form 4952, treat as investment income any net passive income recharacterized as nonpassive income from rental of nondepreciable property, equity-financed lending activity, or licensing of intangible property by a pass-through entity. Income tax return 1040ez Significant Participation Passive Activities A significant participation passive activity is any trade or business activity in which you participated for more than 100 hours during the tax year but did not materially participate. Income tax return 1040ez If your gross income from all significant participation passive activities is more than your deductions from those activities, a part of your net income from each significant participation passive activity is treated as nonpassive income. Income tax return 1040ez Corporations. Income tax return 1040ez   An activity of a personal service corporation or closely held corporation is a significant participation passive activity if both of the following statements are true. Income tax return 1040ez The corporation is not treated as materially participating in the activity for the year. Income tax return 1040ez One or more individuals, each of whom is treated as significantly participating in the activity, directly or indirectly hold (in total) more than 50% (by value) of the corporation's outstanding stock. Income tax return 1040ez Worksheet A. Income tax return 1040ez   Complete Worksheet A. Income tax return 1040ez Significant Participation Passive Activities , below, if you have income or losses from any significant participation activity. Income tax return 1040ez Begin by entering the name of each activity in the left column. Income tax return 1040ez Column (a). Income tax return 1040ez   Enter the number of hours you participated in each activity and total the column. Income tax return 1040ez   If the total is more than 500, do not complete Worksheet A or B. Income tax return 1040ez None of the activities are passive activities because you satisfy test 4 for material participation. Income tax return 1040ez (See Material participation tests , earlier. Income tax return 1040ez ) Report all the income and losses from these activities on the forms and schedules you normally use. Income tax return 1040ez Do not include the income and losses on Form 8582. Income tax return 1040ez Column (b). Income tax return 1040ez   Enter the net loss, if any, from the activity. Income tax return 1040ez Net loss from an activity means either: The activity's current year net loss (if any) plus prior year unallowed losses (if any), or The excess of prior year unallowed losses over the current year net income (if any). Income tax return 1040ez Enter -0- here if the prior year unallowed loss is the same as the current year net income. Income tax return 1040ez Column (c). Income tax return 1040ez   Enter net income (if any) from the activity. Income tax return 1040ez Net income means the excess of the current year's net income from the activity over any prior year unallowed losses from the activity. Income tax return 1040ez Column (d). Income tax return 1040ez   Combine amounts in the Totals row for columns (b) and (c) and enter the total net income or net loss in the Totals row of column (d). Income tax return 1040ez If column (d) is a net loss, skip Worksheet B, Significant Participation Activities With Net Income. Income tax return 1040ez Include the income and losses in Worksheet 3 of Form 8582 (or Worksheet 2 in the Form 88
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The Income Tax Return 1040ez

Income tax return 1040ez 4. Income tax return 1040ez   Figuring Depreciation Under MACRS Table of Contents Introduction Useful Items - You may want to see: Which Depreciation System (GDS or ADS) Applies? Which Property Class Applies Under GDS?Rent-to-own dealer. Income tax return 1040ez Rent-to-own contract. Income tax return 1040ez What Is the Placed in Service Date? What Is the Basis for Depreciation? Which Recovery Period Applies?Recovery Periods Under GDS Recovery Periods Under ADS Additions and Improvements Which Convention Applies? Which Depreciation Method Applies?Depreciation Methods for Farm Property Electing a Different Method How Is the Depreciation Deduction Figured?Using the MACRS Percentage Tables Figuring the Deduction Without Using the Tables Figuring the Deduction for Property Acquired in a Nontaxable Exchange Figuring the Deduction for a Short Tax Year How Do You Use General Asset Accounts?Grouping Property Figuring Depreciation for a GAA Disposing of GAA Property Terminating GAA Treatment Electing To Use a GAA When Do You Recapture MACRS Depreciation? Introduction The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. Income tax return 1040ez MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Income tax return 1040ez Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. Income tax return 1040ez To be sure you can use MACRS to figure depreciation for your property, see What Method Can You Use To Depreciate Your Property in chapter 1. Income tax return 1040ez This chapter explains how to determine which MACRS depreciation system applies to your property. Income tax return 1040ez It also discusses other information you need to know before you can figure depreciation under MACRS. Income tax return 1040ez This information includes the property's recovery class, placed in service date, and basis, as well as the applicable recovery period, convention, and depreciation method. Income tax return 1040ez It explains how to use this information to figure your depreciation deduction and how to use a general asset account to depreciate a group of properties. Income tax return 1040ez Finally, it explains when and how to recapture MACRS depreciation. Income tax return 1040ez Useful Items - You may want to see: Publication 225 Farmer's Tax Guide 463 Travel, Entertainment, Gift, and Car  Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 587 Business Use of Your Home (Including Use by Daycare Providers) Form (and Instructions) 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 4562 Depreciation and Amortization See chapter 6 for information about getting publications and forms. Income tax return 1040ez 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. Income tax return 1040ez You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Income tax return 1040ez If you placed your property in service in 2013, complete Part III of Form 4562 to report depreciation using MACRS. Income tax return 1040ez Complete section B of Part III to report depreciation using GDS, and complete section C of Part III to report depreciation using ADS. Income tax return 1040ez If you placed your property in service before 2013 and are required to file Form 4562, report depreciation using either GDS or ADS on line 17 in Part III. Income tax return 1040ez Required use of ADS. Income tax return 1040ez   You must use ADS for the following property. Income tax return 1040ez Listed property used 50% or less in a qualified business use. Income tax return 1040ez See chapter 5 for information on listed property. Income tax return 1040ez Any tangible property used predominantly outside the United States during the year. Income tax return 1040ez Any tax-exempt use property. Income tax return 1040ez Any tax-exempt bond-financed property. Income tax return 1040ez 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. Income tax return 1040ez 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. Income tax return 1040ez If you are required to use ADS to depreciate your property, you cannot claim any special depreciation allowance (discussed in chapter 3) for the property. Income tax return 1040ez Electing ADS. Income tax return 1040ez   Although your property may qualify for GDS, you can elect to use ADS. Income tax return 1040ez The election generally must cover all property in the same property class that you placed in service during the year. Income tax return 1040ez However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. Income tax return 1040ez Once you make this election, you can never revoke it. Income tax return 1040ez   You make the election by completing line 20 in Part III of Form 4562. Income tax return 1040ez Which Property Class Applies Under GDS? The following is a list of the nine property classifications under GDS and examples of the types of property included in each class. Income tax return 1040ez These property classes are also listed under column (a) in section B, Part III, of Form 4562. Income tax return 1040ez For detailed information on property classes, see Appendix B, Table of Class Lives and Recovery Periods, in this publication. Income tax return 1040ez 3-year property. Income tax return 1040ez Tractor units for over-the-road use. Income tax return 1040ez Any race horse over 2 years old when placed in service. Income tax return 1040ez (All race horses placed in service after December 31, 2008, and before January 1, 2014, are deemed to be 3-year property, regardless of age. Income tax return 1040ez ) Any other horse (other than a race horse) over 12 years old when placed in service. Income tax return 1040ez Qualified rent-to-own property (defined later). Income tax return 1040ez 5-year property. Income tax return 1040ez Automobiles, taxis, buses, and trucks. Income tax return 1040ez Computers and peripheral equipment. Income tax return 1040ez Office machinery (such as typewriters, calculators, and copiers). Income tax return 1040ez Any property used in research and experimentation. Income tax return 1040ez Breeding cattle and dairy cattle. Income tax return 1040ez Appliances, carpets, furniture, etc. Income tax return 1040ez , used in a residential rental real estate activity. Income tax return 1040ez Certain geothermal, solar, and wind energy property. Income tax return 1040ez 7-year property. Income tax return 1040ez Office furniture and fixtures (such as desks, files, and safes). Income tax return 1040ez Agricultural machinery and equipment. Income tax return 1040ez Any property that does not have a class life and has not been designated by law as being in any other class. Income tax return 1040ez Certain motorsports entertainment complex property (defined later) placed in service before January 1, 2014. Income tax return 1040ez Any natural gas gathering line placed in service after April 11, 2005. Income tax return 1040ez See Natural gas gathering line and electric transmission property , later. Income tax return 1040ez 10-year property. Income tax return 1040ez Vessels, barges, tugs, and similar water transportation equipment. Income tax return 1040ez Any single purpose agricultural or horticultural structure. Income tax return 1040ez Any tree or vine bearing fruits or nuts. Income tax return 1040ez Qualified small electric meter and qualified smart electric grid system (defined later) placed in service on or after October 3, 2008. Income tax return 1040ez 15-year property. Income tax return 1040ez Certain improvements made directly to land or added to it (such as shrubbery, fences, roads, sidewalks, and bridges). Income tax return 1040ez Any retail motor fuels outlet (defined later), such as a convenience store. Income tax return 1040ez Any municipal wastewater treatment plant. Income tax return 1040ez Any qualified leasehold improvement property (defined later) placed in service before January 1, 2014. Income tax return 1040ez Any qualified restaurant property (defined later) placed in service before January 1, 2014. Income tax return 1040ez Initial clearing and grading land improvements for gas utility property. Income tax return 1040ez Electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity placed in service after April 11, 2005. Income tax return 1040ez See Natural gas gathering line and electric transmission property , later. Income tax return 1040ez Any natural gas distribution line placed in service after April 11, 2005 and before January 1, 2011. Income tax return 1040ez Any qualified retail improvement property placed in service before January 1, 2014. Income tax return 1040ez 20-year property. Income tax return 1040ez Farm buildings (other than single purpose agricultural or horticultural structures). Income tax return 1040ez Municipal sewers not classified as 25-year property. Income tax return 1040ez Initial clearing and grading land improvements for electric utility transmission and distribution plants. Income tax return 1040ez 25-year property. Income tax return 1040ez This class is water utility property, which is either of the following. Income tax return 1040ez Property that is an integral part of the gathering, treatment, or commercial distribution of water, and that, without regard to this provision, would be 20-year property. Income tax return 1040ez Municipal sewers other than property placed in service under a binding contract in effect at all times since June 9, 1996. Income tax return 1040ez Residential rental property. Income tax return 1040ez This is any building or structure, such as a rental home (including a mobile home), if 80% or more of its gross rental income for the tax year is from dwelling units. Income tax return 1040ez A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. Income tax return 1040ez It does not include a unit in a hotel, motel, or other establishment where more than half the units are used on a transient basis. Income tax return 1040ez If you occupy any part of the building or structure for personal use, its gross rental income includes the fair rental value of the part you occupy. Income tax return 1040ez Nonresidential real property. Income tax return 1040ez This is section 1250 property, such as an office building, store, or warehouse, that is neither residential rental property nor property with a class life of less than 27. Income tax return 1040ez 5 years. Income tax return 1040ez Qualified rent-to-own property. Income tax return 1040ez   Qualified rent-to-own property is property held by a rent-to-own dealer for purposes of being subject to a rent-to-own contract. Income tax return 1040ez It is tangible personal property generally used in the home for personal use. Income tax return 1040ez It includes computers and peripheral equipment, televisions, videocassette recorders, stereos, camcorders, appliances, furniture, washing machines and dryers, refrigerators, and other similar consumer durable property. Income tax return 1040ez Consumer durable property does not include real property, aircraft, boats, motor vehicles, or trailers. Income tax return 1040ez   If some of the property you rent to others under a rent-to-own agreement is of a type that may be used by the renters for either personal or business purposes, you still can treat this property as qualified property as long as it does not represent a significant portion of your leasing property. Income tax return 1040ez However, if this dual-use property does represent a significant portion of your leasing property, you must prove that this property is qualified rent-to-own property. Income tax return 1040ez Rent-to-own dealer. Income tax return 1040ez   You are a rent-to-own dealer if you meet all the following requirements. Income tax return 1040ez You regularly enter into rent-to-own contracts (defined below) in the ordinary course of your business for the use of consumer property. Income tax return 1040ez A substantial portion of these contracts end with the customer returning the property before making all the payments required to transfer ownership. Income tax return 1040ez The property is tangible personal property of a type generally used within the home for personal use. Income tax return 1040ez Rent-to-own contract. Income tax return 1040ez   This is any lease for the use of consumer property between a rent-to-own dealer and a customer who is an individual which— Is titled “Rent-to-Own Agreement,” “Lease Agreement with Ownership Option,” or other similar language. Income tax return 1040ez Provides a beginning date and a maximum period of time, not to exceed 156 weeks or 36 months from the beginning date, for which the contract can be in effect (including renewals or options to extend). Income tax return 1040ez Provides for regular periodic (weekly or monthly) payments that can be either level or decreasing. Income tax return 1040ez If the payments are decreasing, no payment can be less than 40% of the largest payment. Income tax return 1040ez Provides for total payments that generally exceed the normal retail price of the property plus interest. Income tax return 1040ez Provides for total payments that do not exceed $10,000 for each item of property. Income tax return 1040ez Provides that the customer has no legal obligation to make all payments outlined in the contract and that, at the end of each weekly or monthly payment period, the customer can either continue to use the property by making the next payment or return the property in good working order with no further obligations and no entitlement to a return of any prior payments. Income tax return 1040ez Provides that legal title to the property remains with the rent-to-own dealer until the customer makes either all the required payments or the early purchase payments required under the contract to acquire legal title. Income tax return 1040ez Provides that the customer has no right to sell, sublease, mortgage, pawn, pledge, or otherwise dispose of the property until all contract payments have been made. Income tax return 1040ez Motorsports entertainment complex. Income tax return 1040ez   This is a racing track facility permanently situated on land that hosts one or more racing events for automobiles, trucks, or motorcycles during the 36-month period after the first day of the month in which the facility is placed in service. Income tax return 1040ez The events must be open to the public for the price of admission. Income tax return 1040ez Qualified smart electric grid system. Income tax return 1040ez   A qualified smart electric grid system means any smart grid property used as part of a system for electric distribution grid communications, monitoring, and management placed in service after October 3, 2008, by a taxpayer who is a supplier of electrical energy or a provider of electrical energy services. Income tax return 1040ez Smart grid property includes electronics and related equipment that is capable of: Sensing, collecting, and monitoring data of or from all portions of a utility's electric distribution grid, Providing real-time, two-way communications to monitor or to manage the grid, and Providing real-time analysis of an event prediction based on collected data that can be used to provide electric distribution system reliability, quality, and performance. Income tax return 1040ez Retail motor fuels outlet. Income tax return 1040ez   Real property is a retail motor fuels outlet if it is used to a substantial extent in the retail marketing of petroleum or petroleum products (whether or not it is also used to sell food or other convenience items) and meets any one of the following three tests. Income tax return 1040ez It is not larger than 1,400 square feet. Income tax return 1040ez 50% or more of the gross revenues generated from the property are derived from petroleum sales. Income tax return 1040ez 50% or more of the floor space in the property is devoted to petroleum marketing sales. Income tax return 1040ez A retail motor fuels outlet does not include any facility related to petroleum and natural gas trunk pipelines. Income tax return 1040ez Qualified leasehold improvement property. Income tax return 1040ez    Generally, this is any improvement to an interior part of a building (placed in service before January 1, 2014) that is nonresidential real property, provided all of the requirements discussed in chapter 3 under Qualified leasehold improvement property are met. Income tax return 1040ez   In addition, an improvement made by the lessor does not qualify as qualified leasehold improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor's death or in any of the following types of transactions. Income tax return 1040ez A transaction to which section 381(a) applies, A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business, A like-kind exchange, involuntary conversion, or reacquisition of real property to the extent that the basis in the property represents the carryover basis, or Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor's or distributor's basis in the property. Income tax return 1040ez Examples include the following. Income tax return 1040ez A complete liquidation of a subsidiary. Income tax return 1040ez A transfer to a corporation controlled by the transferor. Income tax return 1040ez An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. Income tax return 1040ez Qualified restaurant property. Income tax return 1040ez   Qualified restaurant property is any section 1250 property that is a building placed in service after December 31, 2008, and before January 1, 2014. Income tax return 1040ez Also, more than 50% of the building's square footage must be devoted to preparation of meals and seating for on-premises consumption of prepared meals. Income tax return 1040ez Qualified smart electric meter. Income tax return 1040ez   A qualified smart electric meter is any time-based meter and related communication equipment which is placed in service by a supplier of electric energy or a provider of electric energy services and which is capable of being used by you as part of a system that: Measures and records electricity usage data on a time-differentiated basis in at least 24 separate time segments per day; Provides for the exchange of information between the supplier or provider and the customer's smart electric meter in support of time-based rates or other forms of demand response; Provides data to the supplier or provider so that the supplier or provider can provide energy usage information to customers electronically, and Provides all commercial and residential customers of such supplier or provider with net metering. Income tax return 1040ez Net metering means allowing a customer a credit, if any, as complies with applicable federal and state laws and regulations for providing electricity to the supplier or provider. Income tax return 1040ez Natural gas gathering line and electric transmission property. Income tax return 1040ez   Any natural gas gathering line placed in service after April 11, 2005, is treated as 7-year property, and electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity and any natural gas distribution line placed in service after April 11, 2005, are treated as 15-year property, if the following requirements are met. Income tax return 1040ez The original use of the property must have begun with you after April 11, 2005. Income tax return 1040ez Original use means the first use to which the property is put, whether or not by you. Income tax return 1040ez Therefore, property used by any person before April 12, 2005, is not original use. Income tax return 1040ez Original use includes additional capital expenditures you incurred to recondition or rebuild your property. Income tax return 1040ez However, original use does not include the cost of reconditioned or rebuilt property you acquired. Income tax return 1040ez Property containing used parts will not be treated as reconditioned or rebuilt if the cost of the used parts is not more than 20% of the total cost of the property. Income tax return 1040ez The property must not be placed in service under a binding contract in effect before April 12, 2005. Income tax return 1040ez The property must not be self-constructed property (property you manufacture, construct, or produce for your own use), if you began the manufacture, construction, or production of the property before April 12, 2005. Income tax return 1040ez Property that is manufactured, constructed, or produced for your use by another person under a written binding contract entered into by you or a related party before the manufacture, construction, or production of the property is considered to be manufactured, constructed, or produced by you. Income tax return 1040ez What Is the Placed in Service Date? You begin to claim depreciation when your property is placed in service for either use in a trade or business or the production of income. Income tax return 1040ez The placed in service date for your property is the date the property is ready and available for a specific use. Income tax return 1040ez It is therefore not necessarily the date it is first used. Income tax return 1040ez 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. Income tax return 1040ez See Placed in Service under When Does Depreciation Begin and End in chapter 1 for examples illustrating when property is placed in service. Income tax return 1040ez 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. Income tax return 1040ez For a discussion of business/investment use, see Partial business or investment use under Property Used in Your Business or Income-Producing Activity in chapter 1 . Income tax return 1040ez Reduce that amount by any credits and deductions allocable to the property. Income tax return 1040ez The following are examples of some credits and deductions that reduce basis. Income tax return 1040ez Any deduction for section 179 property. Income tax return 1040ez Any deduction under section 179B of the Internal Revenue Code for capital costs to comply with Environmental Protection Agency sulfur regulations. Income tax return 1040ez Any deduction under section 179C of the Internal Revenue Code for certain qualified refinery property placed in service after August 8, 2005, and before January 1, 2014. Income tax return 1040ez Any deduction under section 179D of the Internal Revenue Code for certain energy efficient commercial building property placed in service after December 31, 2005, and before January 1, 2014. Income tax return 1040ez Any deduction under section 179E of the Internal Revenue Code for qualified advanced mine safety equipment property placed in service after December 20, 2006, and before January 1, 2014 . Income tax return 1040ez Any deduction for removal of barriers to the disabled and the elderly. Income tax return 1040ez Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. Income tax return 1040ez Any special depreciation allowance. Income tax return 1040ez Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. Income tax return 1040ez For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. Income tax return 1040ez Enter the basis for depreciation under column (c) in Part III of Form 4562. Income tax return 1040ez For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property in chapter 1 . Income tax return 1040ez Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. Income tax return 1040ez It is determined based on the depreciation system (GDS or ADS) used. Income tax return 1040ez Recovery Periods Under GDS Under GDS, property that is not qualified Indian reservation property is depreciated over one of the following recovery periods. Income tax return 1040ez Property Class Recovery Period 3-year property   3 years 1   5-year property   5 years     7-year property   7 years     10-year property   10 years     15-year property   15 years 2   20-year property   20 years     25-year property   25 years 3   Residential rental property   27. Income tax return 1040ez 5 years     Nonresidential real property   39 years 4   15 years for qualified rent-to-own property placed in service before August 6, 1997. Income tax return 1040ez 239 years for property that is a retail motor fuels outlet placed in service before August 20, 1996 (31. Income tax return 1040ez 5 years if placed in service before May 13, 1993), unless you elected to depreciate it over 15 years. Income tax return 1040ez 320 years for property placed in service before June 13, 1996, or under a binding contract in effect before June 10, 1996. Income tax return 1040ez 431. Income tax return 1040ez 5 years for property placed in service before May 13, 1993 (or before January 1, 1994, if the purchase or construction of the property is under a binding contract in effect before May 13, 1993, or if construction began before May 13, 1993). Income tax return 1040ez The GDS recovery periods for property not listed above can be found in Appendix B, Table of Class Lives and Recovery Periods. Income tax return 1040ez Residential rental property and nonresidential real property are defined earlier under Which Depreciation System (GDS or ADS) Applies. Income tax return 1040ez Enter the appropriate recovery period on Form 4562 under column (d) in section B of Part III, unless already shown (for 25-year property, residential rental property, and nonresidential real property). Income tax return 1040ez Office in the home. Income tax return 1040ez   If your home is a personal-use single family residence and you begin to use part of your home as an office, depreciate that part of your home as nonresidential real property over 39 years (31. Income tax return 1040ez 5 years if you began using it for business before May 13, 1993). Income tax return 1040ez However, if your home is an apartment in an apartment building that you own and the building is residential rental property as defined earlier under Which Depreciation System (GDS or ADS) Applies , depreciate the part used as an office as residential rental property over 27. Income tax return 1040ez 5 years. Income tax return 1040ez See Publication 587 for a discussion of the tests you must meet to claim expenses, including depreciation, for the business use of your home. Income tax return 1040ez Home changed to rental use. Income tax return 1040ez   If you begin to rent a home that was your personal home before 1987, you depreciate it as residential rental property over 27. Income tax return 1040ez 5 years. Income tax return 1040ez Indian Reservation Property The recovery periods for qualified property you placed in service on an Indian reservation after 1993 and before 2014 are shorter than those listed earlier. Income tax return 1040ez The following table shows these shorter recovery periods. Income tax return 1040ez Property Class Recovery  Period 3-year property 2 years 5-year property 3 years 7-year property 4 years 10-year property 6 years 15-year property 9 years 20-year property 12 years Nonresidential real property 22 years Nonresidential real property is defined earlier under Which Property Class Applies Under GDS . Income tax return 1040ez Use this chart to find the correct percentage table to use for qualified Indian reservation property. Income tax return 1040ez IF your recovery period is: THEN use the following table in Appendix A: 2 years A-21 3 years A-1, A-2, A-3, A-4, or A-5 4 years A-22 6 years A-23 9 years A-14, A-15, A-16, A-17, or A-18 12 years A-14, A-15, A-16, A-17, or A-18 22 years A-24 Qualified property. Income tax return 1040ez   Property eligible for the shorter recovery periods are 3-, 5-, 7-, 10-, 15-, and 20-year property and nonresidential real property. Income tax return 1040ez You must use this property predominantly in the active conduct of a trade or business within an Indian reservation. Income tax return 1040ez The rental of real property that is located on an Indian reservation is treated as the active conduct of a trade or business within an Indian reservation. Income tax return 1040ez   The following property is not qualified property. Income tax return 1040ez Property used or located outside an Indian reservation on a regular basis, other than qualified infrastructure property. Income tax return 1040ez Property acquired directly or indirectly from a related person. Income tax return 1040ez Property placed in service for purposes of conducting or housing class I, II, or III gaming activities. Income tax return 1040ez These activities are defined in section 4 of the Indian Regulatory Act (25 U. Income tax return 1040ez S. Income tax return 1040ez C. Income tax return 1040ez 2703). Income tax return 1040ez Any property you must depreciate under ADS. Income tax return 1040ez Determine whether property is qualified without regard to the election to use ADS and after applying the special rules for listed property not used predominantly for qualified business use (discussed in chapter 5). Income tax return 1040ez Qualified infrastructure property. Income tax return 1040ez   Item (1) above does not apply to qualified infrastructure property located outside the reservation that is used to connect with qualified infrastructure property within the reservation. Income tax return 1040ez Qualified infrastructure property is property that meets all the following rules. Income tax return 1040ez It is qualified property, as defined earlier, except that it is outside the reservation. Income tax return 1040ez It benefits the tribal infrastructure. Income tax return 1040ez It is available to the general public. Income tax return 1040ez It is placed in service in connection with the active conduct of a trade or business within a reservation. Income tax return 1040ez Infrastructure property includes, but is not limited to, roads, power lines, water systems, railroad spurs, and communications facilities. Income tax return 1040ez Related person. Income tax return 1040ez   For purposes of item (2) above, see Related persons in the discussion on property owned or used in 1986 under What Method Can You Use To Depreciate Your Property in chapter 1 for a description of related persons. Income tax return 1040ez Indian reservation. Income tax return 1040ez   The term Indian reservation means a reservation as defined in section 3(d) of the Indian Financing Act of 1974 (25 U. Income tax return 1040ez S. Income tax return 1040ez C. Income tax return 1040ez 1452(d)) or section 4(10) of the Indian Child Welfare Act of 1978 (25 U. Income tax return 1040ez S. Income tax return 1040ez C. Income tax return 1040ez 1903(10)). Income tax return 1040ez Section 3(d) of the Indian Financing Act of 1974 defines reservation to include former Indian reservations in Oklahoma. Income tax return 1040ez For a definition of the term “former Indian reservations in Oklahoma,” see Notice 98-45 in Internal Revenue Bulletin 1998-35. Income tax return 1040ez Recovery Periods Under ADS The recovery periods for most property generally are longer under ADS than they are under GDS. Income tax return 1040ez The following table shows some of the ADS recovery periods. Income tax return 1040ez Property Recovery  Period Rent-to-own property 4 years Automobiles and light duty trucks 5 years Computers and peripheral equipment 5 years High technology telephone station equipment installed on customer premises 5 years High technology medical equipment 5 years Personal property with no class life 12 years Natural gas gathering lines 14 years Single purpose agricultural and horticultural structures 15 years Any tree or vine bearing fruit or nuts 20 years Initial clearing and grading land  improvements for gas utility property 20 years Initial clearing and grading land  improvements for electric utility  transmission and distribution plants 25 years Electric transmission property used in the transmission at 69 or more kilovolts of electricity 30 years Natural gas distribution lines 35 years Any qualified leasehold improvement property 39 years Any qualified restaurant property 39 years Nonresidential real property 40 years Residential rental property 40 years Section 1245 real property not listed in Appendix B 40 years Railroad grading and tunnel bore 50 years The ADS recovery periods for property not listed above can be found in the tables in Appendix B. Income tax return 1040ez Rent-to-own property, qualified leasehold improvement property, qualified restaurant property, residential rental property, and nonresidential real property are defined earlier under Which Property Class Applies Under GDS . Income tax return 1040ez Tax-exempt use property subject to a lease. Income tax return 1040ez   The ADS recovery period for any property leased under a lease agreement to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership) cannot be less than 125% of the lease term. Income tax return 1040ez Additions and Improvements An addition or improvement you make to depreciable property is treated as separate depreciable property. Income tax return 1040ez See How Do You Treat Repairs and Improvements in chapter 1 for a definition of improvements. Income tax return 1040ez Its property class and recovery period are the same as those that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. Income tax return 1040ez The recovery period begins on the later of the following dates. Income tax return 1040ez The date you place the addition or improvement in service. Income tax return 1040ez The date you place in service the property to which you made the addition or improvement. Income tax return 1040ez If the improvement you make is qualified leasehold improvement property, qualified restaurant property, or qualified retail improvement property, the GDS recovery period is 15 years (39 years under ADS). Income tax return 1040ez Example. Income tax return 1040ez You own a rental home that you have been renting out since 1981. Income tax return 1040ez If you put an addition on the home and place the addition in service this year, you would use MACRS to figure your depreciation deduction for the addition. Income tax return 1040ez Under GDS, the property class for the addition is residential rental property and its recovery period is 27. Income tax return 1040ez 5 years because the home to which the addition is made would be residential rental property if you had placed it in service this year. Income tax return 1040ez Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. Income tax return 1040ez 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. Income tax return 1040ez The mid-month convention. Income tax return 1040ez   Use this convention for nonresidential real property, residential rental property, and any railroad grading or tunnel bore. Income tax return 1040ez   Under this convention, you treat all property placed in service or disposed of during a month as placed in service or disposed of at the midpoint of the month. Income tax return 1040ez This means that a one-half month of depreciation is allowed for the month the property is placed in service or disposed of. Income tax return 1040ez   Your use of the mid-month convention is indicated by the “MM” already shown under column (e) in Part III of Form 4562. Income tax return 1040ez The mid-quarter convention. Income tax return 1040ez   Use this convention if the mid-month convention does not apply and the total depreciable bases of MACRS property you placed in service during the last 3 months of the tax year (excluding nonresidential real property, residential rental property, any railroad grading or tunnel bore, property placed in service and disposed of in the same year, and property that is being depreciated under a method other than MACRS) are more than 40% of the total depreciable bases of all MACRS property you placed in service during the entire year. Income tax return 1040ez   Under this convention, you treat all property placed in service or disposed of during any quarter of the tax year as placed in service or disposed of at the midpoint of that quarter. Income tax return 1040ez This means that 1½ months of depreciation is allowed for the quarter the property is placed in service or disposed of. Income tax return 1040ez   If you use this convention, enter “MQ” under column (e) in Part III of Form 4562. Income tax return 1040ez    For purposes of determining whether the mid-quarter convention applies, the depreciable basis of property you placed in service during the tax year reflects the reduction in basis for amounts expensed under section 179 and the part of the basis of property attributable to personal use. Income tax return 1040ez However, it does not reflect any reduction in basis for any special depreciation allowance. Income tax return 1040ez The half-year convention. Income tax return 1040ez   Use this convention if neither the mid-quarter convention nor the mid-month convention applies. Income tax return 1040ez   Under this convention, you treat all property placed in service or disposed of during a tax year as placed in service or disposed of at the midpoint of the year. Income tax return 1040ez This means that a one-half year of depreciation is allowed for the year the property is placed in service or disposed of. Income tax return 1040ez   If you use this convention, enter “HY” under column (e) in Part III of Form 4562. Income tax return 1040ez Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. Income tax return 1040ez The 200% declining balance method over a GDS recovery period. Income tax return 1040ez The 150% declining balance method over a GDS recovery period. Income tax return 1040ez The straight line method over a GDS recovery period. Income tax return 1040ez The straight line method over an ADS recovery period. Income tax return 1040ez For property placed in service before 1999, you could have elected the 150% declining balance method using the ADS recovery periods for certain property classes. Income tax return 1040ez If you made this election, continue to use the same method and recovery period for that property. Income tax return 1040ez Table 4–1 lists the types of property you can depreciate under each method. Income tax return 1040ez It also gives a brief explanation of the method, including any benefits that may apply. Income tax return 1040ez Depreciation Methods for Farm Property If you place personal property in service in a farming business after 1988, you generally must depreciate it under GDS using the 150% declining balance method unless you are a farmer who must depreciate the property under ADS using the straight line method or you elect to depreciate the property under GDS or ADS using the straight line method. Income tax return 1040ez You can depreciate real property using the straight line method under either GDS or ADS. Income tax return 1040ez Fruit or nut trees and vines. Income tax return 1040ez   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a recovery period of 10 years. Income tax return 1040ez ADS required for some farmers. Income tax return 1040ez   If you elect not to apply the uniform capitalization rules to any plant produced in your farming business, you must use ADS. Income tax return 1040ez You must use ADS for all property you place in service in any year the election is in effect. Income tax return 1040ez See the regulations under section 263A of the Internal Revenue Code for information on the uniform capitalization rules that apply to farm property. Income tax return 1040ez Electing a Different Method As shown in Table 4–1 , you can elect a different method for depreciation for certain types of property. Income tax return 1040ez You must make the election by the due date of the return (including extensions) for the year you placed the property in service. Income tax return 1040ez 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 return (excluding extensions). Income tax return 1040ez Attach the election to the amended return and write “Filed pursuant to section 301. Income tax return 1040ez 9100-2” on the election statement. Income tax return 1040ez File the amended return at the same address you filed the original return. Income tax return 1040ez Once you make the election, you cannot change it. Income tax return 1040ez 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. Income tax return 1040ez However, you can make the election on a property-by-property basis for nonresidential real and residential rental property. Income tax return 1040ez 150% election. Income tax return 1040ez   Instead of using the 200% declining balance method over the GDS recovery period for nonfarm property in the 3-, 5-, 7-, and 10-year property classes, you can elect to use the 150% declining balance method. Income tax return 1040ez Make the election by entering “150 DB” under column (f) in Part III of Form 4562. Income tax return 1040ez Straight line election. Income tax return 1040ez   Instead of using either the 200% or 150% declining balance methods over the GDS recovery period, you can elect to use the straight line method over the GDS recovery period. Income tax return 1040ez Make the election by entering  “S/L” under column (f) in Part III of Form 4562. Income tax return 1040ez Election of ADS. Income tax return 1040ez   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. Income tax return 1040ez ADS uses the straight line method of depreciation over fixed ADS recovery periods. Income tax return 1040ez Most ADS recovery periods are listed in Appendix B, or see the table under Recovery Periods Under ADS , earlier. Income tax return 1040ez   Make the election by completing line 20 in Part III of Form 4562. Income tax return 1040ez Farm property. Income tax return 1040ez   Instead of using the 150% declining balance method over a GDS recovery period for property you use in a farming business (other than real property), you can elect to depreciate it using either of the following methods. Income tax return 1040ez The straight line method over a GDS recovery period. Income tax return 1040ez The straight line method over an ADS recovery period. Income tax return 1040ez Table 4-1. Income tax return 1040ez Depreciation Methods Note. Income tax return 1040ez The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. Income tax return 1040ez Method Type of Property Benefit GDS using 200% DB • Nonfarm 3-, 5-, 7-, and 10-year property • Provides a greater deduction during the earlier recovery years • Changes to SL when that method provides an equal or greater deduction GDS using 150% DB • All farm property (except real property) • All 15- and 20-year property (except qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property placed in service before January 1, 2014) • Nonfarm 3-, 5-, 7-, and 10-year property • Provides a greater deduction during the earlier recovery years • Changes to SL when that method provides an equal or greater deduction1 GDS using SL • Nonresidential real property • Qualified leasehold improvement property placed in service before January 1, 2014 • Qualified restaurant property placed in service before January 1, 2014 • Qualified retail improvement property placed in service before January 1, 2014 • Residential rental property • Trees or vines bearing fruit or nuts • Water utility property • All 3-, 5-, 7-, 10-, 15-, and 20-year property2 • Property for which you elected section 168(k)(4) • Provides for equal yearly deductions (except for the first and last years) ADS using SL • Listed property used 50% or less for business • Property used predominantly outside the U. Income tax return 1040ez S. Income tax return 1040ez  • Tax-exempt property • Tax-exempt bond-financed property • Farm property used when an election not to apply the uniform capitalization rules is in effect • Imported property3 • Any property for which you elect to use this method4 • Provides for equal yearly deductions (except for the first and last years) 1The MACRS percentage tables in Appendix A have the switch to the straight line method built into their rates 2See section 168(b)(5) of the Internal Revenue Code. Income tax return 1040ez 3See section 168(g)(6) of the Internal Revenue Code 4See section 168(g)(7) of the Internal Revenue Code 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. Income tax return 1040ez Then, you are ready to figure your depreciation deduction. Income tax return 1040ez You can figure it using a percentage table provided by the IRS, or you can figure it yourself without using the table. Income tax return 1040ez 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. Income tax return 1040ez These percentage tables are in Appendix A near the end of this publication. Income tax return 1040ez Which table to use. Income tax return 1040ez    Appendix A contains the MACRS Percentage Table Guide, which is designed to help you locate the correct percentage table to use for depreciating your property. Income tax return 1040ez The percentage tables immediately follow the guide. Income tax return 1040ez Rules Covering the Use of the Tables The following rules cover the use of the percentage tables. Income tax return 1040ez You must apply the rates in the percentage tables to your property's unadjusted basis. Income tax return 1040ez You cannot use the percentage tables for a short tax year. Income tax return 1040ez See Figuring the Deduction for a Short Tax Year, later, for information on the short tax year rules. Income tax return 1040ez Once you start using the percentage tables for any item of property, you generally must continue to use them for the entire recovery period of the property. Income tax return 1040ez 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 that property that is depreciated as a separate item of property. Income tax return 1040ez Basis adjustments other than those made due to the items listed in (4) include an increase in basis for the recapture of a clean-fuel deduction or credit and a reduction in basis for a casualty loss. Income tax return 1040ez Basis adjustment due to recapture of clean-fuel vehicle deduction or credit. Income tax return 1040ez   If you increase the basis of your property because of the recapture of part or all of a deduction for clean-fuel vehicles or the credit for clean-fuel vehicle refueling property placed in service before January 1, 2006, you cannot continue to use the percentage tables. Income tax return 1040ez For the year of the adjustment and the remaining recovery period, you must figure the depreciation deduction yourself using the property's adjusted basis at the end of the year. Income tax return 1040ez See Figuring the Deduction Without Using the Tables, later. Income tax return 1040ez Basis adjustment due to casualty loss. Income tax return 1040ez   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. Income tax return 1040ez 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. Income tax return 1040ez See Figuring the Deduction Without Using the Tables, later. Income tax return 1040ez Example. Income tax return 1040ez On October 26, 2012, Sandra Elm, a calendar year taxpayer, bought and placed in service in her business a new item of 7-year property. Income tax return 1040ez It cost $39,000 and she elected a section 179 deduction of $24,000. Income tax return 1040ez She also took a special depreciation allowance of $7,500 [50% of $15,000 ($39,000 − $24,000)]. Income tax return 1040ez Her unadjusted basis after the section 179 deduction and special depreciation allowance was $7,500 ($15,000 − $7,500). Income tax return 1040ez She figured her MACRS depreciation deduction using the percentage tables. Income tax return 1040ez For 2012, her MACRS depreciation deduction was $268. Income tax return 1040ez In July 2013, the property was vandalized and Sandra had a deductible casualty loss of $3,000. Income tax return 1040ez She must adjust the property's basis for the casualty loss, so she can no longer use the percentage tables. Income tax return 1040ez Her adjusted basis at the end of 2013, before figuring her 2013 depreciation, is $4,232. Income tax return 1040ez She figures that amount by subtracting the 2012 MACRS depreciation of $268 and the casualty loss of $3,000 from the unadjusted basis of $7,500. Income tax return 1040ez She must now figure her depreciation for 2013 without using the percentage tables. Income tax return 1040ez Figuring the Unadjusted Basis of Your Property You must apply the table rates to your property's unadjusted basis each year of the recovery period. Income tax return 1040ez Unadjusted basis is the same basis amount you would use to figure gain on a sale, but you figure it without reducing your original basis by any MACRS depreciation taken in earlier years. Income tax return 1040ez However, you do reduce your original basis by other amounts, including the following. Income tax return 1040ez Any amortization taken on the property. Income tax return 1040ez Any section 179 deduction claimed. Income tax return 1040ez Any special depreciation allowance taken on the property. Income tax return 1040ez For business property you purchase during the year, the unadjusted basis is its cost minus these and other applicable adjustments. Income tax return 1040ez If you trade property, your unadjusted basis in the property received is the cash paid plus the adjusted basis of the property traded minus these adjustments. Income tax return 1040ez MACRS Worksheet You can use this worksheet to help you figure your depreciation deduction using the percentage tables. Income tax return 1040ez Use a separate worksheet for each item of property. Income tax return 1040ez Then, use the information from this worksheet to prepare Form 4562. Income tax return 1040ez Do not use this worksheet for automobiles. Income tax return 1040ez Use the Depreciation Worksheet for Passenger Automobiles in chapter 5. Income tax return 1040ez MACRS Worksheet Part I   1. Income tax return 1040ez MACRS system (GDS or ADS)   2. Income tax return 1040ez Property class   3. Income tax return 1040ez Date placed in service   4. Income tax return 1040ez Recovery period   5. Income tax return 1040ez Method and convention   6. Income tax return 1040ez Depreciation rate (from tables)   Part II   7. Income tax return 1040ez Cost or other basis* $     8. Income tax return 1040ez Business/investment use   %   9. Income tax return 1040ez Multiply line 7 by line 8   $ 10. Income tax return 1040ez Total claimed for section 179 deduction and other items   $ 11. Income tax return 1040ez Subtract line 10 from line 9. Income tax return 1040ez This is your tentative basis for depreciation   $ 12. Income tax return 1040ez Multiply line 11 by . Income tax return 1040ez 50 if the 50% special depreciation allowance applies. Income tax return 1040ez This is your special depreciation allowance. Income tax return 1040ez Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance   $ 13. Income tax return 1040ez Subtract line 12 from line 11. Income tax return 1040ez This is your basis for depreciation     14. Income tax return 1040ez Depreciation rate (from line 6)     15. Income tax return 1040ez Multiply line 13 by line 14. Income tax return 1040ez This is your MACRS depreciation deduction   $ *If real estate, do not include cost (basis) of land. Income tax return 1040ez The following example shows how to figure your MACRS depreciation deduction using the percentage tables and the MACRS worksheet. Income tax return 1040ez Example. Income tax return 1040ez You bought office furniture (7-year property) for $10,000 and placed it in service on August 11, 2013. Income tax return 1040ez You use the furniture only for business. Income tax return 1040ez This is the only property you placed in service this year. Income tax return 1040ez You did not elect a section 179 deduction and the property is not qualified property for purposes of claiming a special depreciation allowance so your property's unadjusted basis is its cost, $10,000. Income tax return 1040ez You use GDS and the half-year convention to figure your depreciation. Income tax return 1040ez You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-1. Income tax return 1040ez Multiply your property's unadjusted basis each year by the percentage for 7-year property given in Table A-1. Income tax return 1040ez You figure your depreciation deduction using the MACRS worksheet as follows. Income tax return 1040ez MACRS Worksheet Part I 1. Income tax return 1040ez MACRS system (GDS or ADS) GDS 2. Income tax return 1040ez Property class 7-year 3. Income tax return 1040ez Date placed in service 8/11/13 4. Income tax return 1040ez Recovery period 7-Year 5. Income tax return 1040ez Method and convention 200%DB/Half-Year 6. Income tax return 1040ez Depreciation rate (from tables) . Income tax return 1040ez 1429 Part II 7. Income tax return 1040ez Cost or other basis* $10,000     8. Income tax return 1040ez Business/investment use 100 %   9. Income tax return 1040ez Multiply line 7 by line 8   $10,000 10. Income tax return 1040ez Total claimed for section 179 deduction and other items   -0- 11. Income tax return 1040ez Subtract line 10 from line 9. Income tax return 1040ez This is your tentative basis for depreciation   $10,000 12. Income tax return 1040ez Multiply line 11 by . Income tax return 1040ez 50 if the 50% special depreciation allowance applies. Income tax return 1040ez This is your special depreciation allowance. Income tax return 1040ez Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance   -0- 13. Income tax return 1040ez Subtract line 12 from line 11. Income tax return 1040ez This is your basis for depreciation   $10,000 14. Income tax return 1040ez Depreciation rate (from line 6)   . Income tax return 1040ez 1429 15. Income tax return 1040ez Multiply line 13 by line 14. Income tax return 1040ez This is your MACRS depreciation deduction   $1,429 *If real estate, do not include cost (basis) of land. Income tax return 1040ez If there are no adjustments to the basis of the property other than depreciation, your depreciation deduction for each subsequent year of the recovery period will be as follows. Income tax return 1040ez Year   Basis Percentage Deduction 2014 $ 10,000 24. Income tax return 1040ez 49%   $2,449   2015   10,000 17. Income tax return 1040ez 49   1,749   2016   10,000 12. Income tax return 1040ez 49   1,249   2017   10,000 8. Income tax return 1040ez 93   893   2018   10,000 8. Income tax return 1040ez 92   892   2019   10,000 8. Income tax return 1040ez 93   893   2020   10,000 4. Income tax return 1040ez 46   446   Examples The following examples are provided to show you how to use the percentage tables. Income tax return 1040ez In both examples, assume the following. Income tax return 1040ez You use the property only for business. Income tax return 1040ez You use the calendar year as your tax year. Income tax return 1040ez You use GDS for all the properties. Income tax return 1040ez Example 1. Income tax return 1040ez You bought a building and land for $120,000 and placed it in service on March 8. Income tax return 1040ez The sales contract showed that the building cost $100,000 and the land cost $20,000. Income tax return 1040ez It is nonresidential real property. Income tax return 1040ez The building's unadjusted basis is its original cost, $100,000. Income tax return 1040ez You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-7a. Income tax return 1040ez March is the third month of your tax year, so multiply the building's unadjusted basis, $100,000, by the percentages for the third month in Table A-7a. Income tax return 1040ez Your depreciation deduction for each of the first 3 years is as follows: Year   Basis Percentage Deduction 1st $ 100,000 2. Income tax return 1040ez 033%   $2,033   2nd   100,000 2. Income tax return 1040ez 564   2,564   3rd   100,000 2. Income tax return 1040ez 564   2,564   Example 2. Income tax return 1040ez During the year, you bought a machine (7-year property) for $4,000, office furniture (7-year property) for $1,000, and a computer (5-year property) for $5,000. Income tax return 1040ez You placed the machine in service in January, the furniture in September, and the computer in October. Income tax return 1040ez You do not elect a section 179 deduction and none of these items is qualified property for purposes of claiming a special depreciation allowance. Income tax return 1040ez You placed property in service during the last 3 months of the year, so you must first determine if you have to use the mid-quarter convention. Income tax return 1040ez The total bases of all property you placed in service during the year is $10,000. Income tax return 1040ez The $5,000 basis of the computer, which you placed in service during the last 3 months (the fourth quarter) of your tax year, is more than 40% of the total bases of all property ($10,000) you placed in service during the year. Income tax return 1040ez Therefore, you must use the mid-quarter convention for all three items. Income tax return 1040ez You refer to the MACRS Percentage Table Guide in Appendix A to determine which table you should use under the mid-quarter convention. Income tax return 1040ez The machine is 7-year property placed in service in the first quarter, so you use Table A-2. Income tax return 1040ez The furniture is 7-year property placed in service in the third quarter, so you use Table A-4. Income tax return 1040ez Finally, because the computer is 5-year property placed in service in the fourth quarter, you use Table A-6. Income tax return 1040ez Knowing what table to use for each property, you figure the depreciation for the first 2 years as follows. Income tax return 1040ez Year Property Basis Percentage Deduction 1st Machine $4,000 25. Income tax return 1040ez 00 $1,000   2nd Machine 4,000 21. Income tax return 1040ez 43 857   1st Furniture 1,000 10. Income tax return 1040ez 71 107   2nd Furniture 1,000 25. Income tax return 1040ez 51 255   1st Computer 5,000 5. Income tax return 1040ez 00 250   2nd Computer 5,000 38. Income tax return 1040ez 00 1,900   Sale or Other Disposition Before the Recovery Period Ends If you sell or otherwise dispose of your property before the end of its recovery period, your depreciation deduction for the year of the disposition will be only part of the depreciation amount for the full year. Income tax return 1040ez You have disposed of your property if you have permanently withdrawn it from use in your business or income-producing activity because of its sale, exchange, retirement, abandonment, involuntary conversion, or destruction. Income tax return 1040ez After you figure the full-year depreciation amount, figure the deductible part using the convention that applies to the property. Income tax return 1040ez Half-year convention used. Income tax return 1040ez   For property for which you used a half-year convention, the depreciation deduction for the year of the disposition is half the depreciation determined for the full year. Income tax return 1040ez Mid-quarter convention used. Income tax return 1040ez   For property for which you used the mid-quarter convention, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter in which you disposed of the property. Income tax return 1040ez Quarter Percentage First 12. Income tax return 1040ez 5% Second 37. Income tax return 1040ez 5 Third 62. Income tax return 1040ez 5 Fourth 87. Income tax return 1040ez 5 Example. Income tax return 1040ez On December 2, 2010, you placed in service an item of 5-year property costing $10,000. Income tax return 1040ez You did not claim a section 179 deduction and the property does not qualify for a special depreciation allowance. Income tax return 1040ez Your unadjusted basis for the property was $10,000. Income tax return 1040ez You used the mid-quarter convention because this was the only item of business property you placed in service in 2010 and it was placed in service during the last 3 months of your tax year. Income tax return 1040ez Your property is in the 5-year property class, so you used Table A-5 to figure your depreciation deduction. Income tax return 1040ez Your deductions for 2010, 2011, and 2012 were $500 (5% of $10,000), $3,800 (38% of $10,000), and $2,280 (22. Income tax return 1040ez 80% of $10,000). Income tax return 1040ez You disposed of the property on April 6, 2013. Income tax return 1040ez To determine your depreciation deduction for 2013, first figure the deduction for the full year. Income tax return 1040ez This is $1,368 (13. Income tax return 1040ez 68% of $10,000). Income tax return 1040ez April is in the second quarter of the year, so you multiply $1,368 by 37. Income tax return 1040ez 5% to get your depreciation deduction of $513 for 2013. Income tax return 1040ez Mid-month convention used. Income tax return 1040ez   If you dispose of residential rental or nonresidential real property, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by a fraction. Income tax return 1040ez The numerator of the fraction is the number of months (including partial months) in the year that the property is considered in service. Income tax return 1040ez The denominator is 12. Income tax return 1040ez Example. Income tax return 1040ez On July 2, 2011, you purchased and placed in service residential rental property. Income tax return 1040ez The property cost $100,000, not including the cost of land. Income tax return 1040ez You used Table A-6 to figure your MACRS depreciation for this property. Income tax return 1040ez You sold the property on March 2, 2013. Income tax return 1040ez You file your tax return based on the calendar year. Income tax return 1040ez A full year of depreciation for 2013 is $3,636. Income tax return 1040ez This is $100,000 multiplied by . Income tax return 1040ez 03636 (the percentage for the seventh month of the third recovery year) from Table A-6 . Income tax return 1040ez You then apply the mid-month convention for the 2½ months of use in 2013. Income tax return 1040ez Treat the month of disposition as one-half month of use. Income tax return 1040ez Multiply $3,636 by the fraction, 2. Income tax return 1040ez 5 over 12, to get your 2013 depreciation deduction of $757. Income tax return 1040ez 50. Income tax return 1040ez Figuring the Deduction Without Using the Tables Instead of using the rates in the percentage tables to figure your depreciation deduction, you can figure it yourself. Income tax return 1040ez Before making the computation each year, you must reduce your adjusted basis in the property by the depreciation claimed the previous year. Income tax return 1040ez Figuring MACRS deductions without using the tables generally will result in a slightly different amount than using the tables. Income tax return 1040ez Declining Balance Method When using a declining balance method, you apply the same depreciation rate each year to the adjusted basis of your property. Income tax return 1040ez You must use the applicable convention for the first tax year and you must switch to the straight line method beginning in the first year for which it will give an equal or greater deduction. Income tax return 1040ez The straight line method is explained later. Income tax return 1040ez You figure depreciation for the year you place property in service as follows. Income tax return 1040ez Multiply your adjusted basis in the property by the declining balance rate. Income tax return 1040ez Apply the applicable convention. Income tax return 1040ez You figure depreciation for all other years (before the year you switch to the straight line method) as follows. Income tax return 1040ez Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years. Income tax return 1040ez Multiply this new adjusted basis by the same declining balance rate used in earlier years. Income tax return 1040ez If you dispose of property before the end of its recovery period, see Using the Applicable Convention, later, for information on how to figure depreciation for the year you dispose of it. Income tax return 1040ez Figuring depreciation under the declining balance method and switching to the straight line method is illustrated in Example 1 , later, under Examples. Income tax return 1040ez Declining balance rate. Income tax return 1040ez   You figure your declining balance rate by dividing the specified declining balance percentage (150% or 200% changed to a decimal) by the number of years in the property's recovery period. Income tax return 1040ez For example, for 3-year property depreciated using the 200% declining balance method, divide 2. Income tax return 1040ez 00 (200%) by 3 to get 0. Income tax return 1040ez 6667, or a 66. Income tax return 1040ez 67% declining balance rate. Income tax return 1040ez For 15-year property depreciated using the 150% declining balance method, divide 1. Income tax return 1040ez 50 (150%) by 15 to get 0. Income tax return 1040ez 10, or a 10% declining balance rate. Income tax return 1040ez   The following table shows the declining balance rate for each property class and the first year for which the straight line method gives an equal or greater deduction. Income tax return 1040ez Property Class Method Declining Balance Rate Year 3-year 200% DB 66. Income tax return 1040ez 667% 3rd 5-year 200% DB 40. Income tax return 1040ez 0 4th 7-year 200% DB 28. Income tax return 1040ez 571 5th 10-year 200% DB 20. Income tax return 1040ez 0 7th 15-year 150% DB 10. Income tax return 1040ez 0 7th 20-year 150% DB 7. Income tax return 1040ez 5 9th Straight Line Method When using the straight line method, you apply a different depreciation rate each year to the adjusted basis of your property. Income tax return 1040ez You must use the applicable convention in the year you place the property in service and the year you dispose of the property. Income tax return 1040ez You figure depreciation for the year you place property in service as follows. Income tax return 1040ez Multiply your adjusted basis in the property by the straight line rate. Income tax return 1040ez Apply the applicable convention. Income tax return 1040ez You figure depreciation for all other years (including the year you switch from the declining balance method to the straight line method) as follows. Income tax return 1040ez Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years (under any method). Income tax return 1040ez Determine the depreciation rate for the year. Income tax return 1040ez Multiply the adjusted basis figured in (1) by the depreciation rate figured in (2). Income tax return 1040ez If you dispose of property before the end of its recovery period, see Using the Applicable Convention , later, for information on how to figure depreciation for the year you dispose of it. Income tax return 1040ez Straight line rate. Income tax return 1040ez   You determine the straight line depreciation rate for any tax year by dividing the number 1 by the years remaining in the recovery period at the beginning of that year. Income tax return 1040ez When figuring the number of years remaining, you must take into account the convention used in the year you placed the property in service. Income tax return 1040ez If the number of years remaining is less than 1, the depreciation rate for that tax year is 1. Income tax return 1040ez 0 (100%). Income tax return 1040ez Using the Applicable Convention The applicable convention (discussed earlier under Which Convention Applies ) affects how you figure your depreciation deduction for the year you place your property in service and for the year you dispose of it. Income tax return 1040ez It determines how much of the recovery period remains at the beginning of each year, so it also affects the depreciation rate for property you depreciate under the straight line method. Income tax return 1040ez See Straight line rate in the previous discussion. Income tax return 1040ez Use the applicable convention as explained in the following discussions. Income tax return 1040ez Half-year convention. Income tax return 1040ez   If this convention applies, you deduct a half-year of depreciation for the first year and the last year that you depreciate the property. Income tax return 1040ez You deduct a full year of depreciation for any other year during the recovery period. Income tax return 1040ez   Figure your depreciation deduction for the year you place the property in service by dividing the depreciation for a full year by 2. Income tax return 1040ez If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. Income tax return 1040ez If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final 6 months of the recovery period is the amount of your unrecovered basis in the property. Income tax return 1040ez Mid-quarter convention. Income tax return 1040ez   If this convention applies, the depreciation you can deduct for the first year you depreciate the property depends on the quarter in which you place the property in service. Income tax return 1040ez   A quarter of a full 12-month tax year is a period of 3 months. Income tax return 1040ez The first quarter in a year begins on the first day of the tax year. Income tax return 1040ez The second quarter begins on the first day of the fourth month of the tax year. Income tax return 1040ez The third quarter begins on the first day of the seventh month of the tax year. Income tax return 1040ez The fourth quarter begins on the first day of the tenth month of the tax year. Income tax return 1040ez A calendar year is divided into the following quarters. Income tax return 1040ez Quarter Months First January, February, March Second April, May, June Third July, August, September Fourth October, November, December   Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by the percentage listed below for the quarter you place the property in service. Income tax return 1040ez Quarter Percentage First 87. Income tax return 1040ez 5% Second 62. Income tax return 1040ez 5 Third 37. Income tax return 1040ez 5 Fourth 12. Income tax return 1040ez 5   If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter you dispose of the property. Income tax return 1040ez Quarter Percentage First 12. Income tax return 1040ez 5% Second 37. Income tax return 1040ez 5 Third 62. Income tax return 1040ez 5 Fourth 87. Income tax return 1040ez 5   If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final quarter of the recovery period is the amount of your unrecovered basis in the property. Income tax return 1040ez Mid-month convention. Income tax return 1040ez   If this convention applies, the depreciation you can deduct for the first year that you depreciate the property depends on the month in which you place the property in service. Income tax return 1040ez Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by a fraction. Income tax return 1040ez The numerator of the fraction is the number of full months in the year that the property is in service plus ½ (or 0. Income tax return 1040ez 5). Income tax return 1040ez The denominator is 12. Income tax return 1040ez   If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. Income tax return 1040ez If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final month of the recovery period is the amount of your unrecovered basis in the property. Income tax return 1040ez Example. Income tax return 1040ez You use the calendar year and place nonresidential real property in service in August. Income tax return 1040ez The property is in service 4 full months (September, October, November, and December). Income tax return 1040ez Your numerator is 4. Income tax return 1040ez 5 (4 full months plus 0. Income tax return 1040ez 5). Income tax return 1040ez You multiply the depreciation for a full year by 4. Income tax return 1040ez 5/12, or 0. Income tax return 1040ez 375. Income tax return 1040ez Examples The following examples show how to figure depreciation under MACRS without using the percentage tables. Income tax return 1040ez Figures are rounded for purposes of the examples. Income tax return 1040ez Assume for all the examples that you use a calendar year as your tax year. Income tax return 1040ez Example 1—200% DB method and half-year convention. Income tax return 1040ez In February, you placed in service depreciable property with a 5-year recovery period and a basis of $1,000. Income tax return 1040ez You do not elect to take the section 179 deduction and the property does not qualify for a special depreciation allowance. Income tax return 1040ez You use GDS and the 200% declining balance (DB) method to figure your depreciation. Income tax return 1040ez When the straight line (SL) method results in an equal or larger deduction, you switch to the SL method. Income tax return 1040ez You did not place any property in service in the last 3 months of the year, so you must use the half-year convention. Income tax return 1040ez First year. Income tax return 1040ez You figure the depreciation rate under the 200% DB method by dividing 2 (200%) by 5 (the number of years in the recovery period). Income tax return 1040ez The result is 40%. Income tax return 1040ez You multiply the adjusted basis of the property ($1,000) by the 40% DB rate. Income tax return 1040ez You apply the half-year convention by dividing the result ($400) by 2. Income tax return 1040ez Depreciation for the first year under the 200% DB method is $200. Income tax return 1040ez You figure the depreciation rate under the straight line (SL) method by dividing 1 by 5, the number of years in the recovery period. Income tax return 1040ez The result is 20%. Income tax return 1040ez You multiply the adjusted basis of the property ($1,000) by the 20% SL rate. Income tax return 1040ez You apply the half-year convention by dividing the result ($200) by 2. Income tax return 1040ez Depreciation for the first year under the SL method is $100. Income tax return 1040ez The DB method provides a larger deduction, so you deduct the $200 figured under the 200% DB method. Income tax return 1040ez Second year. Income tax return 1040ez You reduce the adjusted basis ($1,000) by the depreciation claimed in the first year ($200). Income tax return 1040ez You multiply the result ($800) by the DB rate (40%). Income tax return 1040ez Depreciation for the second year under the 200% DB method is $320. Income tax return 1040ez You figure the SL depreciation rate by dividing 1 by 4. Income tax return 1040ez 5, the number of years remaining in the recovery period. Income tax return 1040ez (Based on the half-year convention, you used only half a year of the recovery period in the first year. Income tax return 1040ez ) You multiply the reduced adjusted basis ($800) by the result (22. Income tax return 1040ez 22%). Income tax return 1040ez Depreciation under the SL method for the second year is $178. Income tax return 1040ez The DB method provides a larger deduction, so you deduct the $320 figured under the 200% DB method. Income tax return 1040ez Third year. Income tax return 1040ez You reduce the adjusted basis ($800) by the depreciation claimed in the second year ($320). Income tax return 1040ez You multiply the result ($480) by the DB rate (40%). Income tax return 1040ez Depreciation for the third year under the 200% DB method is $192. Income tax return 1040ez You figure the SL depreciation rate by dividing 1 by 3. Income tax return 1040ez 5. Income tax return 1040ez You multiply the reduced adjusted basis ($480) by the result (28. Income tax return 1040ez 57%). Income tax return 1040ez Depreciation under the SL method for the third year is $137. Income tax return 1040ez The DB method provides a larger deduction, so you deduct the $192 figured under the 200% DB method. Income tax return 1040ez Fourth year. Income tax return 1040ez You reduce the adjusted basis ($480) by the de