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New tax 8. New tax   Business Expenses Table of Contents Introduction Useful Items - You may want to see: Bad DebtsAccrual method. New tax Cash method. New tax Car and Truck ExpensesOffice in the home. New tax Methods for Deducting Car and Truck Expenses Reimbursing Your Employees for Expenses Depreciation Employees' PayFringe benefits. New tax InsuranceHow to figure the deduction. New tax Interest Legal and Professional FeesTax preparation fees. New tax Pension Plans Rent Expense Taxes Travel, Meals, and EntertainmentTransportation. New tax Taxi, commuter bus, and limousine. New tax Baggage and shipping. New tax Car or truck. New tax Meals and lodging. New tax Cleaning. New tax Telephone. New tax Tips. New tax More information. New tax Business Use of Your HomeExceptions to exclusive use. New tax Other Expenses You Can Deduct Expenses You Cannot Deduct Introduction You can deduct the costs of operating your business. New tax These costs are known as business expenses. New tax These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year. New tax To be deductible, a business expense must be both ordinary and necessary. New tax An ordinary expense is one that is common and accepted in your field of business. New tax A necessary expense is one that is helpful and appropriate for your business. New tax An expense does not have to be indispensable to be considered necessary. New tax For more information about the general rules for deducting business expenses, see chapter 1 in Publication 535, Business Expenses. New tax If you have an expense that is partly for business and partly personal, separate the personal part from the business part. New tax The personal part is not deductible. New tax Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 535 Business Expenses 946 How To Depreciate Property See chapter 12 for information about getting publications and forms. New tax Bad Debts If someone owes you money you cannot collect, you have a bad debt. New tax There are two kinds of bad debts, business bad debts and nonbusiness bad debts. New tax A business bad debt is generally one that comes from operating your trade or business. New tax You may be able to deduct business bad debts as an expense on your business tax return. New tax Business bad debt. New tax   A business bad debt is a loss from the worthlessness of a debt that was either of the following. New tax Created or acquired in your business. New tax Closely related to your business when it became partly or totally worthless. New tax A debt is closely related to your business if your primary motive for incurring the debt is a business reason. New tax   Business bad debts are mainly the result of credit sales to customers. New tax They can also be the result of loans to suppliers, clients, employees, or distributors. New tax Goods and services customers have not paid for are shown in your books as either accounts receivable or notes receivable. New tax If you are unable to collect any part of these accounts or notes receivable, the uncollectible part is a business bad debt. New tax    You can take a bad debt deduction for these accounts and notes receivable only if the amount you were owed was included in your gross income either for the year the deduction is claimed or for a prior year. New tax Accrual method. New tax   If you use an accrual method of accounting, you normally report income as you earn it. New tax You can take a bad debt deduction for an uncollectible receivable if you have included the uncollectible amount in income. New tax Cash method. New tax   If you use the cash method of accounting, you normally report income when you receive payment. New tax You cannot take a bad debt deduction for amounts owed to you that you have not received and cannot collect if you never included those amounts in income. New tax More information. New tax   For more information about business bad debts, see chapter 10 in Publication 535. New tax Nonbusiness bad debts. New tax   All other bad debts are nonbusiness bad debts and are deductible as short-term capital losses on Form 8949 and Schedule D (Form 1040). New tax For more information on nonbusiness bad debts, see Publication 550, Investment Income and Expenses. New tax Car and Truck Expenses If you use your car or truck in your business, you may be able to deduct the costs of operating and maintaining your vehicle. New tax You also may be able to deduct other costs of local transportation and traveling away from home overnight on business. New tax You may qualify for a tax credit for qualified plug-in electric vehicles, qualified plug-in electric drive motor vehicles, and alternative motor vehicles you place in service during the year. New tax See Form 8936 and Form 8910 for more information. New tax Local transportation expenses. New tax   Local transportation expenses include the ordinary and necessary costs of all the following. New tax Getting from one workplace to another in the course of your business or profession when you are traveling within the city or general area that is your tax home. New tax Tax home is defined later. New tax Visiting clients or customers. New tax Going to a business meeting away from your regular workplace. New tax Getting from your home to a temporary workplace when you have one or more regular places of work. New tax These temporary workplaces can be either within the area of your tax home or outside that area. New tax Local business transportation does not include expenses you have while traveling away from home overnight. New tax Those expenses are deductible as travel expenses and are discussed later under Travel, Meals, and Entertainment. New tax However, if you use your car while traveling away from home overnight, use the rules in this section to figure your car expense deduction. New tax   Generally, your tax home is your regular place of business, regardless of where you maintain your family home. New tax It includes the entire city or general area in which your business or work is located. New tax Example. New tax You operate a printing business out of rented office space. New tax You use your van to deliver completed jobs to your customers. New tax You can deduct the cost of round-trip transportation between your customers and your print shop. New tax    You cannot deduct the costs of driving your car or truck between your home and your main or regular workplace. New tax These costs are personal commuting expenses. New tax Office in the home. New tax   Your workplace can be your home if you have an office in your home that qualifies as your principal place of business. New tax For more information, see Business Use of Your Home, later. New tax Example. New tax You are a graphics designer. New tax You operate your business out of your home. New tax Your home qualifies as your principal place of business. New tax You occasionally have to drive to your clients to deliver your completed work. New tax You can deduct the cost of the round-trip transportation between your home and your clients. New tax Methods for Deducting Car and Truck Expenses For local transportation or overnight travel by car or truck, you generally can use one of the following methods to figure your expenses. New tax Standard mileage rate. New tax Actual expenses. New tax Standard mileage rate. New tax   You may be able to use the standard mileage rate to figure the deductible costs of operating your car, van, pickup, or panel truck for business purposes. New tax For 2013, the standard mileage rate is 56. New tax 5 cents per mile. New tax    If you choose to use the standard mileage rate for a year, you cannot deduct your actual expenses for that year except for business-related parking fees and tolls. New tax Choosing the standard mileage rate. New tax   If you want to use the standard mileage rate for a car or truck you own, you must choose to use it in the first year the car is available for use in your business. New tax In later years, you can choose to use either the standard mileage rate or actual expenses. New tax   If you use the standard mileage rate for a car you lease, you must choose to use it for the entire lease period (including renewals). New tax Standard mileage rate not allowed. New tax   You cannot use the standard mileage rate if you: Operate five or more cars at the same time, Claimed a depreciation deduction using any method other than straight line, for example, ACRS or MACRS, Claimed a section 179 deduction on the car, Claimed the special depreciation allowance on the car, Claimed actual car expenses for a car you leased, or Are a rural mail carrier who received a qualified reimbursement. New tax Parking fees and tolls. New tax   In addition to using the standard mileage rate, you can deduct any business-related parking fees and tolls. New tax (Parking fees you pay to park your car at your place of work are nondeductible commuting expenses. New tax ) Actual expenses. New tax   If you do not choose to use the standard mileage rate, you may be able to deduct your actual car or truck expenses. New tax    If you qualify to use both methods, figure your deduction both ways to see which gives you a larger deduction. New tax   Actual car expenses include the costs of the following items. New tax Depreciation Lease payments Registration Garage rent Licenses Repairs Gas Oil Tires Insurance Parking fees Tolls   If you use your vehicle for both business and personal purposes, you must divide your expenses between business and personal use. New tax You can divide your expenses based on the miles driven for each purpose. New tax Example. New tax You are the sole proprietor of a flower shop. New tax You drove your van 20,000 miles during the year. New tax 16,000 miles were for delivering flowers to customers and 4,000 miles were for personal use (including commuting miles). New tax You can claim only 80% (16,000 ÷ 20,000) of the cost of operating your van as a business expense. New tax More information. New tax   For more information about the rules for claiming car and truck expenses, see Publication 463. New tax Reimbursing Your Employees for Expenses You generally can deduct the amount you reimburse your employees for car and truck expenses. New tax The reimbursement you deduct and the manner in which you deduct it depend in part on whether you reimburse the expenses under an accountable plan or a nonaccountable plan. New tax For details, see chapter 11 in Publication 535. New tax That chapter explains accountable and nonaccountable plans and tells you whether to report the reimbursement on your employee's Form W-2, Wage and Tax Statement. New tax Depreciation If property you acquire to use in your business is expected to last more than 1 year, you generally cannot deduct the entire cost as a business expense in the year you acquire it. New tax You must spread the cost over more than 1 tax year and deduct part of it each year on Schedule C. New tax This method of deducting the cost of business property is called depreciation. New tax The discussion here is brief. New tax You will find more information about depreciation in Publication 946. New tax What property can be depreciated?   You can depreciate property if it meets all the following requirements. New tax It must be property you own. New tax It must be used in business or held to produce income. New tax You never can depreciate inventory (explained in chapter 2) because it is not held for use in your business. New tax It must have a useful life that extends substantially beyond the year it is placed in service. New tax It must have a determinable useful life, which means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. New tax You never can depreciate the cost of land because land does not wear out, become obsolete, or get used up. New tax It must not be excepted property. New tax This includes property placed in service and disposed of in the same year. New tax Repairs. New tax    You cannot depreciate repairs and replacements that do not increase the value of your property, make it more useful, or lengthen its useful life. New tax You can deduct these amounts on line 21 of Schedule C or line 2 of Schedule C-EZ. New tax Depreciation method. New tax   The method for depreciating most business and investment property placed in service after 1986 is called the Modified Accelerated Cost Recovery System (MACRS). New tax MACRS is discussed in detail in Publication 946. New tax Section 179 deduction. New tax   You can elect to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. New tax This deduction is known as the “section 179 deduction. New tax ” The maximum amount you can elect to deduct during 2013 is generally $500,000 (higher limits apply to certain property). New tax See IRC 179(e). New tax   This limit is generally reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2 million. New tax The total amount of depreciation (including the section 179 deduction) you can take for a passenger automobile you use in your business and first place in service in 2013 is $3,160 ($11,160 if you take the special depreciation allowance for qualified passenger automobiles placed in service in 2013). New tax Special rules apply to trucks and vans. New tax For more information, see Publication 946. New tax It explains what property qualifies for the deduction, what limits apply to the deduction, and when and how to recapture the deduction. New tax    Your section 179 election for the cost of any sport utility vehicle (SUV) and certain other vehicles is limited to $25,000. New tax For more information, see the Instructions for Form 4562 or Publication 946. New tax Listed property. New tax   You must follow special rules and recordkeeping requirements when depreciating listed property. New tax Listed property is any of the following. New tax Most passenger automobiles. New tax Most other property used for transportation. New tax Any property of a type generally used for entertainment, recreation, or amusement. New tax Certain computers and related peripheral equipment. New tax   For more information about listed property, see Publication 946. New tax Form 4562. New tax   Use Form 4562, Depreciation and Amortization, if you are claiming any of the following. New tax Depreciation on property placed in service during the current tax year. New tax A section 179 deduction. New tax Depreciation on any listed property (regardless of when it was placed in service). New tax    If you have to use Form 4562, you must file Schedule C. New tax You cannot use Schedule C-EZ. New tax   Employees' Pay You can generally deduct on Schedule C the pay you give your employees for the services they perform for your business. New tax The pay may be in cash, property, or services. New tax To be deductible, your employees' pay must be an ordinary and necessary expense and you must pay or incur it in the tax year. New tax In addition, the pay must meet both the following tests. New tax The pay must be reasonable. New tax The pay must be for services performed. New tax Chapter 2 in Publication 535 explains and defines these requirements. New tax You cannot deduct your own salary or any personal withdrawals you make from your business. New tax As a sole proprietor, you are not an employee of the business. New tax If you had employees during the year, you must use Schedule C. New tax You cannot use Schedule C-EZ. New tax Kinds of pay. New tax   Some of the ways you may provide pay to your employees are listed below. New tax For an explanation of each of these items, see chapter 2 in Publication 535. New tax Awards. New tax Bonuses. New tax Education expenses. New tax Fringe benefits (discussed later). New tax Loans or advances you do not expect the employee to repay if they are for personal services actually performed. New tax Property you transfer to an employee as payment for services. New tax Reimbursements for employee business expenses. New tax Sick pay. New tax Vacation pay. New tax Fringe benefits. New tax   A fringe benefit is a form of pay for the performance of services. New tax The following are examples of fringe benefits. New tax Benefits under qualified employee benefit programs. New tax Meals and lodging. New tax The use of a car. New tax Flights on airplanes. New tax Discounts on property or services. New tax Memberships in country clubs or other social clubs. New tax Tickets to entertainment or sporting events. New tax   Employee benefit programs include the following. New tax Accident and health plans. New tax Adoption assistance. New tax Cafeteria plans. New tax Dependent care assistance. New tax Educational assistance. New tax Group-term life insurance coverage. New tax Welfare benefit funds. New tax   You can generally deduct the cost of fringe benefits you provide on your Schedule C in whatever category the cost falls. New tax For example, if you allow an employee to use a car or other property you lease, deduct the cost of the lease as a rent or lease expense. New tax If you own the property, include your deduction for its cost or other basis as a section 179 deduction or a depreciation deduction. New tax    You may be able to exclude all or part of the fringe benefits you provide from your employees' wages. New tax For more information about fringe benefits and the exclusion of benefits, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. New tax Insurance You can generally deduct premiums you pay for the following kinds of insurance related to your business. New tax Fire, theft, flood, or similar insurance. New tax Credit insurance that covers losses from business bad debts. New tax Group hospitalization and medical insurance for employees, including long-term care insurance. New tax Liability insurance. New tax Malpractice insurance that covers your personal liability for professional negligence resulting in injury or damage to patients or clients. New tax Workers' compensation insurance set by state law that covers any claims for bodily injuries or job-related diseases suffered by employees in your business, regardless of fault. New tax Contributions to a state unemployment insurance fund are deductible as taxes if they are considered taxes under state law. New tax Overhead insurance that pays for business overhead expenses you have during long periods of disability caused by your injury or sickness. New tax Car and other vehicle insurance that covers vehicles used in your business for liability, damages, and other losses. New tax If you operate a vehicle partly for personal use, deduct only the part of the insurance premium that applies to the business use of the vehicle. New tax If you use the standard mileage rate to figure your car expenses, you cannot deduct any car insurance premiums. New tax Life insurance covering your employees if you are not directly or indirectly the beneficiary under the contract. New tax Business interruption insurance that pays for lost profits if your business is shut down due to a fire or other cause. New tax Nondeductible premiums. New tax   You cannot deduct premiums on the following kinds of insurance. New tax Self-insurance reserve funds. New tax You cannot deduct amounts credited to a reserve set up for self-insurance. New tax This applies even if you cannot get business insurance coverage for certain business risks. New tax However, your actual losses may be deductible. New tax For more information, see Publication 547, Casualties, Disasters, and Thefts. New tax Loss of earnings. New tax You cannot deduct premiums for a policy that pays for your lost earnings due to sickness or disability. New tax However, see item (8) in the previous list. New tax Certain life insurance and annuities. New tax For contracts issued before June 9, 1997, you cannot deduct the premiums on a life insurance policy covering you, an employee, or any person with a financial interest in your business if you are directly or indirectly a beneficiary of the policy. New tax You are included among possible beneficiaries of the policy if the policy owner is obligated to repay a loan from you using the proceeds of the policy. New tax A person has a financial interest in your business if the person is an owner or part owner of the business or has lent money to the business. New tax For contracts issued after June 8, 1997, you generally cannot deduct the premiums on any life insurance policy, endowment contract, or annuity contract if you are directly or indirectly a beneficiary. New tax The disallowance applies without regard to whom the policy covers. New tax Insurance to secure a loan. New tax If you take out a policy on your life or on the life of another person with a financial interest in your business to get or protect a business loan, you cannot deduct the premiums as a business expense. New tax Nor can you deduct the premiums as interest on business loans or as an expense of financing loans. New tax In the event of death, the proceeds of the policy are not taxed as income even if they are used to liquidate the debt. New tax Self-employed health insurance deduction. New tax   You may be able to deduct the amount you paid for medical and dental insurance and qualified long-term care insurance for you and your family. New tax How to figure the deduction. New tax   Generally, you can use the worksheet in the Form 1040 instructions to figure your deduction. New tax However, if any of the following apply, you must use the worksheet in chapter 6 of Publication 535. New tax You have more than one source of income subject to self-employment tax. New tax You file Form 2555 or Form 2555-EZ (relating to foreign earned income). New tax You are using amounts paid for qualified long-term care insurance to figure the deduction. New tax Prepayment. New tax   You cannot deduct expenses in advance, even if you pay them in advance. New tax This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. New tax Example. New tax In 2013, you signed a 3-year insurance contract. New tax Even though you paid the premiums for 2013, 2014, and 2015 when you signed the contract, you can only deduct the premium for 2013 on your 2013 tax return. New tax You can deduct in 2014 and 2015 the premium allocable to those years. New tax More information. New tax   For more information about deducting insurance, see chapter 6 in Publication 535. New tax Interest You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your business. New tax Interest relates to your business if you use the proceeds of the loan for a business expense. New tax It does not matter what type of property secures the loan. New tax You can deduct interest on a debt only if you meet all of the following requirements. New tax You are legally liable for that debt. New tax Both you and the lender intend that the debt be repaid. New tax You and the lender have a true debtor-creditor relationship. New tax You cannot deduct on Schedule C or C-EZ the interest you paid on personal loans. New tax If a loan is part business and part personal, you must divide the interest between the personal part and the business part. New tax Example. New tax In 2013, you paid $600 interest on a car loan. New tax During 2013, you used the car 60% for business and 40% for personal purposes. New tax You are claiming actual expenses on the car. New tax You can only deduct $360 (60% × $600) for 2013 on Schedule C or C-EZ. New tax The remaining interest of $240 is a nondeductible personal expense. New tax More information. New tax   For more information about deducting interest, see chapter 4 in Publication 535. New tax That chapter explains the following items. New tax Interest you can deduct. New tax Interest you cannot deduct. New tax How to allocate interest between personal and business use. New tax When to deduct interest. New tax The rules for a below-market interest rate loan. New tax (This is generally a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. New tax ) Legal and Professional Fees Legal and professional fees, such as fees charged by accountants, that are ordinary and necessary expenses directly related to operating your business are deductible on Schedule C or C-EZ. New tax However, you usually cannot deduct legal fees you pay to acquire business assets. New tax Add them to the basis of the property. New tax If the fees include payments for work of a personal nature (such as making a will), you can take a business deduction only for the part of the fee related to your business. New tax The personal part of legal fees for producing or collecting taxable income, doing or keeping your job, or for tax advice may be deductible on Schedule A (Form 1040) if you itemize deductions. New tax For more information, see Publication 529, Miscellaneous Deductions. New tax Tax preparation fees. New tax   You can deduct on Schedule C or C-EZ the cost of preparing that part of your tax return relating to your business as a sole proprietor or statutory employee. New tax You can deduct the remaining cost on Schedule A (Form 1040) if you itemize your deductions. New tax   You can also deduct on Schedule C or C-EZ the amount you pay or incur in resolving asserted tax deficiencies for your business as a sole proprietor or statutory employee. New tax Pension Plans You can set up and maintain the following small business retirement plans for yourself and your employees. New tax SEP (Simplified Employee Pension) plans. New tax SIMPLE (Savings Incentive Match Plan for Employees) plans. New tax Qualified plans (including Keogh or H. New tax R. New tax 10 plans). New tax SEP, SIMPLE, and qualified plans offer you and your employees a tax favored way to save for retirement. New tax You can deduct contributions you make to the plan for your employees on line 19 of Schedule C. New tax If you are a sole proprietor, you can deduct contributions you make to the plan for yourself on line 28 of Form 1040. New tax You can also deduct trustees' fees if contributions to the plan do not cover them. New tax Earnings on the contributions are generally tax free until you or your employees receive distributions from the plan. New tax You may also be able to claim a tax credit of 50% of the first $1,000 of qualified startup costs if you begin a new qualified defined benefit or defined contribution plan (including a 401(k) plan), SIMPLE plan, or simplified employee pension. New tax Under certain plans, employees can have you contribute limited amounts of their before-tax pay to a plan. New tax These amounts (and earnings on them) are generally tax free until your employees receive distributions from the plan. New tax For more information on retirement plans for small business, see Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans). New tax Publication 590, Individual Retirement Arrangements (IRAs), discusses other tax favored ways to save for retirement. New tax Rent Expense Rent is any amount you pay for the use of property you do not own. New tax In general, you can deduct rent as a business expense only if the rent is for property you use in your business. New tax If you have or will receive equity in or title to the property, you cannot deduct the rent. New tax Unreasonable rent. New tax   You cannot take a rental deduction for unreasonable rents. New tax Ordinarily, the issue of reasonableness arises only if you and the lessor are related. New tax Rent paid to a related person is reasonable if it is the same amount you would pay to a stranger for use of the same property. New tax Rent is not unreasonable just because it is figured as a percentage of gross receipts. New tax   Related persons include members of your immediate family, including only brothers and sisters (either whole or half), your spouse, ancestors, and lineal descendants. New tax For a list of the other related persons, see section 267 of the Internal Revenue Code. New tax Rent on your home. New tax   If you rent your home and use part of it as your place of business, you may be able to deduct the rent you pay for that part. New tax You must meet the requirements for business use of your home. New tax For more information, see Business Use of Your Home , later. New tax Rent paid in advance. New tax   Generally, rent paid in your business is deductible in the year paid or accrued. New tax If you pay rent in advance, you can deduct only the amount that applies to your use of the rented property during the tax year. New tax You can deduct the rest of your payment only over the period to which it applies. New tax More information. New tax   For more information about rent, see chapter 3 in Publication 535. New tax Taxes You can deduct on Schedule C or C-EZ various federal, state, local, and foreign taxes directly attributable to your business. New tax Income taxes. New tax   You can deduct on Schedule C or C-EZ a state tax on gross income (as distinguished from net income) directly attributable to your business. New tax You can deduct other state and local income taxes on Schedule A (Form 1040) if you itemize your deductions. New tax Do not deduct federal income tax. New tax Employment taxes. New tax   You can deduct the social security, Medicare, and federal unemployment (FUTA) taxes you paid out of your own funds as an employer. New tax Employment taxes are discussed briefly in chapter 1. New tax You can also deduct payments you made as an employer to a state unemployment compensation fund or to a state disability benefit fund. New tax Deduct these payments as taxes. New tax Self-employment tax. New tax   You can deduct one-half of your self-employment tax on line 27 of Form 1040. New tax Self-employment tax is discussed in chapters 1 and 10. New tax Personal property tax. New tax   You can deduct on Schedule C or C-EZ any tax imposed by a state or local government on personal property used in your business. New tax   You can also deduct registration fees for the right to use property within a state or local area. New tax Example. New tax May and Julius Winter drove their car 7,000 business miles out of a total of 10,000 miles. New tax They had to pay $25 for their annual state license tags and $20 for their city registration sticker. New tax They also paid $235 in city personal property tax on the car, for a total of $280. New tax They are claiming their actual car expenses. New tax Because they used the car 70% for business, they can deduct 70% of the $280, or $196, as a business expense. New tax Real estate taxes. New tax   You can deduct on Schedule C or C-EZ the real estate taxes you pay on your business property. New tax Deductible real estate taxes are any state, local, or foreign taxes on real estate levied for the general public welfare. New tax The taxing authority must base the taxes on the assessed value of the real estate and charge them uniformly against all property under its jurisdiction. New tax   For more information about real estate taxes, see chapter 5 in Publication 535. New tax That chapter explains special rules for deducting the following items. New tax Taxes for local benefits, such as those for sidewalks, streets, water mains, and sewer lines. New tax Real estate taxes when you buy or sell property during the year. New tax Real estate taxes if you use an accrual method of accounting and choose to accrue real estate tax related to a definite period ratably over that period. New tax Sales tax. New tax   Treat any sales tax you pay on a service or on the purchase or use of property as part of the cost of the service or property. New tax If the service or the cost or use of the property is a deductible business expense, you can deduct the tax as part of that service or cost. New tax If the property is merchandise bought for resale, the sales tax is part of the cost of the merchandise. New tax If the property is depreciable, add the sales tax to the basis for depreciation. New tax For information on the basis of property, see Publication 551, Basis of Assets. New tax    Do not deduct state and local sales taxes imposed on the buyer that you must collect and pay over to the state or local government. New tax Do not include these taxes in gross receipts or sales. New tax Excise taxes. New tax   You can deduct on Schedule C or C-EZ all excise taxes that are ordinary and necessary expenses of carrying on your business. New tax Excise taxes are discussed briefly in chapter 1. New tax Fuel taxes. New tax   Taxes on gasoline, diesel fuel, and other motor fuels you use in your business are usually included as part of the cost of the fuel. New tax Do not deduct these taxes as a separate item. New tax   You may be entitled to a credit or refund for federal excise tax you paid on fuels used for certain purposes. New tax For more information, see Publication 510, Excise Taxes. New tax Travel, Meals, and Entertainment This section briefly explains the kinds of travel and entertainment expenses you can deduct on Schedule C or C-EZ. New tax Table 8-1. New tax When Are Entertainment Expenses Deductible? (Note. New tax The following is a summary of the rules for deducting entertainment expenses. New tax For more details about these rules, see Publication 463. New tax ) General rule You can deduct ordinary and necessary expenses to entertain a client, customer, or employee if the expenses meet the directly-related test or the associated test. New tax Definitions Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client. New tax An ordinary expense is one that is common and accepted in your field of business, trade, or profession. New tax A necessary expense is one that is helpful and appropriate, although not necessarily required, for your business. New tax Tests to be met Directly-related test Entertainment took place in a clear business setting, or Main purpose of entertainment was the active conduct of business, and You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit. New tax   Associated test Entertainment is associated with your trade or business, and Entertainment directly precedes or follows a substantial business discussion. New tax Other rules You cannot deduct the cost of your meal as an entertainment expense if you are claiming the meal as a travel expense. New tax You cannot deduct expenses that are lavish or extravagant under the circumstances. New tax You generally can deduct only 50% of your unreimbursed entertainment expenses. New tax Travel expenses. New tax   These are the ordinary and necessary expenses of traveling away from home for your business. New tax You are traveling away from home if both the following conditions are met. New tax Your duties require you to be away from the general area of your tax home (defined later) substantially longer than an ordinary day's work. New tax You need to get sleep or rest to meet the demands of your work while away from home. New tax Generally, your tax home is your regular place of business, regardless of where you maintain your family home. New tax It includes the entire city or general area in which your business is located. New tax See Publication 463 for more information. New tax   The following is a brief discussion of the expenses you can deduct. New tax Transportation. New tax   You can deduct the cost of travel by airplane, train, bus, or car between your home and your business destination. New tax Taxi, commuter bus, and limousine. New tax   You can deduct fares for these and other types of transportation between the airport or station and your hotel, or between the hotel and your work location away from home. New tax Baggage and shipping. New tax   You can deduct the cost of sending baggage and sample or display material between your regular and temporary work locations. New tax Car or truck. New tax   You can deduct the costs of operating and maintaining your vehicle when traveling away from home on business. New tax You can deduct actual expenses or the standard mileage rate (discussed earlier under Car and Truck Expenses), as well as business-related tolls and parking. New tax If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses. New tax Meals and lodging. New tax   You can deduct the cost of meals and lodging if your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. New tax In most cases, you can deduct only 50% of your meal expenses. New tax Cleaning. New tax   You can deduct the costs of dry cleaning and laundry while on your business trip. New tax Telephone. New tax   You can deduct the cost of business calls while on your business trip, including business communication by fax machine or other communication devices. New tax Tips. New tax   You can deduct the tips you pay for any expense in this list. New tax More information. New tax   For more information about travel expenses, see Publication 463. New tax Entertainment expenses. New tax   You may be able to deduct business-related entertainment expenses for entertaining a client, customer, or employee. New tax In most cases, you can deduct only 50% of these expenses. New tax   The following are examples of entertainment expenses. New tax Entertaining guests at nightclubs, athletic clubs, theaters, or sporting events. New tax Providing meals, a hotel suite, or a car to business customers or their families. New tax To be deductible, the expenses must meet the rules listed in Table 8-1. New tax For details about these rules, see Publication 463. New tax Reimbursing your employees for expenses. New tax   You generally can deduct the amount you reimburse your employees for travel and entertainment expenses. New tax The reimbursement you deduct and the manner in which you deduct it depend in part on whether you reimburse the expenses under an accountable plan or a nonaccountable plan. New tax For details, see chapter 11 in Publication 535. New tax That chapter explains accountable and nonaccountable plans and tells you whether to report the reimbursement on your employee's Form W-2, Wage and Tax Statement. New tax Business Use of Your Home To deduct expenses related to the part of your home used for business, you must meet specific requirements. New tax Even then, your deduction may be limited. New tax To qualify to claim expenses for business use of your home, you must meet the following tests. New tax Your use of the business part of your home must be: Exclusive (however, see Exceptions to exclusive use , later), Regular, For your business, and The business part of your home must be one of the following: Your principal place of business (defined later), A place where you meet or deal with patients, clients, or customers in the normal course of your business, or A separate structure (not attached to your home) you use in connection with your business. New tax Exclusive use. New tax   To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. New tax The area used for business can be a room or other separately identifiable space. New tax The space does not need to be marked off by a permanent partition. New tax   You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes. New tax Example. New tax You are an attorney and use a den in your home to write legal briefs and prepare clients' tax returns. New tax Your family also uses the den for recreation. New tax The den is not used exclusively in your profession, so you cannot claim a business deduction for its use. New tax Exceptions to exclusive use. New tax   You do not have to meet the exclusive use test if you use part of your home in either of the following ways. New tax For the storage of inventory or product samples. New tax As a daycare facility. New tax For an explanation of these exceptions, see Publication 587, Business Use of Your Home (Including Use by Daycare Providers). New tax Regular use. New tax   To qualify under the regular use test, you must use a specific area of your home for business on a continuing basis. New tax You do not meet the test if your business use of the area is only occasional or incidental, even if you do not use that area for any other purpose. New tax Principal place of business. New tax   You can have more than one business location, including your home, for a single trade or business. New tax To qualify to deduct the expenses for the business use of your home under the principal place of business test, your home must be your principal place of business for that business. New tax To determine your principal place of business, you must consider all the facts and circumstances. New tax   Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements. New tax You use it exclusively and regularly for administrative or management activities of your business. New tax You have no other fixed location where you conduct substantial administrative or management activities of your business. New tax   Alternatively, if you use your home exclusively and regularly for your business, but your home office does not qualify as your principal place of business based on the previous rules, you determine your principal place of business based on the following factors. New tax The relative importance of the activities performed at each location. New tax If the relative importance factor does not determine your principal place of business, you can also consider the time spent at each location. New tax   If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. New tax However, for other ways to qualify to deduct home office expenses, see Publication 587. New tax Deduction limit. New tax   If your gross income from the business use of your home equals or exceeds your total business expenses (including depreciation), you can deduct all your business expenses related to the use of your home. New tax If your gross income from the business use is less than your total business expenses, your deduction for certain expenses for the business use of your home is limited. New tax   Your deduction of otherwise nondeductible expenses, such as insurance, utilities, and depreciation (with depreciation taken last), allocable to the business is limited to the gross income from the business use of your home minus the sum of the following. New tax The business part of expenses you could deduct even if you did not use your home for business (such as mortgage interest, real estate taxes, and casualty and theft losses that are allowable as itemized deductions on Schedule A (Form 1040)). New tax The business expenses that relate to the business activity in the home (for example, business phone, supplies, and depreciation on equipment), but not to the use of the home itself. New tax Do not include in (2) above your deduction for one-half of your self-employment tax. New tax   Use Form 8829, Expenses for Business Use of Your Home, to figure your deduction. New tax New simplified method. New tax    The IRS now provides a simplified method to determine your expenses for business use of your home. New tax The simplified method is an alternative to calculating and substantiating actual expenses. New tax In most cases, you will figure your deduction by multiplying $5 by the area of your home used for a qualified business use. New tax The area you use to figure your deduction is limited to 300 square feet. New tax For more information, see the Instructions for Schedule C. New tax More information. New tax   For more information on deducting expenses for the business use of your home, see Publication 587. New tax Other Expenses You Can Deduct You may also be able to deduct the following expenses. New tax See Publication 535 to find out whether you can deduct them. New tax Advertising. New tax Bank fees. New tax Donations to business organizations. New tax Education expenses. New tax Energy efficient commercial buildings deduction expenses. New tax Impairment-related expenses. New tax Interview expense allowances. New tax Licenses and regulatory fees. New tax Moving machinery. New tax Outplacement services. New tax Penalties and fines you pay for late performance or nonperformance of a contract. New tax Repairs that keep your property in a normal efficient operating condition. New tax Repayments of income. New tax Subscriptions to trade or professional publications. New tax Supplies and materials. New tax Utilities. New tax Expenses You Cannot Deduct You usually cannot deduct the following as business expenses. New tax For more information, see Publication 535. New tax Bribes and kickbacks. New tax Charitable contributions. New tax Demolition expenses or losses. New tax Dues to business, social, athletic, luncheon, sporting, airline, and hotel clubs. New tax Lobbying expenses. New tax Penalties and fines you pay to a governmental agency or instrumentality because you broke the law. New tax Personal, living, and family expenses. New tax Political contributions. New tax Repairs that add to the value of your property or significantly increase its life. New tax Prev  Up  Next   Home   More Online Publications
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The New Tax

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