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Turbotax 2013

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Turbotax 2013

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

Turbotax 2013 2. Turbotax 2013   Possession Source Income Table of Contents Types of IncomeCompensation for Labor or Personal Services Investment Income Sales or Other Dispositions of Property Scholarships, Fellowships, Grants, Prizes, and Awards Effectively Connected Income In order to determine where to file your return and which form(s) you need to complete, you must determine the source of each item of income you received during the tax year. Turbotax 2013 Income you received from sources within, or that was effectively connected with the conduct of a trade or business within, the relevant possession must be identified separately from U. Turbotax 2013 S. Turbotax 2013 or foreign source income. Turbotax 2013 This chapter discusses the rules for determining if the source of your income is from: American Samoa, The Commonwealth of the Northern Mariana Islands (CNMI), The Commonwealth of Puerto Rico (Puerto Rico), Guam, or The U. Turbotax 2013 S. Turbotax 2013 Virgin Islands (USVI). Turbotax 2013 Generally, the same rules that apply for determining U. Turbotax 2013 S. Turbotax 2013 source income also apply for determining possession source income. Turbotax 2013 However, there are some important exceptions to these rules. Turbotax 2013 Both the general rules and the exceptions are discussed in this chapter. Turbotax 2013 U. Turbotax 2013 S. Turbotax 2013 income rule. Turbotax 2013   This rule states that income is not possession source income if, under the rules of Internal Revenue Code sections 861–865, it is treated as income: From sources within the United States, or Effectively connected with the conduct of a trade or business within the United States. Turbotax 2013 Table 2-1 shows the general rules for determining whether income is from sources within the United States. Turbotax 2013 Table 2-1. Turbotax 2013 General Rules for Determining U. Turbotax 2013 S. Turbotax 2013 Source of Income Item of Income Factor Determining Source Salaries, wages, and other compensation for labor or personal services Where labor or services performed Pensions Contributions: Where services were performed that earned the pension Investment earnings: Where pension trust is located Interest Residence of payer Dividends Where corporation created or organized Rents Location of property Royalties:   Natural resources Location of property Patents, copyrights, etc. Turbotax 2013 Where property is used Sale of business inventory—purchased Where sold Sale of business inventory—produced Allocation if produced and sold in different locations Sale of real property Location of property Sale of personal property Seller's tax home (but see Special Rules for Gains From Dispositions of Certain Property , later, for exceptions) Sale of natural resources Allocation based on fair market value of product at export terminal. Turbotax 2013 For more information, see Regulations section 1. Turbotax 2013 863-1(b). Turbotax 2013 Types of Income This section looks at the most common types of income received by individuals, and the rules for determining the source of the income. Turbotax 2013 Generally, the same rules shown in Table 2-1 are used to determine if you have possession source income. Turbotax 2013 Compensation for Labor or Personal Services Income from labor or personal services includes wages, salaries, commissions, fees, per diem allowances, employee allowances and bonuses, and fringe benefits. Turbotax 2013 It also includes income earned by sole proprietors and general partners from providing personal services in the course of their trade or business. Turbotax 2013 Services performed wholly within a relevant possession. Turbotax 2013   Generally, all pay you receive for services performed in a relevant possession is considered to be from sources within that possession. Turbotax 2013 However, there is an exception for income earned as a member of the U. Turbotax 2013 S. Turbotax 2013 Armed Forces or a civilian spouse. Turbotax 2013 U. Turbotax 2013 S. Turbotax 2013 Armed Forces. Turbotax 2013   If you are a bona fide resident of a relevant possession, your military service pay will be sourced in that possession even if you perform the services in the United States or another possession. Turbotax 2013 However, if you are not a bona fide resident of a possession, your military service pay will be income from the  United States even if you perform services in a possession. Turbotax 2013 Civilian spouse of active duty member of the U. Turbotax 2013 S. Turbotax 2013 Armed Forces. Turbotax 2013   If you are a bona fide resident of a U. Turbotax 2013 S. Turbotax 2013 possession and choose to keep that possession as your tax residence under MSRRA when relocating with your servicemember spouse under military orders, the source of income for your labor or personal services is considered to be that possession. Turbotax 2013 Likewise, if your tax residence is in one of the 50 states or the District of Columbia before relocating and you choose to keep it as your tax residence, the source of income for services performed in any of the U. Turbotax 2013 S. Turbotax 2013 possessions is considered to be the United States and, specifically, your state of residence or the District of Columbia. Turbotax 2013 Services performed partly inside and partly outside a relevant possession. Turbotax 2013   If you are an employee and receive compensation for labor or personal services performed both inside and outside the relevant possession, special rules apply in determining the source of the compensation. Turbotax 2013 Compensation (other than certain fringe benefits) is sourced on a time basis. Turbotax 2013 Certain fringe benefits (such as housing and education) are sourced on a geographical basis. Turbotax 2013   Or, you may be permitted to use an alternative basis to determine the source of compensation. Turbotax 2013 See Alternative basis , later. Turbotax 2013   If you are self-employed, determine the source of your income for labor or personal services from self-employment on the basis that most correctly reflects the proper source of that income under the facts and circumstances of your particular case. Turbotax 2013 In many cases, the facts and circumstances will call for an apportionment on a time basis as explained next. Turbotax 2013 Time basis. Turbotax 2013   Use a time basis to figure your compensation for labor or personal services from the relevant possession (other than the fringe benefits discussed later). Turbotax 2013 Do this by multiplying your total compensation (other than the fringe benefits discussed later) by the following fraction:   Number of days you performed  services in the relevant  possession during the year     Total number of days you  performed services during the year           You can use a unit of time less than a day in the above fraction, if appropriate. Turbotax 2013 The time period for which the income is made does not have to be a year. Turbotax 2013 Instead, you can use another distinct, separate, and continuous time period if you can establish to the satisfaction of the IRS that this other period is more appropriate. Turbotax 2013 Example. Turbotax 2013 In 2013, you worked in your employer's office in the United States for 60 days and in the Puerto Rico office for 180 days, earning a total of $80,000 for the year. Turbotax 2013 Your Puerto Rico source income is $60,000, figured as follows. Turbotax 2013       180 days 240 days × $80,000 = $60,000                 Multi-year compensation. Turbotax 2013   The source of multi-year compensation is generally determined on a time basis over the period to which the compensation is attributable. Turbotax 2013 Multi-year compensation is compensation that is included in your income in 1 tax year but is attributable to a period that includes 2 or more tax years. Turbotax 2013 You determine the period to which the income is attributable based on the facts and circumstances of your case. Turbotax 2013 For more information on multi-year compensation, see Treasury Decision (T. Turbotax 2013 D. Turbotax 2013 ) 9212 and Regulations section 1. Turbotax 2013 861-4, 2005-35 I. Turbotax 2013 R. Turbotax 2013 B. Turbotax 2013 429, available at www. Turbotax 2013 irs. Turbotax 2013 gov/irb/2005-35_IRB/ar14. Turbotax 2013 html. Turbotax 2013 Certain fringe benefits sourced on a geographical basis. Turbotax 2013   If you received any of the following fringe benefits as compensation for labor or services performed as an employee partly inside and partly outside a relevant possession, you must source that income on a geographical basis. Turbotax 2013 Housing. Turbotax 2013 Education. Turbotax 2013 Local transportation. Turbotax 2013 Tax reimbursement. Turbotax 2013 Hazardous or hardship duty pay. Turbotax 2013 Moving expense reimbursement. Turbotax 2013 For information on determining the source of the fringe benefits listed above, see Regulations section 1. Turbotax 2013 861-4. Turbotax 2013 Alternative basis. Turbotax 2013   You can determine the source of your compensation under an alternative basis if you establish to the satisfaction of the IRS that, under the facts and circumstances of your case, the alternative basis more properly determines the source of your income than the time or geographical basis. Turbotax 2013 If you use an alternative basis, you must keep (and have available for inspection) records to document why the alternative basis more properly determines the source of your income. Turbotax 2013 De minimis exception. Turbotax 2013   There is an exception to the rule for determining the source of income earned in a possession. Turbotax 2013 Generally, you will not have income from a possession if during a tax year you: Are a U. Turbotax 2013 S. Turbotax 2013 citizen or resident, Are not a bona fide resident of that possession, Are not employed by or under contract with an individual, partnership, or corporation that is engaged in a trade or business in that possession, Temporarily perform services in that possession for 90 days or less, and Earned $3,000 or less from such services. Turbotax 2013 This exception began with income earned during your 2008 tax year. Turbotax 2013 Pensions. Turbotax 2013   Generally, pension income has two components: contributions to the pension plan and the earnings accrued from investing those contributions. Turbotax 2013 The contribution portion is sourced according to where services were performed that earned the pension. Turbotax 2013 The investment earnings portion is sourced according to the location of the pension trust. Turbotax 2013 Example. Turbotax 2013 You are a U. Turbotax 2013 S. Turbotax 2013 citizen who worked in Puerto Rico for a U. Turbotax 2013 S. Turbotax 2013 company. Turbotax 2013 All services were performed in Puerto Rico. Turbotax 2013 Upon retirement you remained in Puerto Rico and began receiving your pension from the U. Turbotax 2013 S. Turbotax 2013 pension trust of your employer. Turbotax 2013 Distributions from the U. Turbotax 2013 S. Turbotax 2013 pension trust must be allocated between (1) contributions, which are Puerto Rico source income, and (2) investment earnings, which are U. Turbotax 2013 S. Turbotax 2013 source income. Turbotax 2013 Investment Income This category includes such income as interest, dividends, rents, and royalties. Turbotax 2013 Interest income. Turbotax 2013   The source of interest income is generally determined by the residence of the payer. Turbotax 2013 Interest paid by corporations created or organized in a relevant possession (possession corporation) or by individuals who are bona fide residents of a relevant possession is considered income from sources within that possession. Turbotax 2013   However, there is an exception to this rule if you are a bona fide resident of a relevant possession, receive interest from a corporation created or organized in that possession, and are a shareholder of that corporation who owns, directly or indirectly, at least 10% of the total voting stock of the corporation. Turbotax 2013 See Regulations section 1. Turbotax 2013 937-2(i) for more information. Turbotax 2013 Dividends. Turbotax 2013   Generally, dividends paid by a corporation created or organized in a relevant possession will be considered income from sources within that possession. Turbotax 2013 There are additional rules for bona fide residents of a relevant possession who receive dividend income from possession corporations, and who own, directly or indirectly, at least 10% of the voting stock of the corporation. Turbotax 2013 For more information, see Regulations section 1. Turbotax 2013 937-2(g). Turbotax 2013 Rental income. Turbotax 2013   Rents from property located in a relevant possession are treated as income from sources within that possession. Turbotax 2013 Royalties. Turbotax 2013   Royalties from natural resources located in a relevant possession are considered income from sources within that possession. Turbotax 2013   Also considered possession source income are royalties received for the use of, or for the privilege of using, in a relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property. Turbotax 2013 Sales or Other Dispositions of Property The source rules for sales or other dispositions of property are varied. Turbotax 2013 The most common situations are discussed below. Turbotax 2013 Real property. Turbotax 2013   Real property includes land and buildings, and generally anything built on, growing on, or attached to land. Turbotax 2013 The location of the property generally determines the source of income from the sale. Turbotax 2013 For example, if you are a bona fide resident of Guam and sell your home that is located in Guam, the gain on the sale is sourced in Guam. Turbotax 2013 If, however, the home you sold was located in the United States, the gain is U. Turbotax 2013 S. Turbotax 2013 source income. Turbotax 2013 Personal property. Turbotax 2013   The term “personal property” refers to property (such as machinery, equipment, or furniture) that is not real property. Turbotax 2013 Generally, gain (or loss) from the sale or other disposition is sourced according to the seller's tax home. Turbotax 2013 If personal property is sold by a bona fide resident of a relevant possession, the gain (or loss) from the sale is treated as sourced within that possession. Turbotax 2013   This rule does not apply to the sale of inventory, intangible property, depreciable personal property, or property sold through a foreign office or fixed place of business. Turbotax 2013 The rules applying to sales of inventory are discussed below. Turbotax 2013 For information on sales of the other types of property mentioned, see Internal Revenue Code section 865. Turbotax 2013 Inventory. Turbotax 2013   Your inventory is personal property that is stock in trade or that is held primarily for sale to customers in the ordinary course of your trade or business. Turbotax 2013 The source of income from the sale of inventory depends on whether the inventory was purchased or produced. Turbotax 2013 Purchased. Turbotax 2013   Income from the sale of inventory that you purchased is sourced where you sell the property. Turbotax 2013 Generally, this is where title to the property passes to the buyer. Turbotax 2013 Produced. Turbotax 2013   Income from the sale of inventory that you produced in a relevant possession and sold outside that possession (or vice versa) is sourced based on an allocation. Turbotax 2013 For information on making the allocation, see Regulations section 1. Turbotax 2013 863-3(f). Turbotax 2013 Special Rules for Gains From Dispositions of Certain Property There are special rules for gains from dispositions of certain investment property (for example, stocks, bonds, debt instruments, diamonds, and gold) owned by a U. Turbotax 2013 S. Turbotax 2013 citizen or resident alien prior to becoming a bona fide resident of a possession. Turbotax 2013 You are subject to these special rules if you meet both of the following conditions. Turbotax 2013 For the tax year for which the source of the gain must be determined, you are a bona fide resident of the relevant possession. Turbotax 2013 For any of the 10 years preceding that year, you were a citizen or resident alien of the United States (other than a bona fide resident of the relevant possession). Turbotax 2013 If you meet these conditions, gains from the disposition of this property will not be treated as income from sources within the relevant possession for purposes of the Internal Revenue Code. Turbotax 2013 Accordingly, bona fide residents of American Samoa and Puerto Rico, for example, may not exclude the gain on their U. Turbotax 2013 S. Turbotax 2013 tax return. Turbotax 2013 (See chapter 3 for additional filing information. Turbotax 2013 ) With respect to the CNMI, Guam, and the USVI, the gain from the disposition of this property will not meet the requirements for certain tax rules that may allow bona fide residents of those possessions to reduce or obtain a rebate of taxes on income from sources within the relevant possessions. Turbotax 2013 These rules apply to dispositions after April 11, 2005. Turbotax 2013 For details, see Regulations section 1. Turbotax 2013 937-2(f)(1) and Examples 1 and 2 of section 1. Turbotax 2013 937-2(k). Turbotax 2013 Example 1. Turbotax 2013 In 2007, Cheryl Jones, a U. Turbotax 2013 S. Turbotax 2013 citizen, lived in the United States and paid $1,000 for 100 shares of stock in the Rose Corporation, a U. Turbotax 2013 S. Turbotax 2013 corporation listed on the New York Stock Exchange. Turbotax 2013 On March 1, 2010, she moved to Puerto Rico and changed her tax home to Puerto Rico on the same date. Turbotax 2013 Cheryl satisfied the presence test in 2010 and, under the year-of-move exception, she was considered a bona fide resident of Puerto Rico for the rest of 2010. Turbotax 2013 On March 1, 2010, the closing value of Cheryl's stock in the Rose Corporation was $2,000. Turbotax 2013 On January 5, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold all her Rose Corporation stock for $7,000. Turbotax 2013 Under the earlier rules, none of Cheryl's $6,000 gain will be treated as income from sources within Puerto Rico. Turbotax 2013 The source rules discussed in the preceding paragraphs supplement, and may apply in conjunction with, an existing special rule. Turbotax 2013 This existing special rule applies if you are a U. Turbotax 2013 S. Turbotax 2013 citizen or resident alien who becomes a bona fide resident of American Samoa, the CNMI, or Guam, and who has gain from the disposition of certain U. Turbotax 2013 S. Turbotax 2013 assets during the 10-year period beginning when you became a bona fide resident. Turbotax 2013 The gain is U. Turbotax 2013 S. Turbotax 2013 source income that generally is subject to U. Turbotax 2013 S. Turbotax 2013 tax if the property is either (1) located in the United States; (2) stock issued by a U. Turbotax 2013 S. Turbotax 2013 corporation or a debt obligation of a U. Turbotax 2013 S. Turbotax 2013 person or of the United States, a state (or political subdivision), or the District of Columbia; or (3) property that has a basis in whole or in part by reference to property described in (1) or (2). Turbotax 2013 See chapter 3 for filing information. Turbotax 2013 Special election. Turbotax 2013   For dispositions after April 11, 2005, you can choose to treat the part of gain (or loss) attributable to the time you held the property while a bona fide resident of the relevant possession (the possession holding period) as gain (or loss) from sources within that possession. Turbotax 2013 Make the election by reporting the gain attributable to the possession holding period on your income tax return for the year of disposition. Turbotax 2013 This election overrides both of the special rules discussed earlier. Turbotax 2013   There are two methods for figuring the gain for the possession holding period, one for marketable securities and another for other types of investment property. Turbotax 2013 Marketable securities. Turbotax 2013   Marketable securities are those actively traded on an established financial market, such as stock in a publicly held corporation. Turbotax 2013 Under the special election, allocate the gain (or loss) by figuring the appreciation separately for your possession and U. Turbotax 2013 S. Turbotax 2013 holding periods. Turbotax 2013   Your possession holding period begins on the first day you do not have a tax home outside the relevant possession. Turbotax 2013 The gain (or loss) attributable to the possession holding period is the difference in fair market value of the security at the close of the market on the first and last days of this holding period. Turbotax 2013 This is your gain (or loss) that is treated as being from sources within the relevant possession. Turbotax 2013 If you were a bona fide resident of the relevant possession for more than one continuous period, combine the gains (or losses) from each possession holding period. Turbotax 2013 Example 2. Turbotax 2013 Assume the same facts as in Example 1, except that Cheryl makes the special election to allocate the gain between her U. Turbotax 2013 S. Turbotax 2013 and possession holding periods. Turbotax 2013 Cheryl's possession holding period began March 1, 2010, the date her tax home changed to Puerto Rico. Turbotax 2013 Therefore, the portion of gain attributable to her possession holding period is $5,000 ($7,000 sale price – $2,000 closing value on first day of the possession holding period). Turbotax 2013 By reporting $5,000 of her $6,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. Turbotax 2013 Other personal property. Turbotax 2013   For personal property other than marketable securities, use a time-based allocation. Turbotax 2013 Figure the gain (or loss) attributable to the possession holding period by multiplying your total gain (or loss) by the following fraction. Turbotax 2013      Number of days in the  possession holding period     Total number of days  in your holding period         The result is your gain (or loss) that is treated as being from sources within the relevant possession. Turbotax 2013 Example 3. Turbotax 2013 In addition to the stock in Rose Corporation, Cheryl acquired a 5% interest in the Alder Partnership on January 1, 2009. Turbotax 2013 On March 1, 2010, when she established bona fide residency in Puerto Rico, her partnership interest was not considered a marketable security. Turbotax 2013 On September 16, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold her interest in Alder Partnership for a $100,000 gain. Turbotax 2013 She had owned the interest for a total of 1,720 days. Turbotax 2013 Cheryl's possession holding period (from March 1, 2010, through September 16, 2013) is 1,296 days. Turbotax 2013 The portion of her gain attributable to Puerto Rico is $75,349 ($100,000 x (1,296 Puerto Rico days ÷ 1,720 total days)). Turbotax 2013 By reporting $75,349 of her $100,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. Turbotax 2013 Scholarships, Fellowships, Grants, Prizes, and Awards The source of these types of income is generally the residence of the payer, regardless of who actually disburses the funds. Turbotax 2013 Therefore, in order to be possession source income, the payer must be a resident of the relevant possession, such as an individual who is a bona fide resident or a corporation created or organized in that possession. Turbotax 2013 These rules do not apply to amounts paid as salary or other compensation for services. Turbotax 2013 See Compensation for Labor or Personal Services, earlier in this chapter, for the source rules that apply. Turbotax 2013 Effectively Connected Income In limited circumstances, some kinds of income from sources outside the relevant possession must be treated as effectively connected with a trade or business in that possession. Turbotax 2013 These circumstances are listed below. Turbotax 2013 You have an office or other fixed place of business in the relevant possession to which the income can be attributed. Turbotax 2013 That office or place of business is a material factor in producing the income. Turbotax 2013 The income is produced in the ordinary course of the trade or business carried on through that office or other fixed place of business. Turbotax 2013 An office or other fixed place of business is a material factor if it significantly contributes to, and is an essential economic element in, the earning of the income. Turbotax 2013 The three kinds of income from sources outside the relevant possession to which these rules apply are the following. Turbotax 2013 Rents and royalties for the use of, or for the privilege of using, intangible personal property located outside the relevant possession or from any interest in such property. Turbotax 2013 Included are rents or royalties for the use of, or for the privilege of using, outside the relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and similar properties if the rents or royalties are from the active conduct of a trade or business in the relevant possession. Turbotax 2013 Dividends or interest from the active conduct of a banking, financing, or similar business in the relevant possession. Turbotax 2013 Income, gain, or loss from the sale or exchange outside the relevant possession, through the office or other fixed place of business in the relevant possession, of: Stock in trade, Property that would be included in inventory if on hand at the end of the tax year, or Property held primarily for sale to customers in the ordinary course of business. Turbotax 2013 Item (3) will not apply if you sold the property for use, consumption, or disposition outside the relevant possession and an office or other fixed place of business in a foreign country was a material factor in the sale. Turbotax 2013 Example. Turbotax 2013 Marcy Jackson is a bona fide resident of American Samoa. Turbotax 2013 Her business, which she conducts from an office in American Samoa, is developing and selling specialized computer software. Turbotax 2013 A software purchaser will frequently pay Marcy an additional amount to install the software on the purchaser's operating system and to ensure that the software is functioning properly. Turbotax 2013 Marcy installs the software at the purchaser's place of business, which may be in American Samoa, in the United States, or in another country. Turbotax 2013 The income from selling the software is effectively connected with the conduct of Marcy's business in American Samoa, even though the product's destination may be outside the possession. Turbotax 2013 However, the compensation she receives for installing the software (personal services) outside of American Samoa is not effectively connected with the conduct of her business in the possession—the income is sourced where she performs the services. Turbotax 2013 Prev  Up  Next   Home   More Online Publications