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1040 Now

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1040 Now

1040 now Index A Adopted child, Adopted child. 1040 now Adoption taxpayer identification number (ATIN), Married child. 1040 now Age test (see Qualifying child) Alaska Permanent Fund dividends, Rule 6—Your Investment Income Must Be $3,300 or Less Alimony, Income That Is Not Earned Income Annuities, Income That Is Not Earned Income Armed forces, Nontaxable military pay. 1040 now , Military personnel stationed outside the United States. 1040 now , Temporary absences. 1040 now , Joint Return Test, Military personnel stationed outside the United States. 1040 now , Nontaxable combat pay. 1040 now Assistance (see Tax help) B Basic Allowance for Housing (BAH), Nontaxable military pay. 1040 now Basic Allowance for Subsistence (BAS), Nontaxable military pay. 1040 now C Child Adopted child, Adopted child. 1040 now Birth or death of, Birth or death of child. 1040 now Foster child, Relationship Test, Foster child. 1040 now , Rule 10—You Cannot Be a Qualifying Child of Another Taxpayer, Kidnapped child, Kidnapped child. 1040 now Married child, Married child. 1040 now Child support, Income That Is Not Earned Income Clergy, Clergy. 1040 now Combat zone pay, Nontaxable combat pay. 1040 now Community property, Community property. 1040 now , Community property. 1040 now D Detailed examples, Chapter 6—Detailed Examples Disability benefits, Disability Benefits Disallowance of the EIC, Chapter 5—Disallowance of the EIC Dividend income, Income That Is Not Earned Income Divorced parents, special rule, Special rule for divorced or separated parents (or parents who live apart). 1040 now Domestic partner, Nevada, Washington, and California domestic partners. 1040 now E Earned income, Rule 7—You Must Have Earned Income, Earned Income Earned income credit (EIC), EIC Table EITC Assistant, Is There Help Online? Extended active duty, Extended active duty. 1040 now , Military personnel stationed outside the United States. 1040 now F Figuring EIC yourself, Chapter 4—Figuring and Claiming the EIC, How To Figure the EIC Yourself Filing status: Head of household, Rule 3—Your Filing Status Cannot Be Married Filing Separately Married filing separately, Rule 3—Your Filing Status Cannot Be Married Filing Separately Forms: 1040, Do I Need This Publication?, Adjusted gross income (AGI). 1040 now , No SSN. 1040 now , Form 1040. 1040 now 1040A, Adjusted gross income (AGI). 1040 now , No SSN. 1040 now , Form 1040A. 1040 now 1040EZ, Adjusted gross income (AGI). 1040 now , No SSN. 1040 now , Form 1040EZ. 1040 now 1040X, Rule 2—You Must Have a Valid Social Security Number (SSN), Filing deadline approaching and still no SSN. 1040 now 2555, Rule 5—You Cannot File Form 2555 or Form 2555-EZ 2555–EZ, Rule 5—You Cannot File Form 2555 or Form 2555-EZ 4029, Minister's housing. 1040 now , Approved Form 4361 or Form 4029, Form 4029. 1040 now 4361, Minister's housing. 1040 now , Approved Form 4361 or Form 4029, Form 4361. 1040 now 4797, Do I Need This Publication? 4868, Filing deadline approaching and still no SSN. 1040 now 8814, Do I Need This Publication? 8862, Chapter 5—Disallowance of the EIC, Form 8862 Foster care payments, Income That Is Not Earned Income Foster child, Relationship Test, Foster child. 1040 now , Rule 10—You Cannot Be a Qualifying Child of Another Taxpayer, Fraud, Exception 2. 1040 now , Are You Prohibited From Claiming the EIC for a Period of Years? Free tax services, Free help with your tax return. 1040 now H Head of household, Community property. 1040 now , Spouse did not live with you. 1040 now , Community property. 1040 now , Rule 9—Your Qualifying Child Cannot Be Used by More Than One Person To Claim the EIC, Applying Rule 9 to divorced or separated parents (or parents who live apart). 1040 now Help (see Tax help) Home Homeless shelter, Rule 14—You Must Have Lived in the United States More Than Half of the Year Military, Rule 14—You Must Have Lived in the United States More Than Half of the Year United States, Rule 14—You Must Have Lived in the United States More Than Half of the Year Homeless, Homeless shelter. 1040 now , Homeless shelter. 1040 now I Income that is not earned income, Income That Is Not Earned Income Individual taxpayer identification number (ITIN), Other taxpayer identification number. 1040 now , Married child. 1040 now Inmate, Earnings while an inmate. 1040 now , Figuring earned income. 1040 now Interest, Income That Is Not Earned Income Investment income, Rule 6—Your Investment Income Must Be $3,300 or Less IRS can figure EIC for you, IRS Will Figure the EIC for You J Joint return test (see Qualifying child) K Kidnapped child, Kidnapped child. 1040 now M Married child, Married child. 1040 now Married filing a joint return, Rule 4—You Must Be a U. 1040 now S. 1040 now Citizen or Resident Alien All Year Married filing separately, Spouse did not live with you. 1040 now Military Combat pay, Nontaxable military pay. 1040 now Nontaxable pay, Nontaxable military pay. 1040 now Outside U. 1040 now S. 1040 now , Military personnel stationed outside the United States. 1040 now Minister, Net earnings from self-employment. 1040 now , Minister's housing. 1040 now , Church employees. 1040 now N Net earnings, self-employment, Net earnings from self-employment. 1040 now Nonresident alien, Rule 4—You Must Be a U. 1040 now S. 1040 now Citizen or Resident Alien All Year, Step 1. 1040 now O Online help EITC Assistant, Is There Help Online? P Parents, divorced or separated, Married child. 1040 now , Examples. 1040 now , Special rule for divorced or separated parents (or parents who live apart). 1040 now Passive activity, Worksheet 1. 1040 now Investment Income If You Are Filing Form 1040 Pensions, Income That Is Not Earned Income Permanently and totally disabled, Permanently and totally disabled. 1040 now Prisoner, Figuring earned income. 1040 now Publications (see Tax help) Q Qualifying child, Can I Claim the EIC?, Do I Have To Have A Child To Qualify For The EIC?, Chapter 2—Rules If You Have a Qualifying Child Age test, Rule 8—Your Child Must Meet the Relationship, Age, Residency, and Joint Return Tests, Age Test Home, Residency Test Joint return test, Rule 8—Your Child Must Meet the Relationship, Age, Residency, and Joint Return Tests Permanently and totally disabled, Permanently and totally disabled. 1040 now Relationship test, Rule 8—Your Child Must Meet the Relationship, Age, Residency, and Joint Return Tests Residency test, Residency Test United States, Residency Test R Railroad retirement benefits, Income That Is Not Earned Income Registered domestic partner, Nevada, Washington, and California domestic partners. 1040 now Relationship test (see Qualifying child) Reminders, Reminders Residency test (see Qualifying child) S Salaries, wages, and tips, Earned Income, Wages, salaries, and tips. 1040 now , Earned Income Schedules: C, EIC Worksheet A. 1040 now , EIC Worksheet B. 1040 now C-EZ, EIC Worksheet A. 1040 now , EIC Worksheet B. 1040 now EIC, Chapter 2—Rules If You Have a Qualifying Child, Kidnapped child. 1040 now , Figuring earned income. 1040 now , Nontaxable combat pay. 1040 now , How To Figure the EIC Yourself, When to use the optional methods of figuring net earnings. 1040 now , Schedule EIC SE, Figuring earned income. 1040 now , Clergy. 1040 now , Church employees. 1040 now , EIC Worksheet A. 1040 now , EIC Worksheet B. 1040 now , Net earnings from self-employment $400 or more. 1040 now , When to use the optional methods of figuring net earnings. 1040 now , When both spouses have self-employment income. 1040 now School, School defined. 1040 now Self-employed persons, Rule 7—You Must Have Earned Income, Figuring earned income. 1040 now , EIC Worksheet B. 1040 now Self-employment income, Earned Income Self-employment tax, Net earnings from self-employment $400 or more. 1040 now Separated parents, special rule, Married child. 1040 now Social security benefits, Income That Is Not Earned Income Social security number (SSN), Rule 2—You Must Have a Valid Social Security Number (SSN), Valid for work only with INS authorization or DHS authorization. 1040 now , No SSN. 1040 now , Getting an SSN. 1040 now , Married child. 1040 now , Exception for math or clerical errors. 1040 now Statutory employee, Statutory employee. 1040 now , Figuring earned income. 1040 now , EIC Worksheet A. 1040 now , Statutory employees. 1040 now Strike benefits, Strike benefits. 1040 now Student, Student defined. 1040 now T Tax help, How To Get Tax Help Taxpayer identification number Adoption identification number (ATIN), Married child. 1040 now Individual taxpayer identification number (ITIN), Other taxpayer identification number. 1040 now Social security number (SSN), Other taxpayer identification number. 1040 now Tiebreaker rules, Tiebreaker rules. 1040 now Tips, wages, and salaries, Earned Income, Wages, salaries, and tips. 1040 now , Earned Income TTY/TDD information, How To Get Tax Help U Unemployment compensation, Income That Is Not Earned Income United States, United States. 1040 now V Veterans' benefits, Income That Is Not Earned Income W Wages, salaries, and tips, Earned Income, Wages, salaries, and tips. 1040 now , Earned Income Welfare benefits, Income That Is Not Earned Income Workers' compensation benefits, Income That Is Not Earned Income Workfare payments, Workfare payments. 1040 now Worksheet 1, Worksheet 1. 1040 now Investment Income If You Are Filing Form 1040 Worksheet 2, Worksheet 2. 1040 now Worksheet for Line 4 of Worksheet 1 Prev  Up     Home   More Online Publications
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TEB Post-Issuance Compliance: Some Basic Concepts

Tax Exempt Bonds (TEB) focuses on providing participants in the municipal bond industry with quality service to assist issuers and conduit borrowers in understanding their tax responsibilities.  As part of that service, TEB is providing the following basic information for issuers of tax-advantaged bonds with respect to their post-issuance compliance requirements.  Issuers may use this basic information to establish due diligence practices to monitor tax compliance throughout the period that their bonds are outstanding.  However, issuers may not cite this basic information as an authoritative source.  TEB recommends that issuers review this basic information in consultation with their counsel.

Generally

Tax-advantaged bonds (tax-exempt, tax credit, and direct pay) are bonds that receive preferential tax treatment.  These bonds, issued by or on behalf of state and local governments, are subject to applicable federal tax requirements both at the time of issuance and for so long as the bonds remain outstanding.  An issuer or other party’s failure to comply with any applicable federal tax requirement with respect to tax-advantaged bonds jeopardizes the preferential tax status of those bonds.  

Compliance with certain applicable federal tax requirements normally occurs at the closing of the bond transaction, while other federal tax requirements require on-going monitoring after the issuance of the bonds.  Issuance related requirements include filing a Form 8038 series information return ( 8038, 8038-G, 8038-GC, 8038-B, or 8038-TC) and the issuer having reasonable expectations of on-going post-issuance compliance.  Additional issuance related requirements might include volume cap allocation limits and public approval of the bond issue.

Post-issuance federal tax requirements generally fall into two categories:  (1) qualified use of proceeds and financed property; and (2) arbitrage yield restriction and rebate.  Qualified use requirements require monitoring of the various direct and indirect uses of bond-financed property over the life of the bonds and calculations of the percentage of nonqualified uses.  Arbitrage requirements also require monitoring over the life of the bonds to determine whether both the yield on investments acquired with bond proceeds are properly restricted and whether the issuer must file Form 8038-T to pay a yield reduction payment and/or rebate payment.

Some federal tax requirements that are generally issuance related might require some level of post-issuance due diligence monitoring.  For example, adjustments to the determination of issue price for federal tax purposes can affect compliance with volume cap allocation, arbitrage yield restriction, and other federal tax requirements.  Similarly, some level of post-issuance monitoring may be required to determine compliance with the issuance costs limitations applicable to qualified private activity bonds.

Importance of Post-Issuance Compliance

The on-going nature of post-issuance compliance requirements applicable to tax-advantaged bonds requires issuers to actively monitor compliance throughout the entire period their bonds remain outstanding.  This due diligence will significantly improve the issuer’s ability to identify noncompliance and prevent violations from occurring, or timely correct identified violations (when prevention is not possible), to ensure the continued tax-advantaged status of the bonds. 

Written Procedures for Monitoring Compliance

Issuers should adopt written procedures, applicable to all bond issues, which go beyond reliance on tax certificates included in bond documents provided at closing.  Sole reliance on the closing bond documents may result in procedures insufficiently detailed or not incorporated into an issuer’s operations.  Written procedures should contain certain key characteristics, including making provision for:

  • Due diligence review at regular intervals;
  • Identifying the official or employee responsible for review;
  • Training of the responsible official/employee;
  • Retention of adequate records to substantiate compliance (e.g., records relating to expenditure of proceeds);
  • Procedures reasonably expected to timely identify noncompliance; and
  • Procedures ensuring that the issuer will take steps to timely correct noncompliance.

The goal of establishing and following written procedures is to identify and resolve noncompliance, on a timely basis, to preserve the preferential status of tax-advantaged bonds.  Generally, an issuer that has established and followed comprehensive written procedures to promote post-issuance compliance is less likely, than an issuer that does not have such procedures, to violate the federal tax requirements related to its bonds.

How Does the IRS Promote Post-Issuance Compliance?

TEB administers a Voluntary Closing Agreement Program (TEB VCAP) to assist issuers in resolving federal tax violations related to their bonds as described in Notice 2008-31 and IRM section 7.2.3

Generally, an issuer will receive more favorable resolution terms under TEB VCAP than for the same tax violation discovered during an examination of the bonds.  In addition, an issuer that identifies a violation in accordance with the implementation of its written post-issuance compliance procedures can generally expect to receive more favorable treatment in resolving its tax violation under TEB VCAP than if the issuer has not implemented such procedures.

TEB uses compliance check questionnaires to evaluate compliance trends and practices issuers use to monitor compliance with federal tax requirements.  For example, in May 2011 TEB initiated a questionnaire project on advance refundings.  Generally, the design of the questionnaires is to gather information from a segment of the municipal bond market.  While these questionnaires are not examinations of  specific bond issues, the data collected allows TEB to develop new voluntary compliance and education programs as well as to identify future compliance projects.

Issuers of tax-advantaged bonds are required to file a Form 8038 series information return.  All Form 8038 series returns include questions regarding whether the issuer has established written procedures to timely identify and correct violations and to ensure compliance with the arbitrage yield restriction and rebate requirements.
 
The Advisory Committee on Tax Exempt and Government Entities (ACT) issued several reports related to post-issuance compliance.  Specific ACT recommendations on post-issuance compliance procedures are included in an exhibit to its June 2007 report.

Page Last Reviewed or Updated: 08-Jan-2014

The 1040 Now

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