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Amend Federal Tax Return

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Amend Federal Tax Return

Amend federal tax return 4. Amend federal tax return   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. Amend federal tax return Rent-to-own contract. Amend federal tax return 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. Amend federal tax return MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Amend federal tax return Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. Amend federal tax return 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. Amend federal tax return This chapter explains how to determine which MACRS depreciation system applies to your property. Amend federal tax return It also discusses other information you need to know before you can figure depreciation under MACRS. Amend federal tax return 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. Amend federal tax return 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. Amend federal tax return Finally, it explains when and how to recapture MACRS depreciation. Amend federal tax return 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. Amend federal tax return 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. Amend federal tax return You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Amend federal tax return If you placed your property in service in 2013, complete Part III of Form 4562 to report depreciation using MACRS. Amend federal tax return Complete section B of Part III to report depreciation using GDS, and complete section C of Part III to report depreciation using ADS. Amend federal tax return 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. Amend federal tax return Required use of ADS. Amend federal tax return   You must use ADS for the following property. Amend federal tax return Listed property used 50% or less in a qualified business use. Amend federal tax return See chapter 5 for information on listed property. Amend federal tax return Any tangible property used predominantly outside the United States during the year. Amend federal tax return Any tax-exempt use property. Amend federal tax return Any tax-exempt bond-financed property. Amend federal tax return 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. Amend federal tax return 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. Amend federal tax return 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. Amend federal tax return Electing ADS. Amend federal tax return   Although your property may qualify for GDS, you can elect to use ADS. Amend federal tax return The election generally must cover all property in the same property class that you placed in service during the year. Amend federal tax return However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. Amend federal tax return Once you make this election, you can never revoke it. Amend federal tax return   You make the election by completing line 20 in Part III of Form 4562. Amend federal tax return 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. Amend federal tax return These property classes are also listed under column (a) in section B, Part III, of Form 4562. Amend federal tax return For detailed information on property classes, see Appendix B, Table of Class Lives and Recovery Periods, in this publication. Amend federal tax return 3-year property. Amend federal tax return Tractor units for over-the-road use. Amend federal tax return Any race horse over 2 years old when placed in service. Amend federal tax return (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. Amend federal tax return ) Any other horse (other than a race horse) over 12 years old when placed in service. Amend federal tax return Qualified rent-to-own property (defined later). Amend federal tax return 5-year property. Amend federal tax return Automobiles, taxis, buses, and trucks. Amend federal tax return Computers and peripheral equipment. Amend federal tax return Office machinery (such as typewriters, calculators, and copiers). Amend federal tax return Any property used in research and experimentation. Amend federal tax return Breeding cattle and dairy cattle. Amend federal tax return Appliances, carpets, furniture, etc. Amend federal tax return , used in a residential rental real estate activity. Amend federal tax return Certain geothermal, solar, and wind energy property. Amend federal tax return 7-year property. Amend federal tax return Office furniture and fixtures (such as desks, files, and safes). Amend federal tax return Agricultural machinery and equipment. Amend federal tax return Any property that does not have a class life and has not been designated by law as being in any other class. Amend federal tax return Certain motorsports entertainment complex property (defined later) placed in service before January 1, 2014. Amend federal tax return Any natural gas gathering line placed in service after April 11, 2005. Amend federal tax return See Natural gas gathering line and electric transmission property , later. Amend federal tax return 10-year property. Amend federal tax return Vessels, barges, tugs, and similar water transportation equipment. Amend federal tax return Any single purpose agricultural or horticultural structure. Amend federal tax return Any tree or vine bearing fruits or nuts. Amend federal tax return Qualified small electric meter and qualified smart electric grid system (defined later) placed in service on or after October 3, 2008. Amend federal tax return 15-year property. Amend federal tax return Certain improvements made directly to land or added to it (such as shrubbery, fences, roads, sidewalks, and bridges). Amend federal tax return Any retail motor fuels outlet (defined later), such as a convenience store. Amend federal tax return Any municipal wastewater treatment plant. Amend federal tax return Any qualified leasehold improvement property (defined later) placed in service before January 1, 2014. Amend federal tax return Any qualified restaurant property (defined later) placed in service before January 1, 2014. Amend federal tax return Initial clearing and grading land improvements for gas utility property. Amend federal tax return 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. Amend federal tax return See Natural gas gathering line and electric transmission property , later. Amend federal tax return Any natural gas distribution line placed in service after April 11, 2005 and before January 1, 2011. Amend federal tax return Any qualified retail improvement property placed in service before January 1, 2014. Amend federal tax return 20-year property. Amend federal tax return Farm buildings (other than single purpose agricultural or horticultural structures). Amend federal tax return Municipal sewers not classified as 25-year property. Amend federal tax return Initial clearing and grading land improvements for electric utility transmission and distribution plants. Amend federal tax return 25-year property. Amend federal tax return This class is water utility property, which is either of the following. Amend federal tax return 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. Amend federal tax return Municipal sewers other than property placed in service under a binding contract in effect at all times since June 9, 1996. Amend federal tax return Residential rental property. Amend federal tax return 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. Amend federal tax return A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. Amend federal tax return 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. Amend federal tax return 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. Amend federal tax return Nonresidential real property. Amend federal tax return 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. Amend federal tax return 5 years. Amend federal tax return Qualified rent-to-own property. Amend federal tax return   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. Amend federal tax return It is tangible personal property generally used in the home for personal use. Amend federal tax return It includes computers and peripheral equipment, televisions, videocassette recorders, stereos, camcorders, appliances, furniture, washing machines and dryers, refrigerators, and other similar consumer durable property. Amend federal tax return Consumer durable property does not include real property, aircraft, boats, motor vehicles, or trailers. Amend federal tax return   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. Amend federal tax return 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. Amend federal tax return Rent-to-own dealer. Amend federal tax return   You are a rent-to-own dealer if you meet all the following requirements. Amend federal tax return You regularly enter into rent-to-own contracts (defined below) in the ordinary course of your business for the use of consumer property. Amend federal tax return A substantial portion of these contracts end with the customer returning the property before making all the payments required to transfer ownership. Amend federal tax return The property is tangible personal property of a type generally used within the home for personal use. Amend federal tax return Rent-to-own contract. Amend federal tax return   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. Amend federal tax return 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). Amend federal tax return Provides for regular periodic (weekly or monthly) payments that can be either level or decreasing. Amend federal tax return If the payments are decreasing, no payment can be less than 40% of the largest payment. Amend federal tax return Provides for total payments that generally exceed the normal retail price of the property plus interest. Amend federal tax return Provides for total payments that do not exceed $10,000 for each item of property. Amend federal tax return 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. Amend federal tax return 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. Amend federal tax return 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. Amend federal tax return Motorsports entertainment complex. Amend federal tax return   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. Amend federal tax return The events must be open to the public for the price of admission. Amend federal tax return Qualified smart electric grid system. Amend federal tax return   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. Amend federal tax return 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. Amend federal tax return Retail motor fuels outlet. Amend federal tax return   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. Amend federal tax return It is not larger than 1,400 square feet. Amend federal tax return 50% or more of the gross revenues generated from the property are derived from petroleum sales. Amend federal tax return 50% or more of the floor space in the property is devoted to petroleum marketing sales. Amend federal tax return A retail motor fuels outlet does not include any facility related to petroleum and natural gas trunk pipelines. Amend federal tax return Qualified leasehold improvement property. Amend federal tax return    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. Amend federal tax return   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. Amend federal tax return 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. Amend federal tax return Examples include the following. Amend federal tax return A complete liquidation of a subsidiary. Amend federal tax return A transfer to a corporation controlled by the transferor. Amend federal tax return An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. Amend federal tax return Qualified restaurant property. Amend federal tax return   Qualified restaurant property is any section 1250 property that is a building placed in service after December 31, 2008, and before January 1, 2014. Amend federal tax return 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. Amend federal tax return Qualified smart electric meter. Amend federal tax return   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. Amend federal tax return 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. Amend federal tax return Natural gas gathering line and electric transmission property. Amend federal tax return   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. Amend federal tax return The original use of the property must have begun with you after April 11, 2005. Amend federal tax return Original use means the first use to which the property is put, whether or not by you. Amend federal tax return Therefore, property used by any person before April 12, 2005, is not original use. Amend federal tax return Original use includes additional capital expenditures you incurred to recondition or rebuild your property. Amend federal tax return However, original use does not include the cost of reconditioned or rebuilt property you acquired. Amend federal tax return 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. Amend federal tax return The property must not be placed in service under a binding contract in effect before April 12, 2005. Amend federal tax return 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. Amend federal tax return 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. Amend federal tax return 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. Amend federal tax return The placed in service date for your property is the date the property is ready and available for a specific use. Amend federal tax return It is therefore not necessarily the date it is first used. Amend federal tax return 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. Amend federal tax return See Placed in Service under When Does Depreciation Begin and End in chapter 1 for examples illustrating when property is placed in service. Amend federal tax return 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. Amend federal tax return 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 . Amend federal tax return Reduce that amount by any credits and deductions allocable to the property. Amend federal tax return The following are examples of some credits and deductions that reduce basis. Amend federal tax return Any deduction for section 179 property. Amend federal tax return Any deduction under section 179B of the Internal Revenue Code for capital costs to comply with Environmental Protection Agency sulfur regulations. Amend federal tax return 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. Amend federal tax return 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. Amend federal tax return 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 . Amend federal tax return Any deduction for removal of barriers to the disabled and the elderly. Amend federal tax return Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. Amend federal tax return Any special depreciation allowance. Amend federal tax return Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. Amend federal tax return For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. Amend federal tax return Enter the basis for depreciation under column (c) in Part III of Form 4562. Amend federal tax return 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 . Amend federal tax return Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. Amend federal tax return It is determined based on the depreciation system (GDS or ADS) used. Amend federal tax return Recovery Periods Under GDS Under GDS, property that is not qualified Indian reservation property is depreciated over one of the following recovery periods. Amend federal tax return 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. Amend federal tax return 5 years     Nonresidential real property   39 years 4   15 years for qualified rent-to-own property placed in service before August 6, 1997. Amend federal tax return 239 years for property that is a retail motor fuels outlet placed in service before August 20, 1996 (31. Amend federal tax return 5 years if placed in service before May 13, 1993), unless you elected to depreciate it over 15 years. Amend federal tax return 320 years for property placed in service before June 13, 1996, or under a binding contract in effect before June 10, 1996. Amend federal tax return 431. Amend federal tax return 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). Amend federal tax return The GDS recovery periods for property not listed above can be found in Appendix B, Table of Class Lives and Recovery Periods. Amend federal tax return Residential rental property and nonresidential real property are defined earlier under Which Depreciation System (GDS or ADS) Applies. Amend federal tax return 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). Amend federal tax return Office in the home. Amend federal tax return   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. Amend federal tax return 5 years if you began using it for business before May 13, 1993). Amend federal tax return 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. Amend federal tax return 5 years. Amend federal tax return See Publication 587 for a discussion of the tests you must meet to claim expenses, including depreciation, for the business use of your home. Amend federal tax return Home changed to rental use. Amend federal tax return   If you begin to rent a home that was your personal home before 1987, you depreciate it as residential rental property over 27. Amend federal tax return 5 years. Amend federal tax return 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. Amend federal tax return The following table shows these shorter recovery periods. Amend federal tax return 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 . Amend federal tax return Use this chart to find the correct percentage table to use for qualified Indian reservation property. Amend federal tax return 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. Amend federal tax return   Property eligible for the shorter recovery periods are 3-, 5-, 7-, 10-, 15-, and 20-year property and nonresidential real property. Amend federal tax return You must use this property predominantly in the active conduct of a trade or business within an Indian reservation. Amend federal tax return 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. Amend federal tax return   The following property is not qualified property. Amend federal tax return Property used or located outside an Indian reservation on a regular basis, other than qualified infrastructure property. Amend federal tax return Property acquired directly or indirectly from a related person. Amend federal tax return Property placed in service for purposes of conducting or housing class I, II, or III gaming activities. Amend federal tax return These activities are defined in section 4 of the Indian Regulatory Act (25 U. Amend federal tax return S. Amend federal tax return C. Amend federal tax return 2703). Amend federal tax return Any property you must depreciate under ADS. Amend federal tax return 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). Amend federal tax return Qualified infrastructure property. Amend federal tax return   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. Amend federal tax return Qualified infrastructure property is property that meets all the following rules. Amend federal tax return It is qualified property, as defined earlier, except that it is outside the reservation. Amend federal tax return It benefits the tribal infrastructure. Amend federal tax return It is available to the general public. Amend federal tax return It is placed in service in connection with the active conduct of a trade or business within a reservation. Amend federal tax return Infrastructure property includes, but is not limited to, roads, power lines, water systems, railroad spurs, and communications facilities. Amend federal tax return Related person. Amend federal tax return   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. Amend federal tax return Indian reservation. Amend federal tax return   The term Indian reservation means a reservation as defined in section 3(d) of the Indian Financing Act of 1974 (25 U. Amend federal tax return S. Amend federal tax return C. Amend federal tax return 1452(d)) or section 4(10) of the Indian Child Welfare Act of 1978 (25 U. Amend federal tax return S. Amend federal tax return C. Amend federal tax return 1903(10)). Amend federal tax return Section 3(d) of the Indian Financing Act of 1974 defines reservation to include former Indian reservations in Oklahoma. Amend federal tax return For a definition of the term “former Indian reservations in Oklahoma,” see Notice 98-45 in Internal Revenue Bulletin 1998-35. Amend federal tax return Recovery Periods Under ADS The recovery periods for most property generally are longer under ADS than they are under GDS. Amend federal tax return The following table shows some of the ADS recovery periods. Amend federal tax return 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. Amend federal tax return 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 . Amend federal tax return Tax-exempt use property subject to a lease. Amend federal tax return   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. Amend federal tax return Additions and Improvements An addition or improvement you make to depreciable property is treated as separate depreciable property. Amend federal tax return See How Do You Treat Repairs and Improvements in chapter 1 for a definition of improvements. Amend federal tax return 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. Amend federal tax return The recovery period begins on the later of the following dates. Amend federal tax return The date you place the addition or improvement in service. Amend federal tax return The date you place in service the property to which you made the addition or improvement. Amend federal tax return 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). Amend federal tax return Example. Amend federal tax return You own a rental home that you have been renting out since 1981. Amend federal tax return 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. Amend federal tax return Under GDS, the property class for the addition is residential rental property and its recovery period is 27. Amend federal tax return 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. Amend federal tax return Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. Amend federal tax return 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. Amend federal tax return The mid-month convention. Amend federal tax return   Use this convention for nonresidential real property, residential rental property, and any railroad grading or tunnel bore. Amend federal tax return   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. Amend federal tax return This means that a one-half month of depreciation is allowed for the month the property is placed in service or disposed of. Amend federal tax return   Your use of the mid-month convention is indicated by the “MM” already shown under column (e) in Part III of Form 4562. Amend federal tax return The mid-quarter convention. Amend federal tax return   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. Amend federal tax return   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. Amend federal tax return This means that 1½ months of depreciation is allowed for the quarter the property is placed in service or disposed of. Amend federal tax return   If you use this convention, enter “MQ” under column (e) in Part III of Form 4562. Amend federal tax return    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. Amend federal tax return However, it does not reflect any reduction in basis for any special depreciation allowance. Amend federal tax return The half-year convention. Amend federal tax return   Use this convention if neither the mid-quarter convention nor the mid-month convention applies. Amend federal tax return   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. Amend federal tax return This means that a one-half year of depreciation is allowed for the year the property is placed in service or disposed of. Amend federal tax return   If you use this convention, enter “HY” under column (e) in Part III of Form 4562. Amend federal tax return Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. Amend federal tax return The 200% declining balance method over a GDS recovery period. Amend federal tax return The 150% declining balance method over a GDS recovery period. Amend federal tax return The straight line method over a GDS recovery period. Amend federal tax return The straight line method over an ADS recovery period. Amend federal tax return 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. Amend federal tax return If you made this election, continue to use the same method and recovery period for that property. Amend federal tax return Table 4–1 lists the types of property you can depreciate under each method. Amend federal tax return It also gives a brief explanation of the method, including any benefits that may apply. Amend federal tax return 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. Amend federal tax return You can depreciate real property using the straight line method under either GDS or ADS. Amend federal tax return Fruit or nut trees and vines. Amend federal tax return   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a recovery period of 10 years. Amend federal tax return ADS required for some farmers. Amend federal tax return   If you elect not to apply the uniform capitalization rules to any plant produced in your farming business, you must use ADS. Amend federal tax return You must use ADS for all property you place in service in any year the election is in effect. Amend federal tax return See the regulations under section 263A of the Internal Revenue Code for information on the uniform capitalization rules that apply to farm property. Amend federal tax return Electing a Different Method As shown in Table 4–1 , you can elect a different method for depreciation for certain types of property. Amend federal tax return You must make the election by the due date of the return (including extensions) for the year you placed the property in service. Amend federal tax return 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). Amend federal tax return Attach the election to the amended return and write “Filed pursuant to section 301. Amend federal tax return 9100-2” on the election statement. Amend federal tax return File the amended return at the same address you filed the original return. Amend federal tax return Once you make the election, you cannot change it. Amend federal tax return 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. Amend federal tax return However, you can make the election on a property-by-property basis for nonresidential real and residential rental property. Amend federal tax return 150% election. Amend federal tax return   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. Amend federal tax return Make the election by entering “150 DB” under column (f) in Part III of Form 4562. Amend federal tax return Straight line election. Amend federal tax return   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. Amend federal tax return Make the election by entering  “S/L” under column (f) in Part III of Form 4562. Amend federal tax return Election of ADS. Amend federal tax return   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. Amend federal tax return ADS uses the straight line method of depreciation over fixed ADS recovery periods. Amend federal tax return Most ADS recovery periods are listed in Appendix B, or see the table under Recovery Periods Under ADS , earlier. Amend federal tax return   Make the election by completing line 20 in Part III of Form 4562. Amend federal tax return Farm property. Amend federal tax return   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. Amend federal tax return The straight line method over a GDS recovery period. Amend federal tax return The straight line method over an ADS recovery period. Amend federal tax return Table 4-1. Amend federal tax return Depreciation Methods Note. Amend federal tax return The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. Amend federal tax return 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. Amend federal tax return S. Amend federal tax return  • 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. Amend federal tax return 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. Amend federal tax return Then, you are ready to figure your depreciation deduction. Amend federal tax return You can figure it using a percentage table provided by the IRS, or you can figure it yourself without using the table. Amend federal tax return 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. Amend federal tax return These percentage tables are in Appendix A near the end of this publication. Amend federal tax return Which table to use. Amend federal tax return    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. Amend federal tax return The percentage tables immediately follow the guide. Amend federal tax return Rules Covering the Use of the Tables The following rules cover the use of the percentage tables. Amend federal tax return You must apply the rates in the percentage tables to your property's unadjusted basis. Amend federal tax return You cannot use the percentage tables for a short tax year. Amend federal tax return See Figuring the Deduction for a Short Tax Year, later, for information on the short tax year rules. Amend federal tax return 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. Amend federal tax return 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. Amend federal tax return 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. Amend federal tax return Basis adjustment due to recapture of clean-fuel vehicle deduction or credit. Amend federal tax return   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. Amend federal tax return 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. Amend federal tax return See Figuring the Deduction Without Using the Tables, later. Amend federal tax return Basis adjustment due to casualty loss. Amend federal tax return   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. Amend federal tax return 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. Amend federal tax return See Figuring the Deduction Without Using the Tables, later. Amend federal tax return Example. Amend federal tax return 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. Amend federal tax return It cost $39,000 and she elected a section 179 deduction of $24,000. Amend federal tax return She also took a special depreciation allowance of $7,500 [50% of $15,000 ($39,000 − $24,000)]. Amend federal tax return Her unadjusted basis after the section 179 deduction and special depreciation allowance was $7,500 ($15,000 − $7,500). Amend federal tax return She figured her MACRS depreciation deduction using the percentage tables. Amend federal tax return For 2012, her MACRS depreciation deduction was $268. Amend federal tax return In July 2013, the property was vandalized and Sandra had a deductible casualty loss of $3,000. Amend federal tax return She must adjust the property's basis for the casualty loss, so she can no longer use the percentage tables. Amend federal tax return Her adjusted basis at the end of 2013, before figuring her 2013 depreciation, is $4,232. Amend federal tax return 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. Amend federal tax return She must now figure her depreciation for 2013 without using the percentage tables. Amend federal tax return 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. Amend federal tax return 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. Amend federal tax return However, you do reduce your original basis by other amounts, including the following. Amend federal tax return Any amortization taken on the property. Amend federal tax return Any section 179 deduction claimed. Amend federal tax return Any special depreciation allowance taken on the property. Amend federal tax return For business property you purchase during the year, the unadjusted basis is its cost minus these and other applicable adjustments. Amend federal tax return 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. Amend federal tax return MACRS Worksheet You can use this worksheet to help you figure your depreciation deduction using the percentage tables. Amend federal tax return Use a separate worksheet for each item of property. Amend federal tax return Then, use the information from this worksheet to prepare Form 4562. Amend federal tax return Do not use this worksheet for automobiles. Amend federal tax return Use the Depreciation Worksheet for Passenger Automobiles in chapter 5. Amend federal tax return MACRS Worksheet Part I   1. Amend federal tax return MACRS system (GDS or ADS)   2. Amend federal tax return Property class   3. Amend federal tax return Date placed in service   4. Amend federal tax return Recovery period   5. Amend federal tax return Method and convention   6. Amend federal tax return Depreciation rate (from tables)   Part II   7. Amend federal tax return Cost or other basis* $     8. Amend federal tax return Business/investment use   %   9. Amend federal tax return Multiply line 7 by line 8   $ 10. Amend federal tax return Total claimed for section 179 deduction and other items   $ 11. Amend federal tax return Subtract line 10 from line 9. Amend federal tax return This is your tentative basis for depreciation   $ 12. Amend federal tax return Multiply line 11 by . Amend federal tax return 50 if the 50% special depreciation allowance applies. Amend federal tax return This is your special depreciation allowance. Amend federal tax return 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. Amend federal tax return Subtract line 12 from line 11. Amend federal tax return This is your basis for depreciation     14. Amend federal tax return Depreciation rate (from line 6)     15. Amend federal tax return Multiply line 13 by line 14. Amend federal tax return This is your MACRS depreciation deduction   $ *If real estate, do not include cost (basis) of land. Amend federal tax return The following example shows how to figure your MACRS depreciation deduction using the percentage tables and the MACRS worksheet. Amend federal tax return Example. Amend federal tax return You bought office furniture (7-year property) for $10,000 and placed it in service on August 11, 2013. Amend federal tax return You use the furniture only for business. Amend federal tax return This is the only property you placed in service this year. Amend federal tax return 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. Amend federal tax return You use GDS and the half-year convention to figure your depreciation. Amend federal tax return You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-1. Amend federal tax return Multiply your property's unadjusted basis each year by the percentage for 7-year property given in Table A-1. Amend federal tax return You figure your depreciation deduction using the MACRS worksheet as follows. Amend federal tax return MACRS Worksheet Part I 1. Amend federal tax return MACRS system (GDS or ADS) GDS 2. Amend federal tax return Property class 7-year 3. Amend federal tax return Date placed in service 8/11/13 4. Amend federal tax return Recovery period 7-Year 5. Amend federal tax return Method and convention 200%DB/Half-Year 6. Amend federal tax return Depreciation rate (from tables) . Amend federal tax return 1429 Part II 7. Amend federal tax return Cost or other basis* $10,000     8. Amend federal tax return Business/investment use 100 %   9. Amend federal tax return Multiply line 7 by line 8   $10,000 10. Amend federal tax return Total claimed for section 179 deduction and other items   -0- 11. Amend federal tax return Subtract line 10 from line 9. Amend federal tax return This is your tentative basis for depreciation   $10,000 12. Amend federal tax return Multiply line 11 by . Amend federal tax return 50 if the 50% special depreciation allowance applies. Amend federal tax return This is your special depreciation allowance. Amend federal tax return 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. Amend federal tax return Subtract line 12 from line 11. Amend federal tax return This is your basis for depreciation   $10,000 14. Amend federal tax return Depreciation rate (from line 6)   . Amend federal tax return 1429 15. Amend federal tax return Multiply line 13 by line 14. Amend federal tax return This is your MACRS depreciation deduction   $1,429 *If real estate, do not include cost (basis) of land. Amend federal tax return 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. Amend federal tax return Year   Basis Percentage Deduction 2014 $ 10,000 24. Amend federal tax return 49%   $2,449   2015   10,000 17. Amend federal tax return 49   1,749   2016   10,000 12. Amend federal tax return 49   1,249   2017   10,000 8. Amend federal tax return 93   893   2018   10,000 8. Amend federal tax return 92   892   2019   10,000 8. Amend federal tax return 93   893   2020   10,000 4. Amend federal tax return 46   446   Examples The following examples are provided to show you how to use the percentage tables. Amend federal tax return In both examples, assume the following. Amend federal tax return You use the property only for business. Amend federal tax return You use the calendar year as your tax year. Amend federal tax return You use GDS for all the properties. Amend federal tax return Example 1. Amend federal tax return You bought a building and land for $120,000 and placed it in service on March 8. Amend federal tax return The sales contract showed that the building cost $100,000 and the land cost $20,000. Amend federal tax return It is nonresidential real property. Amend federal tax return The building's unadjusted basis is its original cost, $100,000. Amend federal tax return You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-7a. Amend federal tax return 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. Amend federal tax return Your depreciation deduction for each of the first 3 years is as follows: Year   Basis Percentage Deduction 1st $ 100,000 2. Amend federal tax return 033%   $2,033   2nd   100,000 2. Amend federal tax return 564   2,564   3rd   100,000 2. Amend federal tax return 564   2,564   Example 2. Amend federal tax return 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. Amend federal tax return You placed the machine in service in January, the furniture in September, and the computer in October. Amend federal tax return You do not elect a section 179 deduction and none of these items is qualified property for purposes of claiming a special depreciation allowance. Amend federal tax return 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. Amend federal tax return The total bases of all property you placed in service during the year is $10,000. Amend federal tax return 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. Amend federal tax return Therefore, you must use the mid-quarter convention for all three items. Amend federal tax return You refer to the MACRS Percentage Table Guide in Appendix A to determine which table you should use under the mid-quarter convention. Amend federal tax return The machine is 7-year property placed in service in the first quarter, so you use Table A-2. Amend federal tax return The furniture is 7-year property placed in service in the third quarter, so you use Table A-4. Amend federal tax return Finally, because the computer is 5-year property placed in service in the fourth quarter, you use Table A-6. Amend federal tax return Knowing what table to use for each property, you figure the depreciation for the first 2 years as follows. Amend federal tax return Year Property Basis Percentage Deduction 1st Machine $4,000 25. Amend federal tax return 00 $1,000   2nd Machine 4,000 21. Amend federal tax return 43 857   1st Furniture 1,000 10. Amend federal tax return 71 107   2nd Furniture 1,000 25. Amend federal tax return 51 255   1st Computer 5,000 5. Amend federal tax return 00 250   2nd Computer 5,000 38. Amend federal tax return 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. Amend federal tax return 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. Amend federal tax return After you figure the full-year depreciation amount, figure the deductible part using the convention that applies to the property. Amend federal tax return Half-year convention used. Amend federal tax return   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. Amend federal tax return Mid-quarter convention used. Amend federal tax return   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. Amend federal tax return Quarter Percentage First 12. Amend federal tax return 5% Second 37. Amend federal tax return 5 Third 62. Amend federal tax return 5 Fourth 87. Amend federal tax return 5 Example. Amend federal tax return On December 2, 2010, you placed in service an item of 5-year property costing $10,000. Amend federal tax return You did not claim a section 179 deduction and the property does not qualify for a special depreciation allowance. Amend federal tax return Your unadjusted basis for the property was $10,000. Amend federal tax return 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. Amend federal tax return Your property is in the 5-year property class, so you used Table A-5 to figure your depreciation deduction. Amend federal tax return Your deductions for 2010, 2011, and 2012 were $500 (5% of $10,000), $3,800 (38% of $10,000), and $2,280 (22. Amend federal tax return 80% of $10,000). Amend federal tax return You disposed of the property on April 6, 2013. Amend federal tax return To determine your depreciation deduction for 2013, first figure the deduction for the full year. Amend federal tax return This is $1,368 (13. Amend federal tax return 68% of $10,000). Amend federal tax return April is in the second quarter of the year, so you multiply $1,368 by 37. Amend federal tax return 5% to get your depreciation deduction of $513 for 2013. Amend federal tax return Mid-month convention used. Amend federal tax return   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. Amend federal tax return The numerator of the fraction is the number of months (including partial months) in the year that the property is considered in service. Amend federal tax return The denominator is 12. Amend federal tax return Example. Amend federal tax return On July 2, 2011, you purchased and placed in service residential rental property. Amend federal tax return The property cost $100,000, not including the cost of land. Amend federal tax return You used Table A-6 to figure your MACRS depreciation for this property. Amend federal tax return You sold the property on March 2, 2013. Amend federal tax return You file your tax return based on the calendar year. Amend federal tax return A full year of depreciation for 2013 is $3,636. Amend federal tax return This is $100,000 multiplied by . Amend federal tax return 03636 (the percentage for the seventh month of the third recovery year) from Table A-6 . Amend federal tax return You then apply the mid-month convention for the 2½ months of use in 2013. Amend federal tax return Treat the month of disposition as one-half month of use. Amend federal tax return Multiply $3,636 by the fraction, 2. Amend federal tax return 5 over 12, to get your 2013 depreciation deduction of $757. Amend federal tax return 50. Amend federal tax return 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. Amend federal tax return Before making the computation each year, you must reduce your adjusted basis in the property by the depreciation claimed the previous year. Amend federal tax return Figuring MACRS deductions without using the tables generally will result in a slightly different amount than using the tables. Amend federal tax return Declining Balance Method When using a declining balance method, you apply the same depreciation rate each year to the adjusted basis of your property. Amend federal tax return 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. Amend federal tax return The straight line method is explained later. Amend federal tax return You figure depreciation for the year you place property in service as follows. Amend federal tax return Multiply your adjusted basis in the property by the declining balance rate. Amend federal tax return Apply the applicable convention. Amend federal tax return You figure depreciation for all other years (before the year you switch to the straight line method) as follows. Amend federal tax return Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years. Amend federal tax return Multiply this new adjusted basis by the same declining balance rate used in earlier years. Amend federal tax return 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. Amend federal tax return Figuring depreciation under the declining balance method and switching to the straight line method is illustrated in Example 1 , later, under Examples. Amend federal tax return Declining balance rate. Amend federal tax return   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. Amend federal tax return For example, for 3-year property depreciated using the 200% declining balance method, divide 2. Amend federal tax return 00 (200%) by 3 to get 0. Amend federal tax return 6667, or a 66. Amend federal tax return 67% declining balance rate. Amend federal tax return For 15-year property depreciated using the 150% declining balance method, divide 1. Amend federal tax return 50 (150%) by 15 to get 0. Amend federal tax return 10, or a 10% declining balance rate. Amend federal tax return   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. Amend federal tax return Property Class Method Declining Balance Rate Year 3-year 200% DB 66. Amend federal tax return 667% 3rd 5-year 200% DB 40. Amend federal tax return 0 4th 7-year 200% DB 28. Amend federal tax return 571 5th 10-year 200% DB 20. Amend federal tax return 0 7th 15-year 150% DB 10. Amend federal tax return 0 7th 20-year 150% DB 7. Amend federal tax return 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. Amend federal tax return You must use the applicable convention in the year you place the property in service and the year you dispose of the property. Amend federal tax return You figure depreciation for the year you place property in service as follows. Amend federal tax return Multiply your adjusted basis in the property by the straight line rate. Amend federal tax return Apply the applicable convention. Amend federal tax return You figure depreciation for all other years (including the year you switch from the declining balance method to the straight line method) as follows. Amend federal tax return Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years (under any method). Amend federal tax return Determine the depreciation rate for the year. Amend federal tax return Multiply the adjusted basis figured in (1) by the depreciation rate figured in (2). Amend federal tax return 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. Amend federal tax return Straight line rate. Amend federal tax return   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. Amend federal tax return When figuring the number of years remaining, you must take into account the convention used in the year you placed the property in service. Amend federal tax return If the number of years remaining is less than 1, the depreciation rate for that tax year is 1. Amend federal tax return 0 (100%). Amend federal tax return 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. Amend federal tax return 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. Amend federal tax return See Straight line rate in the previous discussion. Amend federal tax return Use the applicable convention as explained in the following discussions. Amend federal tax return Half-year convention. Amend federal tax return   If this convention applies, you deduct a half-year of depreciation for the first year and the last year that you depreciate the property. Amend federal tax return You deduct a full year of depreciation for any other year during the recovery period. Amend federal tax return   Figure your depreciation deduction for the year you place the property in service by dividing the depreciation for a full year by 2. Amend federal tax return 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. Amend federal tax return 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. Amend federal tax return Mid-quarter convention. Amend federal tax return   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. Amend federal tax return   A quarter of a full 12-month tax year is a period of 3 months. Amend federal tax return The first quarter in a year begins on the first day of the tax year. Amend federal tax return The second quarter begins on the first day of the fourth month of the tax year. Amend federal tax return The third quarter begins on the first day of the seventh month of the tax year. Amend federal tax return The fourth quarter begins on the first day of the tenth month of the tax year. Amend federal tax return A calendar year is divided into the following quarters. Amend federal tax return 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. Amend federal tax return Quarter Percentage First 87. Amend federal tax return 5% Second 62. Amend federal tax return 5 Third 37. Amend federal tax return 5 Fourth 12. Amend federal tax return 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. Amend federal tax return Quarter Percentage First 12. Amend federal tax return 5% Second 37. Amend federal tax return 5 Third 62. Amend federal tax return 5 Fourth 87. Amend federal tax return 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. Amend federal tax return Mid-month convention. Amend federal tax return   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. Amend federal tax return Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by a fraction. Amend federal tax return The numerator of the fraction is the number of full months in the year that the property is in service plus ½ (or 0. Amend federal tax return 5). Amend federal tax return The denominator is 12. Amend federal tax return   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. Amend federal tax return 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. Amend federal tax return Example. Amend federal tax return You use the calendar year and place nonresidential real property in service in August. Amend federal tax return The property is in service 4 full months (September, October, November, and December). Amend federal tax return Your numerator is 4. Amend federal tax return 5 (4 full months plus 0. Amend federal tax return 5). Amend federal tax return You multiply the depreciation for a full year by 4. Amend federal tax return 5/12, or 0. Amend federal tax return 375. Amend federal tax return Examples The following examples show how to figure depreciation under MACRS without using the percentage tables. Amend federal tax return Figures are rounded for purposes of the examples. Amend federal tax return Assume for all the examples that you use a calendar year as your tax year. Amend federal tax return Example 1—200% DB method and half-year convention. Amend federal tax return In February, you placed in service depreciable property with a 5-year recovery period and a basis of $1,000. Amend federal tax return You do not elect to take the section 179 deduction and the property does not qualify for a special depreciation allowance. Amend federal tax return You use GDS and the 200% declining balance (DB) method to figure your depreciation. Amend federal tax return When the straight line (SL) method results in an equal or larger deduction, you switch to the SL method. Amend federal tax return You did not place any property in service in the last 3 months of the year, so you must use the half-year convention. Amend federal tax return First year. Amend federal tax return You figure the depreciation rate under the 200% DB method by dividing 2 (200%) by 5 (the number of years in the recovery period). Amend federal tax return The result is 40%. Amend federal tax return You multiply the adjusted basis of the property ($1,000) by the 40% DB rate. Amend federal tax return You apply the half-year convention by dividing the result ($400) by 2. Amend federal tax return Depreciation for the first year under the 200% DB method is $200. Amend federal tax return You figure the depreciation rate under the straight line (SL) method by dividing 1 by 5, the number of years in the recovery period. Amend federal tax return The result is 20%. Amend federal tax return You multiply the adjusted basis of the property ($1,000) by the 20% SL rate. Amend federal tax return You apply the half-year convention by dividing the result ($200) by 2. Amend federal tax return Depreciation for the first year under the SL method is $100. Amend federal tax return The DB method provides a larger deduction, so you deduct the $200 figured under the 200% DB method. Amend federal tax return Second year. Amend federal tax return You reduce the adjusted basis ($1,000) by the depreciation claimed in the first year ($200). Amend federal tax return You multiply the result ($800) by the DB rate (40%). Amend federal tax return Depreciation for the second year under the 200% DB method is $320. Amend federal tax return You figure the SL depreciation rate by dividing 1 by 4. Amend federal tax return 5, the number of years remaining in the recovery period. Amend federal tax return (Based on the half-year convention, you used only half a year of the recovery period in the first year. Amend federal tax return ) You multiply the reduced adjusted basis ($800) by the result (22. Amend federal tax return 22%). Amend federal tax return Depreciation under the SL method for the second year is $178. Amend federal tax return The DB method provides a larger deduction, so you deduct the $320 figured under the 200% DB method. Amend federal tax return Third year. Amend federal tax return You reduce the adjusted basis ($800) by the depreciation claimed in the second year ($320). Amend federal tax return You multiply the result ($480) by the DB rate (40%). Amend federal tax return Depreciation for the third year under the 200% DB method is $192. Amend federal tax return You figure the SL depreciation rate by dividing 1 by 3. Amend federal tax return 5. Amend federal tax return You multiply the reduced adjusted basis ($480) by the result (28. Amend federal tax return 57%). Amend federal tax return Depreciation under the SL method for the third year is $137. Amend federal tax return The DB method provides a larger deduction, so you deduct the $192 figured under the 200% DB method. Amend federal tax return Fourth year. Amend federal tax return You reduce the adjusted basis ($480) by the de
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The Amend Federal Tax Return

Amend federal tax return 2. Amend federal tax return   Simplified Employee Pensions (SEPs) Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Setting Up a SEPWhen not to use Form 5305-SEP. Amend federal tax return How Much Can I Contribute?Contribution Limits Deducting ContributionsDeduction Limit for Contributions for Participants Deduction Limit for Self-Employed Individuals Carryover of Excess SEP Contributions When To Deduct Contributions Where To Deduct Contributions Salary Reduction Simplified Employee Pensions (SARSEPs)SARSEP ADP test. Amend federal tax return Deferral percentage. Amend federal tax return Employee compensation. Amend federal tax return Compensation of self-employed individuals. Amend federal tax return Choice not to treat deferrals as compensation. Amend federal tax return Limit on Elective Deferrals Tax Treatment of Deferrals Distributions (Withdrawals) Additional TaxesEffects on employee. Amend federal tax return Reporting and Disclosure Requirements Topics - This chapter discusses: Setting up a SEP How much can I contribute Deducting contributions Salary reduction simplified employee pensions (SARSEPs) Distributions (withdrawals) Additional taxes Reporting and disclosure requirements Useful Items - You may want to see: Publication 590 Individual Retirement Arrangements (IRAs) 3998 Choosing A Retirement Solution for Your Small Business 4285 SEP Checklist 4286 SARSEP Checklist 4333 SEP Retirement Plans for Small Businesses 4336 SARSEP for Small Businesses 4407 SARSEP—Key Issues and Assistance Forms (and Instructions) W-2 Wage and Tax Statement 1040 U. Amend federal tax return S. Amend federal tax return Individual Income Tax Return 5305-SEP Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 5305A-SEP Salary Reduction Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs A SEP is a written plan that allows you to make contributions toward your own retirement and your employees' retirement without getting involved in a more complex qualified plan. Amend federal tax return Under a SEP, you make contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. Amend federal tax return A SEP-IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP-IRA is maintained. Amend federal tax return SEP-IRAs are set up for, at a minimum, each eligible employee (defined below). Amend federal tax return A SEP-IRA may have to be set up for a leased employee (defined in chapter 1), but does not need to be set up for excludable employees (defined later). Amend federal tax return Eligible employee. Amend federal tax return   An eligible employee is an individual who meets all the following requirements. Amend federal tax return Has reached age 21. Amend federal tax return Has worked for you in at least 3 of the last 5 years. Amend federal tax return Has received at least $550 in compensation from you in 2013. Amend federal tax return This amount remains the same in 2014. Amend federal tax return    You can use less restrictive participation requirements than those listed, but not more restrictive ones. Amend federal tax return Excludable employees. Amend federal tax return   The following employees can be excluded from coverage under a SEP. Amend federal tax return Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you. Amend federal tax return Nonresident alien employees who have received no U. Amend federal tax return S. Amend federal tax return source wages, salaries, or other personal services compensation from you. Amend federal tax return For more information about nonresident aliens, see Publication 519, U. Amend federal tax return S. Amend federal tax return Tax Guide for Aliens. Amend federal tax return Setting Up a SEP There are three basic steps in setting up a SEP. Amend federal tax return You must execute a formal written agreement to provide benefits to all eligible employees. Amend federal tax return You must give each eligible employee certain information about the SEP. Amend federal tax return A SEP-IRA must be set up by or for each eligible employee. Amend federal tax return Many financial institutions will help you set up a SEP. Amend federal tax return Formal written agreement. Amend federal tax return   You must execute a formal written agreement to provide benefits to all eligible employees under a SEP. Amend federal tax return You can satisfy the written agreement requirement by adopting an IRS model SEP using Form 5305-SEP. Amend federal tax return However, see When not to use Form 5305-SEP, below. Amend federal tax return   If you adopt an IRS model SEP using Form 5305-SEP, no prior IRS approval or determination letter is required. Amend federal tax return Keep the original form. Amend federal tax return Do not file it with the IRS. Amend federal tax return Also, using Form 5305-SEP will usually relieve you from filing annual retirement plan information returns with the IRS and the Department of Labor. Amend federal tax return See the Form 5305-SEP instructions for details. Amend federal tax return If you choose not to use Form 5305-SEP, you should seek professional advice in adopting a SEP. Amend federal tax return When not to use Form 5305-SEP. Amend federal tax return   You cannot use Form 5305-SEP if any of the following apply. Amend federal tax return You currently maintain any other qualified retirement plan other than another SEP. Amend federal tax return You have any eligible employees for whom IRAs have not been set up. Amend federal tax return You use the services of leased employees, who are not your common-law employees (as described in chapter 1). Amend federal tax return You are a member of any of the following unless all eligible employees of all the members of these groups, trades, or businesses participate under the SEP. Amend federal tax return An affiliated service group described in section 414(m). Amend federal tax return A controlled group of corporations described in section 414(b). Amend federal tax return Trades or businesses under common control described in section 414(c). Amend federal tax return You do not pay the cost of the SEP contributions. Amend federal tax return Information you must give to employees. Amend federal tax return   You must give each eligible employee a copy of Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions. Amend federal tax return An IRS model SEP is not considered adopted until you give each employee this information. Amend federal tax return Setting up the employee's SEP-IRA. Amend federal tax return   A SEP-IRA must be set up by or for each eligible employee. Amend federal tax return SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. Amend federal tax return You send SEP contributions to the financial institution where the SEP-IRA is maintained. Amend federal tax return Deadline for setting up a SEP. Amend federal tax return   You can set up a SEP for any year as late as the due date (including extensions) of your income tax return for that year. Amend federal tax return Credit for startup costs. Amend federal tax return   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP that first became effective in 2013. Amend federal tax return For more information, see Credit for startup costs under Reminders, earlier. Amend federal tax return How Much Can I Contribute? The SEP rules permit you to contribute a limited amount of money each year to each employee's SEP-IRA. Amend federal tax return If you are self-employed, you can contribute to your own SEP-IRA. Amend federal tax return Contributions must be in the form of money (cash, check, or money order). Amend federal tax return You cannot contribute property. Amend federal tax return However, participants may be able to transfer or roll over certain property from one retirement plan to another. Amend federal tax return See Publication 590 for more information about rollovers. Amend federal tax return You do not have to make contributions every year. Amend federal tax return But if you make contributions, they must be based on a written allocation formula and must not discriminate in favor of highly compensated employees (defined in chapter 1). Amend federal tax return When you contribute, you must contribute to the SEP-IRAs of all participants who actually performed personal services during the year for which the contributions are made, including employees who die or terminate employment before the contributions are made. Amend federal tax return Contributions are deductible within limits, as discussed later, and generally are not taxable to the plan participants. Amend federal tax return A SEP-IRA cannot be a Roth IRA. Amend federal tax return Employer contributions to a SEP-IRA will not affect the amount an individual can contribute to a Roth or traditional IRA. Amend federal tax return Unlike regular contributions to a traditional IRA, contributions under a SEP can be made to participants over age 70½. Amend federal tax return If you are self-employed, you can also make contributions under the SEP for yourself even if you are over 70½. Amend federal tax return Participants age 70½ or over must take required minimum distributions. Amend federal tax return Time limit for making contributions. Amend federal tax return   To deduct contributions for a year, you must make the contributions by the due date (including extensions) of your tax return for the year. Amend federal tax return Contribution Limits Contributions you make for 2013 to a common-law employee's SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000. Amend federal tax return Compensation generally does not include your contributions to the SEP. Amend federal tax return The SEP plan document will specify how the employer contribution is determined and how it will be allocated to participants. Amend federal tax return Example. Amend federal tax return Your employee, Mary Plant, earned $21,000 for 2013. Amend federal tax return The maximum contribution you can make to her SEP-IRA is $5,250 (25% x $21,000). Amend federal tax return Contributions for yourself. Amend federal tax return   The annual limits on your contributions to a common-law employee's SEP-IRA also apply to contributions you make to your own SEP-IRA. Amend federal tax return However, special rules apply when figuring your maximum deductible contribution. Amend federal tax return See Deduction Limit for Self-Employed Individuals , later. Amend federal tax return Annual compensation limit. Amend federal tax return   You cannot consider the part of an employee's compensation over $255,000 when figuring your contribution limit for that employee. Amend federal tax return However, $51,000 is the maximum contribution for an eligible employee. Amend federal tax return These limits are $260,000 and $52,000, respectively, in 2014. Amend federal tax return Example. Amend federal tax return Your employee, Susan Green, earned $210,000 for 2013. Amend federal tax return Because of the maximum contribution limit for 2013, you can only contribute $51,000 to her SEP-IRA. Amend federal tax return More than one plan. Amend federal tax return   If you contribute to a defined contribution plan (defined in chapter 4), annual additions to an account are limited to the lesser of $51,000 or 100% of the participant's compensation. Amend federal tax return When you figure this limit, you must add your contributions to all defined contribution plans maintained by you. Amend federal tax return Because a SEP is considered a defined contribution plan for this limit, your contributions to a SEP must be added to your contributions to other defined contribution plans you maintain. Amend federal tax return Tax treatment of excess contributions. Amend federal tax return   Excess contributions are your contributions to an employee's SEP-IRA (or to your own SEP-IRA) for 2013 that exceed the lesser of the following amounts. Amend federal tax return 25% of the employee's compensation (or, for you, 20% of your net earnings from self-employment). Amend federal tax return $51,000. Amend federal tax return Excess contributions are included in the employee's income for the year and are treated as contributions by the employee to his or her SEP-IRA. Amend federal tax return For more information on employee tax treatment of excess contributions, see chapter 1 in Publication 590. Amend federal tax return Reporting on Form W-2. Amend federal tax return   Do not include SEP contributions on your employee's Form W-2 unless contributions were made under a salary reduction arrangement (discussed later). Amend federal tax return Deducting Contributions Generally, you can deduct the contributions you make each year to each employee's SEP-IRA. Amend federal tax return If you are self-employed, you can deduct the contributions you make each year to your own SEP-IRA. Amend federal tax return Deduction Limit for Contributions for Participants The most you can deduct for your contributions to you or your employee's SEP-IRA is the lesser of the following amounts. Amend federal tax return Your contributions (including any excess contributions carryover). Amend federal tax return 25% of the compensation (limited to $255,000 per participant) paid to the participants during 2013 from the business that has the plan, not to exceed $51,000 per participant. Amend federal tax return In 2014, the amounts in (2) above are $260,000 and $52,000, respectively. Amend federal tax return Deduction Limit for Self-Employed Individuals If you contribute to your own SEP-IRA, you must make a special computation to figure your maximum deduction for these contributions. Amend federal tax return When figuring the deduction for contributions made to your own SEP-IRA, compensation is your net earnings from self-employment (defined in chapter 1), which takes into account both the following deductions. Amend federal tax return The deduction for the deductible part of your self-employment tax. Amend federal tax return The deduction for contributions to your own SEP-IRA. Amend federal tax return The deduction for contributions to your own SEP-IRA and your net earnings depend on each other. Amend federal tax return For this reason, you determine the deduction for contributions to your own SEP-IRA indirectly by reducing the contribution rate called for in your plan. Amend federal tax return To do this, use the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed, whichever is appropriate for your plan's contribution rate, in chapter 5. Amend federal tax return Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5. Amend federal tax return Carryover of Excess SEP Contributions If you made SEP contributions that are more than the deduction limit (nondeductible contributions), you can carry over and deduct the difference in later years. Amend federal tax return However, the carryover, when combined with the contribution for the later year, is subject to the deduction limit for that year. Amend federal tax return If you also contributed to a defined benefit plan or defined contribution plan, see Carryover of Excess Contributions under Employer Deduction in chapter 4 for the carryover limit. Amend federal tax return Excise tax. Amend federal tax return   If you made nondeductible (excess) contributions to a SEP, you may be subject to a 10% excise tax. Amend federal tax return For information about the excise tax, see Excise Tax for Nondeductible (Excess) Contributions under Employer Deduction in chapter 4. Amend federal tax return When To Deduct Contributions When you can deduct contributions made for a year depends on the tax year on which the SEP is maintained. Amend federal tax return If the SEP is maintained on a calendar year basis, you deduct the yearly contributions on your tax return for the year within which the calendar year ends. Amend federal tax return If you file your tax return and maintain the SEP using a fiscal year or short tax year, you deduct contributions made for a year on your tax return for that year. Amend federal tax return Example. Amend federal tax return You are a fiscal year taxpayer whose tax year ends June 30. Amend federal tax return You maintain a SEP on a calendar year basis. Amend federal tax return You deduct SEP contributions made for calendar year 2013 on your tax return for your tax year ending June 30, 2014. Amend federal tax return Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. Amend federal tax return For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), Profit or Loss From Farming; partnerships deduct them on Form 1065, U. Amend federal tax return S. Amend federal tax return Return of Partnership Income; and corporations deduct them on Form 1120, U. Amend federal tax return S. Amend federal tax return Corporation Income Tax Return, or Form 1120S, U. Amend federal tax return S. Amend federal tax return Income Tax Return for an S Corporation. Amend federal tax return Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. Amend federal tax return (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Amend federal tax return , you receive from the partnership. Amend federal tax return ) Remember that sole proprietors and partners can't deduct as a business expense contributions made to a SEP for themselves, only those made for their common-law employees. Amend federal tax return Salary Reduction Simplified Employee Pensions (SARSEPs) A SARSEP is a SEP set up before 1997 that includes a salary reduction arrangement. Amend federal tax return (See the Caution, next. Amend federal tax return ) Under a SARSEP, your employees can choose to have you contribute part of their pay to their SEP-IRAs rather than receive it in cash. Amend federal tax return This contribution is called an “elective deferral” because employees choose (elect) to set aside the money, and they defer the tax on the money until it is distributed to them. Amend federal tax return You are not allowed to set up a SARSEP after 1996. Amend federal tax return However, participants (including employees hired after 1996) in a SARSEP set up before 1997 can continue to have you contribute part of their pay to the plan. Amend federal tax return If you are interested in setting up a retirement plan that includes a salary reduction arrangement, see chapter 3. Amend federal tax return Who can have a SARSEP?   A SARSEP set up before 1997 is available to you and your eligible employees only if all the following requirements are met. Amend federal tax return At least 50% of your employees eligible to participate choose to make elective deferrals. Amend federal tax return You have 25 or fewer employees who were eligible to participate in the SEP at any time during the preceding year. Amend federal tax return The elective deferrals of your highly compensated employees meet the SARSEP ADP test. Amend federal tax return SARSEP ADP test. Amend federal tax return   Under the SARSEP ADP test, the amount deferred each year by each eligible highly compensated employee as a percentage of pay (the deferral percentage) cannot be more than 125% of the average deferral percentage (ADP) of all non-highly compensated employees eligible to participate. Amend federal tax return A highly compensated employee is defined in chapter 1. Amend federal tax return Deferral percentage. Amend federal tax return   The deferral percentage for an employee for a year is figured as follows. Amend federal tax return   The elective employer contributions (excluding certain catch-up contributions)  paid to the SEP for the employee for the year     The employee's compensation (limited to $255,000 in 2013)   The instructions for Form 5305A-SEP have a worksheet you can use to determine whether the elective deferrals of your highly compensated employees meet the SARSEP ADP test. Amend federal tax return Employee compensation. Amend federal tax return   For figuring the deferral percentage, compensation is generally the amount you pay to the employee for the year. Amend federal tax return Compensation includes the elective deferral and other amounts deferred in certain employee benefit plans. Amend federal tax return See Compensation in chapter 1. Amend federal tax return Elective deferrals under the SARSEP are included in figuring your employees' deferral percentage even though they are not included in the income of your employees for income tax purposes. Amend federal tax return Compensation of self-employed individuals. Amend federal tax return   If you are self-employed, compensation is your net earnings from self-employment as defined in chapter 1. Amend federal tax return   Compensation does not include tax-free items (or deductions related to them) other than foreign earned income and housing cost amounts. Amend federal tax return Choice not to treat deferrals as compensation. Amend federal tax return   You can choose not to treat elective deferrals (and other amounts deferred in certain employee benefit plans) for a year as compensation under your SARSEP. Amend federal tax return Limit on Elective Deferrals The most a participant can choose to defer for calendar year 2013 is the lesser of the following amounts. Amend federal tax return 25% of the participant's compensation (limited to $255,000 of the participant's compensation). Amend federal tax return $17,500. Amend federal tax return The $17,500 limit applies to the total elective deferrals the employee makes for the year to a SEP and any of the following. Amend federal tax return Cash or deferred arrangement (section 401(k) plan). Amend federal tax return Salary reduction arrangement under a tax-sheltered annuity plan (section 403(b) plan). Amend federal tax return SIMPLE IRA plan. Amend federal tax return In 2014, the $255,000 limit increases to $260,000 and the $17,500 limit remains at $17,500. Amend federal tax return Catch-up contributions. Amend federal tax return   A SARSEP can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. Amend federal tax return The catch-up contribution limit for 2013 is $5,500 and remains at $5,500 for 2014. Amend federal tax return Elective deferrals are not treated as catch-up contributions for 2013 until they exceed the elective deferral limit (the lesser of 25% of compensation or $17,500), the SARSEP ADP test limit discussed earlier, or the plan limit (if any). Amend federal tax return However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. Amend federal tax return The catch-up contribution limit. Amend federal tax return The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. Amend federal tax return   Catch-up contributions are not subject to the elective deferral limit (the lesser of 25% of compensation or $17,500 in 2013 and in 2014). Amend federal tax return Overall limit on SEP contributions. Amend federal tax return   If you also make nonelective contributions to a SEP-IRA, the total of the nonelective and elective contributions to that SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000 for 2013 ($52,000 for 2014). Amend federal tax return The same rule applies to contributions you make to your own SEP-IRA. Amend federal tax return See Contribution Limits , earlier. Amend federal tax return Figuring the elective deferral. Amend federal tax return   For figuring the 25% limit on elective deferrals, compensation does not include SEP contributions, including elective deferrals or other amounts deferred in certain employee benefit plans. Amend federal tax return Tax Treatment of Deferrals Elective deferrals that are not more than the limits discussed earlier under Limit on Elective Deferrals are excluded from your employees' wages subject to federal income tax in the year of deferral. Amend federal tax return However, these deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax. Amend federal tax return Excess deferrals. Amend federal tax return   For 2013, excess deferrals are the elective deferrals for the year that are more than the $17,500 limit discussed earlier. Amend federal tax return For a participant who is eligible to make catch-up contributions, excess deferrals are the elective deferrals that are more than $23,000. Amend federal tax return The treatment of excess deferrals made under a SARSEP is similar to the treatment of excess deferrals made under a qualified plan. Amend federal tax return See Treatment of Excess Deferrals under Elective Deferrals (401(k) Plans) in chapter 4. Amend federal tax return Excess SEP contributions. Amend federal tax return   Excess SEP contributions are elective deferrals of highly compensated employees that are more than the amount permitted under the SARSEP ADP test. Amend federal tax return You must notify your highly compensated employees within 2½ months after the end of the plan year of their excess SEP contributions. Amend federal tax return If you do not notify them within this time period, you must pay a 10% tax on the excess. Amend federal tax return For an explanation of the notification requirements, see Rev. Amend federal tax return Proc. Amend federal tax return 91-44, 1991-2 C. Amend federal tax return B. Amend federal tax return 733. Amend federal tax return If you adopted a SARSEP using Form 5305A-SEP, the notification requirements are explained in the instructions for that form. Amend federal tax return Reporting on Form W-2. Amend federal tax return   Do not include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. Amend federal tax return You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. Amend federal tax return You must also include them in box 12. Amend federal tax return Mark the “Retirement plan” checkbox in box 13. Amend federal tax return For more information, see the Form W-2 instructions. Amend federal tax return Distributions (Withdrawals) As an employer, you cannot prohibit distributions from a SEP-IRA. Amend federal tax return Also, you cannot make your contributions on the condition that any part of them must be kept in the account after you have made your contributions to the employee's accounts. Amend federal tax return Distributions are subject to IRA rules. Amend federal tax return Generally, you or your employee must begin to receive distributions from a SEP-IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 70½. Amend federal tax return For more information about IRA rules, including the tax treatment of distributions, rollovers, required distributions, and income tax withholding, see Publication 590. Amend federal tax return Additional Taxes The tax advantages of using SEP-IRAs for retirement savings can be offset by additional taxes that may be imposed for all the following actions. Amend federal tax return Making excess contributions. Amend federal tax return Making early withdrawals. Amend federal tax return Not making required withdrawals. Amend federal tax return For information about these taxes, see chapter 1 in Publication 590. Amend federal tax return Also, a SEP-IRA may be disqualified, or an excise tax may apply, if the account is involved in a prohibited transaction, discussed next. Amend federal tax return Prohibited transaction. Amend federal tax return   If an employee improperly uses his or her SEP-IRA, such as by borrowing money from it, the employee has engaged in a prohibited transaction. Amend federal tax return In that case, the SEP-IRA will no longer qualify as an IRA. Amend federal tax return For a list of prohibited transactions, see Prohibited Transactions in chapter 4. Amend federal tax return Effects on employee. Amend federal tax return   If a SEP-IRA is disqualified because of a prohibited transaction, the assets in the account will be treated as having been distributed to the employee on the first day of the year in which the transaction occurred. Amend federal tax return The employee must include in income the fair market value of the assets (on the first day of the year) that is more than any cost basis in the account. Amend federal tax return Also, the employee may have to pay the additional tax for making early withdrawals. Amend federal tax return Reporting and Disclosure Requirements If you set up a SEP using Form 5305-SEP, you must give your eligible employees certain information about the SEP when you set it up. Amend federal tax return See Setting Up a SEP , earlier. Amend federal tax return Also, you must give your eligible employees a statement each year showing any contributions to their SEP-IRAs. Amend federal tax return You must also give them notice of any excess contributions. Amend federal tax return For details about other information you must give them, see the instructions for Form 5305-SEP or Form 5305A-SEP (for a salary reduction SEP). Amend federal tax return Even if you did not use Form 5305-SEP or Form 5305A-SEP to set up your SEP, you must give your employees information similar to that described above. Amend federal tax return For more information, see the instructions for either Form 5305-SEP or Form 5305A-SEP. Amend federal tax return Prev  Up  Next   Home   More Online Publications