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Amended Us Individual Income Tax Return

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Amended Us Individual Income Tax Return

Amended us individual income tax return 3. Amended us individual income tax return   Unrelated Trade or Business Table of Contents Selling of products of exempt functions. Amended us individual income tax return Dual use of assets or facilities. Amended us individual income tax return Exploitation of exempt functions. Amended us individual income tax return ExamplesExceptions. Amended us individual income tax return Excluded Trade or Business ActivitiesQualified sponsorship payment. Amended us individual income tax return Advertising. Amended us individual income tax return Exception for contingent payments. Amended us individual income tax return Exception for periodicals. Amended us individual income tax return Exception for conventions and trade shows. Amended us individual income tax return Legal definition. Amended us individual income tax return Legal where played. Amended us individual income tax return No for-profit games where played. Amended us individual income tax return Unrelated business income. Amended us individual income tax return   Unrelated business income is the income from a trade or business regularly conducted by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity. Amended us individual income tax return   Certain trade or business activities are not treated as an unrelated trade or business. Amended us individual income tax return See Excluded Trade or Business Activities, later. Amended us individual income tax return Trade or business. Amended us individual income tax return   The term “trade or business” generally includes any activity conducted for the production of income from selling goods or performing services. Amended us individual income tax return An activity does not lose its identity as a trade or business merely because it is conducted within a larger group of similar activities that may or may not be related to the exempt purposes of the organization. Amended us individual income tax return   For example, the regular sale of pharmaceutical supplies to the general public by a hospital pharmacy does not lose its identity as a trade or business, even though the pharmacy also furnishes supplies to the hospital and patients of the hospital in accordance with its exempt purpose. Amended us individual income tax return Similarly, soliciting, selling, and publishing commercial advertising is a trade or business even though the advertising is published in an exempt organization's periodical that contains editorial matter related to the organization's exempt purpose. Amended us individual income tax return Regularly conducted. Amended us individual income tax return   Business activities of an exempt organization ordinarily are considered regularly conducted if they show a frequency and continuity, and are pursued in a manner similar to comparable commercial activities of nonexempt organizations. Amended us individual income tax return   For example, a hospital auxiliary's operation of a sandwich stand for 2 weeks at a state fair would not be the regular conduct of a trade or business. Amended us individual income tax return The stand would not compete with similar facilities that a nonexempt organization would ordinarily operate year-round. Amended us individual income tax return However, operating a commercial parking lot every Saturday, year-round, would be the regular conduct of a trade or business. Amended us individual income tax return Not substantially related. Amended us individual income tax return    A business activity is not substantially related to an organization's exempt purpose if it does not contribute importantly to accomplishing that purpose (other than through the production of funds). Amended us individual income tax return Whether an activity contributes importantly depends in each case on the facts involved. Amended us individual income tax return   In determining whether activities contribute importantly to the accomplishment of an exempt purpose, the size and extent of the activities involved must be considered in relation to the nature and extent of the exempt function that they intend to serve. Amended us individual income tax return For example, to the extent an activity is conducted on a scale larger than is reasonably necessary to perform an exempt purpose, it does not contribute importantly to the accomplishment of the exempt purpose. Amended us individual income tax return The part of the activity that is more than needed to accomplish the exempt purpose is an unrelated trade or business. Amended us individual income tax return   Also in determining whether activities contribute importantly to the accomplishment of an exempt purpose, the following principles apply. Amended us individual income tax return Selling of products of exempt functions. Amended us individual income tax return   Ordinarily, selling products that result from the performance of exempt functions is not an unrelated trade or business if the product is sold in substantially the same state it is in when the exempt functions are completed. Amended us individual income tax return Thus, for an exempt organization engaged in rehabilitating handicapped persons (its exempt function), selling articles made by these persons as part of their rehabilitation training is not an unrelated trade or business. Amended us individual income tax return   However, if a completed product resulting from an exempt function is used or exploited in further business activity beyond what is reasonably appropriate or necessary to dispose of it as is, the activity is an unrelated trade or business. Amended us individual income tax return For example, if an exempt organization maintains an experimental dairy herd for scientific purposes, the sale of milk and cream produced in the ordinary course of operation of the project is not an unrelated trade or business. Amended us individual income tax return But if the organization uses the milk and cream in the further manufacture of food items such as ice cream, pastries, etc. Amended us individual income tax return , the sale of these products is an unrelated trade or business unless the manufacturing activities themselves contribute importantly to the accomplishment of an exempt purpose of the organization. Amended us individual income tax return Dual use of assets or facilities. Amended us individual income tax return   If an asset or facility necessary to the conduct of exempt functions is also used in commercial activities, its use for exempt functions does not, by itself, make the commercial activities a related trade or business. Amended us individual income tax return The test, as discussed earlier, is whether the activities contribute importantly to the accomplishment of exempt purposes. Amended us individual income tax return   For example, a museum has a theater auditorium designed for showing educational films in connection with its program of public education in the arts and sciences. Amended us individual income tax return The theater is a principal feature of the museum and operates continuously while the museum is open to the public. Amended us individual income tax return If the organization also operates the theater as a motion picture theater for the public when the museum is closed, the activity is an unrelated trade or business. Amended us individual income tax return   For information on allocating expenses for the dual use of assets or facilities, see Deductions in chapter 4. Amended us individual income tax return Exploitation of exempt functions. Amended us individual income tax return   Exempt activities sometimes create goodwill or other intangibles that can be exploited in a commercial way. Amended us individual income tax return When an organization exploits such an intangible in commercial activities, the fact that the income depends in part upon an exempt function of the organization does not make the commercial activities a related trade or business. Amended us individual income tax return Unless the commercial exploitation contributes importantly to the accomplishment of the exempt purpose, the commercial activities are an unrelated trade or business. Amended us individual income tax return   For the treatment of expenses attributable to the exploitation of exempt activities, see Deductions in chapter 4. Amended us individual income tax return Examples The following are examples of activities that were determined to be (or not to be) unrelated trades or businesses using the definitions and principles just discussed. Amended us individual income tax return Sales commissions. Amended us individual income tax return   An agricultural organization, whose exempt purposes are to promote better conditions for cattle breeders and to improve the breed generally, engages in an unrelated trade or business when it regularly sells cattle for its members on a commission basis. Amended us individual income tax return Artists' facilities. Amended us individual income tax return   An organization whose exempt purpose is to stimulate and foster public interest in the fine arts by promoting art exhibits, sponsoring cultural events, and furnishing information about fine arts leases studio apartments to artist tenants and operates a dining hall primarily for these tenants. Amended us individual income tax return These two activities do not contribute importantly to accomplishing the organization's exempt purpose. Amended us individual income tax return Therefore, they are unrelated trades or businesses. Amended us individual income tax return Membership list sales. Amended us individual income tax return   An exempt educational organization regularly sells membership mailing lists to business firms. Amended us individual income tax return This activity does not contribute importantly to the accomplishment of the organization's exempt purpose and therefore is an unrelated trade or business. Amended us individual income tax return Also see Exchange or rental of member lists under Excluded Trade or Business Activities, later. Amended us individual income tax return Hospital facilities. Amended us individual income tax return   An exempt hospital leases its adjacent office building and furnishes certain office services to a hospital-based medical group for a fee. Amended us individual income tax return The group provides all diagnostic and therapeutic procedures to the hospital's patients and operates the hospital's emergency room on a 24-hour basis. Amended us individual income tax return The leasing activity is substantially related to the hospital's exempt purpose and is not an unrelated trade or business. Amended us individual income tax return   The hospital also operates a gift shop patronized by patients, visitors making purchases for patients, and employees; a cafeteria and coffee shop primarily for employees and medical staff; and a parking lot for patients and visitors only. Amended us individual income tax return These activities are also substantially related to the hospital's exempt purpose and do not constitute unrelated trades or businesses. Amended us individual income tax return Book publishing. Amended us individual income tax return   An exempt organization engages primarily in activities that further its exempt purposes. Amended us individual income tax return It also owns the publication rights to a book that does not relate to any of its exempt purposes. Amended us individual income tax return The organization exploits the book in a commercial manner by arranging for printing, distribution, publicity, and advertising in connection with the sale of the book. Amended us individual income tax return These activities constitute a trade or business regularly conducted. Amended us individual income tax return Because exploiting the book is unrelated to the organization's exempt purposes (except for the use of the book's profits), the income is unrelated business income. Amended us individual income tax return   However, if the organization transfers publication rights to a commercial publisher in return for royalties, the royalty income received will not be unrelated business income. Amended us individual income tax return See Royalties under Exclusions in chapter 4. Amended us individual income tax return School handicraft shop. Amended us individual income tax return   An exempt vocational school operates a handicraft shop that sells articles made by students in their regular courses of instruction. Amended us individual income tax return The students are paid a percentage of the sales price. Amended us individual income tax return In addition, the shop sells products made by local residents who make articles at home according to the shop's specifications. Amended us individual income tax return The shop manager periodically inspects the articles during their manufacture to ensure that they meet desired standards of style and quality. Amended us individual income tax return Although many local participants are former students of the school, any qualified person may participate in the program. Amended us individual income tax return The sale of articles made by students does not constitute an unrelated trade or business, but the sale of products made by local residents is an unrelated trade or business and is subject to unrelated business income tax. Amended us individual income tax return School facilities. Amended us individual income tax return   An exempt school has tennis courts and dressing rooms that it uses during the regular school year in its educational program. Amended us individual income tax return During the summer, the school operates a tennis club open to the general public. Amended us individual income tax return Employees of the school run the club, including collecting membership fees and scheduling court time. Amended us individual income tax return   Another exempt school leases the same type of facilities to an unrelated individual who runs a tennis club for the summer. Amended us individual income tax return The lease is for a fixed fee that does not depend on the income or profits derived from the leased property. Amended us individual income tax return   In both situations, the exempt purpose is the advancement of education. Amended us individual income tax return Furnishing tennis facilities in the manner described does not further that exempt purpose. Amended us individual income tax return These activities are unrelated trades or businesses. Amended us individual income tax return However, in the second situation the income derived from the leasing of the property is excluded from unrelated business taxable income as rent from real property. Amended us individual income tax return See Rents under Exclusions in chapter 4. Amended us individual income tax return Services provided with lease. Amended us individual income tax return   An exempt university leases its football stadium during several months of the year to a professional football team for a fixed fee. Amended us individual income tax return Under the lease agreement, the university furnishes heat, light, and water and is responsible for all ground maintenance. Amended us individual income tax return It also provides dressing room, linen, and stadium security services for the professional team. Amended us individual income tax return   Leasing of the stadium is an unrelated trade or business. Amended us individual income tax return In addition, the substantial services furnished for the convenience of the lessee go beyond those usually provided with the rental of space for occupancy only. Amended us individual income tax return Therefore, the income from this lease is rent from real property and unrelated business taxable income. Amended us individual income tax return Broadcasting rights. Amended us individual income tax return   An exempt collegiate athletic conference conducts an annual competitive athletic game between its conference champion and another collegiate team. Amended us individual income tax return Income is derived from admission charges and the sale of exclusive broadcasting rights to a national radio and television network. Amended us individual income tax return An athletic program is considered an integral part of the educational process of a university. Amended us individual income tax return   The educational purposes served by intercollegiate athletics are identical whether conducted directly by individual universities or by their regional athletic conference. Amended us individual income tax return Also, the educational purposes served by exhibiting a game before an audience that is physically present and exhibiting the game on television or radio before a much larger audience are substantially similar. Amended us individual income tax return Therefore, the sale of the broadcasting rights contributes importantly to the accomplishment of the organization's exempt purpose and is not an unrelated trade or business. Amended us individual income tax return   In a similar situation, an exempt organization was created as a national governing body for amateur athletes to foster interest in amateur sports and to encourage widespread public participation. Amended us individual income tax return The organization receives income each year from the sale of exclusive broadcasting rights to an independent producer, who contracts with a commercial network to broadcast many of the athletic events sponsored, supervised, and regulated by the organization. Amended us individual income tax return   The broadcasting of these events promotes the various amateur sports, fosters widespread public interest in the benefits of the organization's nationwide amateur program, and encourages public participation. Amended us individual income tax return The sale of the rights and the broadcasting of the events contribute importantly to the organization's exempt purpose. Amended us individual income tax return Therefore, the sale of the exclusive broadcasting rights is not an unrelated trade or business. Amended us individual income tax return Yearbook advertising. Amended us individual income tax return   An exempt organization receives income from the sale of advertising in its annual yearbook. Amended us individual income tax return The organization hires an independent commercial firm, under a contract covering a full calendar year, to conduct an intensive advertising solicitation campaign in the organization's name. Amended us individual income tax return This firm is paid a percentage of the gross advertising receipts for selling the advertising, collecting from advertisers, and printing the yearbook. Amended us individual income tax return This advertising activity is an unrelated trade or business. Amended us individual income tax return Pet boarding and grooming services. Amended us individual income tax return   An exempt organization, organized and operated for the prevention of cruelty to animals, receives unrelated business income from providing pet boarding and grooming services for the general public. Amended us individual income tax return These activities do not contribute importantly to its purpose of preventing cruelty to animals. Amended us individual income tax return Museum eating facilities. Amended us individual income tax return   An exempt art museum operates a dining room, a cafeteria, and a snack bar for use by the museum staff, employees, and visitors. Amended us individual income tax return Eating facilities in the museum help to attract visitors and allow them to spend more time viewing the museum's exhibits without having to seek outside restaurants at mealtime. Amended us individual income tax return The eating facilities also allow the museum staff and employees to remain in the museum throughout the day. Amended us individual income tax return Thus, the museum's operation of the eating facilities contributes importantly to the accomplishment of its exempt purposes and is not unrelated trade or business. Amended us individual income tax return Halfway house workshop. Amended us individual income tax return   A halfway house organized to provide room, board, therapy, and counseling for persons discharged from alcoholic treatment centers also operates a furniture shop to provide full-time employment for its residents. Amended us individual income tax return The profits are applied to the operating costs of the halfway house. Amended us individual income tax return The income from this venture is not unrelated trade or business income because the furniture shop contributes importantly to the organization's purpose of aiding its residents' transition from treatment to a normal and productive life. Amended us individual income tax return Travel tour programs. Amended us individual income tax return   Travel tour activities that are a trade or business are an unrelated trade or business if the activities are not substantially related to the purpose for which tax exemption was granted to the organization. Amended us individual income tax return Example 1. Amended us individual income tax return A tax-exempt university alumni association provides a travel tour program for its members and their families. Amended us individual income tax return The organization works with various travel agencies and schedules approximately ten tours a year to various places around the world. Amended us individual income tax return It mails out promotional material and accepts reservations for fees paid by the travel agencies on a per-person basis. Amended us individual income tax return The organization provides an employee for each tour as a tour leader. Amended us individual income tax return There is no formal educational program conducted with these tours, and they do not differ from regular commercially operated tours. Amended us individual income tax return By providing travel tours to its members, the organization is engaging in a regularly conducted trade or business. Amended us individual income tax return Even if the tours it offers support the university, financially and otherwise, and encourage alumni to do the same, they do not contribute importantly to the organization's exempt purpose of promoting education. Amended us individual income tax return Therefore, the sale of the travel tours is an unrelated trade or business. Amended us individual income tax return Example 2. Amended us individual income tax return A tax-exempt organization formed for the purpose of educating individuals about the geography and the culture of the United States provides study tours to national parks and other locations within the United States. Amended us individual income tax return These tours are conducted by teachers and others certified by the state board of education. Amended us individual income tax return The tours are primarily designed for students enrolled in degree programs at state educational institutions but are open to all who agree to participate in the required study program associated with the tour taken. Amended us individual income tax return A tour's study program consists of instruction on subjects related to the location being visited on the tour. Amended us individual income tax return Each tour group brings along a library of material related to the subjects being studied on the tour. Amended us individual income tax return During the tour, 5 or 6 hours per day are devoted to organized study, preparation of reports, lectures, instruction, and recitation by the students. Amended us individual income tax return Examinations are given at the end of each tour. Amended us individual income tax return The state board of education awards academic credit for tour participation. Amended us individual income tax return Because these tours are substantially related to the organization's exempt purpose, they are not an unrelated trade or business. Amended us individual income tax return Insurance programs. Amended us individual income tax return   An organization that acts as a group insurance policyholder for its members and collects a fee for performing administrative services is normally carrying on an unrelated trade or business. Amended us individual income tax return Exceptions. Amended us individual income tax return   Organizations whose exempt activities may include the provision of insurance benefits, such as fraternal beneficiary societies, voluntary employees beneficiary associations, and labor organizations, are generally exceptions to this rule. Amended us individual income tax return Magazine publishing. Amended us individual income tax return   An association of credit unions with tax-exempt status as a business league publishes a consumer-oriented magazine four times a year and makes it available to member credit unions for purchase. Amended us individual income tax return   By selling a magazine to its members as a promotional device, the organization furnishes its members with a regular commercial service they can use in their own operations. Amended us individual income tax return This service does not promote the improvement of business conditions of one or more lines of business, which is the exempt purpose of a business league. Amended us individual income tax return   Since the activity does not contribute importantly to the organization's exempt function, it is an unrelated trade or business. Amended us individual income tax return Directory of members. Amended us individual income tax return   A business league publishes an annual directory that contains a list of all its members, their addresses, and their area of expertise. Amended us individual income tax return Each member has the same amount of space in the directory, and its format does not emphasize the relative importance or reputation of any member. Amended us individual income tax return The directory contains no commercial advertisement and is sold only to the organization's members. Amended us individual income tax return   The directory facilitates communication among the members and encourages the exchange of ideas and expertise. Amended us individual income tax return Because the directory lists the members in a similar noncommercial format without advertising and is not distributed to the public, its sale does not confer private commercial benefits on the members. Amended us individual income tax return The sale of the directory does contribute importantly to the organization's exempt purpose and is not an unrelated trade or business. Amended us individual income tax return This directory differs from the publication discussed next because of its noncommercial characteristics. Amended us individual income tax return Sales of advertising space. Amended us individual income tax return   A national association of law enforcement officials publishes a monthly journal that contains articles and other editorial material of professional interest to its members. Amended us individual income tax return The journal is distributed without charge, mainly to the organization's members. Amended us individual income tax return   The organization sells advertising space in the journal either for conventional advertising or to merely identify the purchaser without a commercial message. Amended us individual income tax return Some of the noncommercial advertising identifies the purchaser in a separate space, and some consists of listings of 60 or more purchasers per page. Amended us individual income tax return A business firm identified in a separate space is further identified in an Index of Advertisers. Amended us individual income tax return   The organization solicits advertising by personal contacts. Amended us individual income tax return Advertising from large firms is solicited by contacting their chief executive officer or community relations officer rather than their advertising manager. Amended us individual income tax return The organization also solicits advertising in form letters appealing for corporate and personal contributions. Amended us individual income tax return   An exempt organization's sale of advertising placed for the purchaser's commercial benefit is a commercial activity. Amended us individual income tax return Goodwill derived by the purchaser from being identified as a patron of the organization is usually considered a form of commercial benefit. Amended us individual income tax return Therefore, advertising in an exempt organization's publication is generally presumed to be placed for the purchaser's commercial benefit, even if it has no commercial message. Amended us individual income tax return However, this presumption is not conclusive if the purchaser's patronage would be difficult to justify commercially in view of the facts and circumstances. Amended us individual income tax return In that case, other factors should also be considered in determining whether a commercial benefit can be expected. Amended us individual income tax return Those other factors include: The normal manner in which the publication is circulated; The territorial scope of the circulation; The extent to which its readers, promoters, or the like could reasonably be expected to further, either directly or indirectly, the commercial interest of the advertisers; The eligibility of the publishing organization to receive tax-deductible contributions; and The commercial or noncommercial methods used to solicit the advertisers. Amended us individual income tax return   In this situation, the purchaser of a separate advertising space without a commercial message can nevertheless expect a commercial benefit from the goodwill derived from being identified in that manner as a patron of the organization. Amended us individual income tax return However, the purchaser of a listing cannot expect more than an inconsequential benefit. Amended us individual income tax return Therefore, the sale of separate spaces, but not the listings, is an unrelated trade or business. Amended us individual income tax return Publishing legal notices. Amended us individual income tax return   A bar association publishes a legal journal containing opinions of the county court, articles of professional interest to lawyers, advertisements for products and services used by the legal profession, and legal notices. Amended us individual income tax return The legal notices are published to satisfy state laws requiring publication of notices in connection with legal proceedings, such as the administration of estates and actions to quiet title to real property. Amended us individual income tax return The state designated the bar association's journal as the place to publish the required notices. Amended us individual income tax return   The publication of ordinary commercial advertising does not advance the exempt purposes of the association even when published in a periodical that contains material related to exempt purposes. Amended us individual income tax return Although the advertising is directed specifically to members of the legal profession, it is still commercial in nature and does not contribute importantly to the exempt purposes of the association. Amended us individual income tax return Therefore, the advertising income is unrelated trade or business income. Amended us individual income tax return   On the other hand, the publication of legal notices is distinguishable from ordinary commercial advertising in that its purpose is to inform the general public of significant legal events rather than to stimulate demand for the products or services of an advertiser. Amended us individual income tax return This promotes the common interests of the legal profession and contributes importantly to the association's exempt purposes. Amended us individual income tax return Therefore, the publishing of legal notices does not constitute an unrelated trade or business. Amended us individual income tax return Museum greeting card sales. Amended us individual income tax return    An art museum that exhibits modern art sells greeting cards that display printed reproductions of selected works from other art collections. Amended us individual income tax return Each card is imprinted with the name of the artist, the title or subject matter of the work, the date or period of its creation, if known, and the museum's name. Amended us individual income tax return The cards contain appropriate greetings and are personalized on request. Amended us individual income tax return   The organization sells the cards in the shop it operates in the museum and sells them at quantity discounts to retail stores. Amended us individual income tax return It also sells them by mail order through a catalog that is advertised in magazines and other publications throughout the year. Amended us individual income tax return As a result, a large number of cards are sold at a significant profit. Amended us individual income tax return   The museum is exempt as an educational organization on the basis of its ownership, maintenance, and exhibition for public viewing of works of art. Amended us individual income tax return The sale of greeting cards with printed reproductions of artworks contributes importantly to the achievement of the museum's exempt educational purposes by enhancing public awareness, interest, and appreciation of art. Amended us individual income tax return The cards may encourage more people to visit the museum itself to share in its educational programs. Amended us individual income tax return The fact that the cards are promoted and sold in a commercial manner at a profit and in competition with commercial greeting card publishers does not alter the fact that the activity is related to the museum's exempt purpose. Amended us individual income tax return Therefore, these sales activities are not an unrelated trade or business. Amended us individual income tax return Museum shop. Amended us individual income tax return   An art museum maintained and operated for the exhibition of American folk art operates a shop in the museum that sells: Reproductions of works in the museum's own collection and reproductions of artistic works from the collections of other art museums (prints suitable for framing, postcards, greeting cards, and slides); Metal, wood, and ceramic copies of American folk art objects from its own collection and similar copies of art objects from other collections of artworks; Instructional literature and scientific books and souvenir items concerning the history and development of art and, in particular, of American folk art; and Scientific books and souvenir items of the city in which the museum is located. Amended us individual income tax return   The shop also rents originals or reproductions of paintings contained in its collection. Amended us individual income tax return All of its reproductions are imprinted with the name of the artist, the title or subject matter of the work from which it is reproduced, and the museum's name. Amended us individual income tax return   Each line of merchandise must be considered separately to determine if sales are related to the exempt purpose. Amended us individual income tax return   The sale and rental of reproductions and copies of works from the museum's own collection and reproductions of artistic works not owned by the museum contribute importantly to the achievement of the museum's exempt educational purpose by making works of art familiar to a broader segment of the public, thereby enhancing the public's understanding and appreciation of art. Amended us individual income tax return The same is true for the sale of literature relating to art. Amended us individual income tax return Therefore, these sales activities are not an unrelated trade or business. Amended us individual income tax return   On the other hand, the sale of scientific books and souvenir items of the city where the museum is located has no causal relationship to art or to artistic endeavor and, therefore, does not contribute importantly to the accomplishment of the museum's exempt educational purposes. Amended us individual income tax return The fact that selling some of these items could, under different circumstances, be held related to the exempt educational purpose of some other exempt educational organization does not change this conclusion. Amended us individual income tax return Additionally, the sale of these items does not lose its identity as a trade or business merely because the museum also sells articles which do contribute importantly to the accomplishment of its exempt function. Amended us individual income tax return Therefore, these sales are an unrelated trade or business. Amended us individual income tax return Business league's parking and bus services. Amended us individual income tax return   A business league, whose purpose is to retain and stimulate trade in a downtown area that has inadequate parking facilities, operates a fringe parking lot and shuttle bus service. Amended us individual income tax return It also operates, as an insubstantial part of its activities, a park and shop plan. Amended us individual income tax return   The fringe parking lot and shuttle bus service operate in a manner that does not favor any individual or group of downtown merchants. Amended us individual income tax return The merchants cannot offer free or discount parking or bus fares to their customers. Amended us individual income tax return   The park and shop plan allows customers of particular merchants to park free at certain parking lots in the area. Amended us individual income tax return Merchants participating in this plan buy parking stamps, which they distribute to their customers to use to pay for parking. Amended us individual income tax return   Operating the fringe parking lot and shuttle bus service provides easy and convenient access to the downtown area and, therefore, stimulates and improves business conditions in the downtown area generally. Amended us individual income tax return That activity contributes importantly to the organization's accomplishing its exempt purpose and is not an unrelated trade or business. Amended us individual income tax return   The park and shop plan encourages customers to use a limited number of participating member merchants in order to obtain free parking. Amended us individual income tax return This provides a particular service to individual members of the organization and does not further its exempt purpose. Amended us individual income tax return Therefore, operating the park and shop plan is an unrelated trade or business. Amended us individual income tax return Youth residence. Amended us individual income tax return   An exempt organization, whose purpose is to provide for the welfare of young people, rents rooms primarily to people under age 25. Amended us individual income tax return The residence units are operated on, and as a part of, the premises in which the organization carries on the social, recreational, and guidance programs for which it was recognized as exempt. Amended us individual income tax return The facilities are under the management and supervision of trained career professionals who provide residents with personal counseling, physical education programs, and group recreational activities. Amended us individual income tax return The rentals are not an unrelated trade or business because renting the rooms is substantially related to the organization's exempt purpose. Amended us individual income tax return Health club program. Amended us individual income tax return   An exempt charitable organization's purpose is to provide for the welfare of young people. Amended us individual income tax return The organization conducts charitable activities and maintains facilities that will contribute to the physical, social, mental, and spiritual health of young people at minimum or no cost to them. Amended us individual income tax return Nominal annual dues are charged for membership in the organization and use of the facilities. Amended us individual income tax return   In addition, the organization organized a health club program that its members could join for an annual fee in addition to the annual dues. Amended us individual income tax return The annual fee is comparable to fees charged by similar local commercial health clubs and is sufficiently high to restrict participation in the program to a limited number of members of the community. Amended us individual income tax return   The health club program is in addition to the general physical fitness program of the organization. Amended us individual income tax return Operating this program does not contribute importantly to the organization's accomplishing its exempt purpose and, therefore, is an unrelated trade or business. Amended us individual income tax return Miniature golf course. Amended us individual income tax return   An exempt youth welfare organization operates a miniature golf course that is open to the general public. Amended us individual income tax return The course, which is managed by salaried employees, is substantially similar to commercial courses. Amended us individual income tax return The admission fees charged are comparable to fees of commercial facilities and are designed to return a profit. Amended us individual income tax return   The operation of the miniature golf course in a commercial manner does not contribute importantly to the accomplishment of the organization's exempt purpose and, therefore, is an unrelated trade or business. Amended us individual income tax return Sales of hearing aids. Amended us individual income tax return   A tax-exempt hospital, whose primary activity is rehabilitation, sells hearing aids to patients. Amended us individual income tax return This activity is an essential part of the hospital's program to test and evaluate patients with hearing deficiencies and contributes importantly to its exempt purpose. Amended us individual income tax return It is not an unrelated trade or business. Amended us individual income tax return Nonpatient laboratory testing. Amended us individual income tax return   Nonpatient laboratory testing performed by a tax-exempt teaching hospital on specimens needed for the conduct of its teaching activities is not an unrelated trade or business. Amended us individual income tax return However, laboratory testing performed by a tax-exempt non-teaching hospital on referred specimens from private office patients of staff physicians is an unrelated trade or business if these services are otherwise available in the community. Amended us individual income tax return Selling endorsements. Amended us individual income tax return   An exempt scientific organization enjoys an excellent reputation in the field of biological research. Amended us individual income tax return It exploits this reputation regularly by selling endorsements of laboratory equipment to manufacturers. Amended us individual income tax return Endorsing laboratory equipment does not contribute importantly to the accomplishment of any purpose for which exemption is granted to the organization. Amended us individual income tax return Accordingly, the sale of endorsements is an unrelated trade or business. Amended us individual income tax return Sponsoring entertainment events. Amended us individual income tax return   An exempt university has a regular faculty and a regularly enrolled student body. Amended us individual income tax return During the school year, the university sponsors the appearance of professional theater companies and symphony orchestras that present drama and musical performances for the students and faculty members. Amended us individual income tax return Members of the general public also are admitted. Amended us individual income tax return The university advertises these performances and supervises advance ticket sales at various places, including such university facilities as the cafeteria and the university bookstore. Amended us individual income tax return Although the presentation of the performances makes use of an intangible generated by the university's exempt educational functions—the presence of the student body and faculty—such drama and music events contribute importantly to the overall educational and cultural functions of the university. Amended us individual income tax return Therefore, the activity is not an unrelated trade or business. Amended us individual income tax return Excluded Trade or Business Activities The following activities are specifically excluded from the definition of unrelated trade or business. Amended us individual income tax return Volunteer workforce. Amended us individual income tax return   Any trade or business in which substantially all the work is performed for the organization without compensation is not an unrelated trade or business. Amended us individual income tax return Example 1. Amended us individual income tax return A retail store operated by an exempt orphanage where unpaid volunteers perform substantially all the work in carrying on the business is not an unrelated trade or business. Amended us individual income tax return Example 2. Amended us individual income tax return A volunteer fire company conducts weekly public dances. Amended us individual income tax return Holding public dances and charging admission on a regular basis may, given the facts and circumstances of a particular case, be considered an unrelated trade or business. Amended us individual income tax return However, because the work at the dances is performed by unpaid volunteers, the activity is not an unrelated trade or business. Amended us individual income tax return Convenience of members. Amended us individual income tax return   A trade or business conducted by a 501(c)(3) organization or by a governmental college or university primarily for the convenience of its members, students, patients, officers, or employees is not an unrelated trade or business. Amended us individual income tax return For example, a laundry operated by a college for the purpose of laundering dormitory linens and students' clothing is not an unrelated trade or business. Amended us individual income tax return Qualified sponsorship activities. Amended us individual income tax return   Soliciting and receiving qualified sponsorship payments is not an unrelated trade or business, and the payments are not subject to unrelated business income tax. Amended us individual income tax return Qualified sponsorship payment. Amended us individual income tax return   This is any payment made by a person engaged in a trade or business for which the person will receive no substantial benefit other than the use or acknowledgment of the business name, logo, or product lines in connection with the organization's activities. Amended us individual income tax return “Use or acknowledgment” does not include advertising the sponsor's products or services. Amended us individual income tax return The organization's activities include all its activities, whether or not related to its exempt purposes. Amended us individual income tax return   For example, if, in return for receiving a sponsorship payment, an organization promises to use the sponsor's name or logo in acknowledging the sponsor's support for an educational or fundraising event, the payment is a qualified sponsorship payment and is not subject to the unrelated business income tax. Amended us individual income tax return   Providing facilities, services, or other privileges (for example, complimentary tickets, pro-am playing spots in golf tournaments, or receptions for major donors) to a sponsor or the sponsor's designees in connection with a sponsorship payment does not affect whether the payment is a qualified sponsorship payment. Amended us individual income tax return Instead, providing these goods or services is treated as a separate transaction in determining whether the organization has unrelated business income from the event. Amended us individual income tax return Generally, if the services or facilities are not a substantial benefit or if providing them is a related business activity, the payments will not be subject to the unrelated business income tax. Amended us individual income tax return   Similarly, the sponsor's receipt of a license to use an intangible asset (for example, a trademark, logo, or designation) of the organization is treated as separate from the qualified sponsorship transaction in determining whether the organization has unrelated business taxable income. Amended us individual income tax return   If part of a payment would be a qualified sponsorship payment if paid separately, that part is treated as a separate payment. Amended us individual income tax return For example, if a sponsorship payment entitles the sponsor to both product advertising and the use or acknowledgment of the sponsor's name or logo by the organization, then the unrelated business income tax does not apply to the part of the payment that is more than the fair market value of the product advertising. Amended us individual income tax return Advertising. Amended us individual income tax return   A payment is not a qualified sponsorship payment if, in return, the organization advertises the sponsor's products or services. Amended us individual income tax return For information on the treatment of payments for advertising, see Exploitation of Exempt Activity—Advertising Sales in chapter 4. Amended us individual income tax return   Advertising includes: Messages containing qualitative or comparative language, price information, or other indications of savings or value; Endorsements; and Inducements to purchase, sell, or use the products or services. Amended us individual income tax return   The use of promotional logos or slogans that are an established part of the sponsor's identity is not, by itself, advertising. Amended us individual income tax return In addition, mere distribution or display of a sponsor's product by the organization to the public at a sponsored event, whether for free or for remuneration, is considered use or acknowledgment of the product rather than advertising. Amended us individual income tax return Exception for contingent payments. Amended us individual income tax return   A payment is not a qualified sponsorship payment if its amount is contingent, by contract or otherwise, upon the level of attendance at one or more events, broadcast ratings, or other factors indicating the degree of public exposure to one or more events. Amended us individual income tax return However, the fact that a sponsorship payment is contingent upon an event actually taking place or being broadcast does not, by itself, affect whether a payment qualifies. Amended us individual income tax return Exception for periodicals. Amended us individual income tax return   A payment is not a qualified sponsorship payment if it entitles the payer to the use or acknowledgment of the business name, logo, or product lines in the organization's periodical. Amended us individual income tax return For this purpose, a periodical is any regularly scheduled and printed material (for example, a monthly journal) published by or on behalf of the organization. Amended us individual income tax return It does not include material that is related to and primarily distributed in connection with a specific event conducted by the organization (for example, a program or brochure distributed at a sponsored event). Amended us individual income tax return   The treatment of payments that entitle the payer to the depiction of the payer's name, logo, or products lines in an organization's periodical is determined under the rules that apply to advertising activities. Amended us individual income tax return See Sales of advertising space under Examples, earlier in this chapter. Amended us individual income tax return Also see Exploitation of Exempt Activity—Advertising Sales in chapter 4. Amended us individual income tax return Exception for conventions and trade shows. Amended us individual income tax return   A payment is not a qualified sponsorship payment if it is made in connection with any qualified convention or trade show activity. Amended us individual income tax return The exclusion of qualified convention or trade show activities from the definition of unrelated trade or business is explained later under Convention or trade show activity. Amended us individual income tax return Selling donated merchandise. Amended us individual income tax return   A trade or business that consists of selling merchandise, substantially all of which the organization received as gifts or contributions, is not an unrelated trade or business. Amended us individual income tax return For example, a thrift shop operated by a tax-exempt organization that sells donated clothes and books to the general public, with the proceeds going to the exempt organization, is not an unrelated trade or business. Amended us individual income tax return Employee association sales. Amended us individual income tax return   The sale of certain items by a local association of employees described in section 501(c)(4), organized before May 17, 1969, is not an unrelated trade or business if the items are sold for the convenience of the association's members at their usual place of employment. Amended us individual income tax return This exclusion applies only to the sale of work-related clothes and equipment and items normally sold through vending machines, food dispensing facilities, or by snack bars. Amended us individual income tax return Bingo games. Amended us individual income tax return   Certain bingo games are not included in the term “unrelated trade or business. Amended us individual income tax return ” To qualify for this exclusion, the bingo game must meet the following requirements. Amended us individual income tax return It meets the legal definition of bingo. Amended us individual income tax return It is legal where it is played. Amended us individual income tax return It is played in a jurisdiction where bingo games are not regularly conducted by for-profit organizations. Amended us individual income tax return Legal definition. Amended us individual income tax return   For a game to meet the legal definition of bingo, wagers must be placed, winners must be determined, and prizes or other property must be distributed in the presence of all persons placing wagers in that game. Amended us individual income tax return   A wagering game that does not meet the legal definition of bingo does not qualify for the exclusion, regardless of its name. Amended us individual income tax return For example, “instant bingo,” in which a player buys a pre-packaged bingo card with pull-tabs that the player removes to determine if he or she is a winner, does not qualify. Amended us individual income tax return Legal where played. Amended us individual income tax return   This exclusion applies only if bingo is legal under the laws of the jurisdiction where it is conducted. Amended us individual income tax return The fact that a jurisdiction's law that prohibits bingo is rarely enforced or is widely disregarded does not make the conduct of bingo legal for this purpose. Amended us individual income tax return No for-profit games where played. Amended us individual income tax return   This exclusion applies only if for-profit organizations cannot regularly conduct bingo games in any part of the same jurisdiction. Amended us individual income tax return Jurisdiction is normally the entire state; however, in certain situations, local jurisdiction will control. Amended us individual income tax return Example. Amended us individual income tax return Tax-exempt organizations X and Y are organized under the laws of state N, which has a law that permits exempt organizations to conduct bingo games. Amended us individual income tax return In addition, for-profit organizations are permitted to conduct bingo games in city S, a resort community located in county R. Amended us individual income tax return Several for-profit organizations conduct nightly games. Amended us individual income tax return Y conducts weekly bingo games in city S, while X conducts weekly games in county R. Amended us individual income tax return Since state law confines the for-profit organizations to city S, local jurisdiction controls. Amended us individual income tax return Y's bingo games conducted in city S are an unrelated trade or business. Amended us individual income tax return However, X's bingo games conducted in county R outside of city S are not an unrelated trade or business. Amended us individual income tax return Gambling activities other than bingo. Amended us individual income tax return   Any game of chance conducted by an exempt organization in North Dakota is not an unrelated trade or business if conducting the game does not violate any state or local law. Amended us individual income tax return Pole rentals. Amended us individual income tax return   The term unrelated trade or business does not include qualified pole rentals by a mutual or cooperative telephone or electric company described in section 501(c)(12). Amended us individual income tax return A qualified pole rental is the rental of a pole (or other structure used to support wires) if the pole (or other structure) is used: By the telephone or electric company to support one or more wires that the company uses in providing telephone or electric services to its members, and According to the rental, to support one or more wires (in addition to the wires described in 1 ) for use in connection with the transmission by wire of electricity or of telephone or other communications. Amended us individual income tax return For this purpose, the term rental includes any sale of the right to use the pole (or other structure). Amended us individual income tax return Distribution of low cost articles. Amended us individual income tax return   The term unrelated trade or business does not include activities relating to the distribution of low cost articles incidental to soliciting charitable contributions. Amended us individual income tax return This applies to organizations described in section 501 that are eligible to receive charitable contributions. Amended us individual income tax return   A distribution is considered incidental to the solicitation of a charitable contribution if: The recipient did not request the distribution, The distribution is made without the express consent of the recipient, and The article is accompanied by a request for a charitable contribution to the organization and a statement that the recipient may keep the low cost article regardless of whether a contribution is made. Amended us individual income tax return   An article is considered low cost if the cost of an item (or the aggregate costs if more than one item) distributed to a single recipient in a tax year is not more than $5, indexed annually for inflation. Amended us individual income tax return The maximum cost of a low cost article is $9. Amended us individual income tax return 70 for 2011. Amended us individual income tax return The cost of an article is the cost to the organization that distributes the item or on whose behalf it is distributed. Amended us individual income tax return Exchange or rental of member lists. Amended us individual income tax return   The exchange or rental of member or donor lists between organizations described in section 501 that are eligible to receive charitable contributions is not included in the term unrelated trade or business. Amended us individual income tax return Hospital services. Amended us individual income tax return   The providing of certain services at or below cost by an exempt hospital to other exempt hospitals that have facilities for 100 or fewer inpatients is not an unrelated trade or business. Amended us individual income tax return This exclusion applies only to services described in section 501(e)(1)(A). Amended us individual income tax return Public entertainment activity. Amended us individual income tax return   An unrelated trade or business does not include a qualified public entertainment activity. Amended us individual income tax return A public entertainment activity is one traditionally conducted at a fair or exposition promoting agriculture and education, including any activity whose purpose is designed to attract the public to fairs or expositions or to promote the breeding of animals or the development of products or equipment. Amended us individual income tax return   A qualified public entertainment activity is one conducted by a qualifying organization: In conjunction with an international, national, state, regional, or local fair or exposition; In accordance with state law that permits the activity to be operated or conducted solely by such an organization or by an agency, instrumentality, or political subdivision of the state; or In accordance with state law that permits an organization to be granted a license to conduct an activity for not more than 20 days on paying the state a lower percentage of the revenue from the activity than the state charges nonqualifying organizations that hold similar activities. Amended us individual income tax return   For these purposes, a qualifying organization is an organization described in section 501(c)(3), 501(c)(4), or 501(c)(5) that regularly conducts an agricultural and educational fair or exposition as one of its substantial exempt purposes. Amended us individual income tax return Its conducting qualified public entertainment activities will not affect determination of its exempt status. Amended us individual income tax return Convention or trade show activity. Amended us individual income tax return   An unrelated trade or business does not include qualified convention or trade show activities conducted at a convention, annual meeting, or trade show. Amended us individual income tax return   A qualified convention or trade show activity is any activity of a kind traditionally conducted by a qualifying organization in conjunction with an international, national, state, regional, or local convention, annual meeting, or show if: One of the purposes of the organization in sponsoring the activity is promoting and stimulating interest in, and demand for, the products and services of that industry or educating the persons in attendance regarding new products and services or new rules and regulations affecting the industry; and The show is designed to achieve its purpose through the character of the exhibits and the extent of the industry products that are displayed. Amended us individual income tax return   For these purposes, a qualifying organization is one described in section 501(c)(3), 501(c)(4), 501(c)(5), or 501(c)(6). Amended us individual income tax return The organization must regularly conduct, as one of its substantial exempt purposes, a qualified convention or trade show activity. Amended us individual income tax return   The rental of display space to exhibitors (including exhibitors who are suppliers) at a qualified convention or trade show is not an unrelated trade or business even if the exhibitors who rent the space are permitted to sell or solicit orders. Amended us individual income tax return For this purpose, a supplier's exhibit is one in which the exhibitor displays goods or services that are supplied to, rather than by, members of the qualifying organization in the conduct of these members' own trades or businesses. Amended us individual income tax return    Certain Internet activities conducted by a trade association described in section 501(c)(6) will be considered qualified convention and trade show activity if conducted on a special supplementary section of the association's website in conjunction with a trade show conducted by the association. Amended us individual income tax return The trade show itself must be a qualified convention and trade show activity. Amended us individual income tax return The supplementary section of the website must be ancillary to, and serve to augment and enhance, the trade show, as when it makes available the same information available at the trade show and is available only during a time period that coincides with the time period that the trade show is in operation. Amended us individual income tax return Conversely, Internet activities that are not conducted in conjunction with a qualified convention and trade show activity and that do not augment and enhance the trade show cannot themselves be qualified convention and trade show activity. Amended us individual income tax return Prev  Up  Next   Home   More Online Publications
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The Amended Us Individual Income Tax Return

Amended us individual income tax return 2. Amended us individual income tax return   Depreciation of Rental Property Table of Contents The BasicsWhat Rental Property Can Be Depreciated? When Does Depreciation Begin and End? Depreciation Methods Basis of Depreciable Property Claiming the Special Depreciation Allowance MACRS DepreciationDepreciation Systems Property Classes Under GDS Recovery Periods Under GDS Conventions Figuring Your Depreciation Deduction Figuring MACRS Depreciation Under ADS Claiming the Correct Amount of Depreciation You recover the cost of income producing property through yearly tax deductions. Amended us individual income tax return You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. Amended us individual income tax return Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. Amended us individual income tax return You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures and equipment, as an expense. Amended us individual income tax return You can deduct depreciation only on the part of your property used for rental purposes. Amended us individual income tax return Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. Amended us individual income tax return You may have to use Form 4562 to figure and report your depreciation. Amended us individual income tax return See Which Forms To Use in chapter 3. Amended us individual income tax return Also see Publication 946. Amended us individual income tax return Section 179 deduction. Amended us individual income tax return   The section 179 deduction is a means of recovering part or all of the cost of certain qualifying property in the year you place the property in service. Amended us individual income tax return This deduction is not allowed for property used in connection with residential rental property. Amended us individual income tax return See chapter 2 of Publication 946. Amended us individual income tax return Alternative minimum tax (AMT). Amended us individual income tax return   If you use accelerated depreciation, you may be subject to the AMT. Amended us individual income tax return Accelerated depreciation allows you to deduct more depreciation earlier in the recovery period than you could deduct using a straight line method (same deduction each year). Amended us individual income tax return   The prescribed depreciation methods for rental real estate are not accelerated, so the depreciation deduction is not adjusted for the AMT. Amended us individual income tax return However, accelerated methods are generally used for other property connected with rental activities (for example, appliances and wall-to-wall carpeting). Amended us individual income tax return   To find out if you are subject to the AMT, see the Instructions for Form 6251. Amended us individual income tax return The Basics The following section discusses the information you will need to have about the rental property and the decisions to be made before figuring your depreciation deduction. Amended us individual income tax return What Rental Property Can Be Depreciated? You can depreciate your property if it meets all the following requirements. Amended us individual income tax return You own the property. Amended us individual income tax return You use the property in your business or income-producing activity (such as rental property). Amended us individual income tax return The property has a determinable useful life. Amended us individual income tax return The property is expected to last more than one year. Amended us individual income tax return Property you own. Amended us individual income tax return   To claim depreciation, you usually must be the owner of the property. Amended us individual income tax return You are considered as owning property even if it is subject to a debt. Amended us individual income tax return Rented property. Amended us individual income tax return   Generally, if you pay rent for property, you cannot depreciate that property. Amended us individual income tax return Usually, only the owner can depreciate it. Amended us individual income tax return However, if you make permanent improvements to leased property, you may be able to depreciate the improvements. Amended us individual income tax return See Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. Amended us individual income tax return Cooperative apartments. Amended us individual income tax return   If you are a tenant-stockholder in a cooperative housing corporation and rent your cooperative apartment to others, you can deduct depreciation on your stock in the corporation. Amended us individual income tax return See chapter 4, Special Situations. Amended us individual income tax return Property having a determinable useful life. Amended us individual income tax return   To be depreciable, your property must have a determinable useful life. Amended us individual income tax return This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Amended us individual income tax return What Rental Property Cannot Be Depreciated? Certain property cannot be depreciated. Amended us individual income tax return This includes land and certain excepted property. Amended us individual income tax return Land. Amended us individual income tax return   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. Amended us individual income tax return But if it does, the loss is accounted for upon disposition. Amended us individual income tax return The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. Amended us individual income tax return   Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. Amended us individual income tax return These costs must be so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property. Amended us individual income tax return Example. Amended us individual income tax return You built a new house to use as a rental and paid for grading, clearing, seeding, and planting bushes and trees. Amended us individual income tax return Some of the bushes and trees were planted right next to the house, while others were planted around the outer border of the lot. Amended us individual income tax return If you replace the house, you would have to destroy the bushes and trees right next to it. Amended us individual income tax return These bushes and trees are closely associated with the house, so they have a determinable useful life. Amended us individual income tax return Therefore, you can depreciate them. Amended us individual income tax return Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. Amended us individual income tax return Excepted property. Amended us individual income tax return   Even if the property meets all the requirements listed earlier under What Rental Property Can Be Depreciated , you cannot depreciate the following property. Amended us individual income tax return Property placed in service and disposed of (or taken out of business use) in the same year. Amended us individual income tax return Equipment used to build capital improvements. Amended us individual income tax return You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Amended us individual income tax return For more information, see chapter 1 of Publication 946. Amended us individual income tax return When Does Depreciation Begin and End? You begin to depreciate your rental property when you place it in service for the production of income. Amended us individual income tax return You stop depreciating it either when you have fully recovered your cost or other basis, or when you retire it from service, whichever happens first. Amended us individual income tax return Placed in Service You place property in service in a rental activity when it is ready and available for a specific use in that activity. Amended us individual income tax return Even if you are not using the property, it is in service when it is ready and available for its specific use. Amended us individual income tax return Example 1. Amended us individual income tax return On November 22 of last year, you purchased a dishwasher for your rental property. Amended us individual income tax return The appliance was delivered on December 7, but was not installed and ready for use until January 3 of this year. Amended us individual income tax return Because the dishwasher was not ready for use last year, it is not considered placed in service until this year. Amended us individual income tax return If the appliance had been installed and ready for use when it was delivered in December of last year, it would have been considered placed in service in December, even if it was not actually used until this year. Amended us individual income tax return Example 2. Amended us individual income tax return On April 6, you purchased a house to use as residential rental property. Amended us individual income tax return You made extensive repairs to the house and had it ready for rent on July 5. Amended us individual income tax return You began to advertise the house for rent in July and actually rented it beginning September 1. Amended us individual income tax return The house is considered placed in service in July when it was ready and available for rent. Amended us individual income tax return You can begin to depreciate the house in July. Amended us individual income tax return Example 3. Amended us individual income tax return You moved from your home in July. Amended us individual income tax return During August and September you made several repairs to the house. Amended us individual income tax return On October 1, you listed the property for rent with a real estate company, which rented it on December 1. Amended us individual income tax return The property is considered placed in service on October 1, the date when it was available for rent. Amended us individual income tax return Conversion to business use. Amended us individual income tax return   If you place property in service in a personal activity, you cannot claim depreciation. Amended us individual income tax return However, if you change the property's use to business or the production of income, you can begin to depreciate it at the time of the change. Amended us individual income tax return You place the property in service for business or income-producing use on the date of the change. Amended us individual income tax return Example. Amended us individual income tax return You bought a house and used it as your personal home several years before you converted it to rental property. Amended us individual income tax return Although its specific use was personal and no depreciation was allowable, you placed the home in service when you began using it as your home. Amended us individual income tax return You can begin to claim depreciation in the year you converted it to rental property because at that time its use changed to the production of income. Amended us individual income tax return Idle Property Continue to claim a deduction for depreciation on property used in your rental activity even if it is temporarily idle (not in use). Amended us individual income tax return For example, if you must make repairs after a tenant moves out, you still depreciate the rental property during the time it is not available for rent. Amended us individual income tax return Cost or Other Basis Fully Recovered You must stop depreciating property when the total of your yearly depreciation deductions equals your cost or other basis of your property. Amended us individual income tax return For this purpose, your yearly depreciation deductions include any depreciation that you were allowed to claim, even if you did not claim it. Amended us individual income tax return See Basis of Depreciable Property , later. Amended us individual income tax return Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. Amended us individual income tax return You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events. Amended us individual income tax return You sell or exchange the property. Amended us individual income tax return You convert the property to personal use. Amended us individual income tax return You abandon the property. Amended us individual income tax return The property is destroyed. Amended us individual income tax return Depreciation Methods Generally, you must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate residential rental property placed in service after 1986. Amended us individual income tax return If you placed rental property in service before 1987, you are using one of the following methods. Amended us individual income tax return ACRS (Accelerated Cost Recovery System) for property placed in service after 1980 but before 1987. Amended us individual income tax return Straight line or declining balance method over the useful life of property placed in service before 1981. Amended us individual income tax return See MACRS Depreciation , later, for more information. Amended us individual income tax return Rental property placed in service before 2013. Amended us individual income tax return   Continue to use the same method of figuring depreciation that you used in the past. Amended us individual income tax return Use of real property changed. Amended us individual income tax return   Generally, you must use MACRS to depreciate real property that you acquired for personal use before 1987 and changed to business or income-producing use after 1986. Amended us individual income tax return This includes your residence that you changed to rental use. Amended us individual income tax return See Property Owned or Used in 1986 in Publication 946, chapter 1, for those situations in which MACRS is not allowed. Amended us individual income tax return Improvements made after 1986. Amended us individual income tax return   Treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. Amended us individual income tax return As a result, you can depreciate that improvement as separate property under MACRS if it is the type of property that otherwise qualifies for MACRS depreciation. Amended us individual income tax return For more information about improvements, see Additions or improvements to property , later in this chapter under Recovery Periods Under GDS. Amended us individual income tax return This publication discusses MACRS depreciation only. Amended us individual income tax return If you need information about depreciating property placed in service before 1987, see Publication 534. Amended us individual income tax return Basis of Depreciable Property The basis of property used in a rental activity is generally its adjusted basis when you place it in service in that activity. Amended us individual income tax return This is its cost or other basis when you acquired it, adjusted for certain items occurring before you place it in service in the rental activity. Amended us individual income tax return If you depreciate your property under MACRS, you may also have to reduce your basis by certain deductions and credits with respect to the property. Amended us individual income tax return Basis and adjusted basis are explained in the following discussions. Amended us individual income tax return If you used the property for personal purposes before changing it to rental use, its basis for depreciation is the lesser of its adjusted basis or its fair market value when you change it to rental use. Amended us individual income tax return See Basis of Property Changed to Rental Use in chapter 4. Amended us individual income tax return Cost Basis The basis of property you buy is usually its cost. Amended us individual income tax return The cost is the amount you pay for it in cash, in debt obligation, in other property, or in services. Amended us individual income tax return Your cost also includes amounts you pay for: Sales tax charged on the purchase (but see Exception next), Freight charges to obtain the property, and Installation and testing charges. Amended us individual income tax return Exception. Amended us individual income tax return   If you deducted state and local general sales taxes as an itemized deduction on Schedule A (Form 1040), do not include those sales taxes as part of your cost basis. Amended us individual income tax return Such taxes were deductible before 1987 and after 2003. Amended us individual income tax return Loans with low or no interest. Amended us individual income tax return   If you buy property on any time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, less the amount considered to be unstated interest. Amended us individual income tax return See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. Amended us individual income tax return Real property. Amended us individual income tax return   If you buy real property, such as a building and land, certain fees and other expenses you pay are part of your cost basis in the property. Amended us individual income tax return Real estate taxes. Amended us individual income tax return   If you buy real property and agree to pay real estate taxes on it that were owed by the seller and the seller does not reimburse you, the taxes you pay are treated as part of your basis in the property. Amended us individual income tax return You cannot deduct them as taxes paid. Amended us individual income tax return   If you reimburse the seller for real estate taxes the seller paid for you, you can usually deduct that amount. Amended us individual income tax return Do not include that amount in your basis in the property. Amended us individual income tax return Settlement fees and other costs. Amended us individual income tax return   The following settlement fees and closing costs for buying the property are part of your basis in the property. Amended us individual income tax return Abstract fees. Amended us individual income tax return Charges for installing utility services. Amended us individual income tax return Legal fees. Amended us individual income tax return Recording fees. Amended us individual income tax return Surveys. Amended us individual income tax return Transfer taxes. Amended us individual income tax return Title insurance. Amended us individual income tax return Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. Amended us individual income tax return   The following are settlement fees and closing costs you cannot include in your basis in the property. Amended us individual income tax return Fire insurance premiums. Amended us individual income tax return Rent or other charges relating to occupancy of the property before closing. Amended us individual income tax return Charges connected with getting or refinancing a loan, such as: Points (discount points, loan origination fees), Mortgage insurance premiums, Loan assumption fees, Cost of a credit report, and Fees for an appraisal required by a lender. Amended us individual income tax return   Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Amended us individual income tax return Assumption of a mortgage. Amended us individual income tax return   If you buy property and become liable for an existing mortgage on the property, your basis is the amount you pay for the property plus the amount remaining to be paid on the mortgage. Amended us individual income tax return Example. Amended us individual income tax return You buy a building for $60,000 cash and assume a mortgage of $240,000 on it. Amended us individual income tax return Your basis is $300,000. Amended us individual income tax return Separating cost of land and buildings. Amended us individual income tax return   If you buy buildings and your cost includes the cost of the land on which they stand, you must divide the cost between the land and the buildings to figure the basis for depreciation of the buildings. Amended us individual income tax return The part of the cost that you allocate to each asset is the ratio of the fair market value of that asset to the fair market value of the whole property at the time you buy it. Amended us individual income tax return   If you are not certain of the fair market values of the land and the buildings, you can divide the cost between them based on their assessed values for real estate tax purposes. Amended us individual income tax return Example. Amended us individual income tax return You buy a house and land for $200,000. Amended us individual income tax return The purchase contract does not specify how much of the purchase price is for the house and how much is for the land. Amended us individual income tax return The latest real estate tax assessment on the property was based on an assessed value of $160,000, of which $136,000 was for the house and $24,000 was for the land. Amended us individual income tax return You can allocate 85% ($136,000 ÷ $160,000) of the purchase price to the house and 15% ($24,000 ÷ $160,000) of the purchase price to the land. Amended us individual income tax return Your basis in the house is $170,000 (85% of $200,000) and your basis in the land is $30,000 (15% of $200,000). Amended us individual income tax return Basis Other Than Cost You cannot use cost as a basis for property that you received: In return for services you performed; In an exchange for other property; As a gift; From your spouse, or from your former spouse as the result of a divorce; or As an inheritance. Amended us individual income tax return If you received property in one of these ways, see Publication 551 for information on how to figure your basis. Amended us individual income tax return Adjusted Basis To figure your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service for business or the production of income. Amended us individual income tax return The result of these adjustments to the basis is the adjusted basis. Amended us individual income tax return Increases to basis. Amended us individual income tax return   You must increase the basis of any property by the cost of all items properly added to a capital account. Amended us individual income tax return These include the following. Amended us individual income tax return The cost of any additions or improvements made before placing your property into service as a rental that have a useful life of more than 1 year. Amended us individual income tax return Amounts spent after a casualty to restore the damaged property. Amended us individual income tax return The cost of extending utility service lines to the property. Amended us individual income tax return Legal fees, such as the cost of defending and perfecting title, or settling zoning issues. Amended us individual income tax return Additions or improvements. Amended us individual income tax return   Add to the basis of your property the amount an addition or improvement actually cost you, including any amount you borrowed to make the addition or improvement. Amended us individual income tax return This includes all direct costs, such as material and labor, but does not include your own labor. Amended us individual income tax return It also includes all expenses related to the addition or improvement. Amended us individual income tax return   For example, if you had an architect draw up plans for remodeling your property, the architect's fee is a part of the cost of the remodeling. Amended us individual income tax return Or, if you had your lot surveyed to put up a fence, the cost of the survey is a part of the cost of the fence. Amended us individual income tax return   Keep separate accounts for depreciable additions or improvements made after you place the property in service in your rental activity. Amended us individual income tax return For information on depreciating additions or improvements, see Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. Amended us individual income tax return    The cost of landscaping improvements is usually treated as an addition to the basis of the land, which is not depreciable. Amended us individual income tax return However, see What Rental Property Cannot Be Depreciated, earlier. Amended us individual income tax return Assessments for local improvements. Amended us individual income tax return   Assessments for items which tend to increase the value of property, such as streets and sidewalks, must be added to the basis of the property. Amended us individual income tax return For example, if your city installs curbing on the street in front of your house, and assesses you and your neighbors for its cost, you must add the assessment to the basis of your property. Amended us individual income tax return Also add the cost of legal fees paid to obtain a decrease in an assessment levied against property to pay for local improvements. Amended us individual income tax return You cannot deduct these items as taxes or depreciate them. Amended us individual income tax return    However, you can deduct as taxes, charges or assessments for maintenance, repairs, or interest charges related to the improvements. Amended us individual income tax return Do not add them to your basis in the property. Amended us individual income tax return Deducting vs. Amended us individual income tax return capitalizing costs. Amended us individual income tax return   Do not add to your basis costs you can deduct as current expenses. Amended us individual income tax return However, there are certain costs you can choose either to deduct or to capitalize. Amended us individual income tax return If you capitalize these costs, include them in your basis. Amended us individual income tax return If you deduct them, do not include them in your basis. Amended us individual income tax return   The costs you may choose to deduct or capitalize include carrying charges, such as interest and taxes, that you must pay to own property. Amended us individual income tax return   For more information about deducting or capitalizing costs and how to make the election, see Carrying Charges in Publication 535, chapter 7. Amended us individual income tax return Decreases to basis. Amended us individual income tax return   You must decrease the basis of your property by any items that represent a return of your cost. Amended us individual income tax return These include the following. Amended us individual income tax return Insurance or other payment you receive as the result of a casualty or theft loss. Amended us individual income tax return Casualty loss not covered by insurance for which you took a deduction. Amended us individual income tax return Amount(s) you receive for granting an easement. Amended us individual income tax return Residential energy credits you were allowed before 1986, or after 2005, if you added the cost of the energy items to the basis of your home. Amended us individual income tax return Exclusion from income of subsidies for energy conservation measures. Amended us individual income tax return Special depreciation allowance claimed on qualified property. Amended us individual income tax return Depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. Amended us individual income tax return If you did not deduct enough or deducted too much in any year, see Depreciation under Decreases to Basis in Publication 551. Amended us individual income tax return   If your rental property was previously used as your main home, you must also decrease the basis by the following. Amended us individual income tax return Gain you postponed from the sale of your main home before May 7, 1997, if the replacement home was converted to your rental property. Amended us individual income tax return District of Columbia first-time homebuyer credit allowed on the purchase of your main home after August 4, 1997 and before January 1, 2012. Amended us individual income tax return Amount of qualified principal residence indebtedness discharged on or after January 1, 2007. Amended us individual income tax return Claiming the Special Depreciation Allowance For 2013, your residential rental property may qualify for a special depreciation allowance. Amended us individual income tax return This allowance is figured before you figure your regular depreciation deduction. Amended us individual income tax return See Publication 946, chapter 3, for details. Amended us individual income tax return Also see the Instructions for Form 4562, Line 14. Amended us individual income tax return If you qualify for, but choose not to take, a special depreciation allowance, you must attach a statement to your return. Amended us individual income tax return The details of this election are in Publication 946, chapter 3, and the Instructions for Form 4562, Line 14. Amended us individual income tax return MACRS Depreciation Most business and investment property placed in service after 1986 is depreciated using MACRS. Amended us individual income tax return This section explains how to determine which MACRS depreciation system applies to your property. Amended us individual income tax return It also discusses other information you need to know before you can figure depreciation under MACRS. Amended us individual income tax return This information includes the property's: Recovery class, Applicable recovery period, Convention, Placed-in-service date, Basis for depreciation, and Depreciation method. Amended us individual income tax return Depreciation Systems MACRS consists of two systems that determine how you depreciate your property—the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Amended us individual income tax return You must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Amended us individual income tax return Excluded Property You cannot use MACRS for certain personal property (such as furniture or appliances) placed in service in your rental property in 2013 if it had been previously placed in service before 1987 when MACRS became effective. Amended us individual income tax return In most cases, personal property is excluded from MACRS if you (or a person related to you) owned or used it in 1986 or if your tenant is a person (or someone related to the person) who owned or used it in 1986. Amended us individual income tax return However, the property is not excluded if your 2013 deduction under MACRS (using a half-year convention) is less than the deduction you would have under ACRS. Amended us individual income tax return For more information, see What Method Can You Use To Depreciate Your Property? in Publication 946, chapter 1. Amended us individual income tax return Electing ADS If you choose, you can use the ADS method for most property. Amended us individual income tax return Under ADS, you use the straight line method of depreciation. Amended us individual income tax return The election of ADS for one item in a class of property generally applies to all property in that class that is placed in service during the tax year of the election. Amended us individual income tax return However, the election applies on a property-by-property basis for residential rental property and nonresidential real property. Amended us individual income tax return If you choose to use ADS for your residential rental property, the election must be made in the first year the property is placed in service. Amended us individual income tax return Once you make this election, you can never revoke it. Amended us individual income tax return For property placed in service during 2013, you make the election to use ADS by entering the depreciation on Form 4562, Part III, Section C, line 20c. Amended us individual income tax return Property Classes Under GDS Each item of property that can be depreciated under MACRS is assigned to a property class, determined by its class life. Amended us individual income tax return The property class generally determines the depreciation method, recovery period, and convention. Amended us individual income tax return The property classes under GDS are: 3-year property, 5-year property, 7-year property, 10-year property, 15-year property, 20-year property, Nonresidential real property, and Residential rental property. Amended us individual income tax return Under MACRS, property that you placed in service during 2013 in your rental activities generally falls into one of the following classes. Amended us individual income tax return 5-year property. Amended us individual income tax return This class includes computers and peripheral equipment, office machinery (typewriters, calculators, copiers, etc. Amended us individual income tax return ), automobiles, and light trucks. Amended us individual income tax return This class also includes appliances, carpeting, furniture, etc. Amended us individual income tax return , used in a residential rental real estate activity. Amended us individual income tax return Depreciation on automobiles, other property used for transportation, computers and related peripheral equipment, and property of a type generally used for entertainment, recreation, or amusement is limited. Amended us individual income tax return See chapter 5 of Publication 946. Amended us individual income tax return 7-year property. Amended us individual income tax return This class includes office furniture and equipment (desks, file cabinets, etc. Amended us individual income tax return ). Amended us individual income tax return This class also includes any property that does not have a class life and that has not been designated by law as being in any other class. Amended us individual income tax return 15-year property. Amended us individual income tax return This class includes roads, fences, and shrubbery (if depreciable). Amended us individual income tax return Residential rental property. Amended us individual income tax return This class includes any real property that is a rental building or structure (including a mobile home) for which 80% or more of the gross rental income for the tax year is from dwelling units. Amended us individual income tax return It does not include a unit in a hotel, motel, inn, or other establishment where more than half of the units are used on a transient basis. Amended us individual income tax return If you live in any part of the building or structure, the gross rental income includes the fair rental value of the part you live in. Amended us individual income tax return The other property classes do not generally apply to property used in rental activities. Amended us individual income tax return These classes are not discussed in this publication. Amended us individual income tax return See Publication 946 for more information. Amended us individual income tax return Recovery Periods Under GDS The recovery period of property is the number of years over which you recover its cost or other basis. Amended us individual income tax return The recovery periods are generally longer under ADS than GDS. Amended us individual income tax return The recovery period of property depends on its property class. Amended us individual income tax return Under GDS, the recovery period of an asset is generally the same as its property class. Amended us individual income tax return Class lives and recovery periods for most assets are listed in Appendix B of Publication 946. Amended us individual income tax return See Table 2-1 for recovery periods of property commonly used in residential rental activities. Amended us individual income tax return Qualified Indian reservation property. Amended us individual income tax return   Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations. Amended us individual income tax return For more information, see chapter 4 of Publication 946. Amended us individual income tax return Additions or improvements to property. Amended us individual income tax return   Treat additions or improvements you make to your depreciable rental property as separate property items for depreciation purposes. Amended us individual income tax return   The property class and recovery period of the addition or improvement is the one that would apply to the original property if you had placed it in service at the same time as the addition or improvement. Amended us individual income tax return   The recovery period for an addition or improvement to property begins on the later of: The date the addition or improvement is placed in service, or The date the property to which the addition or improvement was made is placed in service. Amended us individual income tax return Example. Amended us individual income tax return You own a residential rental house that you have been renting since 1986 and depreciating under ACRS. Amended us individual income tax return You built an addition onto the house and placed it in service in 2013. Amended us individual income tax return You must use MACRS for the addition. Amended us individual income tax return Under GDS, the addition is depreciated as residential rental property over 27. Amended us individual income tax return 5 years. Amended us individual income tax return Table 2-1. Amended us individual income tax return MACRS Recovery Periods for Property Used in Rental Activities   MACRS Recovery Period   Type of Property General Depreciation System Alternative Depreciation System   Computers and their peripheral equipment 5 years 5 years   Office machinery, such as: Typewriters Calculators Copiers 5 years 6 years   Automobiles 5 years 5 years   Light trucks 5 years 5 years   Appliances, such as: Stoves Refrigerators 5 years 9 years   Carpets 5 years 9 years   Furniture used in rental property 5 years 9 years   Office furniture and equipment, such as: Desks Files 7 years 10 years   Any property that does not have a class life and that has not been designated by law as being in any other class 7 years 12 years   Roads 15 years 20 years   Shrubbery 15 years 20 years   Fences 15 years 20 years   Residential rental property (buildings or structures) and structural components such as furnaces, waterpipes, venting, etc. Amended us individual income tax return 27. Amended us individual income tax return 5 years 40 years   Additions and improvements, such as a new roof The same recovery period as that of the property to which the addition or improvement is made, determined as if the property were placed in service at the same time as the addition or improvement. Amended us individual income tax return   Conventions A convention is a method established under MACRS to set the beginning and end of the recovery period. Amended us individual income 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. Amended us individual income tax return Mid-month convention. Amended us individual income tax return    A mid-month convention is used for all residential rental property and nonresidential real property. Amended us individual income tax return Under this convention, you treat all property placed in service, or disposed of, during any month as placed in service, or disposed of, at the midpoint of that month. Amended us individual income tax return Mid-quarter convention. Amended us individual income tax return   A mid-quarter convention must be used if the mid-month convention does not apply and the total depreciable basis of MACRS property placed in service in the last 3 months of a tax year (excluding nonresidential real property, residential rental property, and property placed in service and disposed of in the same year) is more than 40% of the total basis of all such property you place in service during the year. Amended us individual income tax return   Under this convention, you treat all property placed in service, or disposed of, during any quarter of a tax year as placed in service, or disposed of, at the midpoint of the quarter. Amended us individual income tax return Example. Amended us individual income tax return During the tax year, Tom Martin purchased the following items to use in his rental property. Amended us individual income tax return He elects not to claim the special depreciation allowance discussed earlier. Amended us individual income tax return A dishwasher for $400 that he placed in service in January. Amended us individual income tax return Used furniture for $100 that he placed in service in September. Amended us individual income tax return A refrigerator for $800 that he placed in service in October. Amended us individual income tax return Tom uses the calendar year as his tax year. Amended us individual income tax return The total basis of all property placed in service that year is $1,300. Amended us individual income tax return The $800 basis of the refrigerator placed in service during the last 3 months of his tax year exceeds $520 (40% × $1,300). Amended us individual income tax return Tom must use the mid-quarter convention instead of the half-year convention for all three items. Amended us individual income tax return Half-year convention. Amended us individual income tax return    The half-year convention is used if neither the mid-quarter convention nor the mid-month convention applies. Amended us individual income 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 that tax year. Amended us individual income 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. Amended us individual income tax return You deduct a full year of depreciation for any other year during the recovery period. Amended us individual income tax return Figuring Your Depreciation Deduction You can figure your MACRS depreciation deduction in one of two ways. Amended us individual income tax return The deduction is substantially the same both ways. Amended us individual income tax return You can either: Actually compute the deduction using the depreciation method and convention that apply over the recovery period of the property, or Use the percentage from the MACRS percentage tables. Amended us individual income tax return In this publication we will use the percentage tables. Amended us individual income tax return For instructions on how to compute the deduction, see chapter 4 of Publication 946. Amended us individual income tax return Residential rental property. Amended us individual income tax return   You must use the straight line method and a mid-month convention for residential rental property. Amended us individual income tax return In the first year that you claim depreciation for residential rental property, you can claim depreciation only for the number of months the property is in use, and you must use the mid-month convention (explained under Conventions , earlier). Amended us individual income tax return 5-, 7-, or 15-year property. Amended us individual income tax return   For property in the 5- or 7-year class, use the 200% declining balance method and a half-year convention. Amended us individual income tax return However, in limited cases you must use the mid-quarter convention, if it applies. Amended us individual income tax return For property in the 15-year class, use the 150% declining balance method and a half-year convention. Amended us individual income tax return   You can also choose to use the 150% declining balance method for property in the 5- or 7-year class. Amended us individual income tax return The choice to use the 150% method for one item in a class of property applies to all property in that class that is placed in service during the tax year of the election. Amended us individual income tax return You make this election on Form 4562. Amended us individual income tax return In Part III, column (f), enter “150 DB. Amended us individual income tax return ” Once you make this election, you cannot change to another method. Amended us individual income tax return   If you use either the 200% or 150% declining balance method, you figure your deduction using the straight line method in the first tax year that the straight line method gives you an equal or larger deduction. Amended us individual income tax return   You can also choose to use the straight line method with a half-year or mid-quarter convention for 5-, 7-, or 15-year property. Amended us individual income tax return The choice to use the straight line method for one item in a class of property applies to all property in that class that is placed in service during the tax year of the election. Amended us individual income tax return You elect the straight line method on Form 4562. Amended us individual income tax return In Part III, column (f), enter “S/L. Amended us individual income tax return ” Once you make this election, you cannot change to another method. Amended us individual income tax return MACRS Percentage Tables You can use the percentages in Table 2-2, earlier, to compute annual depreciation under MACRS. Amended us individual income tax return The tables show the percentages for the first few years or until the change to the straight line method is made. Amended us individual income tax return See Appendix A of Publication 946 for complete tables. Amended us individual income tax return The percentages in Tables 2-2a, 2-2b, and 2-2c make the change from declining balance to straight line in the year that straight line will give a larger deduction. Amended us individual income tax return If you elect to use the straight line method for 5-, 7-, or 15-year property, or the 150% declining balance method for 5- or 7-year property, use the tables in Appendix A of Publication 946. Amended us individual income tax return How to use the percentage tables. Amended us individual income tax return   You must apply the table rates to your property's unadjusted basis (defined below) each year of the recovery period. Amended us individual income tax return   Once you begin using a percentage table to figure depreciation, you must continue to use it for the entire recovery period unless there is an adjustment to the basis of your property for a reason other than: Depreciation allowed or allowable, or An addition or improvement that is depreciated as a separate item of property. Amended us individual income tax return   If there is an adjustment for any reason other than (1) or (2), for example, because of a deductible casualty loss, you can no longer use the table. Amended us individual income tax return For the year of the adjustment and for the remaining recovery period, figure depreciation using the property's adjusted basis at the end of the year and the appropriate depreciation method, as explained earlier under Figuring Your Depreciation Deduction . Amended us individual income tax return See Figuring the Deduction Without Using the Tables in Publication 946, chapter 4. Amended us individual income tax return Unadjusted basis. Amended us individual income tax return   This is the same basis you would use to figure gain on a sale (see Basis of Depreciable Property , earlier), but without reducing your original basis by any MACRS depreciation taken in earlier years. Amended us individual income tax return   However, you do reduce your original basis by other amounts claimed on the property, including: Any amortization, Any section 179 deduction, and Any special depreciation allowance. Amended us individual income tax return For more information, see chapter 4 of Publication 946. Amended us individual income tax return Please click here for the text description of the image. Amended us individual income tax return Table 2-2 Tables 2-2a, 2-2b, and 2-2c. Amended us individual income tax return   The percentages in these tables take into account the half-year and mid-quarter conventions. Amended us individual income tax return Use Table 2-2a for 5-year property, Table 2-2b for 7-year property, and Table 2-2c for 15-year property. Amended us individual income tax return Use the percentage in the second column (half-year convention) unless you are required to use the mid-quarter convention (explained earlier). Amended us individual income tax return If you must use the mid-quarter convention, use the column that corresponds to the calendar year quarter in which you placed the property in service. Amended us individual income tax return Example 1. Amended us individual income tax return You purchased a stove and refrigerator and placed them in service in June. Amended us individual income tax return Your basis in the stove is $600 and your basis in the refrigerator is $1,000. Amended us individual income tax return Both are 5-year property. Amended us individual income tax return Using the half-year convention column in Table 2-2a, the depreciation percentage for Year 1 is 20%. Amended us individual income tax return For that year your depreciation deduction is $120 ($600 × . Amended us individual income tax return 20) for the stove and $200 ($1,000 × . Amended us individual income tax return 20) for the refrigerator. Amended us individual income tax return For Year 2, the depreciation percentage is 32%. Amended us individual income tax return That year's depreciation deduction will be $192 ($600 × . Amended us individual income tax return 32) for the stove and $320 ($1,000 × . Amended us individual income tax return 32) for the refrigerator. Amended us individual income tax return Example 2. Amended us individual income tax return Assume the same facts as in Example 1, except you buy the refrigerator in October instead of June. Amended us individual income tax return Since the refrigerator was placed in service in the last 3 months of the tax year, and its basis ($1,000) is more than 40% of the total basis of all property placed in service during the year ($1,600 × . Amended us individual income tax return 40 = $640), you are required to use the mid-quarter convention to figure depreciation on both the stove and refrigerator. Amended us individual income tax return Because you placed the refrigerator in service in October, you use the fourth quarter column of Table 2-2a and find the depreciation percentage for Year 1 is 5%. Amended us individual income tax return Your depreciation deduction for the refrigerator is $50 ($1,000 x . Amended us individual income tax return 05). Amended us individual income tax return Because you placed the stove in service in June, you use the second quarter column of Table 2-2a and find the depreciation percentage for Year 1 is 25%. Amended us individual income tax return For that year, your depreciation deduction for the stove is $150 ($600 x . Amended us individual income tax return 25). Amended us individual income tax return Table 2-2d. Amended us individual income tax return    Use this table when you are using the GDS 27. Amended us individual income tax return 5 year option for residential rental property. Amended us individual income tax return Find the row for the month that you placed the property in service. Amended us individual income tax return Use the percentages listed for that month to figure your depreciation deduction. Amended us individual income tax return The mid-month convention is taken into account in the percentages shown in the table. Amended us individual income tax return Continue to use the same row (month) under the column for the appropriate year. Amended us individual income tax return Example. Amended us individual income tax return You purchased a single family rental house for $185,000 and placed it in service on February 8. Amended us individual income tax return The sales contract showed that the building cost $160,000 and the land cost $25,000. Amended us individual income tax return Your basis for depreciation is its original cost, $160,000. Amended us individual income tax return This is the first year of service for your residential rental property and you decide to use GDS which has a recovery period of 27. Amended us individual income tax return 5 years. Amended us individual income tax return Using Table 2-2d, you find that the percentage for property placed in service in February of Year 1 is 3. Amended us individual income tax return 182%. Amended us individual income tax return That year's depreciation deduction is $5,091 ($160,000 x . Amended us individual income tax return 03182). Amended us individual income tax return Figuring MACRS Depreciation Under ADS Table 2–1, earlier, shows the ADS recovery periods for property used in rental activities. Amended us individual income tax return See Appendix B in Publication 946 for other property. Amended us individual income tax return If your property is not listed in Appendix B, it is considered to have no class life. Amended us individual income tax return Under ADS, personal property with no class life is depreciated using a recovery period of 12 years. Amended us individual income tax return Use the mid-month convention for residential rental property and nonresidential real property. Amended us individual income tax return For all other property, use the half-year or mid-quarter convention, as appropriate. Amended us individual income tax return See Publication 946 for ADS depreciation tables. Amended us individual income tax return Claiming the Correct Amount of Depreciation You should claim the correct amount of depreciation each tax year. Amended us individual income tax return If you did not claim all the depreciation you were entitled to deduct, you must still reduce your basis in the property by the full amount of depreciation that you could have deducted. Amended us individual income tax return For more information, see Depreciation under Decreases to Basis in Publication 551. Amended us individual income tax return If you deducted an incorrect amount of depreciation for property in any year, you may be able to make a correction by filing Form 1040X, Amended U. Amended us individual income tax return S. Amended us individual income tax return Individual Income Tax Return. Amended us individual income tax return If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amount of depreciation. Amended us individual income tax return Filing an amended return. Amended us individual income tax return   You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. Amended us individual income tax return You claimed the incorrect amount because of a mathematical error made in any year. Amended us individual income tax return You claimed the incorrect amount because of a posting error made in any year. Amended us individual income tax return You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. Amended us individual income tax return You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. Amended us individual income tax return   Generally, you adopt a method of accounting for depreciation by using a permissible method of determining depreciation when you file your first tax return for the property used in your rental activity. Amended us individual income tax return This also occurs when you use the same impermissible method of determining depreciation (for example, using the wrong MACRS recovery period) in two or more consecutively filed tax returns. Amended us individual income tax return   If an amended return is allowed, you must file it by the later of the following dates. Amended us individual income tax return 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. Amended us individual income tax return A return filed before an unextended due date is considered filed on that due date. Amended us individual income tax return 2 years from the time you paid your tax for that year. Amended us individual income tax return Changing your accounting method. Amended us individual income tax return   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. Amended us individual income tax return In some instances, that consent is automatic. Amended us individual income tax return For more information, see Changing Your Accounting Method in Publication 946,  chapter 1. Amended us individual income tax return Prev  Up  Next   Home   More Online Publications