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Federal Ez Form

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Federal Ez Form

Federal ez form 6. Federal ez form   How To Figure Cost of Goods Sold Table of Contents Introduction Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42Line 35 Inventory at Beginning of Year Line 36 Purchases Less Cost of Items Withdrawn for Personal Use Line 37 Cost of Labor Line 38 Materials and Supplies Line 39 Other Costs Line 40 Add Lines 35 through 39 Line 41 Inventory at End of Year Line 42 Cost of Goods Sold Introduction If you make or buy goods to sell, you can deduct the cost of goods sold from your gross receipts on Schedule C. Federal ez form However, to determine these costs, you must value your inventory at the beginning and end of each tax year. Federal ez form This chapter applies to you if you are a manufacturer, wholesaler, or retailer or if you are engaged in any business that makes, buys, or sells goods to produce income. Federal ez form This chapter does not apply to a personal service business, such as the business of a doctor, lawyer, carpenter, or painter. Federal ez form However, if you work in a personal service business and also sell or charge for the materials and supplies normally used in your business, this chapter applies to you. Federal ez form If you must account for an inventory in your business, you must generally use an accrual method of accounting for your purchases and sales. Federal ez form For more information, see chapter 2. Federal ez form Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42 Figure your cost of goods sold by filling out lines 35 through 42 of Schedule C. Federal ez form These lines are reproduced below and are explained in the discussion that follows. Federal ez form 35 Inventory at beginning of year. Federal ez form If different from last year's closing inventory, attach explanation   36 Purchases less cost of items withdrawn for personal use   37 Cost of labor. Federal ez form Do not include any amounts paid to yourself   38 Materials and supplies   39 Other costs   40 Add lines 35 through 39   41 Inventory at end of year   42 Cost of goods sold. Federal ez form Subtract line 41 from line 40. Federal ez form  Enter the result here and on line 4   Line 35 Inventory at Beginning of Year If you are a merchant, beginning inventory is the cost of merchandise on hand at the beginning of the year that you will sell to customers. Federal ez form If you are a manufacturer or producer, it includes the total cost of raw materials, work in process, finished goods, and materials and supplies used in manufacturing the goods (see Inventories in chapter 2). Federal ez form Opening inventory usually will be identical to the closing inventory of the year before. Federal ez form You must explain any difference in a schedule attached to your return. Federal ez form Donation of inventory. Federal ez form   If you contribute inventory (property that you sell in the course of your business), the amount you can claim as a contribution deduction is the smaller of its fair market value on the day you contributed it or its basis. Federal ez form The basis of donated inventory is any cost incurred for the inventory in an earlier year that you would otherwise include in your opening inventory for the year of the contribution. Federal ez form You must remove the amount of your contribution deduction from your opening inventory. Federal ez form It is not part of the cost of goods sold. Federal ez form   If the cost of donated inventory is not included in your opening inventory, the inventory's basis is zero and you cannot claim a charitable contribution deduction. Federal ez form Treat the inventory's cost as you would ordinarily treat it under your method of accounting. Federal ez form For example, include the purchase price of inventory bought and donated in the same year in the cost of goods sold for that year. Federal ez form   A special rule may apply to certain donations of food inventory. Federal ez form See Publication 526, Charitable Contributions. Federal ez form Example 1. Federal ez form You are a calendar year taxpayer who uses an accrual method of accounting. Federal ez form In 2013, you contributed property from inventory to a church. Federal ez form It had a fair market value of $600. Federal ez form The closing inventory at the end of 2012 properly included $400 of costs due to the acquisition of the property, and in 2012, you properly deducted $50 of administrative and other expenses attributable to the property as business expenses. Federal ez form The charitable contribution allowed for 2013 is $400 ($600 − $200). Federal ez form The $200 is the amount that would be ordinary income if you had sold the contributed inventory at fair market value on the date of the gift. Federal ez form The cost of goods sold you use in determining gross income for 2013 must not include the $400. Federal ez form You remove that amount from opening inventory for 2013. Federal ez form Example 2. Federal ez form If, in Example 1, you acquired the contributed property in 2013 at a cost of $400, you would include the $400 cost of the property in figuring the cost of goods sold for 2013 and deduct the $50 of administrative and other expenses attributable to the property for that year. Federal ez form You would not be allowed any charitable contribution deduction for the contributed property. Federal ez form Line 36 Purchases Less Cost of Items Withdrawn for Personal Use If you are a merchant, use the cost of all merchandise you bought for sale. Federal ez form If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into a finished product. Federal ez form Trade discounts. Federal ez form   The differences between the stated prices of articles and the actual prices you pay for them are called trade discounts. Federal ez form You must use the prices you pay (not the stated prices) in figuring your cost of purchases. Federal ez form Do not show the discount amount separately as an item in gross income. Federal ez form   An automobile dealer must record the cost of a car in inventory reduced by any manufacturer's rebate that represents a trade discount. Federal ez form Cash discounts. Federal ez form   Cash discounts are amounts your suppliers let you deduct from your purchase invoices for prompt payments. Federal ez form There are two methods of accounting for cash discounts. Federal ez form You can either credit them to a separate discount account or deduct them from total purchases for the year. Federal ez form Whichever method you use, you must be consistent. Federal ez form If you want to change your method of figuring inventory cost, you must file Form 3115, Application for Change in Accounting Method. Federal ez form For more information, see Change in Accounting Method in chapter 2. Federal ez form   If you credit cash discounts to a separate account, you must include this credit balance in your business income at the end of the tax year. Federal ez form If you use this method, do not reduce your cost of goods sold by the cash discounts. Federal ez form Purchase returns and allowances. Federal ez form   You must deduct all returns and allowances from your total purchases during the year. Federal ez form Merchandise withdrawn from sale. Federal ez form   If you withdraw merchandise for your personal or family use, you must exclude this cost from the total amount of merchandise you bought for sale. Federal ez form Do this by crediting the purchases or sales account with the cost of merchandise you withdraw for personal use. Federal ez form You must also charge the amount to your drawing account. Federal ez form   A drawing account is a separate account you should keep to record the business income you withdraw to pay for personal and family expenses. Federal ez form As stated above, you also use it to record withdrawals of merchandise for personal or family use. Federal ez form This account is also known as a “withdrawals account” or “personal account. Federal ez form ” Line 37 Cost of Labor Labor costs are usually an element of cost of goods sold only in a manufacturing or mining business. Federal ez form Small merchandisers (wholesalers, retailers, etc. Federal ez form ) usually do not have labor costs that can properly be charged to cost of goods sold. Federal ez form In a manufacturing business, labor costs properly allocable to the cost of goods sold include both the direct and indirect labor used in fabricating the raw material into a finished, saleable product. Federal ez form Direct labor. Federal ez form   Direct labor costs are the wages you pay to those employees who spend all their time working directly on the product being manufactured. Federal ez form They also include a part of the wages you pay to employees who work directly on the product part time if you can determine that part of their wages. Federal ez form Indirect labor. Federal ez form   Indirect labor costs are the wages you pay to employees who perform a general factory function that does not have any immediate or direct connection with making the saleable product, but that is a necessary part of the manufacturing process. Federal ez form Other labor. Federal ez form   Other labor costs not properly chargeable to the cost of goods sold can be deducted as selling or administrative expenses. Federal ez form Generally, the only kinds of labor costs properly chargeable to your cost of goods sold are the direct or indirect labor costs and certain other costs treated as overhead expenses properly charged to the manufacturing process, as discussed later under Line 39 Other Costs. Federal ez form Line 38 Materials and Supplies Materials and supplies, such as hardware and chemicals, used in manufacturing goods are charged to cost of goods sold. Federal ez form Those that are not used in the manufacturing process are treated as deferred charges. Federal ez form You deduct them as a business expense when you use them. Federal ez form Business expenses are discussed in chapter 8. Federal ez form Line 39 Other Costs Examples of other costs incurred in a manufacturing or mining process that you charge to your cost of goods sold are as follows. Federal ez form Containers. Federal ez form   Containers and packages that are an integral part of the product manufactured are a part of your cost of goods sold. Federal ez form If they are not an integral part of the manufactured product, their costs are shipping or selling expenses. Federal ez form Freight-in. Federal ez form   Freight-in, express-in, and cartage-in on raw materials, supplies you use in production, and merchandise you purchase for sale are all part of cost of goods sold. Federal ez form Overhead expenses. Federal ez form   Overhead expenses include expenses such as rent, heat, light, power, insurance, depreciation, taxes, maintenance, labor, and supervision. Federal ez form The overhead expenses you have as direct and necessary expenses of the manufacturing operation are included in your cost of goods sold. Federal ez form Line 40 Add Lines 35 through 39 The total of lines 35 through 39 equals the cost of the goods available for sale during the year. Federal ez form Line 41 Inventory at End of Year Subtract the value of your closing inventory (including, as appropriate, the allocable parts of the cost of raw materials and supplies, direct labor, and overhead expenses) from line 40. Federal ez form Inventory at the end of the year is also known as closing or ending inventory. Federal ez form Your ending inventory will usually become the beginning inventory of your next tax year. Federal ez form Line 42 Cost of Goods Sold When you subtract your closing inventory (inventory at the end of the year) from the cost of goods available for sale, the remainder is your cost of goods sold during the tax year. 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Federal ez form Depreciation Table of Contents Introduction Special Depreciation AllowanceQualified Property Election Not To Claim the Allowance Rules for Returns Filed Before June 1, 2002 Passenger Automobiles New York Liberty Zone BenefitsSpecial Liberty Zone Depreciation Allowance Increased Section 179 Deduction Liberty Zone Leasehold Improvement Property If you depreciate business property that you acquired and placed in service after September 10, 2001, new law contains provisions that may affect your depreciation deduction for that property. Federal ez form Publication 946, How To Depreciate Property, contains information on depreciation. Federal ez form However, Publication 946 does not contain the new provisions because it was printed before the law was enacted. Federal ez form The new provisions are in the Supplement to Publication 946, which is reprinted below. Federal ez form Supplement to Publication 946 How To Depreciate Property   Introduction After Publication 946 was printed, the Job Creation and Worker Assistance Act of 2002 was signed into law by the President. Federal ez form The new law made several changes in the tax rules explained in the publication. Federal ez form Some of the changes apply to property placed in service during 2001. Federal ez form This supplemental publication describes those changes and explains what you should do if you are affected by them. Federal ez form The situations and examples in Publication 946 do not reflect any of the changes made by the Job Creation and Worker Assistance Act of 2002. Federal ez form The new law contains the following provisions. Federal ez form 30% depreciation deductions (special depreciation allowance and special New York Liberty Zone (Liberty Zone) depreciation allowance) for the year qualified property is placed in service after September 10, 2001. Federal ez form An increased dollar limit on the section 179 deduction for qualified Liberty Zone property purchased after September 10, 2001. Federal ez form A shorter recovery period for qualified Liberty Zone leasehold improvement property placed in service after September 10, 2001. Federal ez form An increase in the maximum depreciation deduction for 2001 for a qualified passenger automobile placed in service after September 10, 2001. Federal ez form If you believe you qualify for an increased deduction under any of these new rules, you must file the revised 2001 Form 4562 (dated March 2002) for 2001 calendar or fiscal years and 2000 fiscal years ending after September 10, 2001. Federal ez form If you have already filed a tax return, this supplemental publication explains how to claim these benefits and how to elect not to claim the special depreciation allowance or special Liberty Zone depreciation allowance. Federal ez form See Table 2 at the end of the supplement for an overview of the rules that apply if you filed your return before June 1, 2002. Federal ez form Special Depreciation Allowance You can take a special depreciation allowance for qualified property you place in service after September 10, 2001. Federal ez form The allowance is an additional deduction of 30% of the property's depreciable basis. Federal ez form To figure the depreciable basis, you must first multiply the property's cost or other basis by the percentage of business/investment use and then reduce that amount by any section 179 deduction and certain other deductions and credits for the property. Federal ez form See What Is the Basis for Depreciation? on page 23 in Publication 946 for more information on figuring depreciable basis. Federal ez form The allowance is deductible for both regular tax and alternative minimum tax (AMT) purposes. Federal ez form There is no AMT adjustment required for any depreciation figured on the remaining basis of the property. Federal ez form In the year you claim the allowance (generally the year you place the property in service), you must reduce the depreciable basis of the property by the allowance before figuring your regular depreciation deduction. Federal ez form Example 1. Federal ez form On November 1, 2001, you bought and placed in service in your business qualified property that cost $100,000. Federal ez form You did not elect to claim a section 179 deduction. Federal ez form You can deduct 30% of the cost ($30,000) as a special depreciation allowance for 2001. Federal ez form You use the remaining $70,000 of cost to figure your regular depreciation deduction for 2001 and later years. Federal ez form Example 2. Federal ez form The facts are the same as in Example 1, except that you choose to deduct $24,000 of the property's cost as a section 179 deduction. Federal ez form You use the remaining $76,000 of cost to figure your special depreciation allowance of $22,800 ($76,000 × 30%). Federal ez form You use the remaining $53,200 of cost to figure your regular depreciation deduction for 2001 and later years. Federal ez form Qualified Property To qualify for the special depreciation allowance, your property must meet the following requirements. Federal ez form It is new property of one of the following types. Federal ez form Property depreciated under the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less. Federal ez form See Can You Use MACRS To Depreciate Your Property and Which Recovery Period Applies? on pages 7 and 23, respectively, in Publication 946. Federal ez form Water utility property. Federal ez form See 25-year property on page 22 in Publication 946. Federal ez form Computer software that is not a section 197 intangible as described in Computer software on page 5 in Publication 946. Federal ez form (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS. Federal ez form ) Qualified leasehold improvement property (defined later). Federal ez form It meets the following tests (explained later under Tests To Be Met). Federal ez form Acquisition date test. Federal ez form Placed in service date test. Federal ez form Original use test. Federal ez form It is not excepted property (explained later under Excepted Property). Federal ez form Qualified leasehold improvement property. Federal ez form    Generally, this is any improvement to an interior part of a building that is nonresidential real property, provided all of the following requirements are met. Federal ez form The improvement is made under or pursuant to a lease by the lessee (or any sublessee) or the lessor of that part of the building. Federal ez form That part of the building is to be occupied exclusively by the lessee (or any sublessee) of that part. Federal ez form The improvement is placed in service more than 3 years after the date the building was first placed in service. Federal ez form   However, a qualified leasehold improvement does not include any improvement for which the expenditure is attributable to any of the following. Federal ez form The enlargement of the building. Federal ez form Any elevator or escalator. Federal ez form Any structural component benefiting a common area. Federal ez form The internal structural framework of the building. Federal ez form   Generally, a binding commitment to enter into a lease is treated as a lease and the parties to the commitment are treated as the lessor and lessee. Federal ez form However, a binding commitment between related persons is not treated as a lease. Federal ez form Related persons. Federal ez form   For this purpose, the following are related persons. Federal ez form Members of an affiliated group. Federal ez form The persons listed in items (1) through (9) under Related persons on page 8 of Publication 946 (except that “80% or more” should be substituted for “more than 10%” each place it appears). Federal ez form An executor and a beneficiary of the same estate. Federal ez form Tests To Be Met To qualify for the special depreciation allowance, the property must meet all of the following tests. Federal ez form Acquisition date test. Federal ez form    Generally, you must have acquired the property either: After September 10, 2001, and before September 11, 2004, but only if no written binding contract for the acquisition was in effect before September 11, 2001, or Pursuant to a written binding contract entered into after September 10, 2001, and before September 11, 2004. Federal ez form   Property you manufacture, construct, or produce for your own use meets this test if you began the manufacture, construction, or production of the property after September 10, 2001, and before September 11, 2004. Federal ez form Placed in service date test. Federal ez form   Generally, the property must be placed in service for use in your trade or business or for the production of income after September 10, 2001, and before January 1, 2005. Federal ez form   If you sold property you placed in service after September 10, 2001, and you leased it back within 3 months after the property was originally placed in service, the property is treated as placed in service no earlier than the date it is used under the leaseback. Federal ez form Original use test. Federal ez form   The original use of the property must have begun with you after September 10, 2001. Federal ez form “Original use” means the first use to which the property is put, whether or not by you. Federal ez form Additional capital expenditures you incurred after September 10, 2001, to recondition or rebuild your property meet the original use test. Federal ez form Excepted Property The following property does not qualify for the special depreciation allowance. Federal ez form Property used by any person before September 11, 2001. Federal ez form Property required to be depreciated using ADS. Federal ez form This includes listed property used 50% or less in a qualified business use. Federal ez form Qualified New York Liberty Zone leasehold improvement property (defined next). Federal ez form Qualified New York Liberty Zone leasehold improvement property. Federal ez form   This is any qualified leasehold improvement property (as defined earlier) if all of the following requirements are met. Federal ez form The improvement is to a building located in the New York Liberty Zone (defined later under New York Liberty Zone Benefits). Federal ez form The improvement is placed in service after September 10, 2001, and before January 1, 2007. Federal ez form No written binding contract for the improvement was in effect before September 11, 2001. Federal ez form Election Not To Claim the Allowance You can elect not to claim the special depreciation allowance for qualified property. Federal ez form If you make this election for any property, it applies to all property in the same property class placed in service during the year. Federal ez form To make this election, attach a statement to your return indicating you elect not to claim the allowance and the class of property for which you are making the election. Federal ez form When to make election. Federal ez form   Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service. Federal ez form   However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the original return (not including extensions). Federal ez form Attach the election statement to the amended return. Federal ez form At the top of the election statement, write “Filed pursuant to section 301. Federal ez form 9100–2. Federal ez form ” Revoking an election. Federal ez form   Once you elect not to deduct the special depreciation allowance for a class of property, you cannot revoke the election without IRS consent. Federal ez form A request to revoke the election is subject to a user fee. Federal ez form Rules for Returns Filed Before June 1, 2002 The following rules apply if you placed qualified property in service after September 10, 2001, and filed your return before June 1, 2002. Federal ez form The rules apply to returns for the following years. Federal ez form 2000 fiscal years that end after September 10, 2001. Federal ez form 2001 calendar and fiscal years. Federal ez form Claiming the allowance. Federal ez form   If you did not claim the allowance on your return and did not make the election not to claim the allowance, you can do either of the following to claim the allowance. Federal ez form File an amended return by the due date (not including extensions) of your return for the year following the year the property was placed in service. Federal ez form Write “Filed Pursuant to Rev. Federal ez form Proc. Federal ez form 2002–33” at the top of the amended return. Federal ez form File Form 3115, Application for Change in Accounting Method, with your return for the year following the year the property was placed in service. Federal ez form Your return must be filed by the due date (including extensions). Federal ez form Write “Automatic Change Filed Under Rev. Federal ez form Proc. Federal ez form 2002–33” on the appropriate line of Form 3115. Federal ez form You must also file a copy (with signature) of the completed Form 3115 with the IRS National Office no later than when you file the original with your return. Federal ez form For more information about filing Form 3115, including the address to send it to, see Revenue Procedure 2002–9, Revenue Procedure 2002–19, and Revenue Procedure 2002–33. Federal ez form Example 1. Federal ez form You are an individual and you use the calendar year. Federal ez form You placed qualified property in service for your business in December 2001. Federal ez form You filed your 2001 income tax return before April 15, 2002. Federal ez form You did not claim the special depreciation allowance for the property and did not make the election not to claim the allowance. Federal ez form You can claim the special allowance by filing an amended 2001 return by April 15, 2003, with “Filed Pursuant to Rev. Federal ez form Proc. Federal ez form 2002–33” at the top of the amended return. Federal ez form You must file an amended return by April 15, 2003, even if you get an extension of time to file your 2002 tax return. Federal ez form Example 2. Federal ez form The facts concerning your 2001 return are the same as in Example 1. Federal ez form In addition, you got an automatic 4-month extension of time (to August 15, 2003) to file your 2002 return. Federal ez form You can claim the special allowance by filing a Form 3115 (with “Filed Pursuant to Rev. Federal ez form Proc. Federal ez form 2002–33” on the appropriate line) with your 2002 return by August 15, 2003. Federal ez form You must also file a copy of this Form 3115 with the IRS National Office no later than when you file your 2002 return. Federal ez form Electing not to claim the allowance. Federal ez form   Generally, you have elected not to claim the special depreciation allowance for a class of property if you: Filed your return timely (including extensions) for the year you placed qualified property in service and indicated on a statement with the return that you are not claiming the allowance, or Filed your return timely and filed an amended return within 6 months of the due date of the original return (not including extensions) and indicated on a statement with the amended return that you are not claiming the allowance. Federal ez form The statement must indicate that you are not deducting the special depreciation allowance and the class of property to which the election applies. Federal ez form The statement can be either attached to or written on the return. Federal ez form You can, for example, write “not deducting 30%” on Form 4562. Federal ez form Deemed election. Federal ez form   If you have not followed either of the procedures described above to elect not to claim the allowance, you may still be treated as making the election. Federal ez form You will be treated as making the election if you meet both of the following conditions. Federal ez form You filed your return for the year you placed the property in service and claimed depreciation, but not the special allowance, for any class of property. Federal ez form You do not file an amended return or a Form 3115 within the time prescribed for claiming the special allowance. Federal ez form See Claiming the allowance, earlier. Federal ez form Passenger Automobiles The limit on your depreciation deduction (including any section 179 deduction) for any passenger automobile that is qualified property (defined earlier) placed in service after September 10, 2001, and for which you claim the special depreciation allowance is increased. Federal ez form Generally, the limit is increased from $3,060 to $7,660. Federal ez form However, if the automobile is a qualified electric car, the limit is increased from $9,280 to $23,080 ($22,980 if placed in service in 2002). Federal ez form Table 1 shows the maximum deduction amounts for 2001. Federal ez form Table 1. Federal ez form Maximum Deduction for 2001 Qualified Vehicle Placed in Service Before Sept. Federal ez form 11 Placed in Service After Sept. Federal ez form 10 Passenger automobile $3,060 $7,660 Electric car 9,280 23,080 1 1$22,980 if you place an electric car in service in 2002. Federal ez form Election not to claim the allowance. Federal ez form   The increased maximum depreciation deduction does not apply if you elected not to claim the special depreciation allowance as explained earlier under Election Not To Claim the Allowance and Rules for Returns Filed Before June 1, 2002. Federal ez form New York Liberty Zone Benefits Several benefits are available for property you place in service in the New York Liberty Zone (Liberty Zone). Federal ez form They include a special depreciation allowance for the year you place the property in service, an increased section 179 deduction, and the classification of certain leasehold improvement property as 5-year property. Federal ez form Area defined. Federal ez form   The New York Liberty Zone is the area located on or south of Canal Street, East Broadway (east of its intersection with Canal Street), or Grand Street (east of its intersection with East Broadway) in the Borough of Manhattan in the City of New York, New York. Federal ez form Special Liberty Zone Depreciation Allowance You can take a special depreciation allowance for qualified Liberty Zone property you place in service after September 10, 2001. Federal ez form The allowance is an additional deduction of 30% of the property's depreciable basis. Federal ez form To figure the depreciable basis, you must first multiply the property's cost or other basis by the percentage of business/investment use and then reduce that amount by any section 179 deduction and certain other deductions and credits for the property. Federal ez form See What Is the Basis for Depreciation? on page 23 in Publication 946 for more information on figuring depreciable basis. Federal ez form The allowance is deductible for both regular tax and alternative minimum tax (AMT) purposes. Federal ez form There is no AMT adjustment required for any depreciation figured on the remaining basis of the property. Federal ez form In the year you claim the allowance (generally the year you place the property in service), you must reduce the depreciable basis of the property by the allowance before figuring your regular depreciation deduction. Federal ez form You cannot claim the special Liberty Zone depreciation allowance for property eligible for the special depreciation allowance explained earlier in Qualified Property under Special Depreciation Allowance. Federal ez form Qualified property is eligible for only one special depreciation allowance. Federal ez form Example 1. Federal ez form On November 1, 2001, you bought and placed in service in your business, which is in the Liberty Zone, qualified Liberty Zone property that cost $200,000. Federal ez form You did not elect to claim a section 179 deduction. Federal ez form You can deduct 30% of the cost ($60,000) as a special Liberty Zone depreciation allowance for 2001. Federal ez form You use the remaining $140,000 of cost to figure your regular depreciation deduction for 2001 and later years. Federal ez form Example 2. Federal ez form The facts are the same as in Example 1, except that you choose to deduct $59,000 of the property's cost as a section 179 deduction. Federal ez form (See Increased Section 179 Deduction, later, for information concerning how this section 179 deduction amount is figured). Federal ez form You use the remaining $141,000 of cost to figure your special Liberty Zone depreciation allowance of $42,300 ($141,000 × 30%). Federal ez form You use the remaining $98,700 of cost to figure your regular depreciation deduction for 2001 and later years. Federal ez form Qualified Liberty Zone Property For a 2001 calendar or fiscal year and a 2000 fiscal year that ends after September 10, 2001, property qualifies for the special Liberty Zone depreciation allowance if it meets the following requirements. Federal ez form It is one of the following types of property. Federal ez form Used property depreciated under MACRS with a recovery period of 20 years or less. Federal ez form See Can You Use MACRS To Depreciate Your Property and Which Recovery Period Applies? on pages 7 and 23, respectively, in Publication 946. Federal ez form Used water utility property. Federal ez form See 25-year property on page 22 in Publication 946. Federal ez form Used computer software that is not a section 197 intangible as described in Computer software on page 5 in Publication 946. Federal ez form (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS. Federal ez form ) Certain nonresidential real property and residential rental property (defined later). Federal ez form It meets the following tests (explained later under Tests to be met). Federal ez form Acquisition date test. Federal ez form Placed in service date test. Federal ez form Substantial use test. Federal ez form Original use test. Federal ez form It is not excepted property (explained later under Excepted property). Federal ez form Nonresidential real property and residential rental property. Federal ez form   This property is qualifying property only to the extent it rehabilitates real property damaged, or replaces real property destroyed or condemned, as a result of the terrorist attack of September 11, 2001. Federal ez form Property is treated as replacing destroyed or condemned property if, as part of an integrated plan, such property replaces real property included in a continuous area that includes real property destroyed or condemned. Federal ez form   For these purposes, real property is considered destroyed (or condemned) only if an entire building or structure was destroyed (or condemned) as a result of the terrorist attack. Federal ez form Otherwise, the property is considered damaged real property. Federal ez form For example, if certain structural components of a building (such as walls, floors, or plumbing fixtures) are damaged or destroyed as a result of the terrorist attack, but the building is not destroyed (or condemned), then only costs related to replacing the damaged or destroyed structural components qualify for the special Liberty Zone depreciation allowance. Federal ez form Tests to be met. Federal ez form   To qualify for the special Liberty Zone depreciation allowance, your property must meet all of the following tests. Federal ez form Acquisition date test. Federal ez form   You must have acquired the property by purchase after September 10, 2001, and there must not have been a binding written contract for the acquisition in effect before September 11, 2001. Federal ez form   For information on the acquisition of property by purchase, see Property Acquired by Purchase on page 15 of Publication 946. Federal ez form   Property you manufacture, construct, or produce for your own use meets this test if you began the manufacture, construction, or production of the property after September 10, 2001. Federal ez form Placed in service date test. Federal ez form   Generally, the property must be placed in service for use in your trade or business or for the production of income before January 1, 2007 (January 1, 2010, in the case of qualifying nonresidential real property and residential rental property). Federal ez form   If you sold property you placed in service after September 10, 2001, and you leased it back within 3 months after the property was originally placed in service, the property is treated as placed in service no earlier than the date it is used under the leaseback. Federal ez form Substantial use test. Federal ez form   Substantially all use of the property must be in the Liberty Zone and in the active conduct of your trade or business in the Liberty Zone. Federal ez form Original use test. Federal ez form   The original use of the property in the Liberty Zone must have begun with you after September 10, 2001. Federal ez form   Used property can be qualified Liberty Zone property if it has not previously been used within the Liberty Zone. Federal ez form Also, additional capital expenditures you incurred after September 10, 2001, to recondition or rebuild your property meet the original use test if the original use of the property in the Liberty Zone began with you. Federal ez form Excepted property. Federal ez form   The following property does not qualify for the special Liberty Zone depreciation allowance. Federal ez form Property eligible for the special depreciation allowance explained earlier in Qualified Property under Special Depreciation Allowance. Federal ez form Property required to be depreciated using ADS. Federal ez form This includes listed property used 50% or less in a qualified business use. Federal ez form Qualified New York Liberty Zone leasehold improvement property (defined earlier in Excepted Property under Special Depreciation Allowance). Federal ez form Example. Federal ez form In December 2001, you bought and placed in service in your business in the Liberty Zone the following property. Federal ez form New office furniture with a MACRS recovery period of 7 years. Federal ez form A used computer with a MACRS recovery period of 5 years. Federal ez form The computer had not previously been used within the Liberty Zone. Federal ez form Because the office furniture is new property, it qualifies for the special depreciation allowance, but not the special Liberty Zone depreciation allowance. Federal ez form Because the computer is used property that had not previously been used in the Liberty Zone, it qualifies for the special Liberty Zone depreciation allowance, but not the special depreciation allowance. Federal ez form Election Not To Claim the Liberty Zone Allowance You can elect not to claim the special Liberty Zone depreciation allowance for qualified property. Federal ez form If you make this election for any property, it applies to all property in the same property class placed in service during the year. Federal ez form To make this election, attach a statement to your return indicating you elect not to claim the allowance and the class of property for which you are making the election. Federal ez form When to make the election. Federal ez form   Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service. Federal ez form   However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the original return (not including extensions). Federal ez form Attach the election statement to the amended return. Federal ez form At the top of the election statement, write “Filed pursuant to section 301. Federal ez form 9100–2. Federal ez form ” Revoking an election. Federal ez form   Once you elect not to deduct the special Liberty Zone depreciation allowance for a class of property, you cannot revoke the election without IRS consent. Federal ez form A request to revoke the election is subject to a user fee. Federal ez form Returns filed before June 1, 2002. Federal ez form   The rules that apply to the special depreciation allowance discussed earlier in Rules for Returns Filed Before June 1, 2002 under Special Depreciation Allowance also apply to the special Liberty Zone depreciation allowance. Federal ez form Increased Section 179 Deduction Under section 179 of the Internal Revenue Code, you can choose to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. Federal ez form For tax years beginning in 2000, that limit was $20,000. Federal ez form For tax years beginning in 2001 and 2002, that limit is generally $24,000. Federal ez form If the cost of qualifying section 179 property placed in service in a year is over $200,000, you must reduce the dollar limit (but not below zero) by the amount of the cost over $200,000. Federal ez form Increased Dollar Limit The dollar limit on the section 179 deduction is increased for certain property placed in service in the Liberty Zone. Federal ez form The increase is the smaller of the following amounts. Federal ez form $35,000. Federal ez form The cost of section 179 property that is qualified Liberty Zone property placed in service during the year. Federal ez form If you use the revised 2001 Form 4562 (dated March 2002) for a tax year beginning in 2000, you must reduce the section 179 dollar limit to $20,000 before adding the additional amount for qualified property. Federal ez form Qualified property. Federal ez form   To qualify for the increased section 179 deduction, your property must be section 179 property that is either: Qualified Liberty Zone property, or Property that would be qualified Liberty Zone property except that it is eligible for the special depreciation allowance. Federal ez form Qualified Liberty Zone property is explained earlier in Qualified Liberty Zone Property under Special Liberty Zone Depreciation Allowance. Federal ez form Property eligible for the special depreciation allowance is explained earlier in Qualified Property under Special Depreciation Allowance. Federal ez form For information on the requirements that must be met for property to qualify for the section 179 deduction, see What Property Qualifies? on page 14 of Publication 946. Federal ez form Example 1. Federal ez form In 2002, you place in service in your business, which is in the Liberty Zone, qualified property (defined earlier) costing $25,000. Federal ez form Because this cost is less than $35,000, the dollar limit on the section 179 deduction is increased by $25,000 to $49,000 ($24,000 + $25,000). Federal ez form Example 2. Federal ez form In 2002, you place in service in your business, which is in the Liberty Zone, qualified property (defined earlier) costing $75,000. Federal ez form Because $35,000 is less than the cost of the property you place in service, the dollar limit on the section 179 deduction you can claim is increased by $35,000 to $59,000 ($24,000 + $35,000). Federal ez form Reduced Dollar Limit Generally, you must reduce the dollar limit for a year by the cost of qualifying section 179 property placed in service in the year that is more than $200,000. Federal ez form However, if the cost of your Liberty Zone property exceeds $200,000, you take into account only 50% (instead of 100%) of the cost of qualified property placed in service in a year. Federal ez form Example. Federal ez form In 2002, you place in service in your business, which is in the Liberty Zone, qualified property costing $460,000. Federal ez form Your increased dollar limit is $59,000 ($35,000 + $24,000). Federal ez form Because 50% of the cost of the property you place in service ($230,000) is $30,000 more than $200,000, you must reduce your $59,000 dollar limit to $29,000 ($59,000 - $30,000). Federal ez form Recapture Rules Rules similar to those explained on page 20 of Publication 946 under When Must You Recapture the Deduction? apply with respect to any qualified property you stop using in the Liberty Zone. Federal ez form Returns Filed Before June 1, 2002 If you filed a return before June 1, 2002, and did not deduct the increased section 179 amount for qualified property placed in service after September 10, 2001, you can deduct the increased amount by filing an amended return by the due date (not including extensions) of the return for the year after the year the property was placed in service. Federal ez form This rule applies to returns for the following years. Federal ez form 2000 fiscal years that end after September 10, 2001. Federal ez form 2001 calendar and fiscal years. Federal ez form On the amended return, write “Filed Pursuant to Rev. Federal ez form Proc. Federal ez form 2002–33. Federal ez form ” Liberty Zone Leasehold Improvement Property Qualified Liberty Zone leasehold improvement property (described earlier in Qualified Property under Special Depreciation Allowance) is 5-year property. Federal ez form This means that it is depreciated over a recovery period of 5 years. Federal ez form For information about recovery periods, see Which Recovery Period Applies? on page 23 of Publication 946. Federal ez form The straight-line method must be used with respect to qualified Liberty Zone leasehold improvement property. Federal ez form Under ADS, the recovery period for qualified Liberty Zone leasehold improvement property is 9 years. Federal ez form Returns Filed Before June 1, 2002 If you filed either of the following returns before June 1, 2002, and did not depreciate qualified Liberty Zone leasehold improvement property placed in service during the tax year as 5-year property using the straight line method, you should file an amended return before you file your return for the year after the year the property was placed in service. Federal ez form Your 2000 fiscal year return (for a 2000 fiscal year that ends after September 10, 2001). Federal ez form Your 2001 calendar or fiscal year return. Federal ez form On the amended return, write “Filed Pursuant to Rev. Federal ez form Proc. Federal ez form 2002–33. Federal ez form ” Table 2. Federal ez form Rules for Returns Filed Before June 1, 2002 Note:This chart highlights the rules for returns affected by the Job Creation and Worker Assistance Act of 2002 that were filed before June 1, 2002, without accounting for any of the new benefits under the law. Federal ez form See the text for definitions and examples. Federal ez form Do not rely on this chart alone. Federal ez form IF you want to. Federal ez form . Federal ez form . Federal ez form THEN you. Federal ez form . Federal ez form . Federal ez form BY. Federal ez form . Federal ez form . Federal ez form claim the special depreciation allowance or special Liberty Zone depreciation allowance • must file an amended return • the due date (not including extensions) of your return for the year after the year the property was placed in service, or • must file Form 3115, Application for Change in Accounting Method, with your return for the year after the year the property was placed in service • the due date (including extensions) of your return for the year after the year the property was placed in service, and • must file a copy of your completed Form 3115 with the IRS National Office • the date you file the original Form 3115 with your return for the year after the year the property was placed in service. Federal ez form elect not to claim the special depreciation allowance or the special Liberty Zone depreciation allowance 1 • must have filed your return timely for the year the property was placed in service, and   • must file an amended return stating you are not claiming the allowance • the date that is 6 months after the due date of the original return (not including extensions). Federal ez form deduct the increased section 179 amount • must file an amended return • the due date (not including extensions) of your return for the year after the year the property was placed in service. Federal ez form use a 5-year recovery period for depreciating qualified Liberty Zone leasehold improvement property • should file an amended return • the date you file your return for the year after the year the property was placed in service. Federal ez form 1See also Deemed election under Rules for Returns Filed Before June 1, 2002, earlier. 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