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File Federal Taxes Online Free 2012

File federal taxes online free 2012 4. File federal taxes online free 2012   Figuring Depreciation Under MACRS Table of Contents Introduction Useful Items - You may want to see: Which Depreciation System (GDS or ADS) Applies? Which Property Class Applies Under GDS?Rent-to-own dealer. File federal taxes online free 2012 Rent-to-own contract. File federal taxes online free 2012 What Is the Placed in Service Date? What Is the Basis for Depreciation? Which Recovery Period Applies?Recovery Periods Under GDS Recovery Periods Under ADS Additions and Improvements Which Convention Applies? Which Depreciation Method Applies?Depreciation Methods for Farm Property Electing a Different Method How Is the Depreciation Deduction Figured?Using the MACRS Percentage Tables Figuring the Deduction Without Using the Tables Figuring the Deduction for Property Acquired in a Nontaxable Exchange Figuring the Deduction for a Short Tax Year How Do You Use General Asset Accounts?Grouping Property Figuring Depreciation for a GAA Disposing of GAA Property Terminating GAA Treatment Electing To Use a GAA When Do You Recapture MACRS Depreciation? Introduction The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. File federal taxes online free 2012 MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). File federal taxes online free 2012 Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. File federal taxes online free 2012 To be sure you can use MACRS to figure depreciation for your property, see What Method Can You Use To Depreciate Your Property in chapter 1. File federal taxes online free 2012 This chapter explains how to determine which MACRS depreciation system applies to your property. File federal taxes online free 2012 It also discusses other information you need to know before you can figure depreciation under MACRS. File federal taxes online free 2012 This information includes the property's recovery class, placed in service date, and basis, as well as the applicable recovery period, convention, and depreciation method. File federal taxes online free 2012 It explains how to use this information to figure your depreciation deduction and how to use a general asset account to depreciate a group of properties. File federal taxes online free 2012 Finally, it explains when and how to recapture MACRS depreciation. File federal taxes online free 2012 Useful Items - You may want to see: Publication 225 Farmer's Tax Guide 463 Travel, Entertainment, Gift, and Car  Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 587 Business Use of Your Home (Including Use by Daycare Providers) Form (and Instructions) 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 4562 Depreciation and Amortization See chapter 6 for information about getting publications and forms. File federal taxes online free 2012 Which Depreciation System (GDS or ADS) Applies? Your use of either the General Depreciation System (GDS) or the Alternative Depreciation System (ADS) to depreciate property under MACRS determines what depreciation method and recovery period you use. File federal taxes online free 2012 You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. File federal taxes online free 2012 If you placed your property in service in 2013, complete Part III of Form 4562 to report depreciation using MACRS. File federal taxes online free 2012 Complete section B of Part III to report depreciation using GDS, and complete section C of Part III to report depreciation using ADS. File federal taxes online free 2012 If you placed your property in service before 2013 and are required to file Form 4562, report depreciation using either GDS or ADS on line 17 in Part III. File federal taxes online free 2012 Required use of ADS. File federal taxes online free 2012   You must use ADS for the following property. File federal taxes online free 2012 Listed property used 50% or less in a qualified business use. File federal taxes online free 2012 See chapter 5 for information on listed property. File federal taxes online free 2012 Any tangible property used predominantly outside the United States during the year. File federal taxes online free 2012 Any tax-exempt use property. File federal taxes online free 2012 Any tax-exempt bond-financed property. File federal taxes online free 2012 All property used predominantly in a farming business and placed in service in any tax year during which an election not to apply the uniform capitalization rules to certain farming costs is in effect. File federal taxes online free 2012 Any property imported from a foreign country for which an Executive Order is in effect because the country maintains trade restrictions or engages in other discriminatory acts. File federal taxes online free 2012 If you are required to use ADS to depreciate your property, you cannot claim any special depreciation allowance (discussed in chapter 3) for the property. File federal taxes online free 2012 Electing ADS. File federal taxes online free 2012   Although your property may qualify for GDS, you can elect to use ADS. File federal taxes online free 2012 The election generally must cover all property in the same property class that you placed in service during the year. File federal taxes online free 2012 However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. File federal taxes online free 2012 Once you make this election, you can never revoke it. File federal taxes online free 2012   You make the election by completing line 20 in Part III of Form 4562. File federal taxes online free 2012 Which Property Class Applies Under GDS? The following is a list of the nine property classifications under GDS and examples of the types of property included in each class. File federal taxes online free 2012 These property classes are also listed under column (a) in section B, Part III, of Form 4562. File federal taxes online free 2012 For detailed information on property classes, see Appendix B, Table of Class Lives and Recovery Periods, in this publication. File federal taxes online free 2012 3-year property. File federal taxes online free 2012 Tractor units for over-the-road use. File federal taxes online free 2012 Any race horse over 2 years old when placed in service. File federal taxes online free 2012 (All race horses placed in service after December 31, 2008, and before January 1, 2014, are deemed to be 3-year property, regardless of age. File federal taxes online free 2012 ) Any other horse (other than a race horse) over 12 years old when placed in service. File federal taxes online free 2012 Qualified rent-to-own property (defined later). File federal taxes online free 2012 5-year property. File federal taxes online free 2012 Automobiles, taxis, buses, and trucks. File federal taxes online free 2012 Computers and peripheral equipment. File federal taxes online free 2012 Office machinery (such as typewriters, calculators, and copiers). File federal taxes online free 2012 Any property used in research and experimentation. File federal taxes online free 2012 Breeding cattle and dairy cattle. File federal taxes online free 2012 Appliances, carpets, furniture, etc. File federal taxes online free 2012 , used in a residential rental real estate activity. File federal taxes online free 2012 Certain geothermal, solar, and wind energy property. File federal taxes online free 2012 7-year property. File federal taxes online free 2012 Office furniture and fixtures (such as desks, files, and safes). File federal taxes online free 2012 Agricultural machinery and equipment. File federal taxes online free 2012 Any property that does not have a class life and has not been designated by law as being in any other class. File federal taxes online free 2012 Certain motorsports entertainment complex property (defined later) placed in service before January 1, 2014. File federal taxes online free 2012 Any natural gas gathering line placed in service after April 11, 2005. File federal taxes online free 2012 See Natural gas gathering line and electric transmission property , later. File federal taxes online free 2012 10-year property. File federal taxes online free 2012 Vessels, barges, tugs, and similar water transportation equipment. File federal taxes online free 2012 Any single purpose agricultural or horticultural structure. File federal taxes online free 2012 Any tree or vine bearing fruits or nuts. File federal taxes online free 2012 Qualified small electric meter and qualified smart electric grid system (defined later) placed in service on or after October 3, 2008. File federal taxes online free 2012 15-year property. File federal taxes online free 2012 Certain improvements made directly to land or added to it (such as shrubbery, fences, roads, sidewalks, and bridges). File federal taxes online free 2012 Any retail motor fuels outlet (defined later), such as a convenience store. File federal taxes online free 2012 Any municipal wastewater treatment plant. File federal taxes online free 2012 Any qualified leasehold improvement property (defined later) placed in service before January 1, 2014. File federal taxes online free 2012 Any qualified restaurant property (defined later) placed in service before January 1, 2014. File federal taxes online free 2012 Initial clearing and grading land improvements for gas utility property. File federal taxes online free 2012 Electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity placed in service after April 11, 2005. File federal taxes online free 2012 See Natural gas gathering line and electric transmission property , later. File federal taxes online free 2012 Any natural gas distribution line placed in service after April 11, 2005 and before January 1, 2011. File federal taxes online free 2012 Any qualified retail improvement property placed in service before January 1, 2014. File federal taxes online free 2012 20-year property. File federal taxes online free 2012 Farm buildings (other than single purpose agricultural or horticultural structures). File federal taxes online free 2012 Municipal sewers not classified as 25-year property. File federal taxes online free 2012 Initial clearing and grading land improvements for electric utility transmission and distribution plants. File federal taxes online free 2012 25-year property. File federal taxes online free 2012 This class is water utility property, which is either of the following. File federal taxes online free 2012 Property that is an integral part of the gathering, treatment, or commercial distribution of water, and that, without regard to this provision, would be 20-year property. File federal taxes online free 2012 Municipal sewers other than property placed in service under a binding contract in effect at all times since June 9, 1996. File federal taxes online free 2012 Residential rental property. File federal taxes online free 2012 This is any building or structure, such as a rental home (including a mobile home), if 80% or more of its gross rental income for the tax year is from dwelling units. File federal taxes online free 2012 A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. File federal taxes online free 2012 It does not include a unit in a hotel, motel, or other establishment where more than half the units are used on a transient basis. File federal taxes online free 2012 If you occupy any part of the building or structure for personal use, its gross rental income includes the fair rental value of the part you occupy. File federal taxes online free 2012 Nonresidential real property. File federal taxes online free 2012 This is section 1250 property, such as an office building, store, or warehouse, that is neither residential rental property nor property with a class life of less than 27. File federal taxes online free 2012 5 years. File federal taxes online free 2012 Qualified rent-to-own property. File federal taxes online free 2012   Qualified rent-to-own property is property held by a rent-to-own dealer for purposes of being subject to a rent-to-own contract. File federal taxes online free 2012 It is tangible personal property generally used in the home for personal use. File federal taxes online free 2012 It includes computers and peripheral equipment, televisions, videocassette recorders, stereos, camcorders, appliances, furniture, washing machines and dryers, refrigerators, and other similar consumer durable property. File federal taxes online free 2012 Consumer durable property does not include real property, aircraft, boats, motor vehicles, or trailers. File federal taxes online free 2012   If some of the property you rent to others under a rent-to-own agreement is of a type that may be used by the renters for either personal or business purposes, you still can treat this property as qualified property as long as it does not represent a significant portion of your leasing property. File federal taxes online free 2012 However, if this dual-use property does represent a significant portion of your leasing property, you must prove that this property is qualified rent-to-own property. File federal taxes online free 2012 Rent-to-own dealer. File federal taxes online free 2012   You are a rent-to-own dealer if you meet all the following requirements. File federal taxes online free 2012 You regularly enter into rent-to-own contracts (defined below) in the ordinary course of your business for the use of consumer property. File federal taxes online free 2012 A substantial portion of these contracts end with the customer returning the property before making all the payments required to transfer ownership. File federal taxes online free 2012 The property is tangible personal property of a type generally used within the home for personal use. File federal taxes online free 2012 Rent-to-own contract. File federal taxes online free 2012   This is any lease for the use of consumer property between a rent-to-own dealer and a customer who is an individual which— Is titled “Rent-to-Own Agreement,” “Lease Agreement with Ownership Option,” or other similar language. File federal taxes online free 2012 Provides a beginning date and a maximum period of time, not to exceed 156 weeks or 36 months from the beginning date, for which the contract can be in effect (including renewals or options to extend). File federal taxes online free 2012 Provides for regular periodic (weekly or monthly) payments that can be either level or decreasing. File federal taxes online free 2012 If the payments are decreasing, no payment can be less than 40% of the largest payment. File federal taxes online free 2012 Provides for total payments that generally exceed the normal retail price of the property plus interest. File federal taxes online free 2012 Provides for total payments that do not exceed $10,000 for each item of property. File federal taxes online free 2012 Provides that the customer has no legal obligation to make all payments outlined in the contract and that, at the end of each weekly or monthly payment period, the customer can either continue to use the property by making the next payment or return the property in good working order with no further obligations and no entitlement to a return of any prior payments. File federal taxes online free 2012 Provides that legal title to the property remains with the rent-to-own dealer until the customer makes either all the required payments or the early purchase payments required under the contract to acquire legal title. File federal taxes online free 2012 Provides that the customer has no right to sell, sublease, mortgage, pawn, pledge, or otherwise dispose of the property until all contract payments have been made. File federal taxes online free 2012 Motorsports entertainment complex. File federal taxes online free 2012   This is a racing track facility permanently situated on land that hosts one or more racing events for automobiles, trucks, or motorcycles during the 36-month period after the first day of the month in which the facility is placed in service. File federal taxes online free 2012 The events must be open to the public for the price of admission. File federal taxes online free 2012 Qualified smart electric grid system. File federal taxes online free 2012   A qualified smart electric grid system means any smart grid property used as part of a system for electric distribution grid communications, monitoring, and management placed in service after October 3, 2008, by a taxpayer who is a supplier of electrical energy or a provider of electrical energy services. File federal taxes online free 2012 Smart grid property includes electronics and related equipment that is capable of: Sensing, collecting, and monitoring data of or from all portions of a utility's electric distribution grid, Providing real-time, two-way communications to monitor or to manage the grid, and Providing real-time analysis of an event prediction based on collected data that can be used to provide electric distribution system reliability, quality, and performance. File federal taxes online free 2012 Retail motor fuels outlet. File federal taxes online free 2012   Real property is a retail motor fuels outlet if it is used to a substantial extent in the retail marketing of petroleum or petroleum products (whether or not it is also used to sell food or other convenience items) and meets any one of the following three tests. File federal taxes online free 2012 It is not larger than 1,400 square feet. File federal taxes online free 2012 50% or more of the gross revenues generated from the property are derived from petroleum sales. File federal taxes online free 2012 50% or more of the floor space in the property is devoted to petroleum marketing sales. File federal taxes online free 2012 A retail motor fuels outlet does not include any facility related to petroleum and natural gas trunk pipelines. File federal taxes online free 2012 Qualified leasehold improvement property. File federal taxes online free 2012    Generally, this is any improvement to an interior part of a building (placed in service before January 1, 2014) that is nonresidential real property, provided all of the requirements discussed in chapter 3 under Qualified leasehold improvement property are met. File federal taxes online free 2012   In addition, an improvement made by the lessor does not qualify as qualified leasehold improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor's death or in any of the following types of transactions. File federal taxes online free 2012 A transaction to which section 381(a) applies, A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business, A like-kind exchange, involuntary conversion, or reacquisition of real property to the extent that the basis in the property represents the carryover basis, or Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor's or distributor's basis in the property. File federal taxes online free 2012 Examples include the following. File federal taxes online free 2012 A complete liquidation of a subsidiary. File federal taxes online free 2012 A transfer to a corporation controlled by the transferor. File federal taxes online free 2012 An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. File federal taxes online free 2012 Qualified restaurant property. File federal taxes online free 2012   Qualified restaurant property is any section 1250 property that is a building placed in service after December 31, 2008, and before January 1, 2014. File federal taxes online free 2012 Also, more than 50% of the building's square footage must be devoted to preparation of meals and seating for on-premises consumption of prepared meals. File federal taxes online free 2012 Qualified smart electric meter. File federal taxes online free 2012   A qualified smart electric meter is any time-based meter and related communication equipment which is placed in service by a supplier of electric energy or a provider of electric energy services and which is capable of being used by you as part of a system that: Measures and records electricity usage data on a time-differentiated basis in at least 24 separate time segments per day; Provides for the exchange of information between the supplier or provider and the customer's smart electric meter in support of time-based rates or other forms of demand response; Provides data to the supplier or provider so that the supplier or provider can provide energy usage information to customers electronically, and Provides all commercial and residential customers of such supplier or provider with net metering. File federal taxes online free 2012 Net metering means allowing a customer a credit, if any, as complies with applicable federal and state laws and regulations for providing electricity to the supplier or provider. File federal taxes online free 2012 Natural gas gathering line and electric transmission property. File federal taxes online free 2012   Any natural gas gathering line placed in service after April 11, 2005, is treated as 7-year property, and electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity and any natural gas distribution line placed in service after April 11, 2005, are treated as 15-year property, if the following requirements are met. File federal taxes online free 2012 The original use of the property must have begun with you after April 11, 2005. File federal taxes online free 2012 Original use means the first use to which the property is put, whether or not by you. File federal taxes online free 2012 Therefore, property used by any person before April 12, 2005, is not original use. File federal taxes online free 2012 Original use includes additional capital expenditures you incurred to recondition or rebuild your property. File federal taxes online free 2012 However, original use does not include the cost of reconditioned or rebuilt property you acquired. File federal taxes online free 2012 Property containing used parts will not be treated as reconditioned or rebuilt if the cost of the used parts is not more than 20% of the total cost of the property. File federal taxes online free 2012 The property must not be placed in service under a binding contract in effect before April 12, 2005. File federal taxes online free 2012 The property must not be self-constructed property (property you manufacture, construct, or produce for your own use), if you began the manufacture, construction, or production of the property before April 12, 2005. File federal taxes online free 2012 Property that is manufactured, constructed, or produced for your use by another person under a written binding contract entered into by you or a related party before the manufacture, construction, or production of the property is considered to be manufactured, constructed, or produced by you. File federal taxes online free 2012 What Is the Placed in Service Date? You begin to claim depreciation when your property is placed in service for either use in a trade or business or the production of income. File federal taxes online free 2012 The placed in service date for your property is the date the property is ready and available for a specific use. File federal taxes online free 2012 It is therefore not necessarily the date it is first used. File federal taxes online free 2012 If you converted property held for personal use to use in a trade or business or for the production of income, treat the property as being placed in service on the conversion date. File federal taxes online free 2012 See Placed in Service under When Does Depreciation Begin and End in chapter 1 for examples illustrating when property is placed in service. File federal taxes online free 2012 What Is the Basis for Depreciation? The basis for depreciation of MACRS property is the property's cost or other basis multiplied by the percentage of business/investment use. File federal taxes online free 2012 For a discussion of business/investment use, see Partial business or investment use under Property Used in Your Business or Income-Producing Activity in chapter 1 . File federal taxes online free 2012 Reduce that amount by any credits and deductions allocable to the property. File federal taxes online free 2012 The following are examples of some credits and deductions that reduce basis. File federal taxes online free 2012 Any deduction for section 179 property. File federal taxes online free 2012 Any deduction under section 179B of the Internal Revenue Code for capital costs to comply with Environmental Protection Agency sulfur regulations. File federal taxes online free 2012 Any deduction under section 179C of the Internal Revenue Code for certain qualified refinery property placed in service after August 8, 2005, and before January 1, 2014. File federal taxes online free 2012 Any deduction under section 179D of the Internal Revenue Code for certain energy efficient commercial building property placed in service after December 31, 2005, and before January 1, 2014. File federal taxes online free 2012 Any deduction under section 179E of the Internal Revenue Code for qualified advanced mine safety equipment property placed in service after December 20, 2006, and before January 1, 2014 . File federal taxes online free 2012 Any deduction for removal of barriers to the disabled and the elderly. File federal taxes online free 2012 Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. File federal taxes online free 2012 Any special depreciation allowance. File federal taxes online free 2012 Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. File federal taxes online free 2012 For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. File federal taxes online free 2012 Enter the basis for depreciation under column (c) in Part III of Form 4562. File federal taxes online free 2012 For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property in chapter 1 . File federal taxes online free 2012 Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. File federal taxes online free 2012 It is determined based on the depreciation system (GDS or ADS) used. File federal taxes online free 2012 Recovery Periods Under GDS Under GDS, property that is not qualified Indian reservation property is depreciated over one of the following recovery periods. File federal taxes online free 2012 Property Class Recovery Period 3-year property   3 years 1   5-year property   5 years     7-year property   7 years     10-year property   10 years     15-year property   15 years 2   20-year property   20 years     25-year property   25 years 3   Residential rental property   27. File federal taxes online free 2012 5 years     Nonresidential real property   39 years 4   15 years for qualified rent-to-own property placed in service before August 6, 1997. File federal taxes online free 2012 239 years for property that is a retail motor fuels outlet placed in service before August 20, 1996 (31. File federal taxes online free 2012 5 years if placed in service before May 13, 1993), unless you elected to depreciate it over 15 years. File federal taxes online free 2012 320 years for property placed in service before June 13, 1996, or under a binding contract in effect before June 10, 1996. File federal taxes online free 2012 431. File federal taxes online free 2012 5 years for property placed in service before May 13, 1993 (or before January 1, 1994, if the purchase or construction of the property is under a binding contract in effect before May 13, 1993, or if construction began before May 13, 1993). File federal taxes online free 2012 The GDS recovery periods for property not listed above can be found in Appendix B, Table of Class Lives and Recovery Periods. File federal taxes online free 2012 Residential rental property and nonresidential real property are defined earlier under Which Depreciation System (GDS or ADS) Applies. File federal taxes online free 2012 Enter the appropriate recovery period on Form 4562 under column (d) in section B of Part III, unless already shown (for 25-year property, residential rental property, and nonresidential real property). File federal taxes online free 2012 Office in the home. File federal taxes online free 2012   If your home is a personal-use single family residence and you begin to use part of your home as an office, depreciate that part of your home as nonresidential real property over 39 years (31. File federal taxes online free 2012 5 years if you began using it for business before May 13, 1993). File federal taxes online free 2012 However, if your home is an apartment in an apartment building that you own and the building is residential rental property as defined earlier under Which Depreciation System (GDS or ADS) Applies , depreciate the part used as an office as residential rental property over 27. File federal taxes online free 2012 5 years. File federal taxes online free 2012 See Publication 587 for a discussion of the tests you must meet to claim expenses, including depreciation, for the business use of your home. File federal taxes online free 2012 Home changed to rental use. File federal taxes online free 2012   If you begin to rent a home that was your personal home before 1987, you depreciate it as residential rental property over 27. File federal taxes online free 2012 5 years. File federal taxes online free 2012 Indian Reservation Property The recovery periods for qualified property you placed in service on an Indian reservation after 1993 and before 2014 are shorter than those listed earlier. File federal taxes online free 2012 The following table shows these shorter recovery periods. File federal taxes online free 2012 Property Class Recovery  Period 3-year property 2 years 5-year property 3 years 7-year property 4 years 10-year property 6 years 15-year property 9 years 20-year property 12 years Nonresidential real property 22 years Nonresidential real property is defined earlier under Which Property Class Applies Under GDS . File federal taxes online free 2012 Use this chart to find the correct percentage table to use for qualified Indian reservation property. File federal taxes online free 2012 IF your recovery period is: THEN use the following table in Appendix A: 2 years A-21 3 years A-1, A-2, A-3, A-4, or A-5 4 years A-22 6 years A-23 9 years A-14, A-15, A-16, A-17, or A-18 12 years A-14, A-15, A-16, A-17, or A-18 22 years A-24 Qualified property. File federal taxes online free 2012   Property eligible for the shorter recovery periods are 3-, 5-, 7-, 10-, 15-, and 20-year property and nonresidential real property. File federal taxes online free 2012 You must use this property predominantly in the active conduct of a trade or business within an Indian reservation. File federal taxes online free 2012 The rental of real property that is located on an Indian reservation is treated as the active conduct of a trade or business within an Indian reservation. File federal taxes online free 2012   The following property is not qualified property. File federal taxes online free 2012 Property used or located outside an Indian reservation on a regular basis, other than qualified infrastructure property. File federal taxes online free 2012 Property acquired directly or indirectly from a related person. File federal taxes online free 2012 Property placed in service for purposes of conducting or housing class I, II, or III gaming activities. File federal taxes online free 2012 These activities are defined in section 4 of the Indian Regulatory Act (25 U. File federal taxes online free 2012 S. File federal taxes online free 2012 C. File federal taxes online free 2012 2703). File federal taxes online free 2012 Any property you must depreciate under ADS. File federal taxes online free 2012 Determine whether property is qualified without regard to the election to use ADS and after applying the special rules for listed property not used predominantly for qualified business use (discussed in chapter 5). File federal taxes online free 2012 Qualified infrastructure property. File federal taxes online free 2012   Item (1) above does not apply to qualified infrastructure property located outside the reservation that is used to connect with qualified infrastructure property within the reservation. File federal taxes online free 2012 Qualified infrastructure property is property that meets all the following rules. File federal taxes online free 2012 It is qualified property, as defined earlier, except that it is outside the reservation. File federal taxes online free 2012 It benefits the tribal infrastructure. File federal taxes online free 2012 It is available to the general public. File federal taxes online free 2012 It is placed in service in connection with the active conduct of a trade or business within a reservation. File federal taxes online free 2012 Infrastructure property includes, but is not limited to, roads, power lines, water systems, railroad spurs, and communications facilities. File federal taxes online free 2012 Related person. File federal taxes online free 2012   For purposes of item (2) above, see Related persons in the discussion on property owned or used in 1986 under What Method Can You Use To Depreciate Your Property in chapter 1 for a description of related persons. File federal taxes online free 2012 Indian reservation. File federal taxes online free 2012   The term Indian reservation means a reservation as defined in section 3(d) of the Indian Financing Act of 1974 (25 U. File federal taxes online free 2012 S. File federal taxes online free 2012 C. File federal taxes online free 2012 1452(d)) or section 4(10) of the Indian Child Welfare Act of 1978 (25 U. File federal taxes online free 2012 S. File federal taxes online free 2012 C. File federal taxes online free 2012 1903(10)). File federal taxes online free 2012 Section 3(d) of the Indian Financing Act of 1974 defines reservation to include former Indian reservations in Oklahoma. File federal taxes online free 2012 For a definition of the term “former Indian reservations in Oklahoma,” see Notice 98-45 in Internal Revenue Bulletin 1998-35. File federal taxes online free 2012 Recovery Periods Under ADS The recovery periods for most property generally are longer under ADS than they are under GDS. File federal taxes online free 2012 The following table shows some of the ADS recovery periods. File federal taxes online free 2012 Property Recovery  Period Rent-to-own property 4 years Automobiles and light duty trucks 5 years Computers and peripheral equipment 5 years High technology telephone station equipment installed on customer premises 5 years High technology medical equipment 5 years Personal property with no class life 12 years Natural gas gathering lines 14 years Single purpose agricultural and horticultural structures 15 years Any tree or vine bearing fruit or nuts 20 years Initial clearing and grading land  improvements for gas utility property 20 years Initial clearing and grading land  improvements for electric utility  transmission and distribution plants 25 years Electric transmission property used in the transmission at 69 or more kilovolts of electricity 30 years Natural gas distribution lines 35 years Any qualified leasehold improvement property 39 years Any qualified restaurant property 39 years Nonresidential real property 40 years Residential rental property 40 years Section 1245 real property not listed in Appendix B 40 years Railroad grading and tunnel bore 50 years The ADS recovery periods for property not listed above can be found in the tables in Appendix B. File federal taxes online free 2012 Rent-to-own property, qualified leasehold improvement property, qualified restaurant property, residential rental property, and nonresidential real property are defined earlier under Which Property Class Applies Under GDS . File federal taxes online free 2012 Tax-exempt use property subject to a lease. File federal taxes online free 2012   The ADS recovery period for any property leased under a lease agreement to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership) cannot be less than 125% of the lease term. File federal taxes online free 2012 Additions and Improvements An addition or improvement you make to depreciable property is treated as separate depreciable property. File federal taxes online free 2012 See How Do You Treat Repairs and Improvements in chapter 1 for a definition of improvements. File federal taxes online free 2012 Its property class and recovery period are the same as those that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. File federal taxes online free 2012 The recovery period begins on the later of the following dates. File federal taxes online free 2012 The date you place the addition or improvement in service. File federal taxes online free 2012 The date you place in service the property to which you made the addition or improvement. File federal taxes online free 2012 If the improvement you make is qualified leasehold improvement property, qualified restaurant property, or qualified retail improvement property, the GDS recovery period is 15 years (39 years under ADS). File federal taxes online free 2012 Example. File federal taxes online free 2012 You own a rental home that you have been renting out since 1981. File federal taxes online free 2012 If you put an addition on the home and place the addition in service this year, you would use MACRS to figure your depreciation deduction for the addition. File federal taxes online free 2012 Under GDS, the property class for the addition is residential rental property and its recovery period is 27. File federal taxes online free 2012 5 years because the home to which the addition is made would be residential rental property if you had placed it in service this year. File federal taxes online free 2012 Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. File federal taxes online free 2012 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. File federal taxes online free 2012 The mid-month convention. File federal taxes online free 2012   Use this convention for nonresidential real property, residential rental property, and any railroad grading or tunnel bore. File federal taxes online free 2012   Under this convention, you treat all property placed in service or disposed of during a month as placed in service or disposed of at the midpoint of the month. File federal taxes online free 2012 This means that a one-half month of depreciation is allowed for the month the property is placed in service or disposed of. File federal taxes online free 2012   Your use of the mid-month convention is indicated by the “MM” already shown under column (e) in Part III of Form 4562. File federal taxes online free 2012 The mid-quarter convention. File federal taxes online free 2012   Use this convention if the mid-month convention does not apply and the total depreciable bases of MACRS property you placed in service during the last 3 months of the tax year (excluding nonresidential real property, residential rental property, any railroad grading or tunnel bore, property placed in service and disposed of in the same year, and property that is being depreciated under a method other than MACRS) are more than 40% of the total depreciable bases of all MACRS property you placed in service during the entire year. File federal taxes online free 2012   Under this convention, you treat all property placed in service or disposed of during any quarter of the tax year as placed in service or disposed of at the midpoint of that quarter. File federal taxes online free 2012 This means that 1½ months of depreciation is allowed for the quarter the property is placed in service or disposed of. File federal taxes online free 2012   If you use this convention, enter “MQ” under column (e) in Part III of Form 4562. File federal taxes online free 2012    For purposes of determining whether the mid-quarter convention applies, the depreciable basis of property you placed in service during the tax year reflects the reduction in basis for amounts expensed under section 179 and the part of the basis of property attributable to personal use. File federal taxes online free 2012 However, it does not reflect any reduction in basis for any special depreciation allowance. File federal taxes online free 2012 The half-year convention. File federal taxes online free 2012   Use this convention if neither the mid-quarter convention nor the mid-month convention applies. File federal taxes online free 2012   Under this convention, you treat all property placed in service or disposed of during a tax year as placed in service or disposed of at the midpoint of the year. File federal taxes online free 2012 This means that a one-half year of depreciation is allowed for the year the property is placed in service or disposed of. File federal taxes online free 2012   If you use this convention, enter “HY” under column (e) in Part III of Form 4562. File federal taxes online free 2012 Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. File federal taxes online free 2012 The 200% declining balance method over a GDS recovery period. File federal taxes online free 2012 The 150% declining balance method over a GDS recovery period. File federal taxes online free 2012 The straight line method over a GDS recovery period. File federal taxes online free 2012 The straight line method over an ADS recovery period. File federal taxes online free 2012 For property placed in service before 1999, you could have elected the 150% declining balance method using the ADS recovery periods for certain property classes. File federal taxes online free 2012 If you made this election, continue to use the same method and recovery period for that property. File federal taxes online free 2012 Table 4–1 lists the types of property you can depreciate under each method. File federal taxes online free 2012 It also gives a brief explanation of the method, including any benefits that may apply. File federal taxes online free 2012 Depreciation Methods for Farm Property If you place personal property in service in a farming business after 1988, you generally must depreciate it under GDS using the 150% declining balance method unless you are a farmer who must depreciate the property under ADS using the straight line method or you elect to depreciate the property under GDS or ADS using the straight line method. File federal taxes online free 2012 You can depreciate real property using the straight line method under either GDS or ADS. File federal taxes online free 2012 Fruit or nut trees and vines. File federal taxes online free 2012   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a recovery period of 10 years. File federal taxes online free 2012 ADS required for some farmers. File federal taxes online free 2012   If you elect not to apply the uniform capitalization rules to any plant produced in your farming business, you must use ADS. File federal taxes online free 2012 You must use ADS for all property you place in service in any year the election is in effect. File federal taxes online free 2012 See the regulations under section 263A of the Internal Revenue Code for information on the uniform capitalization rules that apply to farm property. File federal taxes online free 2012 Electing a Different Method As shown in Table 4–1 , you can elect a different method for depreciation for certain types of property. File federal taxes online free 2012 You must make the election by the due date of the return (including extensions) for the year you placed the property in service. File federal taxes online free 2012 However, if you timely filed your return for the year without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). File federal taxes online free 2012 Attach the election to the amended return and write “Filed pursuant to section 301. File federal taxes online free 2012 9100-2” on the election statement. File federal taxes online free 2012 File the amended return at the same address you filed the original return. File federal taxes online free 2012 Once you make the election, you cannot change it. File federal taxes online free 2012 If you elect to use a different method for one item in a property class, you must apply the same method to all property in that class placed in service during the year of the election. File federal taxes online free 2012 However, you can make the election on a property-by-property basis for nonresidential real and residential rental property. File federal taxes online free 2012 150% election. File federal taxes online free 2012   Instead of using the 200% declining balance method over the GDS recovery period for nonfarm property in the 3-, 5-, 7-, and 10-year property classes, you can elect to use the 150% declining balance method. File federal taxes online free 2012 Make the election by entering “150 DB” under column (f) in Part III of Form 4562. File federal taxes online free 2012 Straight line election. File federal taxes online free 2012   Instead of using either the 200% or 150% declining balance methods over the GDS recovery period, you can elect to use the straight line method over the GDS recovery period. File federal taxes online free 2012 Make the election by entering  “S/L” under column (f) in Part III of Form 4562. File federal taxes online free 2012 Election of ADS. File federal taxes online free 2012   As explained earlier under Which Depreciation System (GDS or ADS) Applies , you can elect to use ADS even though your property may come under GDS. File federal taxes online free 2012 ADS uses the straight line method of depreciation over fixed ADS recovery periods. File federal taxes online free 2012 Most ADS recovery periods are listed in Appendix B, or see the table under Recovery Periods Under ADS , earlier. File federal taxes online free 2012   Make the election by completing line 20 in Part III of Form 4562. File federal taxes online free 2012 Farm property. File federal taxes online free 2012   Instead of using the 150% declining balance method over a GDS recovery period for property you use in a farming business (other than real property), you can elect to depreciate it using either of the following methods. File federal taxes online free 2012 The straight line method over a GDS recovery period. File federal taxes online free 2012 The straight line method over an ADS recovery period. File federal taxes online free 2012 Table 4-1. File federal taxes online free 2012 Depreciation Methods Note. File federal taxes online free 2012 The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. File federal taxes online free 2012 Method Type of Property Benefit GDS using 200% DB • Nonfarm 3-, 5-, 7-, and 10-year property • Provides a greater deduction during the earlier recovery years • Changes to SL when that method provides an equal or greater deduction GDS using 150% DB • All farm property (except real property) • All 15- and 20-year property (except qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property placed in service before January 1, 2014) • Nonfarm 3-, 5-, 7-, and 10-year property • Provides a greater deduction during the earlier recovery years • Changes to SL when that method provides an equal or greater deduction1 GDS using SL • Nonresidential real property • Qualified leasehold improvement property placed in service before January 1, 2014 • Qualified restaurant property placed in service before January 1, 2014 • Qualified retail improvement property placed in service before January 1, 2014 • Residential rental property • Trees or vines bearing fruit or nuts • Water utility property • All 3-, 5-, 7-, 10-, 15-, and 20-year property2 • Property for which you elected section 168(k)(4) • Provides for equal yearly deductions (except for the first and last years) ADS using SL • Listed property used 50% or less for business • Property used predominantly outside the U. File federal taxes online free 2012 S. File federal taxes online free 2012  • Tax-exempt property • Tax-exempt bond-financed property • Farm property used when an election not to apply the uniform capitalization rules is in effect • Imported property3 • Any property for which you elect to use this method4 • Provides for equal yearly deductions (except for the first and last years) 1The MACRS percentage tables in Appendix A have the switch to the straight line method built into their rates 2See section 168(b)(5) of the Internal Revenue Code. File federal taxes online free 2012 3See section 168(g)(6) of the Internal Revenue Code 4See section 168(g)(7) of the Internal Revenue Code How Is the Depreciation Deduction Figured? To figure your depreciation deduction under MACRS, you first determine the depreciation system, property class, placed in service date, basis amount, recovery period, convention, and depreciation method that applies to your property. File federal taxes online free 2012 Then, you are ready to figure your depreciation deduction. File federal taxes online free 2012 You can figure it using a percentage table provided by the IRS, or you can figure it yourself without using the table. File federal taxes online free 2012 Using the MACRS Percentage Tables To help you figure your deduction under MACRS, the IRS has established percentage tables that incorporate the applicable convention and depreciation method. File federal taxes online free 2012 These percentage tables are in Appendix A near the end of this publication. File federal taxes online free 2012 Which table to use. File federal taxes online free 2012    Appendix A contains the MACRS Percentage Table Guide, which is designed to help you locate the correct percentage table to use for depreciating your property. File federal taxes online free 2012 The percentage tables immediately follow the guide. File federal taxes online free 2012 Rules Covering the Use of the Tables The following rules cover the use of the percentage tables. File federal taxes online free 2012 You must apply the rates in the percentage tables to your property's unadjusted basis. File federal taxes online free 2012 You cannot use the percentage tables for a short tax year. File federal taxes online free 2012 See Figuring the Deduction for a Short Tax Year, later, for information on the short tax year rules. File federal taxes online free 2012 Once you start using the percentage tables for any item of property, you generally must continue to use them for the entire recovery period of the property. File federal taxes online free 2012 You must stop using the tables if you adjust the basis of the property for any reason other than— Depreciation allowed or allowable, or An addition or improvement to that property that is depreciated as a separate item of property. File federal taxes online free 2012 Basis adjustments other than those made due to the items listed in (4) include an increase in basis for the recapture of a clean-fuel deduction or credit and a reduction in basis for a casualty loss. File federal taxes online free 2012 Basis adjustment due to recapture of clean-fuel vehicle deduction or credit. File federal taxes online free 2012   If you increase the basis of your property because of the recapture of part or all of a deduction for clean-fuel vehicles or the credit for clean-fuel vehicle refueling property placed in service before January 1, 2006, you cannot continue to use the percentage tables. File federal taxes online free 2012 For the year of the adjustment and the remaining recovery period, you must figure the depreciation deduction yourself using the property's adjusted basis at the end of the year. File federal taxes online free 2012 See Figuring the Deduction Without Using the Tables, later. File federal taxes online free 2012 Basis adjustment due to casualty loss. File federal taxes online free 2012   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. File federal taxes online free 2012 For the year of the adjustment and the remaining recovery period, you must figure the depreciation yourself using the property's adjusted basis at the end of the year. File federal taxes online free 2012 See Figuring the Deduction Without Using the Tables, later. File federal taxes online free 2012 Example. File federal taxes online free 2012 On October 26, 2012, Sandra Elm, a calendar year taxpayer, bought and placed in service in her business a new item of 7-year property. File federal taxes online free 2012 It cost $39,000 and she elected a section 179 deduction of $24,000. File federal taxes online free 2012 She also took a special depreciation allowance of $7,500 [50% of $15,000 ($39,000 − $24,000)]. File federal taxes online free 2012 Her unadjusted basis after the section 179 deduction and special depreciation allowance was $7,500 ($15,000 − $7,500). File federal taxes online free 2012 She figured her MACRS depreciation deduction using the percentage tables. File federal taxes online free 2012 For 2012, her MACRS depreciation deduction was $268. File federal taxes online free 2012 In July 2013, the property was vandalized and Sandra had a deductible casualty loss of $3,000. File federal taxes online free 2012 She must adjust the property's basis for the casualty loss, so she can no longer use the percentage tables. File federal taxes online free 2012 Her adjusted basis at the end of 2013, before figuring her 2013 depreciation, is $4,232. File federal taxes online free 2012 She figures that amount by subtracting the 2012 MACRS depreciation of $268 and the casualty loss of $3,000 from the unadjusted basis of $7,500. File federal taxes online free 2012 She must now figure her depreciation for 2013 without using the percentage tables. File federal taxes online free 2012 Figuring the Unadjusted Basis of Your Property You must apply the table rates to your property's unadjusted basis each year of the recovery period. File federal taxes online free 2012 Unadjusted basis is the same basis amount you would use to figure gain on a sale, but you figure it without reducing your original basis by any MACRS depreciation taken in earlier years. File federal taxes online free 2012 However, you do reduce your original basis by other amounts, including the following. File federal taxes online free 2012 Any amortization taken on the property. File federal taxes online free 2012 Any section 179 deduction claimed. File federal taxes online free 2012 Any special depreciation allowance taken on the property. File federal taxes online free 2012 For business property you purchase during the year, the unadjusted basis is its cost minus these and other applicable adjustments. File federal taxes online free 2012 If you trade property, your unadjusted basis in the property received is the cash paid plus the adjusted basis of the property traded minus these adjustments. File federal taxes online free 2012 MACRS Worksheet You can use this worksheet to help you figure your depreciation deduction using the percentage tables. File federal taxes online free 2012 Use a separate worksheet for each item of property. File federal taxes online free 2012 Then, use the information from this worksheet to prepare Form 4562. File federal taxes online free 2012 Do not use this worksheet for automobiles. File federal taxes online free 2012 Use the Depreciation Worksheet for Passenger Automobiles in chapter 5. File federal taxes online free 2012 MACRS Worksheet Part I   1. File federal taxes online free 2012 MACRS system (GDS or ADS)   2. File federal taxes online free 2012 Property class   3. File federal taxes online free 2012 Date placed in service   4. File federal taxes online free 2012 Recovery period   5. File federal taxes online free 2012 Method and convention   6. File federal taxes online free 2012 Depreciation rate (from tables)   Part II   7. File federal taxes online free 2012 Cost or other basis* $     8. File federal taxes online free 2012 Business/investment use   %   9. File federal taxes online free 2012 Multiply line 7 by line 8   $ 10. File federal taxes online free 2012 Total claimed for section 179 deduction and other items   $ 11. File federal taxes online free 2012 Subtract line 10 from line 9. File federal taxes online free 2012 This is your tentative basis for depreciation   $ 12. File federal taxes online free 2012 Multiply line 11 by . File federal taxes online free 2012 50 if the 50% special depreciation allowance applies. File federal taxes online free 2012 This is your special depreciation allowance. File federal taxes online free 2012 Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance   $ 13. File federal taxes online free 2012 Subtract line 12 from line 11. File federal taxes online free 2012 This is your basis for depreciation     14. File federal taxes online free 2012 Depreciation rate (from line 6)     15. File federal taxes online free 2012 Multiply line 13 by line 14. File federal taxes online free 2012 This is your MACRS depreciation deduction   $ *If real estate, do not include cost (basis) of land. File federal taxes online free 2012 The following example shows how to figure your MACRS depreciation deduction using the percentage tables and the MACRS worksheet. File federal taxes online free 2012 Example. File federal taxes online free 2012 You bought office furniture (7-year property) for $10,000 and placed it in service on August 11, 2013. File federal taxes online free 2012 You use the furniture only for business. File federal taxes online free 2012 This is the only property you placed in service this year. File federal taxes online free 2012 You did not elect a section 179 deduction and the property is not qualified property for purposes of claiming a special depreciation allowance so your property's unadjusted basis is its cost, $10,000. File federal taxes online free 2012 You use GDS and the half-year convention to figure your depreciation. File federal taxes online free 2012 You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-1. File federal taxes online free 2012 Multiply your property's unadjusted basis each year by the percentage for 7-year property given in Table A-1. File federal taxes online free 2012 You figure your depreciation deduction using the MACRS worksheet as follows. File federal taxes online free 2012 MACRS Worksheet Part I 1. File federal taxes online free 2012 MACRS system (GDS or ADS) GDS 2. File federal taxes online free 2012 Property class 7-year 3. File federal taxes online free 2012 Date placed in service 8/11/13 4. File federal taxes online free 2012 Recovery period 7-Year 5. File federal taxes online free 2012 Method and convention 200%DB/Half-Year 6. File federal taxes online free 2012 Depreciation rate (from tables) . File federal taxes online free 2012 1429 Part II 7. File federal taxes online free 2012 Cost or other basis* $10,000     8. File federal taxes online free 2012 Business/investment use 100 %   9. File federal taxes online free 2012 Multiply line 7 by line 8   $10,000 10. File federal taxes online free 2012 Total claimed for section 179 deduction and other items   -0- 11. File federal taxes online free 2012 Subtract line 10 from line 9. File federal taxes online free 2012 This is your tentative basis for depreciation   $10,000 12. File federal taxes online free 2012 Multiply line 11 by . File federal taxes online free 2012 50 if the 50% special depreciation allowance applies. File federal taxes online free 2012 This is your special depreciation allowance. File federal taxes online free 2012 Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance   -0- 13. File federal taxes online free 2012 Subtract line 12 from line 11. File federal taxes online free 2012 This is your basis for depreciation   $10,000 14. File federal taxes online free 2012 Depreciation rate (from line 6)   . File federal taxes online free 2012 1429 15. File federal taxes online free 2012 Multiply line 13 by line 14. File federal taxes online free 2012 This is your MACRS depreciation deduction   $1,429 *If real estate, do not include cost (basis) of land. File federal taxes online free 2012 If there are no adjustments to the basis of the property other than depreciation, your depreciation deduction for each subsequent year of the recovery period will be as follows. File federal taxes online free 2012 Year   Basis Percentage Deduction 2014 $ 10,000 24. File federal taxes online free 2012 49%   $2,449   2015   10,000 17. File federal taxes online free 2012 49   1,749   2016   10,000 12. File federal taxes online free 2012 49   1,249   2017   10,000 8. File federal taxes online free 2012 93   893   2018   10,000 8. File federal taxes online free 2012 92   892   2019   10,000 8. File federal taxes online free 2012 93   893   2020   10,000 4. File federal taxes online free 2012 46   446   Examples The following examples are provided to show you how to use the percentage tables. File federal taxes online free 2012 In both examples, assume the following. File federal taxes online free 2012 You use the property only for business. File federal taxes online free 2012 You use the calendar year as your tax year. File federal taxes online free 2012 You use GDS for all the properties. File federal taxes online free 2012 Example 1. File federal taxes online free 2012 You bought a building and land for $120,000 and placed it in service on March 8. File federal taxes online free 2012 The sales contract showed that the building cost $100,000 and the land cost $20,000. File federal taxes online free 2012 It is nonresidential real property. File federal taxes online free 2012 The building's unadjusted basis is its original cost, $100,000. File federal taxes online free 2012 You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-7a. File federal taxes online free 2012 March is the third month of your tax year, so multiply the building's unadjusted basis, $100,000, by the percentages for the third month in Table A-7a. File federal taxes online free 2012 Your depreciation deduction for each of the first 3 years is as follows: Year   Basis Percentage Deduction 1st $ 100,000 2. File federal taxes online free 2012 033%   $2,033   2nd   100,000 2. File federal taxes online free 2012 564   2,564   3rd   100,000 2. File federal taxes online free 2012 564   2,564   Example 2. File federal taxes online free 2012 During the year, you bought a machine (7-year property) for $4,000, office furniture (7-year property) for $1,000, and a computer (5-year property) for $5,000. File federal taxes online free 2012 You placed the machine in service in January, the furniture in September, and the computer in October. File federal taxes online free 2012 You do not elect a section 179 deduction and none of these items is qualified property for purposes of claiming a special depreciation allowance. File federal taxes online free 2012 You placed property in service during the last 3 months of the year, so you must first determine if you have to use the mid-quarter convention. File federal taxes online free 2012 The total bases of all property you placed in service during the year is $10,000. File federal taxes online free 2012 The $5,000 basis of the computer, which you placed in service during the last 3 months (the fourth quarter) of your tax year, is more than 40% of the total bases of all property ($10,000) you placed in service during the year. File federal taxes online free 2012 Therefore, you must use the mid-quarter convention for all three items. File federal taxes online free 2012 You refer to the MACRS Percentage Table Guide in Appendix A to determine which table you should use under the mid-quarter convention. File federal taxes online free 2012 The machine is 7-year property placed in service in the first quarter, so you use Table A-2. File federal taxes online free 2012 The furniture is 7-year property placed in service in the third quarter, so you use Table A-4. File federal taxes online free 2012 Finally, because the computer is 5-year property placed in service in the fourth quarter, you use Table A-6. File federal taxes online free 2012 Knowing what table to use for each property, you figure the depreciation for the first 2 years as follows. File federal taxes online free 2012 Year Property Basis Percentage Deduction 1st Machine $4,000 25. File federal taxes online free 2012 00 $1,000   2nd Machine 4,000 21. File federal taxes online free 2012 43 857   1st Furniture 1,000 10. File federal taxes online free 2012 71 107   2nd Furniture 1,000 25. File federal taxes online free 2012 51 255   1st Computer 5,000 5. File federal taxes online free 2012 00 250   2nd Computer 5,000 38. File federal taxes online free 2012 00 1,900   Sale or Other Disposition Before the Recovery Period Ends If you sell or otherwise dispose of your property before the end of its recovery period, your depreciation deduction for the year of the disposition will be only part of the depreciation amount for the full year. File federal taxes online free 2012 You have disposed of your property if you have permanently withdrawn it from use in your business or income-producing activity because of its sale, exchange, retirement, abandonment, involuntary conversion, or destruction. File federal taxes online free 2012 After you figure the full-year depreciation amount, figure the deductible part using the convention that applies to the property. File federal taxes online free 2012 Half-year convention used. File federal taxes online free 2012   For property for which you used a half-year convention, the depreciation deduction for the year of the disposition is half the depreciation determined for the full year. File federal taxes online free 2012 Mid-quarter convention used. File federal taxes online free 2012   For property for which you used the mid-quarter convention, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter in which you disposed of the property. File federal taxes online free 2012 Quarter Percentage First 12. File federal taxes online free 2012 5% Second 37. File federal taxes online free 2012 5 Third 62. File federal taxes online free 2012 5 Fourth 87. File federal taxes online free 2012 5 Example. File federal taxes online free 2012 On December 2, 2010, you placed in service an item of 5-year property costing $10,000. File federal taxes online free 2012 You did not claim a section 179 deduction and the property does not qualify for a special depreciation allowance. File federal taxes online free 2012 Your unadjusted basis for the property was $10,000. File federal taxes online free 2012 You used the mid-quarter convention because this was the only item of business property you placed in service in 2010 and it was placed in service during the last 3 months of your tax year. File federal taxes online free 2012 Your property is in the 5-year property class, so you used Table A-5 to figure your depreciation deduction. File federal taxes online free 2012 Your deductions for 2010, 2011, and 2012 were $500 (5% of $10,000), $3,800 (38% of $10,000), and $2,280 (22. File federal taxes online free 2012 80% of $10,000). File federal taxes online free 2012 You disposed of the property on April 6, 2013. File federal taxes online free 2012 To determine your depreciation deduction for 2013, first figure the deduction for the full year. File federal taxes online free 2012 This is $1,368 (13. File federal taxes online free 2012 68% of $10,000). File federal taxes online free 2012 April is in the second quarter of the year, so you multiply $1,368 by 37. File federal taxes online free 2012 5% to get your depreciation deduction of $513 for 2013. File federal taxes online free 2012 Mid-month convention used. File federal taxes online free 2012   If you dispose of residential rental or nonresidential real property, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by a fraction. File federal taxes online free 2012 The numerator of the fraction is the number of months (including partial months) in the year that the property is considered in service. File federal taxes online free 2012 The denominator is 12. File federal taxes online free 2012 Example. File federal taxes online free 2012 On July 2, 2011, you purchased and placed in service residential rental property. File federal taxes online free 2012 The property cost $100,000, not including the cost of land. File federal taxes online free 2012 You used Table A-6 to figure your MACRS depreciation for this property. File federal taxes online free 2012 You sold the property on March 2, 2013. File federal taxes online free 2012 You file your tax return based on the calendar year. File federal taxes online free 2012 A full year of depreciation for 2013 is $3,636. File federal taxes online free 2012 This is $100,000 multiplied by . File federal taxes online free 2012 03636 (the percentage for the seventh month of the third recovery year) from Table A-6 . File federal taxes online free 2012 You then apply the mid-month convention for the 2½ months of use in 2013. File federal taxes online free 2012 Treat the month of disposition as one-half month of use. File federal taxes online free 2012 Multiply $3,636 by the fraction, 2. File federal taxes online free 2012 5 over 12, to get your 2013 depreciation deduction of $757. File federal taxes online free 2012 50. File federal taxes online free 2012 Figuring the Deduction Without Using the Tables Instead of using the rates in the percentage tables to figure your depreciation deduction, you can figure it yourself. File federal taxes online free 2012 Before making the computation each year, you must reduce your adjusted basis in the property by the depreciation claimed the previous year. File federal taxes online free 2012 Figuring MACRS deductions without using the tables generally will result in a slightly different amount than using the tables. File federal taxes online free 2012 Declining Balance Method When using a declining balance method, you apply the same depreciation rate each year to the adjusted basis of your property. File federal taxes online free 2012 You must use the applicable convention for the first tax year and you must switch to the straight line method beginning in the first year for which it will give an equal or greater deduction. File federal taxes online free 2012 The straight line method is explained later. File federal taxes online free 2012 You figure depreciation for the year you place property in service as follows. File federal taxes online free 2012 Multiply your adjusted basis in the property by the declining balance rate. File federal taxes online free 2012 Apply the applicable convention. File federal taxes online free 2012 You figure depreciation for all other years (before the year you switch to the straight line method) as follows. File federal taxes online free 2012 Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years. File federal taxes online free 2012 Multiply this new adjusted basis by the same declining balance rate used in earlier years. File federal taxes online free 2012 If you dispose of property before the end of its recovery period, see Using the Applicable Convention, later, for information on how to figure depreciation for the year you dispose of it. File federal taxes online free 2012 Figuring depreciation under the declining balance method and switching to the straight line method is illustrated in Example 1 , later, under Examples. File federal taxes online free 2012 Declining balance rate. File federal taxes online free 2012   You figure your declining balance rate by dividing the specified declining balance percentage (150% or 200% changed to a decimal) by the number of years in the property's recovery period. File federal taxes online free 2012 For example, for 3-year property depreciated using the 200% declining balance method, divide 2. File federal taxes online free 2012 00 (200%) by 3 to get 0. File federal taxes online free 2012 6667, or a 66. File federal taxes online free 2012 67% declining balance rate. File federal taxes online free 2012 For 15-year property depreciated using the 150% declining balance method, divide 1. File federal taxes online free 2012 50 (150%) by 15 to get 0. File federal taxes online free 2012 10, or a 10% declining balance rate. File federal taxes online free 2012   The following table shows the declining balance rate for each property class and the first year for which the straight line method gives an equal or greater deduction. File federal taxes online free 2012 Property Class Method Declining Balance Rate Year 3-year 200% DB 66. File federal taxes online free 2012 667% 3rd 5-year 200% DB 40. File federal taxes online free 2012 0 4th 7-year 200% DB 28. File federal taxes online free 2012 571 5th 10-year 200% DB 20. File federal taxes online free 2012 0 7th 15-year 150% DB 10. File federal taxes online free 2012 0 7th 20-year 150% DB 7. File federal taxes online free 2012 5 9th Straight Line Method When using the straight line method, you apply a different depreciation rate each year to the adjusted basis of your property. File federal taxes online free 2012 You must use the applicable convention in the year you place the property in service and the year you dispose of the property. File federal taxes online free 2012 You figure depreciation for the year you place property in service as follows. File federal taxes online free 2012 Multiply your adjusted basis in the property by the straight line rate. File federal taxes online free 2012 Apply the applicable convention. File federal taxes online free 2012 You figure depreciation for all other years (including the year you switch from the declining balance method to the straight line method) as follows. File federal taxes online free 2012 Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years (under any method). File federal taxes online free 2012 Determine the depreciation rate for the year. File federal taxes online free 2012 Multiply the adjusted basis figured in (1) by the depreciation rate figured in (2). File federal taxes online free 2012 If you dispose of property before the end of its recovery period, see Using the Applicable Convention , later, for information on how to figure depreciation for the year you dispose of it. File federal taxes online free 2012 Straight line rate. File federal taxes online free 2012   You determine the straight line depreciation rate for any tax year by dividing the number 1 by the years remaining in the recovery period at the beginning of that year. File federal taxes online free 2012 When figuring the number of years remaining, you must take into account the convention used in the year you placed the property in service. File federal taxes online free 2012 If the number of years remaining is less than 1, the depreciation rate for that tax year is 1. File federal taxes online free 2012 0 (100%). File federal taxes online free 2012 Using the Applicable Convention The applicable convention (discussed earlier under Which Convention Applies ) affects how you figure your depreciation deduction for the year you place your property in service and for the year you dispose of it. File federal taxes online free 2012 It determines how much of the recovery period remains at the beginning of each year, so it also affects the depreciation rate for property you depreciate under the straight line method. File federal taxes online free 2012 See Straight line rate in the previous discussion. File federal taxes online free 2012 Use the applicable convention as explained in the following discussions. File federal taxes online free 2012 Half-year convention. File federal taxes online free 2012   If this convention applies, you deduct a half-year of depreciation for the first year and the last year that you depreciate the property. File federal taxes online free 2012 You deduct a full year of depreciation for any other year during the recovery period. File federal taxes online free 2012   Figure your depreciation deduction for the year you place the property in service by dividing the depreciation for a full year by 2. File federal taxes online free 2012 If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. File federal taxes online free 2012 If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final 6 months of the recovery period is the amount of your unrecovered basis in the property. File federal taxes online free 2012 Mid-quarter convention. File federal taxes online free 2012   If this convention applies, the depreciation you can deduct for the first year you depreciate the property depends on the quarter in which you place the property in service. File federal taxes online free 2012   A quarter of a full 12-month tax year is a period of 3 months. File federal taxes online free 2012 The first quarter in a year begins on the first day of the tax year. File federal taxes online free 2012 The second quarter begins on the first day of the fourth month of the tax year. File federal taxes online free 2012 The third quarter begins on the first day of the seventh month of the tax year. File federal taxes online free 2012 The fourth quarter begins on the first day of the tenth month of the tax year. File federal taxes online free 2012 A calendar year is divided into the following quarters. File federal taxes online free 2012 Quarter Months First January, February, March Second April, May, June Third July, August, September Fourth October, November, December   Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by the percentage listed below for the quarter you place the property in service. File federal taxes online free 2012 Quarter Percentage First 87. File federal taxes online free 2012 5% Second 62. File federal taxes online free 2012 5 Third 37. File federal taxes online free 2012 5 Fourth 12. File federal taxes online free 2012 5   If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter you dispose of the property. File federal taxes online free 2012 Quarter Percentage First 12. File federal taxes online free 2012 5% Second 37. File federal taxes online free 2012 5 Third 62. File federal taxes online free 2012 5 Fourth 87. File federal taxes online free 2012 5   If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final quarter of the recovery period is the amount of your unrecovered basis in the property. File federal taxes online free 2012 Mid-month convention. File federal taxes online free 2012   If this convention applies, the depreciation you can deduct for the first year that you depreciate the property depends on the month in which you place the property in service. File federal taxes online free 2012 Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by a fraction. File federal taxes online free 2012 The numerator of the fraction is the number of full months in the year that the property is in service plus ½ (or 0. File federal taxes online free 2012 5). File federal taxes online free 2012 The denominator is 12. File federal taxes online free 2012   If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. File federal taxes online free 2012 If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final month of the recovery period is the amount of your unrecovered basis in the property. File federal taxes online free 2012 Example. File federal taxes online free 2012 You use the calendar year and place nonresidential real property in service in August. File federal taxes online free 2012 The property is in service 4 full months (September, October, November, and December). File federal taxes online free 2012 Your numerator is 4. File federal taxes online free 2012 5 (4 full months plus 0. File federal taxes online free 2012 5). File federal taxes online free 2012 You multiply the depreciation for a full year by 4. File federal taxes online free 2012 5/12, or 0. File federal taxes online free 2012 375. File federal taxes online free 2012 Examples The following examples show how to figure depreciation under MACRS without using the percentage tables. File federal taxes online free 2012 Figures are rounded for purposes of the examples. File federal taxes online free 2012 Assume for all the examples that you use a calendar year as your tax year. File federal taxes online free 2012 Example 1—200% DB method and half-year convention. File federal taxes online free 2012 In February, you placed in service depreciable property with a 5-year recovery period and a basis of $1,000. File federal taxes online free 2012 You do not elect to take the section 179 deduction and the property does not qualify for a special depreciation allowance. File federal taxes online free 2012 You use GDS and the 200% declining balance (DB) method to figure your depreciation. File federal taxes online free 2012 When the straight line (SL) method results in an equal or larger deduction, you switch to the SL method. File federal taxes online free 2012 You did not place any property in service in the last 3 months of the year, so you must use the half-year convention. File federal taxes online free 2012 First year. File federal taxes online free 2012 You figure the depreciation rate under the 200% DB method by dividing 2 (200%) by 5 (the number of years in the recovery period). File federal taxes online free 2012 The result is 40%. File federal taxes online free 2012 You multiply the adjusted basis of the property ($1,000) by the 40% DB rate. File federal taxes online free 2012 You apply the half-year convention by dividing the result ($400) by 2. File federal taxes online free 2012 Depreciation for the first year under the 200% DB method is $200. File federal taxes online free 2012 You figure the depreciation rate under the straight line (SL) method by dividing 1 by 5, the number of years in the recovery period. File federal taxes online free 2012 The result is 20%. File federal taxes online free 2012 You multiply the adjusted basis of the property ($1,000) by the 20% SL rate. File federal taxes online free 2012 You apply the half-year convention by dividing the result ($200) by 2. File federal taxes online free 2012 Depreciation for the first year under the SL method is $100. File federal taxes online free 2012 The DB method provides a larger deduction, so you deduct the $200 figured under the 200% DB method. File federal taxes online free 2012 Second year. File federal taxes online free 2012 You reduce the adjusted basis ($1,000) by the depreciation claimed in the first year ($200). File federal taxes online free 2012 You multiply the result ($800) by the DB rate (40%). File federal taxes online free 2012 Depreciation for the second year under the 200% DB method is $320. File federal taxes online free 2012 You figure the SL depreciation rate by dividing 1 by 4. File federal taxes online free 2012 5, the number of years remaining in the recovery period. File federal taxes online free 2012 (Based on the half-year convention, you used only half a year of the recovery period in the first year. File federal taxes online free 2012 ) You multiply the reduced adjusted basis ($800) by the result (22. File federal taxes online free 2012 22%). File federal taxes online free 2012 Depreciation under the SL method for the second year is $178. File federal taxes online free 2012 The DB method provides a larger deduction, so you deduct the $320 figured under the 200% DB method. File federal taxes online free 2012 Third year. File federal taxes online free 2012 You reduce the adjusted basis ($800) by the depreciation claimed in the second year ($320). File federal taxes online free 2012 You multiply the result ($480) by the DB rate (40%). File federal taxes online free 2012 Depreciation for the third year under the 200% DB method is $192. File federal taxes online free 2012 You figure the SL depreciation rate by dividing 1 by 3. File federal taxes online free 2012 5. File federal taxes online free 2012 You multiply the reduced adjusted basis ($480) by the result (28. File federal taxes online free 2012 57%). File federal taxes online free 2012 Depreciation under the SL method for the third year is $137. File federal taxes online free 2012 The DB method provides a larger deduction, so you deduct the $192 figured under the 200% DB method. File federal taxes online free 2012 Fourth year. File federal taxes online free 2012 You reduce the adjusted basis ($480) by the de
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File federal taxes online free 2012 3. File federal taxes online free 2012   Rent Expense Table of Contents Introduction Topics - This chapter discusses: RentConditional sales contract. File federal taxes online free 2012 Leveraged leases. File federal taxes online free 2012 Leveraged leases of limited-use property. File federal taxes online free 2012 Taxes on Leased Property Cost of Getting a Lease Improvements by Lessee Capitalizing Rent Expenses Introduction This chapter discusses the tax treatment of rent or lease payments you make for property you use in your business but do not own. File federal taxes online free 2012 It also discusses how to treat other kinds of payments you make that are related to your use of this property. File federal taxes online free 2012 These include payments you make for taxes on the property. File federal taxes online free 2012 Topics - This chapter discusses: The definition of rent Taxes on leased property The cost of getting a lease Improvements by the lessee Capitalizing rent expenses Rent Rent is any amount you pay for the use of property you do not own. File federal taxes online free 2012 In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. File federal taxes online free 2012 If you have or will receive equity in or title to the property, the rent is not deductible. File federal taxes online free 2012 Unreasonable rent. File federal taxes online free 2012   You cannot take a rental deduction for unreasonable rent. File federal taxes online free 2012 Ordinarily, the issue of reasonableness arises only if you and the lessor are related. File federal taxes online free 2012 Rent paid to a related person is reasonable if it is the same amount you would pay to a stranger for use of the same property. File federal taxes online free 2012 Rent is not unreasonable just because it is figured as a percentage of gross sales. File federal taxes online free 2012 For examples of related persons, see Related persons in chapter 2, Publication 544. File federal taxes online free 2012 Rent on your home. File federal taxes online free 2012   If you rent your home and use part of it as your place of business, you may be able to deduct the rent you pay for that part. File federal taxes online free 2012 You must meet the requirements for business use of your home. File federal taxes online free 2012 For more information, see Business use of your home in chapter 1. File federal taxes online free 2012 Rent paid in advance. File federal taxes online free 2012   Generally, rent paid in your trade or business is deductible in the year paid or accrued. File federal taxes online free 2012 If you pay rent in advance, you can deduct only the amount that applies to your use of the rented property during the tax year. File federal taxes online free 2012 You can deduct the rest of your payment only over the period to which it applies. File federal taxes online free 2012 Example 1. File federal taxes online free 2012 You are a calendar year taxpayer and you leased a building for 5 years beginning July 1. File federal taxes online free 2012 Your rent is $12,000 per year. File federal taxes online free 2012 You paid the first year's rent ($12,000) on June 30. File federal taxes online free 2012 You can deduct only $6,000 (6/12 × $12,000) for the rent that applies to the first year. File federal taxes online free 2012 Example 2. File federal taxes online free 2012 You are a calendar year taxpayer. File federal taxes online free 2012 Last January you leased property for 3 years for $6,000 a year. File federal taxes online free 2012 You paid the full $18,000 (3 × $6,000) during the first year of the lease. File federal taxes online free 2012 Each year you can deduct only $6,000, the part of the lease that applies to that year. File federal taxes online free 2012 Canceling a lease. File federal taxes online free 2012   You generally can deduct as rent an amount you pay to cancel a business lease. File federal taxes online free 2012 Lease or purchase. File federal taxes online free 2012   There may be instances in which you must determine whether your payments are for rent or for the purchase of the property. File federal taxes online free 2012 You must first determine whether your agreement is a lease or a conditional sales contract. File federal taxes online free 2012 Payments made under a conditional sales contract are not deductible as rent expense. File federal taxes online free 2012 Conditional sales contract. File federal taxes online free 2012   Whether an agreement is a conditional sales contract depends on the intent of the parties. File federal taxes online free 2012 Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. File federal taxes online free 2012 No single test, or special combination of tests, always applies. File federal taxes online free 2012 However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true. File federal taxes online free 2012 The agreement applies part of each payment toward an equity interest you will receive. File federal taxes online free 2012 You get title to the property after you make a stated amount of required payments. File federal taxes online free 2012 The amount you must pay to use the property for a short time is a large part of the amount you would pay to get title to the property. File federal taxes online free 2012 You pay much more than the current fair rental value of the property. File federal taxes online free 2012 You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. File federal taxes online free 2012 Determine this value when you make the agreement. File federal taxes online free 2012 You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement. File federal taxes online free 2012 The agreement designates part of the payments as interest, or that part is easy to recognize as interest. File federal taxes online free 2012 Leveraged leases. File federal taxes online free 2012   Leveraged lease transactions may not be considered leases. File federal taxes online free 2012 Leveraged leases generally involve three parties: a lessor, a lessee, and a lender to the lessor. File federal taxes online free 2012 Usually the lease term covers a large part of the useful life of the leased property, and the lessee's payments to the lessor are enough to cover the lessor's payments to the lender. File federal taxes online free 2012   If you plan to take part in what appears to be a leveraged lease, you may want to get an advance ruling. File federal taxes online free 2012 Revenue Procedure 2001-28 on page 1156 of Internal Revenue Bulletin 2001-19 contains the guidelines the IRS will use to determine if a leveraged lease is a lease for federal income tax purposes. File federal taxes online free 2012 Revenue Procedure 2001-29 on page 1160 of the same Internal Revenue Bulletin provides the information required to be furnished in a request for an advance ruling on a leveraged lease transaction. File federal taxes online free 2012 Internal Revenue Bulletin 2001-19 is available at www. File federal taxes online free 2012 irs. File federal taxes online free 2012 gov/pub/irs-irbs/irb01-19. File federal taxes online free 2012 pdf. File federal taxes online free 2012   In general, Revenue Procedure 2001-28 provides that, for advance ruling purposes only, the IRS will consider the lessor in a leveraged lease transaction to be the owner of the property and the transaction to be a valid lease if all the factors in the revenue procedure are met, including the following. File federal taxes online free 2012 The lessor must maintain a minimum unconditional “at risk” equity investment in the property (at least 20% of the cost of the property) during the entire lease term. File federal taxes online free 2012 The lessee may not have a contractual right to buy the property from the lessor at less than fair market value when the right is exercised. File federal taxes online free 2012 The lessee may not invest in the property, except as provided by Revenue Procedure 2001-28. File federal taxes online free 2012 The lessee may not lend any money to the lessor to buy the property or guarantee the loan used by the lessor to buy the property. File federal taxes online free 2012 The lessor must show that it expects to receive a profit apart from the tax deductions, allowances, credits, and other tax attributes. File federal taxes online free 2012   The IRS may charge you a user fee for issuing a tax ruling. File federal taxes online free 2012 For more information, see Revenue Procedure 2014-1 available at  www. File federal taxes online free 2012 irs. File federal taxes online free 2012 gov/irb/2014-1_IRB/ar05. File federal taxes online free 2012 html. File federal taxes online free 2012 Leveraged leases of limited-use property. File federal taxes online free 2012   The IRS will not issue advance rulings on leveraged leases of so-called limited-use property. File federal taxes online free 2012 Limited-use property is property not expected to be either useful to or usable by a lessor at the end of the lease term except for continued leasing or transfer to a lessee. File federal taxes online free 2012 See Revenue Procedure 2001-28 for examples of limited-use property and property that is not limited-use property. File federal taxes online free 2012 Leases over $250,000. File federal taxes online free 2012   Special rules are provided for certain leases of tangible property. File federal taxes online free 2012 The rules apply if the lease calls for total payments of more than $250,000 and any of the following apply. File federal taxes online free 2012 Rents increase during the lease. File federal taxes online free 2012 Rents decrease during the lease. File federal taxes online free 2012 Rents are deferred (rent is payable after the end of the calendar year following the calendar year in which the use occurs and the rent is allocated). File federal taxes online free 2012 Rents are prepaid (rent is payable before the end of the calendar year preceding the calendar year in which the use occurs and the rent is allocated). File federal taxes online free 2012 These rules do not apply if your lease specifies equal amounts of rent for each month in the lease term and all rent payments are due in the calendar year to which the rent relates (or in the preceding or following calendar year). File federal taxes online free 2012   Generally, if the special rules apply, you must use an accrual method of accounting (and time value of money principles) for your rental expenses, regardless of your overall method of accounting. File federal taxes online free 2012 In addition, in certain cases in which the IRS has determined that a lease was designed to achieve tax avoidance, you must take rent and stated or imputed interest into account under a constant rental accrual method in which the rent is treated as accruing ratably over the entire lease term. File federal taxes online free 2012 For details, see section 467 of the Internal Revenue Code. File federal taxes online free 2012 Taxes on Leased Property If you lease business property, you can deduct as additional rent any taxes you have to pay to or for the lessor. File federal taxes online free 2012 When you can deduct these taxes as additional rent depends on your accounting method. File federal taxes online free 2012 Cash method. File federal taxes online free 2012   If you use the cash method of accounting, you can deduct the taxes as additional rent only for the tax year in which you pay them. File federal taxes online free 2012 Accrual method. File federal taxes online free 2012   If you use an accrual method of accounting, you can deduct taxes as additional rent for the tax year in which you can determine all the following. File federal taxes online free 2012 That you have a liability for taxes on the leased property. File federal taxes online free 2012 How much the liability is. File federal taxes online free 2012 That economic performance occurred. File federal taxes online free 2012   The liability and amount of taxes are determined by state or local law and the lease agreement. File federal taxes online free 2012 Economic performance occurs as you use the property. File federal taxes online free 2012 Example 1. File federal taxes online free 2012 Oak Corporation is a calendar year taxpayer that uses an accrual method of accounting. File federal taxes online free 2012 Oak leases land for use in its business. File federal taxes online free 2012 Under state law, owners of real property become liable (incur a lien on the property) for real estate taxes for the year on January 1 of that year. File federal taxes online free 2012 However, they do not have to pay these taxes until July 1 of the next year (18 months later) when tax bills are issued. File federal taxes online free 2012 Under the terms of the lease, Oak becomes liable for the real estate taxes in the later year when the tax bills are issued. File federal taxes online free 2012 If the lease ends before the tax bill for a year is issued, Oak is not liable for the taxes for that year. File federal taxes online free 2012 Oak cannot deduct the real estate taxes as rent until the tax bill is issued. File federal taxes online free 2012 This is when Oak's liability under the lease becomes fixed. File federal taxes online free 2012 Example 2. File federal taxes online free 2012 The facts are the same as in Example 1 except that, according to the terms of the lease, Oak becomes liable for the real estate taxes when the owner of the property becomes liable for them. File federal taxes online free 2012 As a result, Oak will deduct the real estate taxes as rent on its tax return for the earlier year. File federal taxes online free 2012 This is the year in which Oak's liability under the lease becomes fixed. File federal taxes online free 2012 Cost of Getting a Lease You may either enter into a new lease with the lessor of the property or get an existing lease from another lessee. File federal taxes online free 2012 Very often when you get an existing lease from another lessee, you must pay the previous lessee money to get the lease, besides having to pay the rent on the lease. File federal taxes online free 2012 If you get an existing lease on property or equipment for your business, you generally must amortize any amount you pay to get that lease over the remaining term of the lease. File federal taxes online free 2012 For example, if you pay $10,000 to get a lease and there are 10 years remaining on the lease with no option to renew, you can deduct $1,000 each year. File federal taxes online free 2012 The cost of getting an existing lease of tangible property is not subject to the amortization rules for section 197 intangibles discussed in chapter 8. File federal taxes online free 2012 Option to renew. File federal taxes online free 2012   The term of the lease for amortization includes all renewal options plus any other period for which you and the lessor reasonably expect the lease to be renewed. File federal taxes online free 2012 However, this applies only if less than 75% of the cost of getting the lease is for the term remaining on the purchase date (not including any period for which you may choose to renew, extend, or continue the lease). File federal taxes online free 2012 Allocate the lease cost to the original term and any option term based on the facts and circumstances. File federal taxes online free 2012 In some cases, it may be appropriate to make the allocation using a present value computation. File federal taxes online free 2012 For more information, see Regulations section 1. File federal taxes online free 2012 178-1(b)(5). File federal taxes online free 2012 Example 1. File federal taxes online free 2012 You paid $10,000 to get a lease with 20 years remaining on it and two options to renew for 5 years each. File federal taxes online free 2012 Of this cost, you paid $7,000 for the original lease and $3,000 for the renewal options. File federal taxes online free 2012 Because $7,000 is less than 75% of the total $10,000 cost of the lease (or $7,500), you must amortize the $10,000 over 30 years. File federal taxes online free 2012 That is the remaining life of your present lease plus the periods for renewal. File federal taxes online free 2012 Example 2. File federal taxes online free 2012 The facts are the same as in Example 1, except that you paid $8,000 for the original lease and $2,000 for the renewal options. File federal taxes online free 2012 You can amortize the entire $10,000 over the 20-year remaining life of the original lease. File federal taxes online free 2012 The $8,000 cost of getting the original lease was not less than 75% of the total cost of the lease (or $7,500). File federal taxes online free 2012 Cost of a modification agreement. File federal taxes online free 2012   You may have to pay an additional “rent” amount over part of the lease period to change certain provisions in your lease. File federal taxes online free 2012 You must capitalize these payments and amortize them over the remaining period of the lease. File federal taxes online free 2012 You cannot deduct the payments as additional rent, even if they are described as rent in the agreement. File federal taxes online free 2012 Example. File federal taxes online free 2012 You are a calendar year taxpayer and sign a 20-year lease to rent part of a building starting on January 1. File federal taxes online free 2012 However, before you occupy it, you decide that you really need less space. File federal taxes online free 2012 The lessor agrees to reduce your rent from $7,000 to $6,000 per year and to release the excess space from the original lease. File federal taxes online free 2012 In exchange, you agree to pay an additional rent amount of $3,000, payable in 60 monthly installments of $50 each. File federal taxes online free 2012   You must capitalize the $3,000 and amortize it over the 20-year term of the lease. File federal taxes online free 2012 Your amortization deduction each year will be $150 ($3,000 ÷ 20). File federal taxes online free 2012 You cannot deduct the $600 (12 × $50) that you will pay during each of the first 5 years as rent. File federal taxes online free 2012 Commissions, bonuses, and fees. File federal taxes online free 2012   Commissions, bonuses, fees, and other amounts you pay to get a lease on property you use in your business are capital costs. File federal taxes online free 2012 You must amortize these costs over the term of the lease. File federal taxes online free 2012 Loss on merchandise and fixtures. File federal taxes online free 2012   If you sell at a loss merchandise and fixtures that you bought solely to get a lease, the loss is a cost of getting the lease. File federal taxes online free 2012 You must capitalize the loss and amortize it over the remaining term of the lease. File federal taxes online free 2012 Improvements by Lessee If you add buildings or make other permanent improvements to leased property, depreciate the cost of the improvements using the modified accelerated cost recovery system (MACRS). File federal taxes online free 2012 Depreciate the property over its appropriate recovery period. File federal taxes online free 2012 You cannot amortize the cost over the remaining term of the lease. File federal taxes online free 2012 If you do not keep the improvements when you end the lease, figure your gain or loss based on your adjusted basis in the improvements at that time. File federal taxes online free 2012 For more information, see the discussion of MACRS in Publication 946, How To Depreciate Property. File federal taxes online free 2012 Assignment of a lease. File federal taxes online free 2012   If a long-term lessee who makes permanent improvements to land later assigns all lease rights to you for money and you pay the rent required by the lease, the amount you pay for the assignment is a capital investment. File federal taxes online free 2012 If the rental value of the leased land increased since the lease began, part of your capital investment is for that increase in the rental value. File federal taxes online free 2012 The rest is for your investment in the permanent improvements. File federal taxes online free 2012   The part that is for the increased rental value of the land is a cost of getting a lease, and you amortize it over the remaining term of the lease. File federal taxes online free 2012 You can depreciate the part that is for your investment in the improvements over the recovery period of the property as discussed earlier, without regard to the lease term. File federal taxes online free 2012 Capitalizing Rent Expenses Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. File federal taxes online free 2012 Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. File federal taxes online free 2012 You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. File federal taxes online free 2012 Indirect costs include amounts incurred for renting or leasing equipment, facilities, or land. File federal taxes online free 2012 Uniform capitalization rules. File federal taxes online free 2012   You may be subject to the uniform capitalization rules if you do any of the following, unless the property is produced for your use other than in a business or an activity carried on for profit. File federal taxes online free 2012 Produce real property or tangible personal property. File federal taxes online free 2012 For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property. File federal taxes online free 2012 Acquire property for resale. File federal taxes online free 2012 However, these rules do not apply to the following property. File federal taxes online free 2012 Personal property you acquire for resale if your average annual gross receipts are $10 million or less for the 3 prior tax years. File federal taxes online free 2012 Property you produce if you meet either of the following conditions. File federal taxes online free 2012 Your indirect costs of producing the property are $200,000 or less. File federal taxes online free 2012 You use the cash method of accounting and do not account for inventories. File federal taxes online free 2012 Example 1. File federal taxes online free 2012 You rent construction equipment to build a storage facility. File federal taxes online free 2012 If you are subject to the uniform capitalization rules, you must capitalize as part of the cost of the building the rent you paid for the equipment. File federal taxes online free 2012 You recover your cost by claiming a deduction for depreciation on the building. File federal taxes online free 2012 Example 2. File federal taxes online free 2012 You rent space in a facility to conduct your business of manufacturing tools. File federal taxes online free 2012 If you are subject to the uniform capitalization rules, you must include the rent you paid to occupy the facility in the cost of the tools you produce. File federal taxes online free 2012 More information. File federal taxes online free 2012   For more information on these rules, see Uniform Capitalization Rules in Publication 538 and the regulations under Internal Revenue Code section 263A. 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