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Free 1040 Income Tax Form

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Free 1040 Income Tax Form

Free 1040 income tax form 4. Free 1040 income tax form   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. Free 1040 income tax form Rent-to-own contract. Free 1040 income tax form 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. Free 1040 income tax form MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Free 1040 income tax form Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. Free 1040 income tax form 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. Free 1040 income tax form This chapter explains how to determine which MACRS depreciation system applies to your property. Free 1040 income tax form It also discusses other information you need to know before you can figure depreciation under MACRS. Free 1040 income tax form 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. Free 1040 income tax form 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. Free 1040 income tax form Finally, it explains when and how to recapture MACRS depreciation. Free 1040 income tax form 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. Free 1040 income tax form 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. Free 1040 income tax form You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Free 1040 income tax form If you placed your property in service in 2013, complete Part III of Form 4562 to report depreciation using MACRS. Free 1040 income tax form Complete section B of Part III to report depreciation using GDS, and complete section C of Part III to report depreciation using ADS. Free 1040 income tax form 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. Free 1040 income tax form Required use of ADS. Free 1040 income tax form   You must use ADS for the following property. Free 1040 income tax form Listed property used 50% or less in a qualified business use. Free 1040 income tax form See chapter 5 for information on listed property. Free 1040 income tax form Any tangible property used predominantly outside the United States during the year. Free 1040 income tax form Any tax-exempt use property. Free 1040 income tax form Any tax-exempt bond-financed property. Free 1040 income tax form 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. Free 1040 income tax form 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. Free 1040 income tax form 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. Free 1040 income tax form Electing ADS. Free 1040 income tax form   Although your property may qualify for GDS, you can elect to use ADS. Free 1040 income tax form The election generally must cover all property in the same property class that you placed in service during the year. Free 1040 income tax form However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. Free 1040 income tax form Once you make this election, you can never revoke it. Free 1040 income tax form   You make the election by completing line 20 in Part III of Form 4562. Free 1040 income tax form 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. Free 1040 income tax form These property classes are also listed under column (a) in section B, Part III, of Form 4562. Free 1040 income tax form For detailed information on property classes, see Appendix B, Table of Class Lives and Recovery Periods, in this publication. Free 1040 income tax form 3-year property. Free 1040 income tax form Tractor units for over-the-road use. Free 1040 income tax form Any race horse over 2 years old when placed in service. Free 1040 income tax form (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. Free 1040 income tax form ) Any other horse (other than a race horse) over 12 years old when placed in service. Free 1040 income tax form Qualified rent-to-own property (defined later). Free 1040 income tax form 5-year property. Free 1040 income tax form Automobiles, taxis, buses, and trucks. Free 1040 income tax form Computers and peripheral equipment. Free 1040 income tax form Office machinery (such as typewriters, calculators, and copiers). Free 1040 income tax form Any property used in research and experimentation. Free 1040 income tax form Breeding cattle and dairy cattle. Free 1040 income tax form Appliances, carpets, furniture, etc. Free 1040 income tax form , used in a residential rental real estate activity. Free 1040 income tax form Certain geothermal, solar, and wind energy property. Free 1040 income tax form 7-year property. Free 1040 income tax form Office furniture and fixtures (such as desks, files, and safes). Free 1040 income tax form Agricultural machinery and equipment. Free 1040 income tax form Any property that does not have a class life and has not been designated by law as being in any other class. Free 1040 income tax form Certain motorsports entertainment complex property (defined later) placed in service before January 1, 2014. Free 1040 income tax form Any natural gas gathering line placed in service after April 11, 2005. Free 1040 income tax form See Natural gas gathering line and electric transmission property , later. Free 1040 income tax form 10-year property. Free 1040 income tax form Vessels, barges, tugs, and similar water transportation equipment. Free 1040 income tax form Any single purpose agricultural or horticultural structure. Free 1040 income tax form Any tree or vine bearing fruits or nuts. Free 1040 income tax form Qualified small electric meter and qualified smart electric grid system (defined later) placed in service on or after October 3, 2008. Free 1040 income tax form 15-year property. Free 1040 income tax form Certain improvements made directly to land or added to it (such as shrubbery, fences, roads, sidewalks, and bridges). Free 1040 income tax form Any retail motor fuels outlet (defined later), such as a convenience store. Free 1040 income tax form Any municipal wastewater treatment plant. Free 1040 income tax form Any qualified leasehold improvement property (defined later) placed in service before January 1, 2014. Free 1040 income tax form Any qualified restaurant property (defined later) placed in service before January 1, 2014. Free 1040 income tax form Initial clearing and grading land improvements for gas utility property. Free 1040 income tax form 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. Free 1040 income tax form See Natural gas gathering line and electric transmission property , later. Free 1040 income tax form Any natural gas distribution line placed in service after April 11, 2005 and before January 1, 2011. Free 1040 income tax form Any qualified retail improvement property placed in service before January 1, 2014. Free 1040 income tax form 20-year property. Free 1040 income tax form Farm buildings (other than single purpose agricultural or horticultural structures). Free 1040 income tax form Municipal sewers not classified as 25-year property. Free 1040 income tax form Initial clearing and grading land improvements for electric utility transmission and distribution plants. Free 1040 income tax form 25-year property. Free 1040 income tax form This class is water utility property, which is either of the following. Free 1040 income tax form 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. Free 1040 income tax form Municipal sewers other than property placed in service under a binding contract in effect at all times since June 9, 1996. Free 1040 income tax form Residential rental property. Free 1040 income tax form 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. Free 1040 income tax form A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. Free 1040 income tax form 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. Free 1040 income tax form 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. Free 1040 income tax form Nonresidential real property. Free 1040 income tax form 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. Free 1040 income tax form 5 years. Free 1040 income tax form Qualified rent-to-own property. Free 1040 income tax form   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. Free 1040 income tax form It is tangible personal property generally used in the home for personal use. Free 1040 income tax form It includes computers and peripheral equipment, televisions, videocassette recorders, stereos, camcorders, appliances, furniture, washing machines and dryers, refrigerators, and other similar consumer durable property. Free 1040 income tax form Consumer durable property does not include real property, aircraft, boats, motor vehicles, or trailers. Free 1040 income tax form   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. Free 1040 income tax form 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. Free 1040 income tax form Rent-to-own dealer. Free 1040 income tax form   You are a rent-to-own dealer if you meet all the following requirements. Free 1040 income tax form You regularly enter into rent-to-own contracts (defined below) in the ordinary course of your business for the use of consumer property. Free 1040 income tax form A substantial portion of these contracts end with the customer returning the property before making all the payments required to transfer ownership. Free 1040 income tax form The property is tangible personal property of a type generally used within the home for personal use. Free 1040 income tax form Rent-to-own contract. Free 1040 income tax form   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. Free 1040 income tax form 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). Free 1040 income tax form Provides for regular periodic (weekly or monthly) payments that can be either level or decreasing. Free 1040 income tax form If the payments are decreasing, no payment can be less than 40% of the largest payment. Free 1040 income tax form Provides for total payments that generally exceed the normal retail price of the property plus interest. Free 1040 income tax form Provides for total payments that do not exceed $10,000 for each item of property. Free 1040 income tax form 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. Free 1040 income tax form 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. Free 1040 income tax form 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. Free 1040 income tax form Motorsports entertainment complex. Free 1040 income tax form   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. Free 1040 income tax form The events must be open to the public for the price of admission. Free 1040 income tax form Qualified smart electric grid system. Free 1040 income tax form   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. Free 1040 income tax form 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. Free 1040 income tax form Retail motor fuels outlet. Free 1040 income tax form   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. Free 1040 income tax form It is not larger than 1,400 square feet. Free 1040 income tax form 50% or more of the gross revenues generated from the property are derived from petroleum sales. Free 1040 income tax form 50% or more of the floor space in the property is devoted to petroleum marketing sales. Free 1040 income tax form A retail motor fuels outlet does not include any facility related to petroleum and natural gas trunk pipelines. Free 1040 income tax form Qualified leasehold improvement property. Free 1040 income tax form    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. Free 1040 income tax form   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. Free 1040 income tax form 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. Free 1040 income tax form Examples include the following. Free 1040 income tax form A complete liquidation of a subsidiary. Free 1040 income tax form A transfer to a corporation controlled by the transferor. Free 1040 income tax form An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. Free 1040 income tax form Qualified restaurant property. Free 1040 income tax form   Qualified restaurant property is any section 1250 property that is a building placed in service after December 31, 2008, and before January 1, 2014. Free 1040 income tax form 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. Free 1040 income tax form Qualified smart electric meter. Free 1040 income tax form   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. Free 1040 income tax form 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. Free 1040 income tax form Natural gas gathering line and electric transmission property. Free 1040 income tax form   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. Free 1040 income tax form The original use of the property must have begun with you after April 11, 2005. Free 1040 income tax form Original use means the first use to which the property is put, whether or not by you. Free 1040 income tax form Therefore, property used by any person before April 12, 2005, is not original use. Free 1040 income tax form Original use includes additional capital expenditures you incurred to recondition or rebuild your property. Free 1040 income tax form However, original use does not include the cost of reconditioned or rebuilt property you acquired. Free 1040 income tax form 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. Free 1040 income tax form The property must not be placed in service under a binding contract in effect before April 12, 2005. Free 1040 income tax form 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. Free 1040 income tax form 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. Free 1040 income tax form 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. Free 1040 income tax form The placed in service date for your property is the date the property is ready and available for a specific use. Free 1040 income tax form It is therefore not necessarily the date it is first used. Free 1040 income tax form 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. Free 1040 income tax form See Placed in Service under When Does Depreciation Begin and End in chapter 1 for examples illustrating when property is placed in service. Free 1040 income tax form 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. Free 1040 income tax form 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 . Free 1040 income tax form Reduce that amount by any credits and deductions allocable to the property. Free 1040 income tax form The following are examples of some credits and deductions that reduce basis. Free 1040 income tax form Any deduction for section 179 property. Free 1040 income tax form Any deduction under section 179B of the Internal Revenue Code for capital costs to comply with Environmental Protection Agency sulfur regulations. Free 1040 income tax form 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. Free 1040 income tax form 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. Free 1040 income tax form 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 . Free 1040 income tax form Any deduction for removal of barriers to the disabled and the elderly. Free 1040 income tax form Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. Free 1040 income tax form Any special depreciation allowance. Free 1040 income tax form Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. Free 1040 income tax form For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. Free 1040 income tax form Enter the basis for depreciation under column (c) in Part III of Form 4562. Free 1040 income tax form 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 . Free 1040 income tax form Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. Free 1040 income tax form It is determined based on the depreciation system (GDS or ADS) used. Free 1040 income tax form Recovery Periods Under GDS Under GDS, property that is not qualified Indian reservation property is depreciated over one of the following recovery periods. Free 1040 income tax form 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. Free 1040 income tax form 5 years     Nonresidential real property   39 years 4   15 years for qualified rent-to-own property placed in service before August 6, 1997. Free 1040 income tax form 239 years for property that is a retail motor fuels outlet placed in service before August 20, 1996 (31. Free 1040 income tax form 5 years if placed in service before May 13, 1993), unless you elected to depreciate it over 15 years. Free 1040 income tax form 320 years for property placed in service before June 13, 1996, or under a binding contract in effect before June 10, 1996. Free 1040 income tax form 431. Free 1040 income tax form 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). Free 1040 income tax form The GDS recovery periods for property not listed above can be found in Appendix B, Table of Class Lives and Recovery Periods. Free 1040 income tax form Residential rental property and nonresidential real property are defined earlier under Which Depreciation System (GDS or ADS) Applies. Free 1040 income tax form 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). Free 1040 income tax form Office in the home. Free 1040 income tax form   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. Free 1040 income tax form 5 years if you began using it for business before May 13, 1993). Free 1040 income tax form 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. Free 1040 income tax form 5 years. Free 1040 income tax form See Publication 587 for a discussion of the tests you must meet to claim expenses, including depreciation, for the business use of your home. Free 1040 income tax form Home changed to rental use. Free 1040 income tax form   If you begin to rent a home that was your personal home before 1987, you depreciate it as residential rental property over 27. Free 1040 income tax form 5 years. Free 1040 income tax form 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. Free 1040 income tax form The following table shows these shorter recovery periods. Free 1040 income tax form 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 . Free 1040 income tax form Use this chart to find the correct percentage table to use for qualified Indian reservation property. Free 1040 income tax form 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. Free 1040 income tax form   Property eligible for the shorter recovery periods are 3-, 5-, 7-, 10-, 15-, and 20-year property and nonresidential real property. Free 1040 income tax form You must use this property predominantly in the active conduct of a trade or business within an Indian reservation. Free 1040 income tax form 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. Free 1040 income tax form   The following property is not qualified property. Free 1040 income tax form Property used or located outside an Indian reservation on a regular basis, other than qualified infrastructure property. Free 1040 income tax form Property acquired directly or indirectly from a related person. Free 1040 income tax form Property placed in service for purposes of conducting or housing class I, II, or III gaming activities. Free 1040 income tax form These activities are defined in section 4 of the Indian Regulatory Act (25 U. Free 1040 income tax form S. Free 1040 income tax form C. Free 1040 income tax form 2703). Free 1040 income tax form Any property you must depreciate under ADS. Free 1040 income tax form 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). Free 1040 income tax form Qualified infrastructure property. Free 1040 income tax form   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. Free 1040 income tax form Qualified infrastructure property is property that meets all the following rules. Free 1040 income tax form It is qualified property, as defined earlier, except that it is outside the reservation. Free 1040 income tax form It benefits the tribal infrastructure. Free 1040 income tax form It is available to the general public. Free 1040 income tax form It is placed in service in connection with the active conduct of a trade or business within a reservation. Free 1040 income tax form Infrastructure property includes, but is not limited to, roads, power lines, water systems, railroad spurs, and communications facilities. Free 1040 income tax form Related person. Free 1040 income tax form   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. Free 1040 income tax form Indian reservation. Free 1040 income tax form   The term Indian reservation means a reservation as defined in section 3(d) of the Indian Financing Act of 1974 (25 U. Free 1040 income tax form S. Free 1040 income tax form C. Free 1040 income tax form 1452(d)) or section 4(10) of the Indian Child Welfare Act of 1978 (25 U. Free 1040 income tax form S. Free 1040 income tax form C. Free 1040 income tax form 1903(10)). Free 1040 income tax form Section 3(d) of the Indian Financing Act of 1974 defines reservation to include former Indian reservations in Oklahoma. Free 1040 income tax form For a definition of the term “former Indian reservations in Oklahoma,” see Notice 98-45 in Internal Revenue Bulletin 1998-35. Free 1040 income tax form Recovery Periods Under ADS The recovery periods for most property generally are longer under ADS than they are under GDS. Free 1040 income tax form The following table shows some of the ADS recovery periods. Free 1040 income tax form 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. Free 1040 income tax form 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 . Free 1040 income tax form Tax-exempt use property subject to a lease. Free 1040 income tax form   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. Free 1040 income tax form Additions and Improvements An addition or improvement you make to depreciable property is treated as separate depreciable property. Free 1040 income tax form See How Do You Treat Repairs and Improvements in chapter 1 for a definition of improvements. Free 1040 income tax form 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. Free 1040 income tax form The recovery period begins on the later of the following dates. Free 1040 income tax form The date you place the addition or improvement in service. Free 1040 income tax form The date you place in service the property to which you made the addition or improvement. Free 1040 income tax form 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). Free 1040 income tax form Example. Free 1040 income tax form You own a rental home that you have been renting out since 1981. Free 1040 income tax form 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. Free 1040 income tax form Under GDS, the property class for the addition is residential rental property and its recovery period is 27. Free 1040 income tax form 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. Free 1040 income tax form Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. Free 1040 income tax form 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. Free 1040 income tax form The mid-month convention. Free 1040 income tax form   Use this convention for nonresidential real property, residential rental property, and any railroad grading or tunnel bore. Free 1040 income tax form   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. Free 1040 income tax form This means that a one-half month of depreciation is allowed for the month the property is placed in service or disposed of. Free 1040 income tax form   Your use of the mid-month convention is indicated by the “MM” already shown under column (e) in Part III of Form 4562. Free 1040 income tax form The mid-quarter convention. Free 1040 income tax form   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. Free 1040 income tax form   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. Free 1040 income tax form This means that 1½ months of depreciation is allowed for the quarter the property is placed in service or disposed of. Free 1040 income tax form   If you use this convention, enter “MQ” under column (e) in Part III of Form 4562. Free 1040 income tax form    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. Free 1040 income tax form However, it does not reflect any reduction in basis for any special depreciation allowance. Free 1040 income tax form The half-year convention. Free 1040 income tax form   Use this convention if neither the mid-quarter convention nor the mid-month convention applies. Free 1040 income tax form   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. Free 1040 income tax form This means that a one-half year of depreciation is allowed for the year the property is placed in service or disposed of. Free 1040 income tax form   If you use this convention, enter “HY” under column (e) in Part III of Form 4562. Free 1040 income tax form Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. Free 1040 income tax form The 200% declining balance method over a GDS recovery period. Free 1040 income tax form The 150% declining balance method over a GDS recovery period. Free 1040 income tax form The straight line method over a GDS recovery period. Free 1040 income tax form The straight line method over an ADS recovery period. Free 1040 income tax form 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. Free 1040 income tax form If you made this election, continue to use the same method and recovery period for that property. Free 1040 income tax form Table 4–1 lists the types of property you can depreciate under each method. Free 1040 income tax form It also gives a brief explanation of the method, including any benefits that may apply. Free 1040 income tax form 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. Free 1040 income tax form You can depreciate real property using the straight line method under either GDS or ADS. Free 1040 income tax form Fruit or nut trees and vines. Free 1040 income tax form   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a recovery period of 10 years. Free 1040 income tax form ADS required for some farmers. Free 1040 income tax form   If you elect not to apply the uniform capitalization rules to any plant produced in your farming business, you must use ADS. Free 1040 income tax form You must use ADS for all property you place in service in any year the election is in effect. Free 1040 income tax form See the regulations under section 263A of the Internal Revenue Code for information on the uniform capitalization rules that apply to farm property. Free 1040 income tax form Electing a Different Method As shown in Table 4–1 , you can elect a different method for depreciation for certain types of property. Free 1040 income tax form You must make the election by the due date of the return (including extensions) for the year you placed the property in service. Free 1040 income tax form 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). Free 1040 income tax form Attach the election to the amended return and write “Filed pursuant to section 301. Free 1040 income tax form 9100-2” on the election statement. Free 1040 income tax form File the amended return at the same address you filed the original return. Free 1040 income tax form Once you make the election, you cannot change it. Free 1040 income tax form 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. Free 1040 income tax form However, you can make the election on a property-by-property basis for nonresidential real and residential rental property. Free 1040 income tax form 150% election. Free 1040 income tax form   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. Free 1040 income tax form Make the election by entering “150 DB” under column (f) in Part III of Form 4562. Free 1040 income tax form Straight line election. Free 1040 income tax form   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. Free 1040 income tax form Make the election by entering  “S/L” under column (f) in Part III of Form 4562. Free 1040 income tax form Election of ADS. Free 1040 income tax form   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. Free 1040 income tax form ADS uses the straight line method of depreciation over fixed ADS recovery periods. Free 1040 income tax form Most ADS recovery periods are listed in Appendix B, or see the table under Recovery Periods Under ADS , earlier. Free 1040 income tax form   Make the election by completing line 20 in Part III of Form 4562. Free 1040 income tax form Farm property. Free 1040 income tax form   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. Free 1040 income tax form The straight line method over a GDS recovery period. Free 1040 income tax form The straight line method over an ADS recovery period. Free 1040 income tax form Table 4-1. Free 1040 income tax form Depreciation Methods Note. Free 1040 income tax form The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. Free 1040 income tax form 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. Free 1040 income tax form S. Free 1040 income tax form  • 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. Free 1040 income tax form 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. Free 1040 income tax form Then, you are ready to figure your depreciation deduction. Free 1040 income tax form You can figure it using a percentage table provided by the IRS, or you can figure it yourself without using the table. Free 1040 income tax form 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. Free 1040 income tax form These percentage tables are in Appendix A near the end of this publication. Free 1040 income tax form Which table to use. Free 1040 income tax form    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. Free 1040 income tax form The percentage tables immediately follow the guide. Free 1040 income tax form Rules Covering the Use of the Tables The following rules cover the use of the percentage tables. Free 1040 income tax form You must apply the rates in the percentage tables to your property's unadjusted basis. Free 1040 income tax form You cannot use the percentage tables for a short tax year. Free 1040 income tax form See Figuring the Deduction for a Short Tax Year, later, for information on the short tax year rules. Free 1040 income tax form 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. Free 1040 income tax form 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. Free 1040 income tax form 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. Free 1040 income tax form Basis adjustment due to recapture of clean-fuel vehicle deduction or credit. Free 1040 income tax form   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. Free 1040 income tax form 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. Free 1040 income tax form See Figuring the Deduction Without Using the Tables, later. Free 1040 income tax form Basis adjustment due to casualty loss. Free 1040 income tax form   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. Free 1040 income tax form 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. Free 1040 income tax form See Figuring the Deduction Without Using the Tables, later. Free 1040 income tax form Example. Free 1040 income tax form 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. Free 1040 income tax form It cost $39,000 and she elected a section 179 deduction of $24,000. Free 1040 income tax form She also took a special depreciation allowance of $7,500 [50% of $15,000 ($39,000 − $24,000)]. Free 1040 income tax form Her unadjusted basis after the section 179 deduction and special depreciation allowance was $7,500 ($15,000 − $7,500). Free 1040 income tax form She figured her MACRS depreciation deduction using the percentage tables. Free 1040 income tax form For 2012, her MACRS depreciation deduction was $268. Free 1040 income tax form In July 2013, the property was vandalized and Sandra had a deductible casualty loss of $3,000. Free 1040 income tax form She must adjust the property's basis for the casualty loss, so she can no longer use the percentage tables. Free 1040 income tax form Her adjusted basis at the end of 2013, before figuring her 2013 depreciation, is $4,232. Free 1040 income tax form 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. Free 1040 income tax form She must now figure her depreciation for 2013 without using the percentage tables. Free 1040 income tax form 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. Free 1040 income tax form 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. Free 1040 income tax form However, you do reduce your original basis by other amounts, including the following. Free 1040 income tax form Any amortization taken on the property. Free 1040 income tax form Any section 179 deduction claimed. Free 1040 income tax form Any special depreciation allowance taken on the property. Free 1040 income tax form For business property you purchase during the year, the unadjusted basis is its cost minus these and other applicable adjustments. Free 1040 income tax form 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. Free 1040 income tax form MACRS Worksheet You can use this worksheet to help you figure your depreciation deduction using the percentage tables. Free 1040 income tax form Use a separate worksheet for each item of property. Free 1040 income tax form Then, use the information from this worksheet to prepare Form 4562. Free 1040 income tax form Do not use this worksheet for automobiles. Free 1040 income tax form Use the Depreciation Worksheet for Passenger Automobiles in chapter 5. Free 1040 income tax form MACRS Worksheet Part I   1. Free 1040 income tax form MACRS system (GDS or ADS)   2. Free 1040 income tax form Property class   3. Free 1040 income tax form Date placed in service   4. Free 1040 income tax form Recovery period   5. Free 1040 income tax form Method and convention   6. Free 1040 income tax form Depreciation rate (from tables)   Part II   7. Free 1040 income tax form Cost or other basis* $     8. Free 1040 income tax form Business/investment use   %   9. Free 1040 income tax form Multiply line 7 by line 8   $ 10. Free 1040 income tax form Total claimed for section 179 deduction and other items   $ 11. Free 1040 income tax form Subtract line 10 from line 9. Free 1040 income tax form This is your tentative basis for depreciation   $ 12. Free 1040 income tax form Multiply line 11 by . Free 1040 income tax form 50 if the 50% special depreciation allowance applies. Free 1040 income tax form This is your special depreciation allowance. Free 1040 income tax form 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. Free 1040 income tax form Subtract line 12 from line 11. Free 1040 income tax form This is your basis for depreciation     14. Free 1040 income tax form Depreciation rate (from line 6)     15. Free 1040 income tax form Multiply line 13 by line 14. Free 1040 income tax form This is your MACRS depreciation deduction   $ *If real estate, do not include cost (basis) of land. Free 1040 income tax form The following example shows how to figure your MACRS depreciation deduction using the percentage tables and the MACRS worksheet. Free 1040 income tax form Example. Free 1040 income tax form You bought office furniture (7-year property) for $10,000 and placed it in service on August 11, 2013. Free 1040 income tax form You use the furniture only for business. Free 1040 income tax form This is the only property you placed in service this year. Free 1040 income tax form 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. Free 1040 income tax form You use GDS and the half-year convention to figure your depreciation. Free 1040 income tax form You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-1. Free 1040 income tax form Multiply your property's unadjusted basis each year by the percentage for 7-year property given in Table A-1. Free 1040 income tax form You figure your depreciation deduction using the MACRS worksheet as follows. Free 1040 income tax form MACRS Worksheet Part I 1. Free 1040 income tax form MACRS system (GDS or ADS) GDS 2. Free 1040 income tax form Property class 7-year 3. Free 1040 income tax form Date placed in service 8/11/13 4. Free 1040 income tax form Recovery period 7-Year 5. Free 1040 income tax form Method and convention 200%DB/Half-Year 6. Free 1040 income tax form Depreciation rate (from tables) . Free 1040 income tax form 1429 Part II 7. Free 1040 income tax form Cost or other basis* $10,000     8. Free 1040 income tax form Business/investment use 100 %   9. Free 1040 income tax form Multiply line 7 by line 8   $10,000 10. Free 1040 income tax form Total claimed for section 179 deduction and other items   -0- 11. Free 1040 income tax form Subtract line 10 from line 9. Free 1040 income tax form This is your tentative basis for depreciation   $10,000 12. Free 1040 income tax form Multiply line 11 by . Free 1040 income tax form 50 if the 50% special depreciation allowance applies. Free 1040 income tax form This is your special depreciation allowance. Free 1040 income tax form 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. Free 1040 income tax form Subtract line 12 from line 11. Free 1040 income tax form This is your basis for depreciation   $10,000 14. Free 1040 income tax form Depreciation rate (from line 6)   . Free 1040 income tax form 1429 15. Free 1040 income tax form Multiply line 13 by line 14. Free 1040 income tax form This is your MACRS depreciation deduction   $1,429 *If real estate, do not include cost (basis) of land. Free 1040 income tax form 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. Free 1040 income tax form Year   Basis Percentage Deduction 2014 $ 10,000 24. Free 1040 income tax form 49%   $2,449   2015   10,000 17. Free 1040 income tax form 49   1,749   2016   10,000 12. Free 1040 income tax form 49   1,249   2017   10,000 8. Free 1040 income tax form 93   893   2018   10,000 8. Free 1040 income tax form 92   892   2019   10,000 8. Free 1040 income tax form 93   893   2020   10,000 4. Free 1040 income tax form 46   446   Examples The following examples are provided to show you how to use the percentage tables. Free 1040 income tax form In both examples, assume the following. Free 1040 income tax form You use the property only for business. Free 1040 income tax form You use the calendar year as your tax year. Free 1040 income tax form You use GDS for all the properties. Free 1040 income tax form Example 1. Free 1040 income tax form You bought a building and land for $120,000 and placed it in service on March 8. Free 1040 income tax form The sales contract showed that the building cost $100,000 and the land cost $20,000. Free 1040 income tax form It is nonresidential real property. Free 1040 income tax form The building's unadjusted basis is its original cost, $100,000. Free 1040 income tax form You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-7a. Free 1040 income tax form 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. Free 1040 income tax form Your depreciation deduction for each of the first 3 years is as follows: Year   Basis Percentage Deduction 1st $ 100,000 2. Free 1040 income tax form 033%   $2,033   2nd   100,000 2. Free 1040 income tax form 564   2,564   3rd   100,000 2. Free 1040 income tax form 564   2,564   Example 2. Free 1040 income tax form 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. Free 1040 income tax form You placed the machine in service in January, the furniture in September, and the computer in October. Free 1040 income tax form You do not elect a section 179 deduction and none of these items is qualified property for purposes of claiming a special depreciation allowance. Free 1040 income tax form 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. Free 1040 income tax form The total bases of all property you placed in service during the year is $10,000. Free 1040 income tax form 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. Free 1040 income tax form Therefore, you must use the mid-quarter convention for all three items. Free 1040 income tax form You refer to the MACRS Percentage Table Guide in Appendix A to determine which table you should use under the mid-quarter convention. Free 1040 income tax form The machine is 7-year property placed in service in the first quarter, so you use Table A-2. Free 1040 income tax form The furniture is 7-year property placed in service in the third quarter, so you use Table A-4. Free 1040 income tax form Finally, because the computer is 5-year property placed in service in the fourth quarter, you use Table A-6. Free 1040 income tax form Knowing what table to use for each property, you figure the depreciation for the first 2 years as follows. Free 1040 income tax form Year Property Basis Percentage Deduction 1st Machine $4,000 25. Free 1040 income tax form 00 $1,000   2nd Machine 4,000 21. Free 1040 income tax form 43 857   1st Furniture 1,000 10. Free 1040 income tax form 71 107   2nd Furniture 1,000 25. Free 1040 income tax form 51 255   1st Computer 5,000 5. Free 1040 income tax form 00 250   2nd Computer 5,000 38. Free 1040 income tax form 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. Free 1040 income tax form 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. Free 1040 income tax form After you figure the full-year depreciation amount, figure the deductible part using the convention that applies to the property. Free 1040 income tax form Half-year convention used. Free 1040 income tax form   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. Free 1040 income tax form Mid-quarter convention used. Free 1040 income tax form   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. Free 1040 income tax form Quarter Percentage First 12. Free 1040 income tax form 5% Second 37. Free 1040 income tax form 5 Third 62. Free 1040 income tax form 5 Fourth 87. Free 1040 income tax form 5 Example. Free 1040 income tax form On December 2, 2010, you placed in service an item of 5-year property costing $10,000. Free 1040 income tax form You did not claim a section 179 deduction and the property does not qualify for a special depreciation allowance. Free 1040 income tax form Your unadjusted basis for the property was $10,000. Free 1040 income tax form 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. Free 1040 income tax form Your property is in the 5-year property class, so you used Table A-5 to figure your depreciation deduction. Free 1040 income tax form Your deductions for 2010, 2011, and 2012 were $500 (5% of $10,000), $3,800 (38% of $10,000), and $2,280 (22. Free 1040 income tax form 80% of $10,000). Free 1040 income tax form You disposed of the property on April 6, 2013. Free 1040 income tax form To determine your depreciation deduction for 2013, first figure the deduction for the full year. Free 1040 income tax form This is $1,368 (13. Free 1040 income tax form 68% of $10,000). Free 1040 income tax form April is in the second quarter of the year, so you multiply $1,368 by 37. Free 1040 income tax form 5% to get your depreciation deduction of $513 for 2013. Free 1040 income tax form Mid-month convention used. Free 1040 income tax form   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. Free 1040 income tax form The numerator of the fraction is the number of months (including partial months) in the year that the property is considered in service. Free 1040 income tax form The denominator is 12. Free 1040 income tax form Example. Free 1040 income tax form On July 2, 2011, you purchased and placed in service residential rental property. Free 1040 income tax form The property cost $100,000, not including the cost of land. Free 1040 income tax form You used Table A-6 to figure your MACRS depreciation for this property. Free 1040 income tax form You sold the property on March 2, 2013. Free 1040 income tax form You file your tax return based on the calendar year. Free 1040 income tax form A full year of depreciation for 2013 is $3,636. Free 1040 income tax form This is $100,000 multiplied by . Free 1040 income tax form 03636 (the percentage for the seventh month of the third recovery year) from Table A-6 . Free 1040 income tax form You then apply the mid-month convention for the 2½ months of use in 2013. Free 1040 income tax form Treat the month of disposition as one-half month of use. Free 1040 income tax form Multiply $3,636 by the fraction, 2. Free 1040 income tax form 5 over 12, to get your 2013 depreciation deduction of $757. Free 1040 income tax form 50. Free 1040 income tax form 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. Free 1040 income tax form Before making the computation each year, you must reduce your adjusted basis in the property by the depreciation claimed the previous year. Free 1040 income tax form Figuring MACRS deductions without using the tables generally will result in a slightly different amount than using the tables. Free 1040 income tax form Declining Balance Method When using a declining balance method, you apply the same depreciation rate each year to the adjusted basis of your property. Free 1040 income tax form 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. Free 1040 income tax form The straight line method is explained later. Free 1040 income tax form You figure depreciation for the year you place property in service as follows. Free 1040 income tax form Multiply your adjusted basis in the property by the declining balance rate. Free 1040 income tax form Apply the applicable convention. Free 1040 income tax form You figure depreciation for all other years (before the year you switch to the straight line method) as follows. Free 1040 income tax form Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years. Free 1040 income tax form Multiply this new adjusted basis by the same declining balance rate used in earlier years. Free 1040 income tax form 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. Free 1040 income tax form Figuring depreciation under the declining balance method and switching to the straight line method is illustrated in Example 1 , later, under Examples. Free 1040 income tax form Declining balance rate. Free 1040 income tax form   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. Free 1040 income tax form For example, for 3-year property depreciated using the 200% declining balance method, divide 2. Free 1040 income tax form 00 (200%) by 3 to get 0. Free 1040 income tax form 6667, or a 66. Free 1040 income tax form 67% declining balance rate. Free 1040 income tax form For 15-year property depreciated using the 150% declining balance method, divide 1. Free 1040 income tax form 50 (150%) by 15 to get 0. Free 1040 income tax form 10, or a 10% declining balance rate. Free 1040 income tax form   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. Free 1040 income tax form Property Class Method Declining Balance Rate Year 3-year 200% DB 66. Free 1040 income tax form 667% 3rd 5-year 200% DB 40. Free 1040 income tax form 0 4th 7-year 200% DB 28. Free 1040 income tax form 571 5th 10-year 200% DB 20. Free 1040 income tax form 0 7th 15-year 150% DB 10. Free 1040 income tax form 0 7th 20-year 150% DB 7. Free 1040 income tax form 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. Free 1040 income tax form You must use the applicable convention in the year you place the property in service and the year you dispose of the property. Free 1040 income tax form You figure depreciation for the year you place property in service as follows. Free 1040 income tax form Multiply your adjusted basis in the property by the straight line rate. Free 1040 income tax form Apply the applicable convention. Free 1040 income tax form You figure depreciation for all other years (including the year you switch from the declining balance method to the straight line method) as follows. Free 1040 income tax form Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years (under any method). Free 1040 income tax form Determine the depreciation rate for the year. Free 1040 income tax form Multiply the adjusted basis figured in (1) by the depreciation rate figured in (2). Free 1040 income tax form 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. Free 1040 income tax form Straight line rate. Free 1040 income tax form   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. Free 1040 income tax form When figuring the number of years remaining, you must take into account the convention used in the year you placed the property in service. Free 1040 income tax form If the number of years remaining is less than 1, the depreciation rate for that tax year is 1. Free 1040 income tax form 0 (100%). Free 1040 income tax form 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. Free 1040 income tax form 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. Free 1040 income tax form See Straight line rate in the previous discussion. Free 1040 income tax form Use the applicable convention as explained in the following discussions. Free 1040 income tax form Half-year convention. Free 1040 income tax form   If this convention applies, you deduct a half-year of depreciation for the first year and the last year that you depreciate the property. Free 1040 income tax form You deduct a full year of depreciation for any other year during the recovery period. Free 1040 income tax form   Figure your depreciation deduction for the year you place the property in service by dividing the depreciation for a full year by 2. Free 1040 income tax form 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. Free 1040 income tax form 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. Free 1040 income tax form Mid-quarter convention. Free 1040 income tax form   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. Free 1040 income tax form   A quarter of a full 12-month tax year is a period of 3 months. Free 1040 income tax form The first quarter in a year begins on the first day of the tax year. Free 1040 income tax form The second quarter begins on the first day of the fourth month of the tax year. Free 1040 income tax form The third quarter begins on the first day of the seventh month of the tax year. Free 1040 income tax form The fourth quarter begins on the first day of the tenth month of the tax year. Free 1040 income tax form A calendar year is divided into the following quarters. Free 1040 income tax form 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. Free 1040 income tax form Quarter Percentage First 87. Free 1040 income tax form 5% Second 62. Free 1040 income tax form 5 Third 37. Free 1040 income tax form 5 Fourth 12. Free 1040 income tax form 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. Free 1040 income tax form Quarter Percentage First 12. Free 1040 income tax form 5% Second 37. Free 1040 income tax form 5 Third 62. Free 1040 income tax form 5 Fourth 87. Free 1040 income tax form 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. Free 1040 income tax form Mid-month convention. Free 1040 income tax form   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. Free 1040 income tax form Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by a fraction. Free 1040 income tax form The numerator of the fraction is the number of full months in the year that the property is in service plus ½ (or 0. Free 1040 income tax form 5). Free 1040 income tax form The denominator is 12. Free 1040 income tax form   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. Free 1040 income tax form 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. Free 1040 income tax form Example. Free 1040 income tax form You use the calendar year and place nonresidential real property in service in August. Free 1040 income tax form The property is in service 4 full months (September, October, November, and December). Free 1040 income tax form Your numerator is 4. Free 1040 income tax form 5 (4 full months plus 0. Free 1040 income tax form 5). Free 1040 income tax form You multiply the depreciation for a full year by 4. Free 1040 income tax form 5/12, or 0. Free 1040 income tax form 375. Free 1040 income tax form Examples The following examples show how to figure depreciation under MACRS without using the percentage tables. Free 1040 income tax form Figures are rounded for purposes of the examples. Free 1040 income tax form Assume for all the examples that you use a calendar year as your tax year. Free 1040 income tax form Example 1—200% DB method and half-year convention. Free 1040 income tax form In February, you placed in service depreciable property with a 5-year recovery period and a basis of $1,000. Free 1040 income tax form You do not elect to take the section 179 deduction and the property does not qualify for a special depreciation allowance. Free 1040 income tax form You use GDS and the 200% declining balance (DB) method to figure your depreciation. Free 1040 income tax form When the straight line (SL) method results in an equal or larger deduction, you switch to the SL method. Free 1040 income tax form You did not place any property in service in the last 3 months of the year, so you must use the half-year convention. Free 1040 income tax form First year. Free 1040 income tax form You figure the depreciation rate under the 200% DB method by dividing 2 (200%) by 5 (the number of years in the recovery period). Free 1040 income tax form The result is 40%. Free 1040 income tax form You multiply the adjusted basis of the property ($1,000) by the 40% DB rate. Free 1040 income tax form You apply the half-year convention by dividing the result ($400) by 2. Free 1040 income tax form Depreciation for the first year under the 200% DB method is $200. Free 1040 income tax form You figure the depreciation rate under the straight line (SL) method by dividing 1 by 5, the number of years in the recovery period. Free 1040 income tax form The result is 20%. Free 1040 income tax form You multiply the adjusted basis of the property ($1,000) by the 20% SL rate. Free 1040 income tax form You apply the half-year convention by dividing the result ($200) by 2. Free 1040 income tax form Depreciation for the first year under the SL method is $100. Free 1040 income tax form The DB method provides a larger deduction, so you deduct the $200 figured under the 200% DB method. Free 1040 income tax form Second year. Free 1040 income tax form You reduce the adjusted basis ($1,000) by the depreciation claimed in the first year ($200). Free 1040 income tax form You multiply the result ($800) by the DB rate (40%). Free 1040 income tax form Depreciation for the second year under the 200% DB method is $320. Free 1040 income tax form You figure the SL depreciation rate by dividing 1 by 4. Free 1040 income tax form 5, the number of years remaining in the recovery period. Free 1040 income tax form (Based on the half-year convention, you used only half a year of the recovery period in the first year. Free 1040 income tax form ) You multiply the reduced adjusted basis ($800) by the result (22. Free 1040 income tax form 22%). Free 1040 income tax form Depreciation under the SL method for the second year is $178. Free 1040 income tax form The DB method provides a larger deduction, so you deduct the $320 figured under the 200% DB method. Free 1040 income tax form Third year. Free 1040 income tax form You reduce the adjusted basis ($800) by the depreciation claimed in the second year ($320). Free 1040 income tax form You multiply the result ($480) by the DB rate (40%). Free 1040 income tax form Depreciation for the third year under the 200% DB method is $192. Free 1040 income tax form You figure the SL depreciation rate by dividing 1 by 3. Free 1040 income tax form 5. Free 1040 income tax form You multiply the reduced adjusted basis ($480) by the result (28. Free 1040 income tax form 57%). Free 1040 income tax form Depreciation under the SL method for the third year is $137. Free 1040 income tax form The DB method provides a larger deduction, so you deduct the $192 figured under the 200% DB method. Free 1040 income tax form Fourth year. Free 1040 income tax form You reduce the adjusted basis ($480) by the de
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Contact My Local Office in South Dakota

Face-to-face Tax Help

IRS Taxpayer Assistance Centers (TACs) are your source for personal tax help when you believe your tax issue can only be handled face-to-face. No appointment is necessary.

Keep in mind, many questions can be resolved online without waiting in line. Through IRS.gov you can:
• Set up a payment plan.
• Get a transcript of your tax return.
• Make a payment.
• Check on your refund.
• Find answers to many of your tax questions.

We are now referring all requests for tax return preparation services to other available resources. You can take advantage of free tax preparation through Free File, Free File Fillable Forms or through a volunteer site in your community. To find the nearest volunteer site location or to get more information about Free File, go to the top of the page and enter “Free Tax Help” in the Search box.

If you have a tax account issues and feel that it requires talking with someone face-to-face, visit your local TAC.

Caution:  Many of our offices are located in Federal Office Buildings. These buildings may not allow visitors to bring in cell phones with camera capabilities.

Multilingual assistance is available in every office. Hours of operation are subject to change.

Before visiting your local office click on "Services Provided" in the chart below to see what services are available. Services are limited and not all services are available at every TAC office and may vary from site to site. You can get these services on a walk-in basis.

City  Street Address  Days/Hours of Service  Telephone* 
Aberdeen  115 Fourth Ave. S.E.
Aberdeen, SD 57401 

Monday-Friday - 8:30 a.m.-4:30 p.m.
(Closed for lunch 11:00 a.m. - 12:00 noon)

 

Services Provided

(605) 226-7273 
Rapid City  515 Ninth St.
Rapid City, SD 57701 

Monday-Friday - 8:30 a.m.- 4:30 p.m. 
(Closed for lunch 1:00 p.m. - 2:00 p.m.)

 

Services Provided

(605) 348-2006 
Sioux Falls  1720 S. Southeastern Ave.
Sioux Falls, SD 57103 

Monday-Friday - 8:30 a.m.-4:30 p.m.

 

**This office will be open until 6:00 p.m. on 4/14 & 4/15**

 

Services Provided

(605) 330-4539 

* Note: The phone numbers in the chart above are not toll-free for all locations. When you call, you will reach a recorded business message with information about office hours, locations and services provided in that office. If  face-to-face assistance is not a priority for you, you may also get help with IRS letters or resolve tax account issues by phone, toll free at 1-800-829-1040 (individuals) or 1-800-829-4933 (businesses).

For information on where to file your tax return please see Where to File Addresses.

The Taxpayer Advocate Service: Call (605) 377-1600 in Aberdeen or 1-877-777-4778 elsewhere, or see  Publication 1546, The Taxpayer Advocate Service of the IRS.

For further information, see  Tax Topic 104

Partnerships

IRS and organizations all over the country are partnering to assist taxpayers. Through these partnerships, organizations are also achieving their own goals. These mutually beneficial partnerships are strengthening outreach efforts and bringing education and assistance to millions.

For more information about these programs for individuals and families, contact the Stakeholder Partnerships, Education and Communication Office at:

Internal Revenue Service
115 4th Ave. SE
Aberdeen, SD 57401

For more information about these programs for businesses, your local Stakeholder Liaison office establishes relationships with organizations representing small business and self-employed taxpayers. They provide information about the policies, practices and procedures the IRS uses to ensure compliance with the tax laws. To establish a relationship with us, use this list to find a contact in your state:

Stakeholder Liaison (SL) Phone Numbers for Organizations Representing Small Businesses and Self-employed Taxpayers.

Page Last Reviewed or Updated: 28-Mar-2014

The Free 1040 Income Tax Form

Free 1040 income tax form 6. Free 1040 income tax form   How To Figure Cost of Goods Sold Table of Contents Introduction Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42Line 35 Inventory at Beginning of Year Line 36 Purchases Less Cost of Items Withdrawn for Personal Use Line 37 Cost of Labor Line 38 Materials and Supplies Line 39 Other Costs Line 40 Add Lines 35 through 39 Line 41 Inventory at End of Year Line 42 Cost of Goods Sold Introduction If you make or buy goods to sell, you can deduct the cost of goods sold from your gross receipts on Schedule C. Free 1040 income tax form However, to determine these costs, you must value your inventory at the beginning and end of each tax year. Free 1040 income tax form This chapter applies to you if you are a manufacturer, wholesaler, or retailer or if you are engaged in any business that makes, buys, or sells goods to produce income. Free 1040 income tax form This chapter does not apply to a personal service business, such as the business of a doctor, lawyer, carpenter, or painter. Free 1040 income tax form However, if you work in a personal service business and also sell or charge for the materials and supplies normally used in your business, this chapter applies to you. Free 1040 income tax form If you must account for an inventory in your business, you must generally use an accrual method of accounting for your purchases and sales. Free 1040 income tax form For more information, see chapter 2. Free 1040 income tax form Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42 Figure your cost of goods sold by filling out lines 35 through 42 of Schedule C. Free 1040 income tax form These lines are reproduced below and are explained in the discussion that follows. Free 1040 income tax form 35 Inventory at beginning of year. Free 1040 income tax form If different from last year's closing inventory, attach explanation   36 Purchases less cost of items withdrawn for personal use   37 Cost of labor. Free 1040 income tax form Do not include any amounts paid to yourself   38 Materials and supplies   39 Other costs   40 Add lines 35 through 39   41 Inventory at end of year   42 Cost of goods sold. Free 1040 income tax form Subtract line 41 from line 40. Free 1040 income tax form  Enter the result here and on line 4   Line 35 Inventory at Beginning of Year If you are a merchant, beginning inventory is the cost of merchandise on hand at the beginning of the year that you will sell to customers. Free 1040 income tax form If you are a manufacturer or producer, it includes the total cost of raw materials, work in process, finished goods, and materials and supplies used in manufacturing the goods (see Inventories in chapter 2). Free 1040 income tax form Opening inventory usually will be identical to the closing inventory of the year before. Free 1040 income tax form You must explain any difference in a schedule attached to your return. Free 1040 income tax form Donation of inventory. Free 1040 income tax form   If you contribute inventory (property that you sell in the course of your business), the amount you can claim as a contribution deduction is the smaller of its fair market value on the day you contributed it or its basis. Free 1040 income tax form The basis of donated inventory is any cost incurred for the inventory in an earlier year that you would otherwise include in your opening inventory for the year of the contribution. Free 1040 income tax form You must remove the amount of your contribution deduction from your opening inventory. Free 1040 income tax form It is not part of the cost of goods sold. Free 1040 income tax form   If the cost of donated inventory is not included in your opening inventory, the inventory's basis is zero and you cannot claim a charitable contribution deduction. Free 1040 income tax form Treat the inventory's cost as you would ordinarily treat it under your method of accounting. Free 1040 income tax form For example, include the purchase price of inventory bought and donated in the same year in the cost of goods sold for that year. Free 1040 income tax form   A special rule may apply to certain donations of food inventory. Free 1040 income tax form See Publication 526, Charitable Contributions. Free 1040 income tax form Example 1. Free 1040 income tax form You are a calendar year taxpayer who uses an accrual method of accounting. Free 1040 income tax form In 2013, you contributed property from inventory to a church. Free 1040 income tax form It had a fair market value of $600. Free 1040 income tax form The closing inventory at the end of 2012 properly included $400 of costs due to the acquisition of the property, and in 2012, you properly deducted $50 of administrative and other expenses attributable to the property as business expenses. Free 1040 income tax form The charitable contribution allowed for 2013 is $400 ($600 − $200). Free 1040 income tax form The $200 is the amount that would be ordinary income if you had sold the contributed inventory at fair market value on the date of the gift. Free 1040 income tax form The cost of goods sold you use in determining gross income for 2013 must not include the $400. Free 1040 income tax form You remove that amount from opening inventory for 2013. Free 1040 income tax form Example 2. Free 1040 income tax form If, in Example 1, you acquired the contributed property in 2013 at a cost of $400, you would include the $400 cost of the property in figuring the cost of goods sold for 2013 and deduct the $50 of administrative and other expenses attributable to the property for that year. Free 1040 income tax form You would not be allowed any charitable contribution deduction for the contributed property. Free 1040 income tax form Line 36 Purchases Less Cost of Items Withdrawn for Personal Use If you are a merchant, use the cost of all merchandise you bought for sale. Free 1040 income tax form If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into a finished product. Free 1040 income tax form Trade discounts. Free 1040 income tax form   The differences between the stated prices of articles and the actual prices you pay for them are called trade discounts. Free 1040 income tax form You must use the prices you pay (not the stated prices) in figuring your cost of purchases. Free 1040 income tax form Do not show the discount amount separately as an item in gross income. Free 1040 income tax form   An automobile dealer must record the cost of a car in inventory reduced by any manufacturer's rebate that represents a trade discount. Free 1040 income tax form Cash discounts. Free 1040 income tax form   Cash discounts are amounts your suppliers let you deduct from your purchase invoices for prompt payments. Free 1040 income tax form There are two methods of accounting for cash discounts. Free 1040 income tax form You can either credit them to a separate discount account or deduct them from total purchases for the year. Free 1040 income tax form Whichever method you use, you must be consistent. Free 1040 income tax form If you want to change your method of figuring inventory cost, you must file Form 3115, Application for Change in Accounting Method. Free 1040 income tax form For more information, see Change in Accounting Method in chapter 2. Free 1040 income tax form   If you credit cash discounts to a separate account, you must include this credit balance in your business income at the end of the tax year. Free 1040 income tax form If you use this method, do not reduce your cost of goods sold by the cash discounts. Free 1040 income tax form Purchase returns and allowances. Free 1040 income tax form   You must deduct all returns and allowances from your total purchases during the year. Free 1040 income tax form Merchandise withdrawn from sale. Free 1040 income tax form   If you withdraw merchandise for your personal or family use, you must exclude this cost from the total amount of merchandise you bought for sale. Free 1040 income tax form Do this by crediting the purchases or sales account with the cost of merchandise you withdraw for personal use. Free 1040 income tax form You must also charge the amount to your drawing account. Free 1040 income tax form   A drawing account is a separate account you should keep to record the business income you withdraw to pay for personal and family expenses. Free 1040 income tax form As stated above, you also use it to record withdrawals of merchandise for personal or family use. Free 1040 income tax form This account is also known as a “withdrawals account” or “personal account. Free 1040 income tax form ” Line 37 Cost of Labor Labor costs are usually an element of cost of goods sold only in a manufacturing or mining business. Free 1040 income tax form Small merchandisers (wholesalers, retailers, etc. Free 1040 income tax form ) usually do not have labor costs that can properly be charged to cost of goods sold. Free 1040 income tax form In a manufacturing business, labor costs properly allocable to the cost of goods sold include both the direct and indirect labor used in fabricating the raw material into a finished, saleable product. Free 1040 income tax form Direct labor. Free 1040 income tax form   Direct labor costs are the wages you pay to those employees who spend all their time working directly on the product being manufactured. Free 1040 income tax form They also include a part of the wages you pay to employees who work directly on the product part time if you can determine that part of their wages. Free 1040 income tax form Indirect labor. Free 1040 income tax form   Indirect labor costs are the wages you pay to employees who perform a general factory function that does not have any immediate or direct connection with making the saleable product, but that is a necessary part of the manufacturing process. Free 1040 income tax form Other labor. Free 1040 income tax form   Other labor costs not properly chargeable to the cost of goods sold can be deducted as selling or administrative expenses. Free 1040 income tax form Generally, the only kinds of labor costs properly chargeable to your cost of goods sold are the direct or indirect labor costs and certain other costs treated as overhead expenses properly charged to the manufacturing process, as discussed later under Line 39 Other Costs. Free 1040 income tax form Line 38 Materials and Supplies Materials and supplies, such as hardware and chemicals, used in manufacturing goods are charged to cost of goods sold. Free 1040 income tax form Those that are not used in the manufacturing process are treated as deferred charges. Free 1040 income tax form You deduct them as a business expense when you use them. Free 1040 income tax form Business expenses are discussed in chapter 8. Free 1040 income tax form Line 39 Other Costs Examples of other costs incurred in a manufacturing or mining process that you charge to your cost of goods sold are as follows. Free 1040 income tax form Containers. Free 1040 income tax form   Containers and packages that are an integral part of the product manufactured are a part of your cost of goods sold. Free 1040 income tax form If they are not an integral part of the manufactured product, their costs are shipping or selling expenses. Free 1040 income tax form Freight-in. Free 1040 income tax form   Freight-in, express-in, and cartage-in on raw materials, supplies you use in production, and merchandise you purchase for sale are all part of cost of goods sold. Free 1040 income tax form Overhead expenses. Free 1040 income tax form   Overhead expenses include expenses such as rent, heat, light, power, insurance, depreciation, taxes, maintenance, labor, and supervision. Free 1040 income tax form The overhead expenses you have as direct and necessary expenses of the manufacturing operation are included in your cost of goods sold. Free 1040 income tax form Line 40 Add Lines 35 through 39 The total of lines 35 through 39 equals the cost of the goods available for sale during the year. Free 1040 income tax form Line 41 Inventory at End of Year Subtract the value of your closing inventory (including, as appropriate, the allocable parts of the cost of raw materials and supplies, direct labor, and overhead expenses) from line 40. Free 1040 income tax form Inventory at the end of the year is also known as closing or ending inventory. Free 1040 income tax form Your ending inventory will usually become the beginning inventory of your next tax year. Free 1040 income tax form Line 42 Cost of Goods Sold When you subtract your closing inventory (inventory at the end of the year) from the cost of goods available for sale, the remainder is your cost of goods sold during the tax year. Free 1040 income tax form Prev  Up  Next   Home   More Online Publications