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

EP Examinations is responsible for overseeing compliance with the retirement plan provisions of the Internal Revenue Code, including the protection of plan assets and of the interests/rights of participants. This is accomplished by conducting examinations to analyze operational features of retirement plans. A centralized examination case selection and review process is used to enhance consistency of enforcement activities and to focus resources on the areas of highest noncompliance.


Priorities and Goals
Critical priorities vital to the success of Employee Plans Examinations.

Articles by the Director of Examinations
Insights on retirement plan topics uncovered during audits.

Internal Controls Protect Your Retirement Plan
Review procedures to help you find and prevent mistakes in administering your plan

EP Abusive Tax Transactions
Abusive tax avoidance transactions involving employee plans are beginning to surface and are growing in number. Left unchallenged, transactions such as these undermine the confidence in our voluntary tax system.

International Issues Affecting Retirement Plans
International issues, including international tax compliance by large corporations and high-wealth individuals, are an IRS-wide priority. The Office of Employee Plans is focused on addressing existing abuse and preventing abuse going forward.

Employee Plans Compliance Unit (EPCU)
Did you receive a letter from this Unit? Will you be getting a letter soon? Go here to get more information.

EP Examination Projects
Results from various examination projects, including listings of most frequent errors and tips on how to avoid these errors.

EP Compliance Trends & Tips
Results and findings from past and current EP examinations that identify compliance risks and recurring plan issues.

Compliance Programs/Initiatives
Plan specialty (403(b)/457, 401(k), multiemployer), large employer plans and Employee Plans Compliance Unit (EPCU) activities.

Audit Closing Agreement Program
The Employee Plans Compliance Resolution System (EPCRS) is a comprehensive system of correction programs established by the IRS that enable sponsors of retirement plans that have experienced compliance violations to preserve the tax benefits of their plans. If plan errors are found during an EP examination, help is available through the Audit Closing Agreement Program (Audit CAP). For plan errors that are found prior to examination notification, possible alternates to Audit CAP are Self-Correction Program (SCP) or the Voluntary Correction Program (VCP).

Technical/Procedural Guidelines for EP Examinations Employees
Locate Field Directives, Examination Guidelines, and other useful information.

EP Examination Process Guide
In response to the results of the Customer Satisfaction Surveys, EP Examinations developed the EP Examination Process Guide to help customers through the examination process. The guide clarifies the various steps in the examination process and introduces available resources.

Form 5500 Corner
Filing tips and updates, notices, and other helpful materials to assist you in preparing your Form 5500 returns.

Form 5330 Corner
Filing tips and updates, notices, and other helpful materials to assist you in preparing your Form 5330 returns.

Communications With EP Customers
Interviews, outreach presentations, newsletters and other important communications.

EP Examinations Office Structure/Contacts
The organizational structure and contacts for the IRS Office of EP Examinations.

Page Last Reviewed or Updated: 20-Mar-2014

The Free Electronic Tax Filing

Free electronic tax filing Publication 503 - Introductory Material Table of Contents Future Developments Reminders IntroductionOrdering forms and publications. Free electronic tax filing Tax questions. Free electronic tax filing Useful Items - You may want to see: Future Developments For the latest information about developments related to Publication 503, such as legislation enacted after it was published, go to www. Free electronic tax filing irs. Free electronic tax filing gov/pub503. Free electronic tax filing Reminders Taxpayer identification number needed for each qualifying person. Free electronic tax filing  You must include on line 2 of Form 2441, Child and Dependent Care Expenses, the name and taxpayer identification number (generally the social security number) of each qualifying person. Free electronic tax filing See Taxpayer identification number under Qualifying Person Test, later. Free electronic tax filing You may have to pay employment taxes. Free electronic tax filing  If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer who has to pay employment taxes. Free electronic tax filing Usually, you are not a household employer if the person who cares for your dependent or spouse does so at his or her home or place of business. Free electronic tax filing See Employment Taxes for Household Employers, later. Free electronic tax filing Photographs of missing children. Free electronic tax filing  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Free electronic tax filing Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Free electronic tax filing You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Free electronic tax filing Introduction This publication explains the tests you must meet to claim the credit for child and dependent care expenses. Free electronic tax filing It explains how to figure and claim the credit. Free electronic tax filing You may be able to claim the credit if you pay someone to care for your dependent who is under age 13 or for your spouse or dependent who is not able to care for himself or herself. Free electronic tax filing The credit can be up to 35% of your expenses. Free electronic tax filing To qualify, you must pay these expenses so you can work or look for work. Free electronic tax filing This publication also discusses some of the employment tax rules for household employers. Free electronic tax filing Dependent care benefits. Free electronic tax filing   If you received any dependent care benefits from your employer during the year, you may be able to exclude from your income all or part of them. Free electronic tax filing You must complete Form 2441, Part III, before you can figure the amount of your credit. Free electronic tax filing See Dependent Care Benefits under How To Figure the Credit, later. Free electronic tax filing Comments and suggestions. Free electronic tax filing   We welcome your comments about this publication and your suggestions for future editions. Free electronic tax filing   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Free electronic tax filing NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Free electronic tax filing Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Free electronic tax filing   You can send your comments from www. Free electronic tax filing irs. Free electronic tax filing gov/formspubs/. Free electronic tax filing Click on “More Information” and then on “Comment on Tax Forms and Publications. Free electronic tax filing ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Free electronic tax filing Ordering forms and publications. Free electronic tax filing   Visit www. Free electronic tax filing irs. Free electronic tax filing gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Free electronic tax filing Internal Revenue Service 1201 N. Free electronic tax filing Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Free electronic tax filing   If you have a tax question, check the information available on IRS. Free electronic tax filing gov or call 1-800-829-1040. Free electronic tax filing We cannot answer tax questions sent to either of the above addresses. Free electronic tax filing Useful Items - You may want to see: Publication 501 Exemptions, Standard Deduction, and Filing Information 926 Household Employer's Tax Guide Form (and Instructions) 2441 Child and Dependent Care Expenses Schedule H (Form 1040) Household Employment Taxes W-10 Dependent Care Provider's Identification and Certification See How To Get Tax Help , near the end of this publication, for information about getting these publications and forms. Free electronic tax filing Prev  Up  Next   Home   More Online Publications