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Free income tax help 7. Free income tax help   Depreciation, Depletion, and Amortization Table of Contents What's New for 2013 Introduction Topics - This chapter discusses: Useful Items - You may want to see: Overview of DepreciationWhat Property Can Be Depreciated? What Property Cannot Be Depreciated? When Does Depreciation Begin and End? Can You Use MACRS To Depreciate Your Property? What Is the Basis of Your Depreciable Property? How Do You Treat Repairs and Improvements? Do You Have To File Form 4562? How Do You Correct Depreciation Deductions? Section 179 Expense DeductionWhat Property Qualifies? What Property Does Not Qualify? How Much Can You Deduct? How Do You Elect the Deduction? When Must You Recapture the Deduction? Claiming the Special Depreciation AllowanceWhat is Qualified Property? How Can You Elect Not To Claim the Allowance? When Must You Recapture an Allowance Figuring Depreciation Under MACRSWhich Depreciation System (GDS or ADS) Applies? Which Property Class Applies Under GDS? What Is the Placed-in-Service Date? What Is the Basis for Depreciation? Which Recovery Period Applies? Which Convention Applies? Which Depreciation Method Applies? How Is the Depreciation Deduction Figured? How Do You Use General Asset Accounts? When Do You Recapture MACRS Depreciation? Additional Rules for Listed PropertyWhat Is Listed Property? What Is the Business-Use Requirement? Do the Passenger Automobile Limits Apply? Depletion Who Can Claim Depletion? Figuring Depletion AmortizationBusiness Start-Up Costs Reforestation Costs Section 197 Intangibles What's New for 2013 Increased section 179 expense deduction dollar limits. Free income tax help  The maximum amount you can elect to deduct for most section 179 property you placed in service in 2013 is $500,000. Free income tax help This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2 million. Free income tax help See Dollar Limits under Section 179 Expense Deduction , later. Free income tax help Extension of special depreciation allowance for certain qualified property acquired after December 31, 2007. Free income tax help . Free income tax help  You may be able to take a 50% special depreciation allowance for certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Free income tax help See Claiming the Special Depreciation Allowance , later. Free income tax help Expiration of the 3- year recovery period for certain race horses. Free income tax help  The 3-year recovery period for race horses two years old or younger will expire for such horses placed in service after December 31, 2013. Free income tax help Introduction If you buy or make improvements to farm property such as machinery, equipment, livestock, or a structure with a useful life of more than a year, you generally cannot deduct its entire cost in one year. Free income tax help Instead, you must spread the cost over the time you use the property and deduct part of it each year. Free income tax help For most types of property, this is called depreciation. Free income tax help This chapter gives information on depreciation methods that generally apply to property placed in service after 1986. Free income tax help For information on depreciating pre-1987 property, see Publication 534, Depreciating Property Placed in Service Before 1987. Free income tax help Topics - This chapter discusses: Overview of depreciation Section 179 expense deduction Special depreciation allowance Modified Accelerated Cost Recovery System (MACRS) Listed property Basic information on cost depletion (including timber depletion) and percentage depletion Amortization of the costs of going into business, reforestation costs, the costs of pollution control facilities, and the costs of section 197 intangibles Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) T (Timber), Forest Activities Schedule 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. Free income tax help It is important to keep good records for property you depreciate. Free income tax help Do not file these records with your return. Free income tax help Instead, you should keep them as part of the permanent records of the depreciated property. Free income tax help They will help you verify the accuracy of the depreciation of assets placed in service in the current and previous tax years. Free income tax help For general information on recordkeeping, see Publication 583, Starting a Business and Keeping Records. Free income tax help For specific information on keeping records for section 179 property and listed property, see Publication 946, How To Depreciate Property. Free income tax help Overview of Depreciation This overview discusses basic information on the following. Free income tax help What property can be depreciated. Free income tax help What property cannot be depreciated. Free income tax help When depreciation begins and ends. Free income tax help Whether MACRS can be used to figure depreciation. Free income tax help What is the basis of your depreciable property. Free income tax help How to treat repairs and improvements. Free income tax help When you must file Form 4562. Free income tax help How you can correct depreciation claimed incorrectly. Free income tax help What Property Can Be Depreciated? You can depreciate most types of tangible property (except land), such as buildings, machinery, equipment, vehicles, certain livestock, and furniture. Free income tax help You can also depreciate certain intangible property, such as copyrights, patents, and computer software. Free income tax help To be depreciable, the property must meet all the following requirements. Free income tax help It must be property you own. Free income tax help It must be used in your business or income-producing activity. Free income tax help It must have a determinable useful life. Free income tax help It must have a useful life that extends substantially beyond the year you place it in service. Free income tax help Property You Own To claim depreciation, you usually must be the owner of the property. Free income tax help You are considered as owning property even if it is subject to a debt. Free income tax help Leased property. Free income tax help   You can depreciate leased property only if you retain the incidents of ownership in the property. Free income tax help This means you bear the burden of exhaustion of the capital investment in the property. Free income tax help Therefore, if you lease property from someone to use in your trade or business or for the production of income, you generally cannot depreciate its cost because you do not retain the incidents of ownership. Free income tax help You can, however, depreciate any capital improvements you make to the leased property. Free income tax help See Additions and Improvements under Which Recovery Period Applies in chapter 4 of Publication 946. Free income tax help   If you lease property to someone, you generally can depreciate its cost even if the lessee (the person leasing from you) has agreed to preserve, replace, renew, and maintain the property. Free income tax help However, you cannot depreciate the cost of the property if the lease provides that the lessee is to maintain the property and return to you the same property or its equivalent in value at the expiration of the lease in as good condition and value as when leased. Free income tax help Life tenant. Free income tax help   Generally, if you hold business or investment property as a life tenant, you can depreciate it as if you were the absolute owner of the property. Free income tax help See Certain term interests in property , later, for an exception. Free income tax help Property Used in Your Business or Income-Producing Activity To claim depreciation on property, you must use it in your business or income-producing activity. Free income tax help If you use property to produce income (investment use), the income must be taxable. Free income tax help You cannot depreciate property that you use solely for personal activities. Free income tax help However, if you use property for business or investment purposes and for personal purposes, you can deduct depreciation based only on the percentage of business or investment use. Free income tax help Example 1. Free income tax help   If you use your car for farm business, you can deduct depreciation based on its percentage of use in farming. Free income tax help If you also use it for investment purposes, you can depreciate it based on its percentage of investment use. Free income tax help Example 2. Free income tax help   If you use part of your home for business, you may be able to deduct depreciation on that part based on its business use. Free income tax help For more information, see Business Use of Your Home in chapter 4. Free income tax help Inventory. Free income tax help   You can never depreciate inventory because it is not held for use in your business. Free income tax help Inventory is any property you hold primarily for sale to customers in the ordinary course of your business. Free income tax help Livestock. Free income tax help   Livestock purchased for draft, breeding, or dairy purposes can be depreciated only if they are not kept in an inventory account. Free income tax help Livestock you raise usually has no depreciable basis because the costs of raising them are deducted and not added to their basis. Free income tax help However, see Immature livestock under When Does Depreciation Begin and End , later, for a special rule. Free income tax help Property Having a Determinable Useful Life To be depreciable, your property must have a determinable useful life. Free income tax help This means it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Free income tax help Irrigation systems and water wells. Free income tax help   Irrigation systems and wells used in a trade or business can be depreciated if their useful life can be determined. Free income tax help You can depreciate irrigation systems and wells composed of masonry, concrete, tile, metal, or wood. Free income tax help In addition, you can depreciate costs for moving dirt to construct irrigation systems and water wells composed of these materials. Free income tax help However, land preparation costs for center pivot irrigation systems are not depreciable. Free income tax help Dams, ponds, and terraces. Free income tax help   In general, you cannot depreciate earthen dams, ponds, and terraces unless the structures have a determinable useful life. Free income tax help What Property Cannot Be Depreciated? Certain property cannot be depreciated, even if the requirements explained earlier are met. Free income tax help This includes the following. Free income tax help Land. Free income tax help You can never depreciate the cost of land because land does not wear out, become obsolete, or get used up. Free income tax help The cost of land generally includes the cost of clearing, grading, planting, and landscaping. Free income tax help Although you cannot depreciate land, you can depreciate certain costs incurred in preparing land for business use. Free income tax help See chapter 1 of Publication 946. Free income tax help Property placed in service and disposed of in the same year. Free income tax help Determining when property is placed in service is explained later. Free income tax help Equipment used to build capital improvements. Free income tax help You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Free income tax help Intangible property such as section 197 intangibles. Free income tax help This property does not have a determinable useful life and generally cannot be depreciated. Free income tax help However, see Amortization , later. Free income tax help Special rules apply to computer software (discussed below). Free income tax help Certain term interests (discussed below). Free income tax help Computer software. Free income tax help   Computer software is generally not a section 197 intangible even if acquired in connection with the acquisition of a business, if it meets all of the following tests. Free income tax help It is readily available for purchase by the general public. Free income tax help It is subject to a nonexclusive license. Free income tax help It has not been substantially modified. Free income tax help   If the software meets the tests above, it can be depreciated and may qualify for the section 179 expense deduction and the special depreciation allowance (if applicable), discussed later. Free income tax help Certain term interests in property. Free income tax help   You cannot depreciate a term interest in property created or acquired after July 27, 1989, for any period during which the remainder interest is held, directly or indirectly, by a person related to you. Free income tax help This rule does not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. Free income tax help For more information, see chapter 1 of Publication 946. Free income tax help When Does Depreciation Begin and End? You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income. Free income tax help You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first. Free income tax help Placed in Service Property is placed in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. Free income tax help Even if you are not using the property, it is in service when it is ready and available for its specific use. Free income tax help Example. Free income tax help You bought a planter for use in your farm business. Free income tax help The planter was delivered in December 2012 after harvest was over. Free income tax help You begin to depreciate the planter for 2012 because it was ready and available for its specific use in 2012, even though it will not be used until the spring of 2013. Free income tax help If your planter comes unassembled in December 2012 and is put together in February 2013, it is not placed in service until 2013. Free income tax help You begin to depreciate it in 2013. Free income tax help If your planter was delivered and assembled in February 2013 but not used until April 2013, it is placed in service in February 2013, because this is when the planter was ready for its specified use. Free income tax help You begin to depreciate it in 2013. Free income tax help Fruit or nut trees and vines. Free income tax help   If you acquire an orchard, grove, or vineyard before the trees or vines have reached the income-producing stage, and they have a preproductive period of more than 2 years, you must capitalize the preproductive-period costs under the uniform capitalization rules (unless you elect not to use these rules). Free income tax help See chapter 6 for information about the uniform capitalization rules. Free income tax help Your depreciation begins when the trees and vines reach the income-producing stage (that is, when they bear fruit, nuts, or grapes in quantities sufficient to commercially warrant harvesting). Free income tax help Immature livestock. Free income tax help   Depreciation for livestock begins when the livestock reaches the age of maturity. Free income tax help If you bought immature livestock for drafting purposes, depreciation begins when they can be worked. Free income tax help If you bought immature livestock for dairy purposes, depreciation begins when they can be milked. Free income tax help If you bought immature livestock for breeding purposes, depreciation begins when they can be bred. Free income tax help Your basis for depreciation is your initial cost for the immature livestock. Free income tax help Idle Property Continue to claim a deduction for depreciation on property used in your business or for the production of income even if it is temporarily idle. Free income tax help For example, if you stop using a machine because there is a temporary lack of a market for a product made with that machine, continue to deduct depreciation on the machine. Free income tax help Cost or Other Basis Fully Recovered You stop depreciating property when you have fully recovered your cost or other basis. Free income tax help This happens when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property. Free income tax help Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. Free income tax help You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events. Free income tax help You sell or exchange the property. Free income tax help You convert the property to personal use. Free income tax help You abandon the property. Free income tax help You transfer the property to a supplies or scrap account. Free income tax help The property is destroyed. Free income tax help For information on abandonment of property, see chapter 8. Free income tax help For information on destroyed property, see chapter 11 and Publication 547, Casualties, Disasters, and Thefts. Free income tax help Can You Use MACRS To Depreciate Your Property? You must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most business and investment property placed in service after 1986. Free income tax help MACRS is explained later under Figuring Depreciation Under MACRS . Free income tax help You cannot use MACRS to depreciate the following property. Free income tax help Property you placed in service before 1987. Free income tax help Use the methods discussed in Publication 534. Free income tax help Certain property owned or used in 1986. Free income tax help See chapter 1 of Publication 946. Free income tax help Intangible property. Free income tax help Films, video tapes, and recordings. Free income tax help Certain corporate or partnership property acquired in a nontaxable transfer. Free income tax help Property you elected to exclude from MACRS. Free income tax help For more information, see chapter 1 of Publication 946. Free income tax help What Is the Basis of Your Depreciable Property? To figure your depreciation deduction, you must determine the basis of your property. Free income tax help To determine basis, you need to know the cost or other basis of your property. Free income tax help Cost or other basis. Free income tax help   The basis of property you buy is usually its cost plus amounts you paid for items such as sales tax, freight charges, and installation and testing fees. Free income tax help The cost includes the amount you pay in cash, debt obligations, other property, or services. Free income tax help   There are times when you cannot use cost as basis. Free income tax help In these situations, the fair market value (FMV) or the adjusted basis of the property may be used. Free income tax help Adjusted basis. Free income tax help   To find your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service. Free income tax help Basis adjustment for depreciation allowed or allowable. Free income tax help   After you place your property in service, you must reduce the basis of the property by the depreciation allowed or allowable, whichever is greater. Free income tax help Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). Free income tax help Depreciation allowable is depreciation you are entitled to deduct. Free income tax help   If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the full amount of depreciation allowable. Free income tax help   If you deduct more depreciation than you should, you must reduce your basis by any amount deducted from which you received a tax benefit (the depreciation allowed). Free income tax help   For more information, see chapter 6. Free income tax help How Do You Treat Repairs and Improvements? You generally deduct the cost of repairing business property in the same way as any other business expense. Free income tax help However, if a repair or replacement increases the value of your property, makes it more useful, or lengthens its life, you must treat it as an improvement and depreciate it. Free income tax help Treat improvements as separate depreciable property. Free income tax help See chapter 1 of Publication 946 for more information. Free income tax help Example. Free income tax help You repair a small section on a corner of the roof of a barn that you rent to others. Free income tax help You deduct the cost of the repair as a business expense. Free income tax help However, if you replace the entire roof, the new roof is considered to be an improvement because it increases the value and lengthens the life for the property. Free income tax help You depreciate the cost of the new roof. Free income tax help Improvements to rented property. Free income tax help   You can depreciate permanent improvements you make to business property you rent from someone else. Free income tax help Do You Have To File Form 4562? Use Form 4562 to claim your deduction for depreciation and amortization. Free income tax help You must complete and attach Form 4562 to your tax return if you are claiming any of the following. Free income tax help A section 179 expense deduction for the current year or a section 179 carryover from a prior year. Free income tax help Depreciation for property placed in service during the current year. Free income tax help Depreciation on any vehicle or other listed property, regardless of when it was placed in service. Free income tax help Amortization of costs that began in the current year. Free income tax help For more information, see the Instructions for Form 4562. Free income tax help How Do You Correct Depreciation Deductions? If you deducted an incorrect amount of depreciation in any year, you may be able to make a correction by filing an amended return for that year. Free income tax help You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. Free income tax help You claimed the incorrect amount because of a mathematical error made in any year. Free income tax help You claimed the incorrect amount because of a posting error made in any year, for example, omitting an asset from the depreciation schedule. Free income tax help You have not adopted a method of accounting for the property placed in service by you in tax years ending after December 29, 2003. Free income tax help You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. Free income tax help Note. Free income tax help You have adopted a method of accounting if you used the same incorrect method of depreciation for two or more consecutively filed returns. Free income tax help If you are not allowed to make the correction on an amended return, you may be able to change your accounting method to claim the correct amount of depreciation. Free income tax help See the Instructions for Form 3115. Free income tax help Section 179 Expense Deduction You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. Free income tax help This is the section 179 expense deduction. Free income tax help You can elect the section 179 expense deduction instead of recovering the cost by taking depreciation deductions. Free income tax help This part of the chapter explains the rules for the section 179 expense deduction. Free income tax help It explains what property qualifies for the deduction, what property does not qualify for the deduction, the limits that may apply, how to elect the deduction, and when you may have to recapture the deduction. Free income tax help For more information, see chapter 2 of Publication 946. Free income tax help What Property Qualifies? To qualify for the section 179 expense deduction, your property must meet all the following requirements. Free income tax help It must be eligible property. Free income tax help It must be acquired for business use. Free income tax help It must have been acquired by purchase. Free income tax help Eligible Property To qualify for the section 179 expense deduction, your property must be one of the following types of depreciable property. Free income tax help Tangible personal property. Free income tax help Qualified real property. Free income tax help (Special rules apply to qualified real property that you elect to treat as qualified section 179 real property. Free income tax help For more information, see chapter 2 of Publication 946 and section 179(f) of the Internal Revenue Code. Free income tax help ) Other tangible property (except buildings and their structural components) used as: An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services; A research facility used in connection with any of the activities in (a) above; or A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities. Free income tax help Single purpose agricultural (livestock) or horticultural structures. Free income tax help Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum. Free income tax help Off-the-shelf computer software that is readily available for purchase by the general public, is subject to a nonexclusive lease, and has not been substantially modified. Free income tax help Tangible personal property. Free income tax help   Tangible personal property is any tangible property that is not real property. Free income tax help It includes the following property. Free income tax help Machinery and equipment. Free income tax help Property contained in or attached to a building (other than structural components), such as milk tanks, automatic feeders, barn cleaners, and office equipment. Free income tax help Gasoline storage tanks and pumps at retail service stations. Free income tax help Livestock, including horses, cattle, hogs, sheep, goats, and mink and other fur-bearing animals. Free income tax help Facility used for the bulk storage of fungible commodities. Free income tax help   A facility used for the bulk storage of fungible commodities is qualifying property for purposes of the section 179 expense deduction if it is used in connection with any of the activities listed earlier in item (3)(a). Free income tax help Bulk storage means the storage of a commodity in a large mass before it is used. Free income tax help Grain bins. Free income tax help   A grain bin is an example of a storage facility that is qualifying section 179 property. Free income tax help It is a facility used in connection with the production of grain or livestock for the bulk storage of fungible commodities. Free income tax help Single purpose agricultural or horticultural structures. Free income tax help   A single purpose agricultural (livestock) or horticultural structure is qualifying property for purposes of the section 179 expense deduction. Free income tax help Agricultural structure. Free income tax help   A single purpose agricultural (livestock) structure is any building or enclosure specifically designed, constructed, and used for both the following reasons. Free income tax help To house, raise, and feed a particular type of livestock and its produce. Free income tax help To house the equipment, including any replacements, needed to house, raise, or feed the livestock. Free income tax help For this purpose, livestock includes poultry. Free income tax help   Single purpose structures are qualifying property if used, for example, to breed chickens or hogs, produce milk from dairy cattle, or produce feeder cattle or pigs, broiler chickens, or eggs. Free income tax help The facility must include, as an integral part of the structure or enclosure, equipment necessary to house, raise, and feed the livestock. Free income tax help Horticultural structure. Free income tax help   A single purpose horticultural structure is either of the following. Free income tax help A greenhouse specifically designed, constructed, and used for the commercial production of plants. Free income tax help A structure specifically designed, constructed, and used for the commercial production of mushrooms. Free income tax help Use of structure. Free income tax help   A structure must be used only for the purpose that qualified it. Free income tax help For example, a hog barn will not be qualifying property if you use it to house poultry. Free income tax help Similarly, using part of your greenhouse to sell plants will make the greenhouse nonqualifying property. Free income tax help   If a structure includes work space, the work space can be used only for the following activities. Free income tax help Stocking, caring for, or collecting livestock or plants or their produce. Free income tax help Maintaining the enclosure or structure. Free income tax help Maintaining or replacing the equipment or stock enclosed or housed in the structure. Free income tax help Property Acquired by Purchase To qualify for the section 179 expense deduction, your property must have been acquired by purchase. Free income tax help For example, property acquired by gift or inheritance does not qualify. Free income tax help Property acquired from a related person (that is, your spouse, ancestors, or lineal descendants) is not considered acquired by purchase. Free income tax help Example. Free income tax help Ken is a farmer. Free income tax help He purchased two tractors, one from his brother and one from his father. Free income tax help He placed both tractors in service in the same year he bought them. Free income tax help The tractor purchased from his father does not qualify for the section 179 expense deduction because he is a related person (as defined above). Free income tax help The tractor purchased from his brother does qualify for the deduction because Ken is not a related person (as defined above). Free income tax help What Property Does Not Qualify? Land and improvements. Free income tax help   Land and land improvements, do not qualify as section 179 property. Free income tax help Land improvements include nonagricultural fences, swimming pools, paved parking areas, wharves, docks, bridges, and fences. Free income tax help However, agricultural fences do qualify as section 179 property. Free income tax help Similarly, field drainage tile also qualifies as section 179 property. Free income tax help Excepted property. Free income tax help   Even if the requirements explained in the preceding discussions are met, farmers cannot elect the section 179 expense deduction for the following property. Free income tax help Certain property you lease to others (if you are a noncorporate lessor). Free income tax help Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging. Free income tax help Property used by a tax-exempt organization (other than a tax-exempt farmers' cooperative) unless the property is used mainly in a taxable unrelated trade or business. Free income tax help Property used by governmental units or foreign persons or entities (except property used under a lease with a term of less than 6 months). Free income tax help How Much Can You Deduct? Your section 179 expense deduction is generally the cost of the qualifying property. Free income tax help However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. Free income tax help These limits apply to each taxpayer, not to each business. Free income tax help However, see Married individuals under Dollar Limits , later. Free income tax help See also the special rules for applying the limits for partnerships and S corporations under Partnerships and S Corporations , later. Free income tax help If you deduct only part of the cost of qualifying property as a section 179 expense deduction, you can generally depreciate the cost you do not deduct. Free income tax help Use Part I of Form 4562 to figure your section 179 expense deduction. Free income tax help Partial business use. Free income tax help   When you use property for business and nonbusiness purposes, you can elect the section 179 expense deduction only if you use it more than 50% for business in the year you place it in service. Free income tax help If you used the property more than 50% for business, multiply the cost of the property by the percentage of business use. Free income tax help Use the resulting business cost to figure your section 179 expense deduction. Free income tax help Trade-in of other property. Free income tax help   If you buy qualifying property with cash and a trade-in, its cost for purposes of the section 179 expense deduction includes only the cash you paid. Free income tax help For example, if you buy (for cash and a trade-in) a new tractor for use in your business, your cost for the section 179 expense deduction is the cash you paid. Free income tax help It does not include the adjusted basis of the old tractor you trade for the new tractor. Free income tax help Example. Free income tax help J-Bar Farms traded two cultivators having a total adjusted basis of $6,800 for a new cultivator costing $13,200. Free income tax help They received an $8,000 trade-in allowance for the old cultivators and paid $5,200 cash for the new cultivator. Free income tax help J-Bar also traded a used pickup truck with an adjusted basis of $8,000 for a new pickup truck costing $35,000. Free income tax help They received a $5,000 trade-in allowance and paid $30,000 cash for the new pickup truck. Free income tax help Only the cash paid by J-Bar qualifies for the section 179 expense deduction. Free income tax help J-Bar's business costs that qualify for a section 179 expense deduction are $35,200 ($5,200 + $30,000). Free income tax help Dollar Limits The total amount you can elect to deduct under section 179 for most property placed in service in 2013 is $500,000. Free income tax help If you acquire and place in service more than one item of qualifying property during the year, you can allocate the section 179 expense deduction among the items in any way, as long as the total deduction is not more than $500,000. Free income tax help Qualified real property that you elect to treat as section 179 property is limited to $250,000 of the maximum section 179 deduction of $500,000 for 2013. Free income tax help You do not have to claim the full $500,000. Free income tax help For specific information on the section 179 dollar limits, see chapter 2 of Publication 946. Free income tax help Reduced dollar limit for cost exceeding $2 million. Free income tax help   If the cost of your qualifying section 179 property placed in service in 2013 is over $2 million, you must reduce the dollar limit (but not below zero) by the amount of cost over $2 million. Free income tax help If the cost of your section 179 property placed in service during 2013 is $2,500,000 or more, you cannot take a section 179 expense deduction and you cannot carry over the cost that is more than $2,500,000. Free income tax help Example. Free income tax help This year, James Smith placed in service machinery costing $2,050,000. Free income tax help Because this cost is $50,000 more than $2 million, he must reduce his dollar limit to $450,000 ($500,000 − $50,000). Free income tax help Limits for sport utility vehicles. Free income tax help   The total amount you can elect to deduct for certain sport utility vehicles and certain other vehicles placed in service in 2013 is $25,000. Free income tax help This rule applies to any 4-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, and highways that is rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight. Free income tax help   For more information, see chapter 2 of Publication 946. Free income tax help Limits for passenger automobiles. Free income tax help   For a passenger automobile that is placed in service in 2013, the total section 179 and depreciation deduction is limited. Free income tax help See Do the Passenger Automobile Limits Apply , later. Free income tax help Married individuals. Free income tax help   If you are married, how you figure your section 179 expense deduction depends on whether you file jointly or separately. Free income tax help If you file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service. Free income tax help If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit, including the reduction for costs over $2 million. Free income tax help You must allocate the dollar limit (after any reduction) equally between you, unless you both elect a different allocation. Free income tax help If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you. Free income tax help Joint return after separate returns. Free income tax help   If you and your spouse elect to amend your separate returns by filing a joint return after the due date for filing your return, the dollar limit on the joint return is the lesser of the following amounts. Free income tax help The dollar limit (after reduction for any cost of section 179 property over $2 million). Free income tax help The total cost of section 179 property you and your spouse elected to expense on your separate returns. Free income tax help Business Income Limit The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. Free income tax help Generally, you are considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business. Free income tax help Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. Free income tax help See Carryover of disallowed deduction , later. Free income tax help Taxable income. Free income tax help   In general, figure taxable income for this purpose by totaling the net income and losses from all trades and businesses you actively conducted during the year. Free income tax help In addition to net income or loss from a sole proprietorship, partnership, or S corporation, net income or loss derived from a trade or business also includes the following items. Free income tax help Section 1231 gains (or losses) as discussed in chapter 9. Free income tax help Interest from working capital of your trade or business. Free income tax help Wages, salaries, tips, or other pay earned by you (or your spouse if you file a joint return) as an employee of any employer. Free income tax help   In addition, figure taxable income without regard to any of the following. Free income tax help The section 179 expense deduction. Free income tax help The self-employment tax deduction. Free income tax help Any net operating loss carryback or carryforward. Free income tax help Any unreimbursed employee business expenses. Free income tax help Two different taxable income limits. Free income tax help   In addition to the business income limit for your section 179 expense deduction, you may have a taxable income limit for some other deduction (for example, charitable contributions). Free income tax help You may have to figure the limit for this other deduction taking into account the section 179 expense deduction. Free income tax help If so, complete the following steps. Free income tax help Step Action 1 Figure taxable income without the section 179 expense deduction or the other deduction. Free income tax help 2 Figure a hypothetical section 179 expense deduction using the taxable income figured in Step 1. Free income tax help 3 Subtract the hypothetical section 179 expense deduction figured in Step 2 from the taxable income figured in Step 1. Free income tax help 4 Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income. Free income tax help 5 Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in  Step 1. Free income tax help 6 Figure your actual section 179 expense deduction using the taxable income figured in Step 5. Free income tax help 7 Subtract your actual section 179 expense deduction figured in Step 6 from the taxable income figured in Step 1. Free income tax help 8 Figure your actual other deduction using the taxable income figured in Step 7. Free income tax help Example. Free income tax help On February 1, 2013, the XYZ farm corporation purchased and placed in service qualifying section 179 property that cost $500,000. Free income tax help It elects to expense the entire $500,000 cost under section 179. Free income tax help In June, the corporation gave a charitable contribution of $10,000. Free income tax help A corporation's limit on charitable contributions is figured after subtracting any section 179 expense deduction. Free income tax help The business income limit for the section 179 expense deduction is figured after subtracting any allowable charitable contributions. Free income tax help XYZ's taxable income figured without the section 179 expense deduction or the deduction for charitable contributions is $520,000. Free income tax help XYZ figures its section 179 expense deduction and its deduction for charitable contributions as follows. Free income tax help Step 1. Free income tax help Taxable income figured without either deduction is $520,000. Free income tax help Step 2. Free income tax help Using $520,000 as taxable income, XYZ's hypothetical section 179 expense deduction is $500,000. Free income tax help Step 3. Free income tax help $20,000 ($520,000 − $500,000). Free income tax help Step 4. Free income tax help Using $20,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable income) is $2,000. Free income tax help Step 5. Free income tax help $518,000 ($520,000 − $2,000). Free income tax help Step 6. Free income tax help Using $518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 expense deduction. Free income tax help Because the taxable income is at least $500,000, XYZ can take a $500,000 section 179 expense deduction. Free income tax help Step 7. Free income tax help $20,000 ($520,000 − $500,000). Free income tax help Step 8. Free income tax help Using $20,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable income) is $2,000. Free income tax help Carryover of disallowed deduction. Free income tax help   You can carry over for an unlimited number of years the cost of any section 179 property you elected to expense but were unable to because of the business income limit. Free income tax help   The amount you carry over is used in determining your section 179 expense deduction in the next year. Free income tax help However, it is subject to the limits in that year. Free income tax help If you place more than one property in service in a year, you can select the properties for which all or a part of the cost will be carried forward. Free income tax help Your selections must be shown in your books and records. Free income tax help Example. Free income tax help Last year, Joyce Jones placed in service a machine that cost $8,000 and elected to deduct all $8,000 under section 179. Free income tax help The taxable income from her business (determined without regard to both a section 179 expense deduction for the cost of the machine and the self-employment tax deduction) was $6,000. Free income tax help Her section 179 expense deduction was limited to $6,000. Free income tax help The $2,000 cost that was not allowed as a section 179 expense deduction (because of the business income limit) is carried to this year. Free income tax help This year, Joyce placed another machine in service that cost $9,000. Free income tax help Her taxable income from business (determined without regard to both a section 179 expense deduction for the cost of the machine and the self-employment tax deduction) is $10,000. Free income tax help Joyce can deduct the full cost of the machine ($9,000) but only $1,000 of the carryover from last year because of the business income limit. Free income tax help She can carry over the balance of $1,000 to next year. Free income tax help Partnerships and S Corporations The section 179 expense deduction limits apply both to the partnership or S corporation and to each partner or shareholder. Free income tax help The partnership or S corporation determines its section 179 expense deduction subject to the limits. Free income tax help It then allocates the deduction among its partners or shareholders. Free income tax help If you are a partner in a partnership or shareholder of an S corporation, you add the amount allocated from the partnership or S corporation to any section 179 costs not related to the partnership or S corporation and then apply the dollar limit to this total. Free income tax help To determine any reduction in the dollar limit for costs over $560,000, you do not include any of the cost of section 179 property placed in service by the partnership or S corporation. Free income tax help After you apply the dollar limit, you apply the business income limit to any remaining section 179 costs. Free income tax help For more information, see chapter 2 of Publication 946. Free income tax help Example. Free income tax help In 2013, Partnership P placed in service section 179 property with a total cost of $2,160,000. Free income tax help P must reduce its dollar limit by $160,000 ($2,160,000 − $2,000,000). Free income tax help Its maximum section 179 expense deduction is $340,000 ($500,000 − $160,000), and it elects to expense that amount. Free income tax help Because P's taxable income from the active conduct of all its trades or businesses for the year was $400,000, it can deduct the full $340,000. Free income tax help P allocates $100,000 of its section 179 expense deduction and $110,000 of its taxable income to John, one of its partners. Free income tax help John also conducts a business as a sole proprietor and in 2013, placed in service in that business, section 179 property costing $28,000. Free income tax help John's taxable income from that business was $10,000. Free income tax help In addition to the $100,000 allocated from P, he elects to expense the $28,000 of his sole proprietorship's section 179 costs. Free income tax help However, John's deduction is limited to his business taxable income of $120,000 ($110,000 from P plus $10,000 from his sole proprietorship). Free income tax help He carries over $8,000 ($128,000 − $120,000) of the elected section 179 costs to 2014. Free income tax help How Do You Elect the Deduction? You elect to take the section 179 expense deduction by completing Part I of Form 4562. Free income tax help If you elect the deduction for listed property, complete Part V of  Form 4562 before completing Part I. Free income tax help   File Form 4562 with either of the following: Your original tax return (whether or not you filed it timely), or An amended return filed within the time prescribed by law. Free income tax help An election made on an amended return must specify the item of section 179 property to which the election applies and the part of the cost of each such item to be taken into account. Free income tax help The amended return must also include any resulting adjustments to taxable income. Free income tax help Revoking an election. Free income tax help   An election (or any specification made in the election) to take a section 179 expense deduction for 2013 can be revoked without IRS approval by filing an amended return. Free income tax help The amended return must be filed within the time prescribed by law. Free income tax help The amended return must also include any resulting adjustments to taxable income (for example, allowable depreciation in that tax year for the item of section 179 property for which the election pertains. Free income tax help ) Once made, the revocation is irrevocable. Free income tax help When Must You Recapture the Deduction? You may have to recapture the section 179 expense deduction if, in any year during the property's recovery period, the percentage of business use drops to 50% or less. Free income tax help In the year the business use drops to 50% or less, you include the recapture amount as ordinary income. Free income tax help You also increase the basis of the property by the recapture amount. Free income tax help Recovery periods for property are discussed later. Free income tax help If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. Free income tax help Instead, use the rules for recapturing depreciation explained in  chapter 9 under Section 1245 Property. Free income tax help   If the property is listed property, do not figure the recapture amount under the rules explained in this discussion when the percentage of business use drops to 50% or less. Free income tax help Instead, use the rules for recapturing depreciation explained in chapter 5 of Publication 946 under Recapture of Excess Depreciation. Free income tax help Figuring the recapture amount. Free income tax help   To figure the amount to recapture, take the following steps. Free income tax help Figure the allowable depreciation for the section 179 expense deduction you claimed. Free income tax help Begin with the year you placed the property in service and include the year of recapture. Free income tax help Subtract the depreciation figured in (1) from the section 179 expense deduction you actually claimed. Free income tax help The result is the amount you must recapture. Free income tax help Example. Free income tax help In January 2011, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. Free income tax help The property is not listed property. Free income tax help He elected a $5,000 section 179 expense deduction for the property and also elected not to claim a special depreciation allowance. Free income tax help He used the property only for business in 2011 and 2012. Free income tax help During 2013, he used the property 40% for business and 60% for personal use. Free income tax help He figures his recapture amount as follows. Free income tax help Section 179 expense deduction claimed (2011) $5,000 Minus: Allowable depreciation (instead of section 179 expense deduction):   2011 $1,250   2012 1,875   2013 ($1,250 × 40% (business)) 500 3,625 2013 — Recapture amount $1,375     Paul must include $1,375 in income for 2013. Free income tax help Where to report recapture. Free income tax help   Report any recapture of the section 179 expense deduction as ordinary income in Part IV of Form 4797 and include it in income on Schedule F (Form 1040). Free income tax help Recapture for qualified section 179 GO Zone property. Free income tax help   If any qualified section 179 GO Zone property ceases to be used in the GO Zone in a later year, you must recapture the benefit of the increased section 179 expense deduction as “other income. Free income tax help ” Claiming the Special Depreciation Allowance For qualified property (defined below) placed in service in 2013, you can take an additional 50% special depreciation allowance. Free income tax help The allowance is an additional deduction you can take after any section 179 expense deduction and before you figure regular depreciation under MACRS. Free income tax help Figure the special depreciation allowance by multiplying the depreciable basis of the qualified property by 50%. Free income tax help What is Qualified Property? For farmers, qualified property generally is certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Free income tax help Certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Free income tax help   Certain qualified property (defined below) acquired after December 31, 2007, and before January 1, 2014, is eligible for a 50% special depreciation allowance. Free income tax help   Qualified property includes the following: Tangible property depreciated under the Modified Accelerated Cost Recovery System (MACRS) with a recovery period of 20 years or less. Free income tax help Water utility property. Free income tax help Off-the-shelf computer software. Free income tax help Qualified leasehold improvement property. Free income tax help   Qualified property must also meet all of the following tests: You must have acquired qualified property by purchase after December 31, 2007. Free income tax help If a binding contract to acquire the property existed before January 1, 2008, the property does not qualify. Free income tax help Qualified property must be placed in service after December 31, 2007 and placed in service before January 1, 2014 (before January 1, 2015 for certain property with a long production period and for certain aircraft). Free income tax help The original use of the property must begin with you after December 31, 2007. Free income tax help For more information, see chapter 3 of Publication 946. Free income tax help How Can You Elect Not To Claim the Allowance? You can elect, for any class of property, not to deduct the special depreciation allowance for all property in such class placed in service during the tax year. Free income tax help To make the election, attach a statement to your return indicating the class of property for which you are making the election. Free income tax help Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service. Free income tax help 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 original return (not including extensions). Free income tax help Attach the election statement to the amended return. Free income tax help On the amended return, write “Filed pursuant to section 301. Free income tax help 9100-2. Free income tax help ” Once made, the election may not be revoked without IRS consent. Free income tax help If you elect not to have the special depreciation allowance apply, the property may be subject to an alternative minimum tax adjustment for depreciation. Free income tax help When Must You Recapture an Allowance When you dispose of property for which you claimed a special depreciation allowance, any gain on the disposition is generally recaptured (included in income) as ordinary income up to the amount of the special depreciation allowance previously allowed or allowable. Free income tax help For more information, see chapter 3 of Publication 946. Free income tax help Figuring Depreciation Under MACRS 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 income tax help MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Free income tax help Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. Free income tax help To be sure you can use MACRS to figure depreciation for your property, see Can You Use MACRS To Depreciate Your Property, earlier. Free income tax help This part explains how to determine which MACRS depreciation system applies to your property. Free income tax help It also discusses the following information that you need to know before you can figure depreciation under MACRS. Free income tax help Property's recovery class. Free income tax help Placed-in-service date. Free income tax help Basis for depreciation. Free income tax help Recovery period. Free income tax help Convention. Free income tax help Depreciation method. Free income tax help Finally, this part explains how to use this information to figure your depreciation deduction. Free income tax help 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 income tax help You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Free income tax help Required use of ADS. Free income tax help   You must use ADS for the following property. Free income tax help 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 income tax help Listed property used 50% or less in a qualified business use. Free income tax help See Additional Rules for Listed Property , later. Free income tax help Any tax-exempt use property. Free income tax help Any tax-exempt bond-financed property. Free income tax help 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 income tax help Any tangible property used predominantly outside the United States during the year. Free income tax help If you are required to use ADS to depreciate your property, you cannot claim the special depreciation allowance. Free income tax help Electing ADS. Free income tax help   Although your property may qualify for GDS, you can elect to use ADS. Free income tax help The election generally must cover all property in the same property class you placed in service during the year. Free income tax help However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. Free income tax help Once you make this election, you can never revoke it. Free income tax help   You make the election by completing line 20 in Part III of Form 4562. Free income tax help Which Property Class Applies Under GDS? The following is a list of the nine property classes under GDS. Free income tax help 3-year property. Free income tax help 5-year property. Free income tax help 7-year property. Free income tax help 10-year property. Free income tax help 15-year property. Free income tax help 20-year property. Free income tax help 25-year property. Free income tax help Residential rental property. Free income tax help Nonresidential real property. Free income tax help See Which Property Class Applies Under GDS in chapter 4 of Publication 946 for examples of the types of property included in each class. Free income tax help What Is the Placed-in-Service Date? You begin to claim depreciation when your property is placed in service for use either in a trade or business or for the production of income. Free income tax help The placed-in-service date for your property is the date the property is ready and available for a specific use. Free income tax help It is therefore not necessarily the date it is first used. Free income tax help 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 income tax help See Placed in Service under When Does Depreciation Begin and End , earlier, for examples illustrating when property is placed in service. Free income tax help 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 income tax help Reduce that amount by any credits and deductions allocable to the property. Free income tax help The following are examples of some of the credits and deductions that reduce basis. Free income tax help Any deduction for section 179 property. Free income tax help Any deduction for removal of barriers to the disabled and the elderly. Free income tax help Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. Free income tax help Any special depreciation allowance. Free income tax help Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. Free income tax help For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property , earlier. Free income tax help Also, see chapter 6. Free income tax help For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. Free income tax help Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. Free income tax help It is determined based on the depreciation system (GDS or ADS) used. Free income tax help See Table 7-1 for recovery periods under both GDS and ADS for some commonly used assets. Free income tax help For a complete list of recovery periods, see the Table of Class Lives and Recovery Periods in Appendix B of Publication 946. Free income tax help House trailers for farm laborers. Free income tax help   To depreciate a house trailer you supply as housing for those who work on your farm, use one of the following recovery periods if the house trailer is mobile (it has wheels and a history of movement). Free income tax help A 7-year recovery period under GDS. Free income tax help A 10-year recovery period under ADS. Free income tax help   However, if the house trailer is not mobile (its wheels have been removed and permanent utilities and pipes attached to it), use one of the following recovery periods. Free income tax help A 20-year recovery period under GDS. Free income tax help A 25-year recovery period under ADS. Free income tax help Water wells. Free income tax help   Water wells used to provide water for raising poultry and livestock are land improvements. Free income tax help If they are depreciable, use one of the following recovery periods. Free income tax help A 15-year recovery period under GDS. Free income tax help A 20-year recovery period under ADS. Free income tax help   The types of water wells that can be depreciated were discussed earlier in Irrigation systems and water wells under Property Having a Determinable Useful Life . Free income tax help Table 7-1. Free income tax help Farm Property Recovery Periods   Recovery Period in Years Assets GDS ADS Agricultural structures (single purpose) 10 15 Automobiles 5 5 Calculators and copiers 5 6 Cattle (dairy or breeding) 5 7 Communication equipment1 7 10 Computer and peripheral equipment 5 5 Drainage facilities 15 20 Farm buildings2 20 25 Farm machinery and equipment 7 10 Fences (agricultural) 7 10 Goats and sheep (breeding) 5 5 Grain bin 7 10 Hogs (breeding) 3 3 Horses (age when placed in service)     Breeding and working (12 years or less) 7 10 Breeding and working (more than 12 years) 3 10 Racing horses 3 12 Horticultural structures (single purpose) 10 15 Logging machinery and equipment3 5 6 Nonresidential real property 394 40 Office furniture, fixtures, and equipment (not calculators, copiers, or typewriters) 7 10 Paved lots 15 20 Residential rental property 27. Free income tax help 5 40 Tractor units (over-the-road) 3 4 Trees or vines bearing fruit or nuts 10 20 Truck (heavy duty, unloaded weight 13,000 lbs. Free income tax help or more) 5 6 Truck (actual weight less than 13,000 lbs) 5 5 Water wells 15 20 1 Not including communication equipment listed in other classes. Free income tax help 2 Not including single purpose agricultural or horticultural structures. Free income tax help 3 Used by logging and sawmill operators for cutting of timber. Free income tax help 4 For property placed in service after May 12, 1993; for property placed in service before May 13, 1993,  the recovery period is 31. Free income tax help 5 years. Free income tax help Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. Free income tax help 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 income tax help Use one of the following conventions. Free income tax help The half-year convention. Free income tax help The mid-month convention. Free income tax help The mid-quarter convention. Free income tax help For a detailed explanation of each convention, see Which Convention Applies in chapter 4 of Publication 946. Free income tax help Also, see the Instructions for Form 4562. Free income tax help Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. Free income tax help The 200% declining balance method over a GDS recovery period. Free income tax help The 150% declining balance method over a GDS recovery period. Free income tax help The straight line method over a GDS recovery period. Free income tax help The straight line method over an ADS recovery period. Free income tax help Depreciation Table. Free income tax help   The following table lists the types of property you can depreciate under each method. Free income tax help The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. Free income tax help Depreciation Table System/Method   Type of Property GDS using  150% DB • All property used in a farming business (except real property)   • All 15- and 20-year property   • Nonfarm 3-, 5-, 7-, and 10-year property1 GDS using SL • Nonresidential real property   • Residential rental property   • Trees or vines bearing fruit or nuts   • All 3-, 5-, 7-, 10-, 15-, and 20-year property1 ADS using SL • Property used predomi- nantly outside the United States   • Farm property used when an election not to apply the uniform capitalization rules is in effect   • Tax-exempt property   • Tax-exempt bond-financed property   • Imported property2   • Any property for which you elect to use this method1 GDS using  200% DB • Nonfarm 3-, 5-, 7-, and 10-year property 1Elective method 2See section 168(g)(6) of the Internal Revenue  Code Property used in farming business. Free income tax help   For personal property placed in service after 1988 in a farming business, you must use the 150% declining balance method over a GDS recovery period or you can elect one of the following methods. Free income tax help The straight line method over a GDS recovery period. Free income tax help The straight line method over an ADS recovery period. Free income tax help For property placed in service before 1999, you could have elected to use the 150% declining balance method using the ADS recovery periods for certain property classes. Free income tax help If you made this election, continue to use the same method and recovery period for that property. Free income tax help Real property. Free income tax help   You can depreciate real property using the straight line method under either GDS or ADS. Free income tax help Switching to straight line. Free income tax help   If you use a declining balance method, you switch to the straight line method in the year it provides an equal or greater deduction. Free income tax help If you use the MACRS percentage tables, discussed later under How Is the Depreciation Deduction Figured , you do not need to determine in which year your deduction is greater using the straight line method. Free income tax help The tables have the switch to the straight line method built into their rates. Free income tax help Fruit or nut trees and vines. Free income tax help   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a 10-year recovery period. Free income tax help ADS required for some farmers. Free income tax help   If you elect not to apply the uniform capitalization rules to any plant shown in Table 6-1 of chapter 6 and produced in your farming business, you must use ADS for all property you place in service in any year the election is in effect. Free income tax help See chapter 6 for a discussion of the application of the uniform capitalization rules to farm property. Free income tax help Electing a different method. Free income tax help   As shown in the Depreciation Table , you can elect a different method for depreciation for certain types of property. Free income tax help You must make the election by the due date of the return (including extensions) for the year you placed the property in service. Free income tax help However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). Free income tax help Attach the election to the amended return and write “Filed pursuant to section 301. Free income tax help 9100-2” on the election statement. Free income tax help File the amended return at the same address you filed the original return. Free income tax help Once you make the election, you cannot change it. Free income tax help    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 income tax help However, you can make the election on a property-by-property basis for residential rental and nonresidential real property. Free income tax help Straight line election. Free income tax help   Instead of using the declining balance method, you can elect to use the straight line method over the GDS recovery period. Free income tax help Make the election by entering “S/L” under column (f) in Part III of Form 4562. Free income tax help ADS election. Free income tax help   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 income tax help ADS uses the straight line method of depreciation over the ADS recovery periods, which are generally longer than the GDS recovery periods. Free income tax help The ADS recovery periods for many assets used in the business of farming are listed in Table 7–1. Free income tax help Additional ADS recovery periods for other classes of property may be found in the Table of Class Lives and Recovery Periods in Appendix B of Publication 946. Free income tax help 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 income tax help Then you are ready to figure your depreciation deduction. Free income tax help You can figure it in one of two ways. Free income tax help You can use the percentage tables provided by the IRS. Free income tax help You can figure your own deduction without using the tables. Free income tax help Figuring your own MACRS deduction will generally result in a slightly different amount than using the tables. Free income tax help 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 income tax help These percentage tables are in Appendix A of Publication 946. Free income tax help Rules for using the tables. Free income tax help   The following rules cover the use of the percentage tables. Free income tax help You must apply the rates in the percentage tables to your property's unadjusted basis. Free income tax help Unadjusted basis is the same basis amount you would use to figure gain on a sale but figured without reducing your original basis by any MACRS depreciation taken in earlier years. Free income tax help You cannot use the percentage tables for a short tax year. Free income tax help See chapter 4 of Publication 946 for information on how to figure the deduction for a short tax year. Free income tax help You generally must continue to use them for the entire recovery period of the property. Free income tax help 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 the property, which is depreciated as a separate property. Free income tax help Basis adjustment due to casualty loss. Free income tax help   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. Free income tax help 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 income tax help See Figuring the Deduction Without Using the Tables in chapter 4 of Publication 946. Free income tax help Figuring depreciation using the 150% DB method and half-year convention. Free income tax help    Table 7-2 has the percentages for 3-, 5-, 7-, and 20-year property. Free income tax help The percentages are based on the 150% declining balance method with a change to the straight line method. Free income tax help This table covers only the half-year convention and the first 8 years for 20-year property. Free income tax help See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. Free income tax help   The following examples show how to figure depreciation under MACRS using the percentages in Table 7-2 . Free income tax help Example 1. Free income tax help During the year, you bought an item of 7-year property for $10,000 and placed it in service. Free income tax help You do not elect a section 179 expense deduction for this property. Free income tax help In addition, the property is not qualified property for purposes of the special depreciation allowance. Free income tax help The unadjusted basis of the property is $10,000. Free income tax help You use the percentages in Table 7-2 to figure your deduction. Free income tax help Since this is 7-year property, you multiply $10,000 by 10. Free income tax help 71% to get this year's depreciation of $1,071. Free income tax help For next year, your depreciation will be $1,913 ($10,000 × 19. Free income tax help 13%). Free income tax help Example 2. Free income tax help You had a barn constructed on your farm at a cost of $20,000. Free income tax help You placed the barn in service this year. Free income tax help You elect not to claim the special depreciation allowance. Free income tax help The barn is 20-year property and you use the table percentages to figure your deduction. Free income tax help You figure this year's depreciation by multiplying $20,000 (unadjusted basis) by 3. Free income tax help 75% to get $750. Free income tax help For next year, your depreciation will be $1,443. Free income tax help 80 ($20,000 × 7. Free income tax help 219%). Free income tax help Table 7-2. Free income tax help 150% Declining Balance Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 25. Free income tax help 0 % 15. Free income tax help 00 % 10. Free income tax help 71 % 3. Free income tax help 750 % 2 37. Free income tax help 5   25. Free income tax help 50   19. Free income tax help 13   7. Free income tax help 219   3 25. Free income tax help 0   17. Free income tax help 85   15. Free income tax help 03   6. Free income tax help 677   4 12. Free income tax help 5   16. Free income tax help 66   12. Free income tax help 25   6. Free income tax help 177   5     16. Free income tax help 66   12. Free income tax help 25   5. Free income tax help 713   6     8. Free income tax help 33   12. Free income tax help 25   5. Free income tax help 285   7         12. Free income tax help 25   4. Free income tax help 888   8         6. Free income tax help 13   4. Free income tax help 522   Figuring depreciation using the straight line method and half-year convention. Free income tax help   The following table has the straight line percentages for 3-, 5-, 7-, and 20-year property using the half-year convention. Free income tax help The table covers only the first 8 years for 20-year property. Free income tax help See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. Free income tax help Table 7-3. Free income tax help Straight Line Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 16. Free income tax help 67 % 10 % 7. Free income tax help 14 % 2. Free income tax help 5 % 2 33. Free income tax help 33   20   14. Free income tax help 29   5. Free income tax help 0   3 33. Free income tax help 33   20   14. Free income tax help 29   5. Free income tax help 0   4 16. Free income tax help 67   20   14. Free income tax help 28   5. Free income tax help 0   5     20   14. Free income tax help 29   5. Free income tax help 0   6     10   14. Free income tax help 28   5. Free income tax help 0   7         14. Free income tax help 29   5. Free income tax help 0   8         7. Free income tax help 14   5. Free income tax help 0