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It1040ez

It1040ez Other Methods of Depreciation Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: How To Figure the DeductionBasis Useful Life Salvage Value Methods To UseStraight Line Method Declining Balance Method Income Forecast Method How To Change Methods DispositionsSale or exchange. It1040ez Property not disposed of or abandoned. It1040ez Special rule for normal retirements from item accounts. It1040ez Abandoned property. It1040ez Single item accounts. It1040ez Multiple property account. It1040ez Topics - This chapter discusses: How to figure the deduction Methods to use How to change methods Dispositions Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 551 Basis of Assets 583 Starting a Business and Keeping Records 946 How To Depreciate Property Form (and Instructions) 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization Schedule C (Form 1040) Profit or Loss From Business If your property is being depreciated under ACRS, you must continue to use rules for depreciation that applied when you placed the property in service. It1040ez If your property qualified for MACRS, you must depreciate it under MACRS. It1040ez See Publication 946. It1040ez However, you cannot use MACRS for certain property because of special rules that exclude it from MACRS. It1040ez Also, you can elect to exclude certain property from being depreciated under MACRS. It1040ez Property that you cannot depreciate using MACRS includes: Intangible property, Property you can elect to exclude from MACRS that you properly depreciate under a method that is not based on a term of years, Certain public utility property, Any motion picture film or video tape, Any sound recording, and Certain real and personal property placed in service before 1987. It1040ez Intangible property. It1040ez   You cannot depreciate intangible property under ACRS or MACRS. It1040ez You depreciate intangible property using any other reasonable method, usually, the straight line method. It1040ez Note. It1040ez The cost of certain intangible property that you acquire after August 10, 1993, must be amortized over a 15-year period. It1040ez For more information, see chapter 12 of Publication 535. It1040ez Public utility property. It1040ez   The law excludes from MACRS any public utility property for which the taxpayer does not use a normalization method of accounting. It1040ez This type of property is subject to depreciation under a special rule. It1040ez Videocassettes. It1040ez   If you are in the videocassette rental business, you can depreciate those videocassettes purchased for rental. It1040ez You can depreciate the cost less salvage value of those videocassettes that have a useful life over one year using either: The straight line method, or The income forecast method. It1040ez The straight line method, salvage value, and useful life are discussed later under Methods To Use. It1040ez You can deduct in the year of purchase as a business expense the cost of any cassette that has a useful life of one year or less. It1040ez How To Figure the Deduction Two other reasonable methods can be used to figure your deduction for property not covered under ACRS or MACRS. It1040ez These methods are straight line and declining balance. It1040ez To figure depreciation using these methods, you must generally determine three things about the property you intend to depreciate. It1040ez They are: The basis, The useful life, and The estimated salvage value at the end of its useful life. It1040ez The amount of the deduction in any year also depends on which method of depreciation you choose. It1040ez Basis To deduct the proper amount of depreciation each year, first determine your basis in the property you intend to depreciate. It1040ez The basis used for figuring depreciation is the same as the basis that would be used for figuring the gain on a sale. It1040ez Your original basis is usually the purchase price. It1040ez However, if you acquire property in some other way, such as inheriting it, getting it as a gift, or building it yourself, you have to figure your original basis in a different way. It1040ez Adjusted basis. It1040ez   Events will often change the basis of property. It1040ez When this occurs, the changed basis is called the adjusted basis. It1040ez Some events, such as improvements you make, increase basis. It1040ez Events such as deducting casualty losses and depreciation decrease basis. It1040ez If basis is adjusted, the depreciation deduction may also have to be changed, depending on the reason for the adjustment and the method of depreciation you are using. It1040ez   Publication 551 explains how to figure basis for property acquired in different ways. It1040ez It also discusses what items increase and decrease basis, how to figure adjusted basis, and how to allocate cost if you buy several pieces of property at one time. It1040ez Useful Life The useful life of a piece of property is an estimate of how long you can expect to use it in your trade or business, or to produce income. It1040ez It is the length of time over which you will make yearly depreciation deductions of your basis in the property. It1040ez It is how long it will continue to be useful to you, not how long the property will last. It1040ez Many things affect the useful life of property, such as: Frequency of use, Age when acquired, Your repair policy, and Environmental conditions. It1040ez The useful life can also be affected by technological improvements, progress in the arts, reasonably foreseeable economic changes, shifting of business centers, prohibitory laws, and other causes. It1040ez Consider all these factors before you arrive at a useful life for your property. It1040ez The useful life of the same type of property varies from user to user. It1040ez When you determine the useful life of your property, keep in mind your own experience with similar property. It1040ez You can use the general experience of the industry you are in until you are able to determine a useful life of your property from your own experience. It1040ez Change in useful life. It1040ez   You base your estimate of useful life on certain facts. It1040ez If these facts change significantly, you can adjust your estimate of the remaining useful life. It1040ez However, you redetermine the estimated useful life only when the change is substantial and there is a clear reason for making the change. It1040ez Salvage Value It is important for you to accurately determine the correct salvage value of the property you want to depreciate. It1040ez You generally cannot depreciate property below a reasonable salvage value. It1040ez Determining salvage value. It1040ez   Salvage value is the estimated value of property at the end of its useful life. It1040ez It is what you expect to get for the property if you sell it after you can no longer use it productively. It1040ez You must estimate the salvage value of a piece of property when you first acquire it. It1040ez   Salvage value is affected both by how you use the property and how long you use it. It1040ez If it is your policy to dispose of property that is still in good operating condition, the salvage value can be relatively large. It1040ez However, if your policy is to use property until it is no longer usable, its salvage value can be its junk value. It1040ez Changing salvage value. It1040ez   Once you determine the salvage value for property, you should not change it merely because prices have changed. It1040ez However, if you redetermine the useful life of property, as discussed earlier under Change in useful life, you can also redetermine the salvage value. It1040ez When you redetermine the salvage value, take into account the facts that exist at the time. It1040ez Net salvage. It1040ez   Net salvage is the salvage value of property minus what it costs to remove it when you dispose of it. It1040ez You can choose either salvage value or net salvage when you figure depreciation. It1040ez You must consistently use the one you choose and the treatment of the costs of removal must be consistent with the practice adopted. It1040ez However, if the cost to remove the property is more than the estimated salvage value, then net salvage is zero. It1040ez Your salvage value can never be less than zero. It1040ez Ten percent rule. It1040ez   If you acquire personal property that has a useful life of 3 years or more, you can use an amount for salvage value that is less than your actual estimate. It1040ez You can subtract from your estimate of salvage value an amount equal to 10% of your basis in the property. It1040ez If salvage value is less than 10% of basis, you can ignore salvage value when you figure depreciation. It1040ez Methods To Use Two methods of depreciation are the straight line and declining balance methods. It1040ez If ACRS or MACRS does not apply, you can use one of these methods. It1040ez The straight line and declining balance methods discussed in this section are not figured in the same way as straight line or declining balance methods under MACRS. It1040ez Straight Line Method Before 1981, you could use any reasonable method for every kind of depreciable property. It1040ez One of these methods was the straight line method. It1040ez This method was also used for intangible property. It1040ez It lets you deduct the same amount of depreciation each year. It1040ez To figure your deduction, determine the adjusted basis of your property, its salvage value, and its estimated useful life. It1040ez Subtract the salvage value, if any, from the adjusted basis. It1040ez The balance is the total amount of depreciation you can take over the useful life of the property. It1040ez Divide the balance by the number of years remaining in the useful life. It1040ez This gives you the amount of your yearly depreciation deduction. It1040ez Unless there is a big change in adjusted basis, or useful life, this amount will stay the same throughout the time you depreciate the property. It1040ez If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use. It1040ez Example. It1040ez In April 1994, Frank bought a franchise for $5,600. It1040ez It expires in 10 years. It1040ez This property is intangible property that cannot be depreciated under MACRS. It1040ez Frank depreciates the franchise under the straight line method, using a 10-year useful life and no salvage value. It1040ez He takes the $5,600 basis and divides that amount by 10 years ($5,600 ÷ 10 = $560, a full year's use). It1040ez He must prorate the $560 for his 9 months of use in 1994. It1040ez This gives him a deduction of $420 ($560 ÷ 9/12). It1040ez In 1995, Frank can deduct $560 for the full year. It1040ez Declining Balance Method The declining balance method allows you to recover a larger amount of the cost of the property in the early years of your use of the property. It1040ez The rate cannot be more than twice the straight line rate. It1040ez Rate of depreciation. It1040ez   Under this method, you must determine your declining balance rate of depreciation. It1040ez The initial step is to: Divide the number 1 by the useful life of your property to get a straight line rate. It1040ez (For example, if property has a useful life of 5 years, its normal straight line rate of depreciation is ⅕, or 20%. It1040ez ) Multiply this straight line rate by a number that is more than 1 but not more than 2 to determine the declining balance rate. It1040ez Unless there is a change in the useful life during the time you depreciate the property, the rate of depreciation generally will not change. It1040ez Depreciation deductions. It1040ez   After you determine the rate of depreciation, multiply the adjusted basis of the property by it. It1040ez This gives you the amount of your deduction. It1040ez For example, if your adjusted basis at the beginning of the first year is $10,000, and your declining balance rate is 20%, your depreciation deduction for the first year is $2,000 ($10,000 ÷ 20%). It1040ez To figure your depreciation deduction in the second year, you must first adjust the basis for the amount of depreciation you deducted in the first year. It1040ez Subtract the previous year's depreciation from your basis ($10,000 - $2,000 = $8,000). It1040ez Multiply this amount by the rate of depreciation ($8,000 ÷ 20% = $1,600). It1040ez Your depreciation deduction for the second year is $1,600. It1040ez   As you can see from this example, your adjusted basis in the property gets smaller each year. It1040ez Also, under this method, deductions are larger in the earlier years and smaller in the later years. It1040ez You can make a change to the straight line method without consent. It1040ez Salvage value. It1040ez   Do not subtract salvage value when you figure your yearly depreciation deductions under the declining balance method. It1040ez However, you cannot depreciate the property below its reasonable salvage value. It1040ez Determine salvage value using the rules discussed earlier, including the special 10% rule. It1040ez Example. It1040ez If your adjusted basis has been decreased to $1,000 and the rate of depreciation is 20%, your depreciation deduction should be $200. It1040ez But if your estimate of salvage value was $900, you can only deduct $100. It1040ez This is because $100 is the amount that would lower your adjusted basis to equal salvage value. It1040ez Income Forecast Method The income forecast method requires income projections for each videocassette or group of videocassettes. It1040ez You can group the videocassettes by title for making this projection. It1040ez You determine the depreciation by applying a fraction to the cost less salvage value of the cassette. It1040ez The numerator is the income from the videocassette for the tax year and the denominator is the total projected income for the cassette. It1040ez For more information on the income forecast method, see Revenue Ruling 60-358 in Cumulative Bulletin 1960, Volume 2, on page 68. It1040ez How To Change Methods In some cases, you may change your method of depreciation for property depreciated under a reasonable method. It1040ez If you change your method of depreciation, it is generally a change in your method of accounting. It1040ez You must get IRS consent before making the change. It1040ez However, you do not need permission for certain changes in your method of depreciation. It1040ez The rules discussed in this section do not apply to property depreciated under ACRS or MACRS. It1040ez For information on ACRS elections,see Revocation of election, in chapter 1 under Alternate ACRS Method. It1040ez Change to the straight line method. It1040ez   You can change from the declining balance method to the straight line method at any time during the useful life of your property without IRS consent. It1040ez However, if you have a written agreement with the IRS that prohibits a change, you must first get IRS permission. It1040ez When the change is made, figure depreciation based on your adjusted basis in the property at that time. It1040ez Your adjusted basis takes into account all previous depreciation deductions. It1040ez Use the estimated remaining useful life of your property at the time of change and its estimated salvage value. It1040ez   You can change from the declining balance method to straight line only on the original tax return for the year you first use the straight line method. It1040ez You cannot make the change on an amended return filed after the due date of the original return (including extensions). It1040ez   When you make the change, attach a statement to your tax return showing: When you acquired the property, Its original cost or other original basis, The total amount claimed for depreciation and other allowances since you acquired it, Its salvage value and remaining useful life, and A description of the property and its use. It1040ez   After you change to straight line, you cannot change back to the declining balance method or to any other method for a period of 10 years without written permission from the IRS. It1040ez Changes that require permission. It1040ez   For most other changes in method of depreciation, you must get permission from the IRS. It1040ez To request a change in method of depreciation, file Form 3115. It1040ez File the application within the first 180 days of the tax year the change is to become effective. It1040ez In most cases, there is a user fee that must accompany Form 3115. It1040ez See the instructions for Form 3115 to determine if a fee is required. It1040ez Changes granted automatically. It1040ez   The IRS automatically approves certain changes of a method of depreciation. It1040ez But, you must file Form 3115 for these automatic changes. It1040ez   However, IRS can deny permission if Form 3115 is not filed on time. It1040ez For more information on automatic changes, see Revenue Procedure 74-11, 1974-1 C. It1040ez B. It1040ez 420. It1040ez Changes for which approval is not automatic. It1040ez   The automatic change procedures do not apply to: Property or an account where you made a change in depreciation within the last 10 tax years (unless the change was made under the Class Life System), Class Life Asset Depreciation Range System, and Public utility property. It1040ez   You must request and receive permission for these changes. It1040ez To make the request, file Form 3115 during the first 180 days of the tax year for which you want the change to be effective. It1040ez Change from an improper method. It1040ez   If the IRS disallows the method you are using, you do not need permission to change to a proper method. It1040ez You can adopt the straight line method, or any other method that would have been permitted if you had used it from the beginning. It1040ez If you file your tax return using an improper method, but later file an amended return, you can use a proper method on the amended return without getting IRS permission. It1040ez However, you must file the amended return before the filing date for the next tax year. It1040ez Dispositions Retirement is the permanent withdrawal of depreciable property from use in your trade or business or for the production of income. It1040ez You can do this by selling, exchanging, or abandoning the item of property. It1040ez You can also withdraw it from use without disposing of it. It1040ez For example, you could place it in a supplies or scrap account. It1040ez Retirements can be either normal or abnormal depending on all facts and circumstances. It1040ez The rules discussed next do not apply to MACRS and ACRS property. It1040ez Normal retirement. It1040ez   A normal retirement is a permanent withdrawal of depreciable property from use if the following apply: The retirement is made within the useful life you estimated originally, and The property has reached a condition at which you customarily retire or would retire similar property from use. It1040ez A retirement is generally considered normal unless you can show that you retired the property because of a reason you did not consider when you originally estimated the useful life of the property. It1040ez Abnormal retirement. It1040ez   A retirement can be abnormal if you withdraw the property early or under other circumstances. It1040ez For example, if the property is damaged by a fire or suddenly becomes obsolete and is now useless. It1040ez Gain or loss on retirement. It1040ez   There are special rules for figuring the gain or loss on retirement of property. It1040ez The gain or loss will depend on several factors. It1040ez These include the type of withdrawal, if the withdrawal was from a single property or multiple property account, and if the retirement was normal or abnormal. It1040ez A single property account contains only one item of property. It1040ez A multiple property account is one in which several items have been combined with a single rate of depreciation assigned to the entire account. It1040ez Sale or exchange. It1040ez   If property is retired by sale or exchange, you figure gain or loss by the usual rules that apply to sales or other dispositions of property. It1040ez See Publication 544. It1040ez Property not disposed of or abandoned. It1040ez   If property is retired permanently, but not disposed of or physically abandoned, you do not recognize gain. It1040ez You are allowed a loss in such a case, but only if the retirement is: An abnormal retirement, A normal retirement from a single property account in which you determined the life of each item of property separately, or A normal retirement from a multiple property account in which the depreciation rate is based on the maximum expected life of the longest lived item of property and the loss occurs before the expiration of the full useful life. It1040ez However, you are not allowed a loss if the depreciation rate is based on the average useful life of the items of property in the account. It1040ez   To figure your loss, subtract the estimated salvage or fair market value of the property at the date of retirement, whichever is more, from its adjusted basis. It1040ez Special rule for normal retirements from item accounts. It1040ez   You can generally deduct losses upon retirement of a few depreciable items of property with similar useful lives, if: You account for each one in a separate account, and You use the average useful life to figure depreciation. It1040ez However, you cannot deduct losses if you use the average useful life to figure depreciation and they have a wide range of useful lives. It1040ez   If you have a large number of depreciable property items and use average useful lives to figure depreciation, you cannot deduct the losses upon normal retirements from these accounts. It1040ez Abandoned property. It1040ez   If you physically abandon property, you can deduct as a loss the adjusted basis of the property at the time of its abandonment. It1040ez However, your intent must be to discard the property so that you will not use it again or retrieve it for sale, exchange, or other disposition. It1040ez Basis of property retired. It1040ez   The basis for figuring gain or loss on the retirement of property is its adjusted basis at the time of retirement, as determined in the following discussions. It1040ez Single item accounts. It1040ez   If an item of property is accounted for in a single item account, the adjusted basis is the basis you would use to figure gain or loss for a sale or exchange of the property. It1040ez This is generally the cost or other basis of the item of property less depreciation. It1040ez See Publication 551. It1040ez Multiple property account. It1040ez   For a normal retirement from a multiple property account, if you figured depreciation using the average expected useful life, the adjusted basis is the salvage value estimated for the item of property when it was originally acquired. It1040ez If you figured depreciation using the maximum expected useful life of the longest lived item of property in the account, you must use the depreciation method used for the multiple property account and a rate based on the maximum expected useful life of the item of property retired. It1040ez   You make the adjustment for depreciation for an abnormal retirement from a multiple property account at the rate that would be proper if the item of property was depreciated in a single property account. It1040ez The method of depreciation used for the multiple property account is used. It1040ez You base the rate on either the average expected useful life or the maximum expected useful life of the retired item of property, depending on the method used to determine the depreciation rate for the multiple property account. It1040ez Prev  Up  Next   Home   More Online Publications
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LP 59 Frequently Asked Questions (FAQs)

What is the notice telling me?

We previously sent a notice of levy to you to collect money from the taxpayer named in the letter, but have received no response.

What do I have to do?

If you previously responded, complete the information and mail it to us in the enclosed envelope. You are legally responsible for responding to the levy and must send us the amount you owe the taxpayer(s), not to exceed the amount on the levy. Failure to do so could result in you being personally liable to us for the amount you owe the taxpayer. A penalty of up to 50% of the tax owed may also be imposed.

How much time do I have?

Respond at your earliest convenience by correspondence or you may call the phone number provided on the letter for additional assistance or to let us know that you do not owe funds to this taxpayer.

What happens if I don't respond to the levy?

You are legally responsible for responding to the levy and must send us the amount you owe the taxpayer(s), not to exceed the amount on the levy. Failure to do so could result in you being personally liable to us for the amount you owe the taxpayer. A penalty of up to 50% of the tax owed may also be imposed.

Who should I contact?

Either call the number provided in the letter or respond in writing using the enclosed envelope.

What if I don't agree or have already taken corrective action?

Contact us by phone to resolve any concerns or outstanding issues related to the levy you received previously.

Page Last Reviewed or Updated: 03-Feb-2014

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