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Long Amended Tax Return

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Long Amended Tax Return

Long amended tax return Listed Property Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Listed Property DefinedPassenger Automobile Defined Dwelling Unit Other Property Used for Transportation Computers and Related Peripheral Equipment Predominant Use TestMeeting the Predominant Use Test Qualified Business Use Method of Allocating Use Applying the Predominant Use Test Deductions After Recovery Period Leased PropertyLessor Lessee What Records Must Be KeptAdequate Records Reporting Information on Form 4562 Deductions in Later Years Appendix Topics - This chapter discusses: Listed property defined The predominant use test What records must be kept Useful Items - You may want to see: Publication 463 Travel, Entertainment, and Gift Expenses 587 Business Use of Your Home (Including Use by Day-Care Providers) 917 Business Use of a Car 946 How To Depreciate Property Form (and Instructions) 2106–EZ Unreimbursed Employee Business Expenses 2106 Employee Business Expenses 4255 Recapture of Investment Credit 4562 Depreciation and Amortization This chapter discusses some special rules and recordkeeping requirements for listed property. Long amended tax return For complete coverage of the rules, including the rules concerning passenger automobiles, see Publication 946. Long amended tax return If listed property is not used predominantly (more than 50%) in a qualified business use as discussed inPredominant Use Test, later, the section 179 deduction is not allowable and the property must be depreciated using the straight line method. Long amended tax return Listed Property Defined Listed property is any of the following: Any passenger automobile (defined later), Any other property used for transportation, Any property of a type generally used for entertainment, recreation, or amusement (including photographic, phonographic, communication, and video recording equipment), Any computer and related peripheral equipment, defined later, unless it is used only at a regular business establishment and owned or leased by the person operating the establishment. Long amended tax return A regular business establishment includes a portion of a dwelling unit (defined later), if, and only if, that portion is used both regularly and exclusively for business as discussed in Publication 587. Long amended tax return Any cellular telephone (or similar telecommunication equipment) placed in service or leased in a tax year beginning after 1989. Long amended tax return Passenger Automobile Defined A passenger automobile is any four-wheeled vehicle made primarily for use on public streets, roads, and highways and rated at 6,000 pounds or less of unloaded gross vehicle weight (at 6,000 pounds or less of gross vehicle weight for trucks and vans). Long amended tax return It includes any part, component, or other item physically attached to the automobile or usually included in the purchase price of an automobile. Long amended tax return A passenger automobile does not include: An ambulance, hearse, or combination ambulance-hearse used directly in a trade or business, and A vehicle used directly in the trade or business of transporting persons or property for compensation or hire. Long amended tax return Dwelling Unit A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. Long amended tax return It does not include a unit in a hotel, motel, inn, or other establishment where more than half the units are used on a transient basis. Long amended tax return Other Property Used for Transportation Other property used for transportation includes trucks, buses, boats, airplanes, motorcycles, and any other vehicles for transporting persons or goods. Long amended tax return Listed property does not include: Any vehicle which, by reason of its design, is not likely to be used more than a minimal amount for personal purposes, such as clearly marked police and fire vehicles, ambulances, or hearses used for those purposes, Any vehicle that is designed to carry cargo and that has a loaded gross vehicle weight over 14,000 pounds, bucket trucks (cherry pickers), cement mixers, combines, cranes and derricks, delivery trucks with seating only for the driver (or only for the driver plus a folding jump seat), dump trucks (including garbage trucks), flatbed trucks, forklifts, qualified moving vans, qualified specialized utility repair trucks, and refrigerated trucks, Any passenger bus used for that purpose with a capacity of at least 20 passengers and school buses, Any tractor or other special purpose farm vehicle, and unmarked vehicles used by law enforcement officers if the use is officially authorized, and Any vehicle, such as a taxicab, if substantially all its use is in the trade or business of providing services to transport persons or property for compensation or hire by unrelated persons. Long amended tax return Computers and Related Peripheral Equipment A computer is a programmable electronically activated device that: Is capable of accepting information, applying prescribed processes to the information, and supplying the results of those processes with or without human intervention, and Consists of a central processing unit with extensive storage, logic, arithmetic, and control capabilities. Long amended tax return Related peripheral equipment is any auxiliary machine which is designed to be controlled by the central processing unit of a computer. Long amended tax return Computer or peripheral equipment does not include: Any equipment which is an integral part of property which is not a computer, Typewriters, calculators, adding and accounting machines, copiers, duplicating equipment, and similar equipment, and Equipment of a kind, used primarily for the user's amusement or entertainment, such as video games. Long amended tax return Predominant Use Test If “listed property,” defined earlier, placed in service after June 18, 1984, is not used predominantly (more than 50%) in a qualified business use during any tax year: The section 179 deduction on the property is not allowable, and You must depreciate the property using the straight line method. Long amended tax return Listed property placed in service before 1987. Long amended tax return   For listed property placed in service before 1987, depreciate the property over the following period: Class of Property Listed Property Recovery Period 3-year property 5 years 5-year property 12 years 10-year property 25 years 18-year real property 40 years 19-year real property 40 years If you must use the above recovery periods for listed property not used predominantly in a trade or business, use the percentages from Table 16 titled Listed Property Not Used Predominantly (Other Than 18- or 19-year Real Property), and Table 17 for 18- or 19-year real property, near the end of this publication in the Appendix. Long amended tax return Listed property placed in service after 1986. Long amended tax return   For information on listed property placed in service after 1986, see Publication 946. Long amended tax return Meeting the Predominant Use Test Listed property meets the predominant use test for any tax year if its business use is more than 50% of its total use. Long amended tax return You must allocate the use of any item of listed property used for more than one purpose during the tax year among its various uses. Long amended tax return The percentage of investment use of listed property cannot be used as part of the percentage of qualified business use to meet the predominant use test. Long amended tax return However, the combined total of business and investment use is taken into account to figure your depreciation deduction for the property. Long amended tax return Note: Property does not stop being predominantly used in a qualified business use because of a transfer at death. Long amended tax return Example. Long amended tax return Sarah Bradley uses a home computer 50% of the time to manage her investments. Long amended tax return She also uses the computer 40% of the time in her part-time consumer research business. Long amended tax return Sarah's home computer is listed property because it is not used at a regular business establishment. Long amended tax return Because her business use of the computer does not exceed 50%, the computer is not predominantly used in a qualified business use for the tax year. Long amended tax return Because she does not meet the predominant use test, she cannot elect a section 179 deduction for this property. Long amended tax return Her combined rate of business/investment use for determining her depreciation deduction is 90%. Long amended tax return Qualified Business Use A qualified business use is any use in your trade or business. Long amended tax return However, it does not include: The use of property held merely to produce income (investment use), The leasing of property to any 5% owner or related person (to the point that the property is used by a 5% owner or person related to the owner or lessee of the property), The use of property as compensation for the performance of services by a 5% owner or related person, or The use of property as compensation for the performance of services by any person (other than a5% owner or related person) unless the value of the use is included in that person's gross income for the use of the property and income tax is withheld on that amount where required. Long amended tax return See Employees, later. Long amended tax return 5% owner. Long amended tax return   A 5% owner of a business, other than a corporation, is any person who owns more than 5% of the capital or profits interest in the business. Long amended tax return   A 5% owner of a corporation is any person who owns, or is considered to own: More than 5% of the outstanding stock of the corporation, or Stock possessing more than 5% of the total combined voting power of all stock in the corporation. Long amended tax return Related person. Long amended tax return   A related person is anyone related to a taxpayer as discussed under Related persons, in chapter 2 under Nonqualifying Property in Publication 946. Long amended tax return Entertainment Use The use of listed property for entertainment, recreation, or amusement purposes is treated as a qualified business use only to the extent that expenses (other than interest and property tax expenses) for its use are deductible as ordinary and necessary business expenses. Long amended tax return See Publication 463. Long amended tax return Leasing or Compensatory Use of Aircraft If at least 25% of the total use of any aircraft during the tax year is for a qualified business use, the leasing or compensatory use of the aircraft by a 5% owner or related person is treated as a qualified business use. Long amended tax return Commuting The use of a vehicle for commuting is not business use, regardless of whether work is performed during the trip. Long amended tax return Use of Your Passenger Automobile by Another Person If someone else uses your automobile, that use is not business use unless: That use is directly connected with your business, The value of the use is property reported by you as income to the other person and tax is withheld on the income where required, or The value of the use results in a payment of fair market rent. Long amended tax return Any payment to you for the use of the automobile is treated as a rent payment for 3). Long amended tax return Employees Any use by an employee of his or her own listed property (or listed property rented by an employee) in performing services as an employee is not business use unless: The use is for the employer's convenience, and The use is required as a condition of employment. Long amended tax return Use for the employer's convenience. Long amended tax return   Whether the use of listed property is for the employer's convenience must be determined from all the facts. Long amended tax return The use is for the employer's convenience if it is for a substantial business reason of the employer. Long amended tax return The use of listed property during the employee's regular working hours to carry on the employer's business is generally for the employer's convenience. Long amended tax return Use required as a condition of employment. Long amended tax return   Whether the use of listed property is a condition of employment depends on all the facts and circumstances. Long amended tax return The use of property must be required for the employee to perform duties properly. Long amended tax return The employer need not explicitly require the employee to use the property. Long amended tax return A mere statement by the employer that the use of the property is a condition of employment is not sufficient. Long amended tax return Example 1. Long amended tax return Virginia Sycamore is employed as a courier with We Deliver which provides local courier services. Long amended tax return She owns and uses a motorcycle to deliver packages to downtown offices. Long amended tax return We Deliver explicitly requires all delivery persons to own a small car or motorcycle for use in their employment. Long amended tax return The company reimburses delivery persons for their costs. Long amended tax return Virginia's use of the motorcycle is for the convenience of We Deliver and is required as a condition of employment. Long amended tax return Example 2. Long amended tax return Bill Nelson is an inspector for Uplift, a construction company with many sites in the local area. Long amended tax return He must travel to these sites on a regular basis. Long amended tax return Uplift does not furnish an automobile or explicitly require him to use his own automobile. Long amended tax return However, it reimburses him for any costs he incurs in traveling to the various sites. Long amended tax return The use of his own automobile or a rental automobile is for the convenience of Uplift and is required as a condition of employment. Long amended tax return Method of Allocating Use For passenger automobiles and other means of transportation, allocate the property's use on the basis of mileage. Long amended tax return You determine the percentage of qualified business use by dividing the number of miles the vehicle is driven for business purposes during the year by the total number of miles the vehicle is driven for all purposes (including business miles) during the year. Long amended tax return For other items of listed property, allocate the property's use on the basis of the most appropriate unit of time. Long amended tax return For example, you can determine the percentage of business use of a computer by dividing the number of hours the computer is used for business purposes during the year by the total number of hours the computer is used for all purposes (including business hours) during the year. Long amended tax return Applying the Predominant Use Test You must apply the predominant use test for an item of listed property each year of the recovery period. Long amended tax return First Recovery Year If any item of listed property is not used predominantly in a qualified business use in the year it is placed in service: The property is not eligible for a section 179 deduction, and The depreciation deduction must be figured using the straight line method. Long amended tax return Note: The required use of the straight line method for an item of listed property that does not meet the predominant use test is not the same as electing the straight line method. Long amended tax return It does not mean that you have to use the straight line method for other property in the same class as the item of listed property. Long amended tax return Years After the First Recovery Year If you use listed property predominantly (more than 50%) in a qualified business use in the tax year you place it in service, but not in a subsequent tax year during the recovery period, the following rules apply: Figure depreciation using the straight line method. Long amended tax return Do this for each year, beginning with the year you no longer use the property predominantly in a qualified business use, and Figure any excess depreciation on the property and add it to: Your gross income, and The adjusted basis of your property. Long amended tax return See Recapture of excess depreciation, next. Long amended tax return Recapture of excess depreciation. Long amended tax return   You must include any excess depreciation in your gross income for the first tax year the property is not predominantly used in a qualified business use. Long amended tax return Any excess depreciation must also be added to the adjusted basis of your property. Long amended tax return Excess depreciation is the excess (if any) of: The amount of depreciation allowable for the property (including any section 179 deduction claimed) for tax years before the first tax year the property was not predominantly used in a qualified business use, over The amount of depreciation that would have been allowable for those years if the property were not used predominantly in a qualified business use for the year it was placed in service. Long amended tax return This means you figure your depreciation using the percentages fromTable 16 or 17. Long amended tax return For information on investment credit recapture, see the instructions for Form 4255. Long amended tax return Deductions After Recovery Period When listed property (other than passenger automobiles) is used for business, investment, and personal purposes, no deduction is ever allowable for the personal use. Long amended tax return In tax years after the recovery period, you must determine if there is any unrecovered basis remaining before you compute the depreciation deduction for that tax year. Long amended tax return To make this determination, figure the depreciation for earlier tax years as if your property were used 100% for business or investment purposes, beginning with the first tax year in which some or all use is for business or investment. Long amended tax return See Car Used 50% or Less for Business in Publication 917. Long amended tax return Leased Property The limitations on cost recovery deductions apply to the rental of listed property. Long amended tax return The following discussion covers the rules that apply to the lessor (the owner of the property) and the lessee (the person who rents the property from the owner). Long amended tax return SeeLeasing a Car in Publication 917 for a discussion of leased passenger automobiles. Long amended tax return Lessor The limitations on cost recovery generally do not apply to any listed property leased or held for leasing by anyone regularly engaged in the business of leasing listed property. Long amended tax return A person is considered regularly engaged in the business of leasing listed property only if contracts for leasing of listed property are entered into with some frequency over a continuous period of time. Long amended tax return This determination is made on the basis of the facts and circumstances in each case and takes into account the nature of the person's business in its entirety. Long amended tax return Occasional or incidental leasing activity is insufficient. Long amended tax return For example, a person leasing only one passenger automobile during a tax year is not regularly engaged in the business of leasing automobiles. Long amended tax return An employer who allows an employee to use the employer's property for personal purposes and charges the employee for the use is not regularly engaged in the business of leasing the property used by the employee. Long amended tax return Lessee A lessee of listed property (other than passenger automobiles), must include an amount in gross income called the inclusion amount for the first tax year the property is not used predominantly in a qualified business use. Long amended tax return Inclusion amount for property leased before 1987. Long amended tax return   You determine the inclusion amount for property leased after June 18, 1984 and before 1987 by multiplying the fair market value of the property by both the average business/investment use percentage and the applicable percentage. Long amended tax return You can find the applicable percentages for listed property that is 5- or 10-year recovery property in Tables 19 or 20 in Appendix A of Publication 946. Long amended tax return   The lease term for listed property other than 18- or 19-year real property, and residential rental or nonresidential real property, includes options to renew. Long amended tax return For 18- or 19-year real property and residential rental or nonresidential real property that is listed property, the period of the lease does not include any option to renew at fair market value, determined at the time of renewal. Long amended tax return You treat two or more successive leases that are part of the same transaction (or a series of related transactions) for the same or substantially similar property as one lease. Long amended tax return Special rules. Long amended tax return   The lessee adds the inclusion amount to gross income in the next tax year if: The lease term begins within 9 months before the close of the lessee's tax year, The lessee does not use the property predominantly in a qualified business use during that portion of the tax year, and The lease term continues into the lessee's next tax year. Long amended tax return The lessee determines the inclusion amount by taking into account the average of the business/investment use for both tax years and the applicable percentage for the tax year the lease term begins. Long amended tax return   If the lease term is less than one year, the amount included in gross income is the amount that bears the same ratio to the additional inclusion amount as the number of days in the lease term bears to 365. Long amended tax return Maximum inclusion amount. Long amended tax return   The inclusion amount cannot be more than the sum of the deductible amounts of rent allocable to the lessee's tax year in which the amount must be included in gross income. Long amended tax return What Records Must Be Kept You cannot take any depreciation or section 179 deduction for the use of listed property (including passenger automobiles) unless you can prove business/investment use with adequate records or sufficient evidence to support your own statements. Long amended tax return How long to keep records. Long amended tax return   For listed property, records must be kept for as long as any excess depreciation can be recaptured (included in income). Long amended tax return Adequate Records To meet the adequate records requirement, you must maintain an account book, diary, log, statement of expense, trip sheet, or similar record or other documentary evidence that, together with the receipt, is sufficient to establish each element of an expenditure or use. Long amended tax return It is not necessary to record information in an account book, diary, or similar record if the information is already shown on the receipt. Long amended tax return However, your records should back up your receipts in an orderly manner. Long amended tax return Elements of Expenditure or Use The records or other documentary evidence must support: The amount of each separate expenditure, such as the cost of acquiring the item, maintenance and repair costs, capital improvement costs, lease payments, and any other expenses, The amount of each business and investment use (based on an appropriate measure, such as mileage for vehicles and time for other listed property), and the total use of the property for the tax year, The date of the expenditure or use, and The business or investment purpose for the expenditure or use. Long amended tax return Written documents of your expenditure or use are generally better evidence than oral statements alone. Long amended tax return A written record prepared at or near the time of the expenditure or use has greater value as proof of the expenditure or use. Long amended tax return A daily log is not required. Long amended tax return However, some type of record containing the elements of an expenditure or the business or investment use of listed property made at or near the time and backed up by other documents is preferable to a statement prepared later. Long amended tax return Timeliness The elements of an expenditure or use must be recorded at the time you have full knowledge of the elements. Long amended tax return An expense account statement made from an account book, diary, or similar record prepared or maintained at or near the time of the expenditure or use is generally considered a timely record if in the regular course of business: The statement is submitted by an employee to the employer, or The statement is submitted by an independent contractor to the client or customer. Long amended tax return For example, a log maintained on a weekly basis, which accounts for use during the week, will be considered a record made at or near the time of use. Long amended tax return Business Purpose Supported An adequate record of business purpose must generally be in the form of a written statement. Long amended tax return However, the amount of backup necessary to establish a business purpose depends on the facts and circumstances of each case. Long amended tax return A written explanation of the business purpose will not be required if the purpose can be determined from the surrounding facts and circumstances. Long amended tax return For example, a salesperson visiting customers on an established sales route will not normally need a written explanation of the business purpose of his or her travel. Long amended tax return Business Use Supported An adequate record contains enough information on each element of every business or investment use. Long amended tax return The amount of detail required to support the use depends on the facts and circumstances. Long amended tax return For example, a taxpayer whose only business use of a truck is to make customer deliveries on an established route can satisfy the requirement by recording the length of the route, including the total number of miles driven during the tax year and the date of each trip at or near the time of the trips. Long amended tax return Although an adequate record generally must be written, a record of the business use of listed property, such as a computer or automobile, can be prepared in a computer memory device using a logging program. Long amended tax return Separate or Combined Expenditures or Uses Each use by you is normally considered a separate use. Long amended tax return However, repeated uses can be combined as a single item. Long amended tax return Each expenditure is recorded as a separate item and not combined with other expenditures. Long amended tax return If you choose, however, amounts spent for the use of listed property during a tax year, such as for gasoline or automobile repairs, can be combined. Long amended tax return If these expenses are combined, you do not need to support the business purpose of each expense. Long amended tax return Instead, you can divide the expenses based on the total business use of the listed property. Long amended tax return Uses which can be considered part of a single use, such as a round trip or uninterrupted business use, can be accounted for by a single record. Long amended tax return For example, use of a truck to make deliveries at several locations which begin and end at the business premises and can include a stop at the business in between deliveries can be accounted for by a single record of miles driven. Long amended tax return Use of a passenger automobile by a salesperson for a business trip away from home over a period of time can be accounted for by a single record of miles traveled. Long amended tax return Minimal personal use (such as a stop for lunch between two business stops) is not an interruption of business use. Long amended tax return Confidential Information If any of the information on the elements of an expenditure or use is confidential, it does not need to be in the account book or similar record if it is recorded at or near the time of the expenditure or use. Long amended tax return It must be kept elsewhere and made available as support to the district director on request. Long amended tax return Substantial Compliance If you have not fully supported a particular element of an expenditure or use, but have complied with the adequate records requirement for the expenditure or use to the district director's satisfaction, you can establish this element by any evidence the district director deems adequate. Long amended tax return If you fail to establish that you have substantially complied with the adequate records requirement for an element of an expenditure or use to the district director's satisfaction, you must establish the element: By your own oral or written statement containing detailed information as to the element, and By other evidence sufficient to establish the element. Long amended tax return If the element is the cost or amount, time, place, or date of an expenditure or use, its supporting evidence must be direct, such as oral testimony by witnesses or a written statement setting forth detailed information about the element or the documentary evidence. Long amended tax return If the element is the business purpose of an expenditure, its supporting evidence can be circumstantial evidence. Long amended tax return Sampling You can maintain an adequate record for portions of a tax year and use that record to support your business and investment use for the entire tax year if it can be shown by other evidence that the periods for which an adequate record is maintained are representative of use throughout the year. Long amended tax return Loss of Records When you establish that failure to produce adequate records is due to loss of the records through circumstances beyond your control, such as through fire, flood, earthquake, or other casualty, you have the right to support a deduction by reasonable reconstruction of your expenditures and use. Long amended tax return Reporting Information on Form 4562 If you claim a deduction for any listed property, you must provide the requested information on page 2, Section B of Form 4562. Long amended tax return If you claim a deduction for any vehicle, you must answer certain questions onpage 2 of Form 4562 to provide information about the vehicle use. Long amended tax return Employees. Long amended tax return   Employees claiming the standard mileage rate or actual expenses (including depreciation) must use Form 2106 instead of Part V of Form 4562. Long amended tax return Employees claiming the standard mileage rate may be able to use Form 2106–EZ. Long amended tax return Employer who provides vehicles to employees. Long amended tax return   An employer who provides vehicles to employees must obtain enough information from those employees to provide the requested information onForm 4562. Long amended tax return   An employer who provides more than five vehicles to employees need not include any information on his or her tax return. Long amended tax return Instead, the employer must obtain the information from his or her employees and indicate on his or her return that the information was obtained and is being retained. Long amended tax return   You do not need to provide the information requested on page 2 of Form 4562 if, as an employer: You can satisfy the requirements of a written policy statement for vehicles either not used for personal purposes, or not used for personal purposes other than commuting, or You treat all vehicle use by employees as personal use. Long amended tax return See the instructions for Form 4562. Long amended tax return Deductions in Later Years When listed property is used for business, investment, and personal purposes, no deduction is allowable for its personal use either in the current year or any later tax year. Long amended tax return In later years, you must determine if there is any remaining unadjusted or unrecovered basis before you compute the depreciation deduction for that tax year. Long amended tax return In making this determination, figure the depreciation deductions for earlier tax years as if the listed property were used 100% for business or investment purposes in those years, beginning with the first tax year in which some or all of the property use is for business or investment. Long amended tax return For more information about deductions after the recovery period for automobiles, see Publication 917. Long amended tax return Appendix The following tables are for use in figuring depreciation deductions under the ACRS system. Long amended tax return Table 1. Long amended tax return 15-Year Real Property* (Other Than Low-Inclome Housing) Table 3. Long amended tax return Low-Income Housing* Table 6 - Table 9 Table 6 - Table 9 Table 10 - Table 13 Table 14 - Table 17 Prev  Up  Next   Home   More Online Publications
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The Long Amended Tax Return

Long amended tax return 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. Long amended tax return Property not disposed of or abandoned. Long amended tax return Special rule for normal retirements from item accounts. Long amended tax return Abandoned property. Long amended tax return Single item accounts. Long amended tax return Multiple property account. Long amended tax return 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. Long amended tax return If your property qualified for MACRS, you must depreciate it under MACRS. Long amended tax return See Publication 946. Long amended tax return However, you cannot use MACRS for certain property because of special rules that exclude it from MACRS. Long amended tax return Also, you can elect to exclude certain property from being depreciated under MACRS. Long amended tax return 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. Long amended tax return Intangible property. Long amended tax return   You cannot depreciate intangible property under ACRS or MACRS. Long amended tax return You depreciate intangible property using any other reasonable method, usually, the straight line method. Long amended tax return Note. Long amended tax return The cost of certain intangible property that you acquire after August 10, 1993, must be amortized over a 15-year period. Long amended tax return For more information, see chapter 12 of Publication 535. Long amended tax return Public utility property. Long amended tax return   The law excludes from MACRS any public utility property for which the taxpayer does not use a normalization method of accounting. Long amended tax return This type of property is subject to depreciation under a special rule. Long amended tax return Videocassettes. Long amended tax return   If you are in the videocassette rental business, you can depreciate those videocassettes purchased for rental. Long amended tax return 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. Long amended tax return The straight line method, salvage value, and useful life are discussed later under Methods To Use. Long amended tax return 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. Long amended tax return How To Figure the Deduction Two other reasonable methods can be used to figure your deduction for property not covered under ACRS or MACRS. Long amended tax return These methods are straight line and declining balance. Long amended tax return To figure depreciation using these methods, you must generally determine three things about the property you intend to depreciate. Long amended tax return They are: The basis, The useful life, and The estimated salvage value at the end of its useful life. Long amended tax return The amount of the deduction in any year also depends on which method of depreciation you choose. Long amended tax return Basis To deduct the proper amount of depreciation each year, first determine your basis in the property you intend to depreciate. Long amended tax return The basis used for figuring depreciation is the same as the basis that would be used for figuring the gain on a sale. Long amended tax return Your original basis is usually the purchase price. Long amended tax return 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. Long amended tax return Adjusted basis. Long amended tax return   Events will often change the basis of property. Long amended tax return When this occurs, the changed basis is called the adjusted basis. Long amended tax return Some events, such as improvements you make, increase basis. Long amended tax return Events such as deducting casualty losses and depreciation decrease basis. Long amended tax return 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. Long amended tax return   Publication 551 explains how to figure basis for property acquired in different ways. Long amended tax return 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. Long amended tax return 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. Long amended tax return It is the length of time over which you will make yearly depreciation deductions of your basis in the property. Long amended tax return It is how long it will continue to be useful to you, not how long the property will last. Long amended tax return Many things affect the useful life of property, such as: Frequency of use, Age when acquired, Your repair policy, and Environmental conditions. Long amended tax return 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. Long amended tax return Consider all these factors before you arrive at a useful life for your property. Long amended tax return The useful life of the same type of property varies from user to user. Long amended tax return When you determine the useful life of your property, keep in mind your own experience with similar property. Long amended tax return 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. Long amended tax return Change in useful life. Long amended tax return   You base your estimate of useful life on certain facts. Long amended tax return If these facts change significantly, you can adjust your estimate of the remaining useful life. Long amended tax return However, you redetermine the estimated useful life only when the change is substantial and there is a clear reason for making the change. Long amended tax return Salvage Value It is important for you to accurately determine the correct salvage value of the property you want to depreciate. Long amended tax return You generally cannot depreciate property below a reasonable salvage value. Long amended tax return Determining salvage value. Long amended tax return   Salvage value is the estimated value of property at the end of its useful life. Long amended tax return It is what you expect to get for the property if you sell it after you can no longer use it productively. Long amended tax return You must estimate the salvage value of a piece of property when you first acquire it. Long amended tax return   Salvage value is affected both by how you use the property and how long you use it. Long amended tax return If it is your policy to dispose of property that is still in good operating condition, the salvage value can be relatively large. Long amended tax return However, if your policy is to use property until it is no longer usable, its salvage value can be its junk value. Long amended tax return Changing salvage value. Long amended tax return   Once you determine the salvage value for property, you should not change it merely because prices have changed. Long amended tax return However, if you redetermine the useful life of property, as discussed earlier under Change in useful life, you can also redetermine the salvage value. Long amended tax return When you redetermine the salvage value, take into account the facts that exist at the time. Long amended tax return Net salvage. Long amended tax return   Net salvage is the salvage value of property minus what it costs to remove it when you dispose of it. Long amended tax return You can choose either salvage value or net salvage when you figure depreciation. Long amended tax return You must consistently use the one you choose and the treatment of the costs of removal must be consistent with the practice adopted. Long amended tax return However, if the cost to remove the property is more than the estimated salvage value, then net salvage is zero. Long amended tax return Your salvage value can never be less than zero. Long amended tax return Ten percent rule. Long amended tax return   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. Long amended tax return You can subtract from your estimate of salvage value an amount equal to 10% of your basis in the property. Long amended tax return If salvage value is less than 10% of basis, you can ignore salvage value when you figure depreciation. Long amended tax return Methods To Use Two methods of depreciation are the straight line and declining balance methods. Long amended tax return If ACRS or MACRS does not apply, you can use one of these methods. Long amended tax return 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. Long amended tax return Straight Line Method Before 1981, you could use any reasonable method for every kind of depreciable property. Long amended tax return One of these methods was the straight line method. Long amended tax return This method was also used for intangible property. Long amended tax return It lets you deduct the same amount of depreciation each year. Long amended tax return To figure your deduction, determine the adjusted basis of your property, its salvage value, and its estimated useful life. Long amended tax return Subtract the salvage value, if any, from the adjusted basis. Long amended tax return The balance is the total amount of depreciation you can take over the useful life of the property. Long amended tax return Divide the balance by the number of years remaining in the useful life. Long amended tax return This gives you the amount of your yearly depreciation deduction. Long amended tax return 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. Long amended tax return 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. Long amended tax return Example. Long amended tax return In April 1994, Frank bought a franchise for $5,600. Long amended tax return It expires in 10 years. Long amended tax return This property is intangible property that cannot be depreciated under MACRS. Long amended tax return Frank depreciates the franchise under the straight line method, using a 10-year useful life and no salvage value. Long amended tax return He takes the $5,600 basis and divides that amount by 10 years ($5,600 ÷ 10 = $560, a full year's use). Long amended tax return He must prorate the $560 for his 9 months of use in 1994. Long amended tax return This gives him a deduction of $420 ($560 ÷ 9/12). Long amended tax return In 1995, Frank can deduct $560 for the full year. Long amended tax return 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. Long amended tax return The rate cannot be more than twice the straight line rate. Long amended tax return Rate of depreciation. Long amended tax return   Under this method, you must determine your declining balance rate of depreciation. Long amended tax return The initial step is to: Divide the number 1 by the useful life of your property to get a straight line rate. Long amended tax return (For example, if property has a useful life of 5 years, its normal straight line rate of depreciation is ⅕, or 20%. Long amended tax return ) Multiply this straight line rate by a number that is more than 1 but not more than 2 to determine the declining balance rate. Long amended tax return Unless there is a change in the useful life during the time you depreciate the property, the rate of depreciation generally will not change. Long amended tax return Depreciation deductions. Long amended tax return   After you determine the rate of depreciation, multiply the adjusted basis of the property by it. Long amended tax return This gives you the amount of your deduction. Long amended tax return 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%). Long amended tax return 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. Long amended tax return Subtract the previous year's depreciation from your basis ($10,000 - $2,000 = $8,000). Long amended tax return Multiply this amount by the rate of depreciation ($8,000 ÷ 20% = $1,600). Long amended tax return Your depreciation deduction for the second year is $1,600. Long amended tax return   As you can see from this example, your adjusted basis in the property gets smaller each year. Long amended tax return Also, under this method, deductions are larger in the earlier years and smaller in the later years. Long amended tax return You can make a change to the straight line method without consent. Long amended tax return Salvage value. Long amended tax return   Do not subtract salvage value when you figure your yearly depreciation deductions under the declining balance method. Long amended tax return However, you cannot depreciate the property below its reasonable salvage value. Long amended tax return Determine salvage value using the rules discussed earlier, including the special 10% rule. Long amended tax return Example. Long amended tax return If your adjusted basis has been decreased to $1,000 and the rate of depreciation is 20%, your depreciation deduction should be $200. Long amended tax return But if your estimate of salvage value was $900, you can only deduct $100. Long amended tax return This is because $100 is the amount that would lower your adjusted basis to equal salvage value. Long amended tax return Income Forecast Method The income forecast method requires income projections for each videocassette or group of videocassettes. Long amended tax return You can group the videocassettes by title for making this projection. Long amended tax return You determine the depreciation by applying a fraction to the cost less salvage value of the cassette. Long amended tax return The numerator is the income from the videocassette for the tax year and the denominator is the total projected income for the cassette. Long amended tax return For more information on the income forecast method, see Revenue Ruling 60-358 in Cumulative Bulletin 1960, Volume 2, on page 68. Long amended tax return How To Change Methods In some cases, you may change your method of depreciation for property depreciated under a reasonable method. Long amended tax return If you change your method of depreciation, it is generally a change in your method of accounting. Long amended tax return You must get IRS consent before making the change. Long amended tax return However, you do not need permission for certain changes in your method of depreciation. Long amended tax return The rules discussed in this section do not apply to property depreciated under ACRS or MACRS. Long amended tax return For information on ACRS elections,see Revocation of election, in chapter 1 under Alternate ACRS Method. Long amended tax return Change to the straight line method. Long amended tax return   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. Long amended tax return However, if you have a written agreement with the IRS that prohibits a change, you must first get IRS permission. Long amended tax return When the change is made, figure depreciation based on your adjusted basis in the property at that time. Long amended tax return Your adjusted basis takes into account all previous depreciation deductions. Long amended tax return Use the estimated remaining useful life of your property at the time of change and its estimated salvage value. Long amended tax return   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. Long amended tax return You cannot make the change on an amended return filed after the due date of the original return (including extensions). Long amended tax return   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. Long amended tax return   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. Long amended tax return Changes that require permission. Long amended tax return   For most other changes in method of depreciation, you must get permission from the IRS. Long amended tax return To request a change in method of depreciation, file Form 3115. Long amended tax return File the application within the first 180 days of the tax year the change is to become effective. Long amended tax return In most cases, there is a user fee that must accompany Form 3115. Long amended tax return See the instructions for Form 3115 to determine if a fee is required. Long amended tax return Changes granted automatically. Long amended tax return   The IRS automatically approves certain changes of a method of depreciation. Long amended tax return But, you must file Form 3115 for these automatic changes. Long amended tax return   However, IRS can deny permission if Form 3115 is not filed on time. Long amended tax return For more information on automatic changes, see Revenue Procedure 74-11, 1974-1 C. Long amended tax return B. Long amended tax return 420. Long amended tax return Changes for which approval is not automatic. Long amended tax return   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. Long amended tax return   You must request and receive permission for these changes. Long amended tax return 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. Long amended tax return Change from an improper method. Long amended tax return   If the IRS disallows the method you are using, you do not need permission to change to a proper method. Long amended tax return You can adopt the straight line method, or any other method that would have been permitted if you had used it from the beginning. Long amended tax return 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. Long amended tax return However, you must file the amended return before the filing date for the next tax year. Long amended tax return Dispositions Retirement is the permanent withdrawal of depreciable property from use in your trade or business or for the production of income. Long amended tax return You can do this by selling, exchanging, or abandoning the item of property. Long amended tax return You can also withdraw it from use without disposing of it. Long amended tax return For example, you could place it in a supplies or scrap account. Long amended tax return Retirements can be either normal or abnormal depending on all facts and circumstances. Long amended tax return The rules discussed next do not apply to MACRS and ACRS property. Long amended tax return Normal retirement. Long amended tax return   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. Long amended tax return 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. Long amended tax return Abnormal retirement. Long amended tax return   A retirement can be abnormal if you withdraw the property early or under other circumstances. Long amended tax return For example, if the property is damaged by a fire or suddenly becomes obsolete and is now useless. Long amended tax return Gain or loss on retirement. Long amended tax return   There are special rules for figuring the gain or loss on retirement of property. Long amended tax return The gain or loss will depend on several factors. Long amended tax return 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. Long amended tax return A single property account contains only one item of property. Long amended tax return A multiple property account is one in which several items have been combined with a single rate of depreciation assigned to the entire account. Long amended tax return Sale or exchange. Long amended tax return   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. Long amended tax return See Publication 544. Long amended tax return Property not disposed of or abandoned. Long amended tax return   If property is retired permanently, but not disposed of or physically abandoned, you do not recognize gain. Long amended tax return 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. Long amended tax return 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. Long amended tax return   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. Long amended tax return Special rule for normal retirements from item accounts. Long amended tax return   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. Long amended tax return However, you cannot deduct losses if you use the average useful life to figure depreciation and they have a wide range of useful lives. Long amended tax return   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. Long amended tax return Abandoned property. Long amended tax return   If you physically abandon property, you can deduct as a loss the adjusted basis of the property at the time of its abandonment. Long amended tax return 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. Long amended tax return Basis of property retired. Long amended tax return   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. Long amended tax return Single item accounts. Long amended tax return   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. Long amended tax return This is generally the cost or other basis of the item of property less depreciation. Long amended tax return See Publication 551. Long amended tax return Multiple property account. Long amended tax return   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. Long amended tax return 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. Long amended tax return   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. Long amended tax return The method of depreciation used for the multiple property account is used. Long amended tax return 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. Long amended tax return Prev  Up  Next   Home   More Online Publications