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Students Filing Taxes

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Students Filing Taxes

Students filing taxes 10. Students filing taxes   Education Savings Bond Program Table of Contents Introduction Who Can Cash In Bonds Tax FreeAdjusted qualified education expenses. Students filing taxes Eligible educational institution. Students filing taxes Dependent for whom you claim an exemption. Students filing taxes MAGI when using Form 1040A. Students filing taxes MAGI when using Form 1040. Students filing taxes Figuring the Tax-Free AmountEffect of the Amount of Your Income on the Amount of Your Exclusion Claiming the Exclusion Introduction Generally, you must pay tax on the interest earned on U. Students filing taxes S. Students filing taxes savings bonds. Students filing taxes If you do not include the interest in income in the years it is earned, you must include it in your income in the year in which you cash in the bonds. Students filing taxes However, when you cash in certain savings bonds under an education savings bond program, you may be able to exclude the interest from income. Students filing taxes Who Can Cash In Bonds Tax Free You may be able to cash in qualified U. Students filing taxes S. Students filing taxes savings bonds without having to include in your income some or all of the interest earned on the bonds if you meet the following conditions. Students filing taxes You pay qualified education expenses for yourself, your spouse, or a dependent for whom you claim an exemption on your return. Students filing taxes Your modified adjusted gross income (MAGI) is less than the amount specified for your filing status. Students filing taxes Your filing status is not married filing separately. Students filing taxes Qualified U. Students filing taxes S. Students filing taxes savings bonds. Students filing taxes   A qualified U. Students filing taxes S. Students filing taxes savings bond is a series EE bond issued after 1989 or a series I bond. Students filing taxes The bond must be issued either in your name (as the sole owner) or in the name of both you and your spouse (as co-owners). Students filing taxes   The owner must be at least 24 years old before the bond's issue date. Students filing taxes The issue date is printed on the front of the savings bond. Students filing taxes    The issue date is not necessarily the date of purchase—it will be the first day of the month in which the bond is purchased (or posted, if bought electronically). Students filing taxes Qualified education expenses. Students filing taxes   These include the following items you pay for either yourself, your spouse, or a dependent for whom you claim an exemption. Students filing taxes Tuition and fees required to enroll at or attend an eligible educational institution. Students filing taxes Qualified education expenses do not include expenses for room and board or for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program. Students filing taxes Contributions to a qualified tuition program (QTP) (see How Much Can You Contribute in chapter 8, Qualified Tuition Program). Students filing taxes Contributions to a Coverdell education savings account (ESA) (see Contributions in chapter 7, Coverdell Education Savings Account). Students filing taxes Adjusted qualified education expenses. Students filing taxes   You must reduce your qualified education expenses by all of the following tax-free benefits. Students filing taxes Tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions). Students filing taxes Expenses used to figure the tax-free portion of distributions from a Coverdell ESA (see Qualified Education Expenses in chapter 7, Coverdell Education Savings Account). Students filing taxes Expenses used to figure the tax-free portion of distributions from a QTP (see Qualified education expenses in chapter 8, Qualified Tuition Program). Students filing taxes Any tax-free payments (other than gifts or inheritances) received as educational assistance, such as: Veterans' educational assistance benefits (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Qualified tuition reductions (see Qualified Tuition Reduction in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), or Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ). Students filing taxes Any expenses used in figuring the American opportunity and lifetime learning credits. Students filing taxes See What Expenses Qualify in chapter 2, American Opportunity Credit, and What Expenses Qualify in chapter 3, Lifetime Learning Credit, for more information. Students filing taxes Eligible educational institution. Students filing taxes   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Students filing taxes S. Students filing taxes Department of Education. Students filing taxes It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Students filing taxes The educational institution should be able to tell you if it is an eligible educational institution. Students filing taxes   Certain educational institutions located outside the United States also participate in the U. Students filing taxes S. Students filing taxes Department of Education's Federal Student Aid (FSA) programs. Students filing taxes Dependent for whom you claim an exemption. Students filing taxes   You claim an exemption for a person if you list his or her name and other required information on Form 1040 (or Form 1040A), line 6c. Students filing taxes Modified adjusted gross income (MAGI). Students filing taxes   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return without taking into account this interest exclusion. Students filing taxes However, as discussed below, there may be other modifications. Students filing taxes MAGI when using Form 1040A. Students filing taxes   If you file Form 1040A, your MAGI is the AGI on line 22 of that form figured without taking into account any savings bond interest exclusion and modified by adding back any amount on line 18 (student loan interest deduction) and line 19 (tuition and fees deduction). Students filing taxes MAGI when using Form 1040. Students filing taxes   If you file Form 1040, your MAGI is the AGI on line 38 of that form figured without taking into account any savings bond interest exclusion and modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, Exclusion of income by bona fide residents of Puerto Rico, Exclusion for adoption benefits received under an employer's adoption assistance program, Deduction for student loan interest, Deduction for tuition and fees, and Deduction for domestic production activities. Students filing taxes    Use the worksheet in the instructions for line 9 of Form 8815 to figure your MAGI. Students filing taxes If you claim any of the exclusion or deduction items (1)–(6) listed above, add the amount of the exclusion or deduction to the amount on line 5 of the worksheet. Students filing taxes Do not add in the deduction for (7) student loan interest, and (8) tuition and fees, or (9) domestic production activities because line 4 of the worksheet already includes these amounts. Students filing taxes Enter the total on Form 8815, line 9, as your modified adjusted gross income (MAGI). Students filing taxes    Because the deduction for interest expenses attributable to royalties and other investments is limited to your net investment income, you cannot figure the deduction until you have figured this interest exclusion. Students filing taxes Therefore, if you had interest expenses attributable to royalties and deductible on Schedule E (Form 1040), Supplemental Income and Loss, you must make a special computation of your deductible interest without regard to this exclusion to figure the net royalty income included in your MAGI. Students filing taxes See Royalties included in MAGI under Education Savings Bond Program in Publication 550, chapter 1. Students filing taxes Figuring the Tax-Free Amount If the total you receive when you cash in the bonds is not more than the adjusted qualified education expenses for the year, all of the interest on the bonds may be tax free. Students filing taxes However, if the total you receive when you cash in the bonds is more than the adjusted expenses, only part of the interest may be tax free. Students filing taxes To determine the tax-free amount, multiply the interest part of the proceeds by a fraction. Students filing taxes The numerator (top part) of the fraction is the adjusted qualified education expenses (AQEE) you paid during the year. Students filing taxes The denominator (bottom part) of the fraction is the total proceeds you received during the year. Students filing taxes Example. Students filing taxes In February 2013, Mark and Joan Washington, a married couple, cashed a qualified series EE U. Students filing taxes S. Students filing taxes savings bond. Students filing taxes They received proceeds of $9,000, representing principal of $6,000 and interest of $3,000. Students filing taxes In 2013, they paid $7,650 of their daughter's college tuition. Students filing taxes They are not claiming an American opportunity or lifetime learning credit for those expenses, and their daughter does not have any tax-free educational assistance. Students filing taxes Their MAGI for 2013 was $80,000. Students filing taxes   $3,000 interest × $7,650 AQEE  $9,000 proceeds = $2,550 tax-free interest   They can exclude $2,550 of interest in 2013. Students filing taxes They must pay tax on the remaining $450 ($3,000 − $2,550) interest. Students filing taxes Effect of the Amount of Your Income on the Amount of Your Exclusion The amount of your interest exclusion is gradually reduced (phased out) based on your MAGI and filing status. Students filing taxes Claiming the Exclusion Use Form 8815 to figure your education savings bond interest exclusion. Students filing taxes Enter your exclusion on line 3 of Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends. Students filing taxes Attach Form 8815 to your tax return. Students filing taxes Prev  Up  Next   Home   More Online Publications
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Understanding your CP24 Notice

We made changes to your return because we found a difference between the amount of estimated tax payments on your tax return and the amount we posted to your account. You have a potential overpayment credit because of these changes.

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How to get help

Calling the 1-800 number listed on the top right corner of your notice is the fastest way to get your questions answered.

You can also authorize someone (such as an accountant) to contact the IRS on your behalf using this Power of Attorney and Declaration of Representative (Form 2848).

Or you may qualify for help from a Low Income Taxpayer Clinic.
 


What you need to do

  • Read your notice carefully — it will explain the changes we made to your return.
  • Check the list of payments we applied to your account to see if we applied all the payments you made.
  • Correct the copy of your tax return that you kept for your records.
  • You don't need to do anything if you agree with the notice.
  • If you disagree with the notice, please contact us at the toll-free number listed on its top right-hand corner (within 60 days of the notice’s date).

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Answers to Common Questions

Is an overpayment credit different from a refund?
You get an overpayment credit when your tax payments exceed what you owe. You will receive the overpayment credit as a refund automatically. You also, however, can ask us to apply the credit as an advance payment towards your next year's taxes instead of sending it to you as a refund.

When can I expect to receive my refund?
You will receive it in four to six weeks if you owe no other taxes or debts we’re required to collect.

What can I do if I don't receive my refund in four to six weeks?
Call us at the toll-free number listed on the top right-hand corner of your notice.

How can I find out what caused my tax return to change?
Please contact us at the number listed on your notice for specific information concerning your tax return.

What should I do if I find you misapplied a payment or haven't credited a payment that I made?
Contact us with your information at the toll-free number listed on your notice. Please have your documentation (such as cancelled checks, amended return, etc.) ready when you call. Our representative will discuss the issue with you and give you further instructions.

What should I do if I disagree with the changes you made?
Contact us at the toll free number listed on the top right-hand corner of your notice.

How do I adjust my estimated tax payments?
You can adjust your estimated tax payments by completing a Form 1040-ES, Estimated Tax for Individuals. See Publication 505, Tax Withholding and Estimated Tax for more information.

What should I do if I need to make another correction to my tax return?
You'll need to file Form 1040X, Amended U.S. Individual Income Tax Return.


Tips for next year

Consider filing your taxes electronically. Filing online can help you avoid mistakes and find credits and deductions that you may qualify for. In many cases you can file for free. Learn more about e-file.

You can receive your refund quickly with a direct deposit to your bank account by completing the banking information in the refund section of your tax return.

Page Last Reviewed or Updated: 03-Mar-2014

The Students Filing Taxes

Students filing taxes 4. Students filing taxes   Figuring Depreciation Under MACRS Table of Contents Introduction Useful Items - You may want to see: Which Depreciation System (GDS or ADS) Applies? Which Property Class Applies Under GDS?Rent-to-own dealer. Students filing taxes Rent-to-own contract. Students filing taxes What Is the Placed in Service Date? What Is the Basis for Depreciation? Which Recovery Period Applies?Recovery Periods Under GDS Recovery Periods Under ADS Additions and Improvements Which Convention Applies? Which Depreciation Method Applies?Depreciation Methods for Farm Property Electing a Different Method How Is the Depreciation Deduction Figured?Using the MACRS Percentage Tables Figuring the Deduction Without Using the Tables Figuring the Deduction for Property Acquired in a Nontaxable Exchange Figuring the Deduction for a Short Tax Year How Do You Use General Asset Accounts?Grouping Property Figuring Depreciation for a GAA Disposing of GAA Property Terminating GAA Treatment Electing To Use a GAA When Do You Recapture MACRS Depreciation? Introduction The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. Students filing taxes MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Students filing taxes Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. Students filing taxes To be sure you can use MACRS to figure depreciation for your property, see What Method Can You Use To Depreciate Your Property in chapter 1. Students filing taxes This chapter explains how to determine which MACRS depreciation system applies to your property. Students filing taxes It also discusses other information you need to know before you can figure depreciation under MACRS. Students filing taxes This information includes the property's recovery class, placed in service date, and basis, as well as the applicable recovery period, convention, and depreciation method. Students filing taxes It explains how to use this information to figure your depreciation deduction and how to use a general asset account to depreciate a group of properties. Students filing taxes Finally, it explains when and how to recapture MACRS depreciation. Students filing taxes Useful Items - You may want to see: Publication 225 Farmer's Tax Guide 463 Travel, Entertainment, Gift, and Car  Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 587 Business Use of Your Home (Including Use by Daycare Providers) Form (and Instructions) 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 4562 Depreciation and Amortization See chapter 6 for information about getting publications and forms. Students filing taxes 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. Students filing taxes You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Students filing taxes If you placed your property in service in 2013, complete Part III of Form 4562 to report depreciation using MACRS. Students filing taxes Complete section B of Part III to report depreciation using GDS, and complete section C of Part III to report depreciation using ADS. Students filing taxes If you placed your property in service before 2013 and are required to file Form 4562, report depreciation using either GDS or ADS on line 17 in Part III. Students filing taxes Required use of ADS. Students filing taxes   You must use ADS for the following property. Students filing taxes Listed property used 50% or less in a qualified business use. Students filing taxes See chapter 5 for information on listed property. Students filing taxes Any tangible property used predominantly outside the United States during the year. Students filing taxes Any tax-exempt use property. Students filing taxes Any tax-exempt bond-financed property. Students filing taxes 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. Students filing taxes 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. Students filing taxes If you are required to use ADS to depreciate your property, you cannot claim any special depreciation allowance (discussed in chapter 3) for the property. Students filing taxes Electing ADS. Students filing taxes   Although your property may qualify for GDS, you can elect to use ADS. Students filing taxes The election generally must cover all property in the same property class that you placed in service during the year. Students filing taxes However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. Students filing taxes Once you make this election, you can never revoke it. Students filing taxes   You make the election by completing line 20 in Part III of Form 4562. Students filing taxes Which Property Class Applies Under GDS? The following is a list of the nine property classifications under GDS and examples of the types of property included in each class. Students filing taxes These property classes are also listed under column (a) in section B, Part III, of Form 4562. Students filing taxes For detailed information on property classes, see Appendix B, Table of Class Lives and Recovery Periods, in this publication. Students filing taxes 3-year property. Students filing taxes Tractor units for over-the-road use. Students filing taxes Any race horse over 2 years old when placed in service. Students filing taxes (All race horses placed in service after December 31, 2008, and before January 1, 2014, are deemed to be 3-year property, regardless of age. Students filing taxes ) Any other horse (other than a race horse) over 12 years old when placed in service. Students filing taxes Qualified rent-to-own property (defined later). Students filing taxes 5-year property. Students filing taxes Automobiles, taxis, buses, and trucks. Students filing taxes Computers and peripheral equipment. Students filing taxes Office machinery (such as typewriters, calculators, and copiers). Students filing taxes Any property used in research and experimentation. Students filing taxes Breeding cattle and dairy cattle. Students filing taxes Appliances, carpets, furniture, etc. Students filing taxes , used in a residential rental real estate activity. Students filing taxes Certain geothermal, solar, and wind energy property. Students filing taxes 7-year property. Students filing taxes Office furniture and fixtures (such as desks, files, and safes). Students filing taxes Agricultural machinery and equipment. Students filing taxes Any property that does not have a class life and has not been designated by law as being in any other class. Students filing taxes Certain motorsports entertainment complex property (defined later) placed in service before January 1, 2014. Students filing taxes Any natural gas gathering line placed in service after April 11, 2005. Students filing taxes See Natural gas gathering line and electric transmission property , later. Students filing taxes 10-year property. Students filing taxes Vessels, barges, tugs, and similar water transportation equipment. Students filing taxes Any single purpose agricultural or horticultural structure. Students filing taxes Any tree or vine bearing fruits or nuts. Students filing taxes Qualified small electric meter and qualified smart electric grid system (defined later) placed in service on or after October 3, 2008. Students filing taxes 15-year property. Students filing taxes Certain improvements made directly to land or added to it (such as shrubbery, fences, roads, sidewalks, and bridges). Students filing taxes Any retail motor fuels outlet (defined later), such as a convenience store. Students filing taxes Any municipal wastewater treatment plant. Students filing taxes Any qualified leasehold improvement property (defined later) placed in service before January 1, 2014. Students filing taxes Any qualified restaurant property (defined later) placed in service before January 1, 2014. Students filing taxes Initial clearing and grading land improvements for gas utility property. Students filing taxes Electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity placed in service after April 11, 2005. Students filing taxes See Natural gas gathering line and electric transmission property , later. Students filing taxes Any natural gas distribution line placed in service after April 11, 2005 and before January 1, 2011. Students filing taxes Any qualified retail improvement property placed in service before January 1, 2014. Students filing taxes 20-year property. Students filing taxes Farm buildings (other than single purpose agricultural or horticultural structures). Students filing taxes Municipal sewers not classified as 25-year property. Students filing taxes Initial clearing and grading land improvements for electric utility transmission and distribution plants. Students filing taxes 25-year property. Students filing taxes This class is water utility property, which is either of the following. Students filing taxes Property that is an integral part of the gathering, treatment, or commercial distribution of water, and that, without regard to this provision, would be 20-year property. Students filing taxes Municipal sewers other than property placed in service under a binding contract in effect at all times since June 9, 1996. Students filing taxes Residential rental property. Students filing taxes This is any building or structure, such as a rental home (including a mobile home), if 80% or more of its gross rental income for the tax year is from dwelling units. Students filing taxes A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. Students filing taxes It does not include a unit in a hotel, motel, or other establishment where more than half the units are used on a transient basis. Students filing taxes If you occupy any part of the building or structure for personal use, its gross rental income includes the fair rental value of the part you occupy. Students filing taxes Nonresidential real property. Students filing taxes This is section 1250 property, such as an office building, store, or warehouse, that is neither residential rental property nor property with a class life of less than 27. Students filing taxes 5 years. Students filing taxes Qualified rent-to-own property. Students filing taxes   Qualified rent-to-own property is property held by a rent-to-own dealer for purposes of being subject to a rent-to-own contract. Students filing taxes It is tangible personal property generally used in the home for personal use. Students filing taxes It includes computers and peripheral equipment, televisions, videocassette recorders, stereos, camcorders, appliances, furniture, washing machines and dryers, refrigerators, and other similar consumer durable property. Students filing taxes Consumer durable property does not include real property, aircraft, boats, motor vehicles, or trailers. Students filing taxes   If some of the property you rent to others under a rent-to-own agreement is of a type that may be used by the renters for either personal or business purposes, you still can treat this property as qualified property as long as it does not represent a significant portion of your leasing property. Students filing taxes However, if this dual-use property does represent a significant portion of your leasing property, you must prove that this property is qualified rent-to-own property. Students filing taxes Rent-to-own dealer. Students filing taxes   You are a rent-to-own dealer if you meet all the following requirements. Students filing taxes You regularly enter into rent-to-own contracts (defined below) in the ordinary course of your business for the use of consumer property. Students filing taxes A substantial portion of these contracts end with the customer returning the property before making all the payments required to transfer ownership. Students filing taxes The property is tangible personal property of a type generally used within the home for personal use. Students filing taxes Rent-to-own contract. Students filing taxes   This is any lease for the use of consumer property between a rent-to-own dealer and a customer who is an individual which— Is titled “Rent-to-Own Agreement,” “Lease Agreement with Ownership Option,” or other similar language. Students filing taxes Provides a beginning date and a maximum period of time, not to exceed 156 weeks or 36 months from the beginning date, for which the contract can be in effect (including renewals or options to extend). Students filing taxes Provides for regular periodic (weekly or monthly) payments that can be either level or decreasing. Students filing taxes If the payments are decreasing, no payment can be less than 40% of the largest payment. Students filing taxes Provides for total payments that generally exceed the normal retail price of the property plus interest. Students filing taxes Provides for total payments that do not exceed $10,000 for each item of property. Students filing taxes Provides that the customer has no legal obligation to make all payments outlined in the contract and that, at the end of each weekly or monthly payment period, the customer can either continue to use the property by making the next payment or return the property in good working order with no further obligations and no entitlement to a return of any prior payments. Students filing taxes Provides that legal title to the property remains with the rent-to-own dealer until the customer makes either all the required payments or the early purchase payments required under the contract to acquire legal title. Students filing taxes Provides that the customer has no right to sell, sublease, mortgage, pawn, pledge, or otherwise dispose of the property until all contract payments have been made. Students filing taxes Motorsports entertainment complex. Students filing taxes   This is a racing track facility permanently situated on land that hosts one or more racing events for automobiles, trucks, or motorcycles during the 36-month period after the first day of the month in which the facility is placed in service. Students filing taxes The events must be open to the public for the price of admission. Students filing taxes Qualified smart electric grid system. Students filing taxes   A qualified smart electric grid system means any smart grid property used as part of a system for electric distribution grid communications, monitoring, and management placed in service after October 3, 2008, by a taxpayer who is a supplier of electrical energy or a provider of electrical energy services. Students filing taxes Smart grid property includes electronics and related equipment that is capable of: Sensing, collecting, and monitoring data of or from all portions of a utility's electric distribution grid, Providing real-time, two-way communications to monitor or to manage the grid, and Providing real-time analysis of an event prediction based on collected data that can be used to provide electric distribution system reliability, quality, and performance. Students filing taxes Retail motor fuels outlet. Students filing taxes   Real property is a retail motor fuels outlet if it is used to a substantial extent in the retail marketing of petroleum or petroleum products (whether or not it is also used to sell food or other convenience items) and meets any one of the following three tests. Students filing taxes It is not larger than 1,400 square feet. Students filing taxes 50% or more of the gross revenues generated from the property are derived from petroleum sales. Students filing taxes 50% or more of the floor space in the property is devoted to petroleum marketing sales. Students filing taxes A retail motor fuels outlet does not include any facility related to petroleum and natural gas trunk pipelines. Students filing taxes Qualified leasehold improvement property. Students filing taxes    Generally, this is any improvement to an interior part of a building (placed in service before January 1, 2014) that is nonresidential real property, provided all of the requirements discussed in chapter 3 under Qualified leasehold improvement property are met. Students filing taxes   In addition, an improvement made by the lessor does not qualify as qualified leasehold improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor's death or in any of the following types of transactions. Students filing taxes A transaction to which section 381(a) applies, A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business, A like-kind exchange, involuntary conversion, or reacquisition of real property to the extent that the basis in the property represents the carryover basis, or Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor's or distributor's basis in the property. Students filing taxes Examples include the following. Students filing taxes A complete liquidation of a subsidiary. Students filing taxes A transfer to a corporation controlled by the transferor. Students filing taxes An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. Students filing taxes Qualified restaurant property. Students filing taxes   Qualified restaurant property is any section 1250 property that is a building placed in service after December 31, 2008, and before January 1, 2014. Students filing taxes Also, more than 50% of the building's square footage must be devoted to preparation of meals and seating for on-premises consumption of prepared meals. Students filing taxes Qualified smart electric meter. Students filing taxes   A qualified smart electric meter is any time-based meter and related communication equipment which is placed in service by a supplier of electric energy or a provider of electric energy services and which is capable of being used by you as part of a system that: Measures and records electricity usage data on a time-differentiated basis in at least 24 separate time segments per day; Provides for the exchange of information between the supplier or provider and the customer's smart electric meter in support of time-based rates or other forms of demand response; Provides data to the supplier or provider so that the supplier or provider can provide energy usage information to customers electronically, and Provides all commercial and residential customers of such supplier or provider with net metering. Students filing taxes Net metering means allowing a customer a credit, if any, as complies with applicable federal and state laws and regulations for providing electricity to the supplier or provider. Students filing taxes Natural gas gathering line and electric transmission property. Students filing taxes   Any natural gas gathering line placed in service after April 11, 2005, is treated as 7-year property, and electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity and any natural gas distribution line placed in service after April 11, 2005, are treated as 15-year property, if the following requirements are met. Students filing taxes The original use of the property must have begun with you after April 11, 2005. Students filing taxes Original use means the first use to which the property is put, whether or not by you. Students filing taxes Therefore, property used by any person before April 12, 2005, is not original use. Students filing taxes Original use includes additional capital expenditures you incurred to recondition or rebuild your property. Students filing taxes However, original use does not include the cost of reconditioned or rebuilt property you acquired. Students filing taxes Property containing used parts will not be treated as reconditioned or rebuilt if the cost of the used parts is not more than 20% of the total cost of the property. Students filing taxes The property must not be placed in service under a binding contract in effect before April 12, 2005. Students filing taxes The property must not be self-constructed property (property you manufacture, construct, or produce for your own use), if you began the manufacture, construction, or production of the property before April 12, 2005. Students filing taxes Property that is manufactured, constructed, or produced for your use by another person under a written binding contract entered into by you or a related party before the manufacture, construction, or production of the property is considered to be manufactured, constructed, or produced by you. Students filing taxes What Is the Placed in Service Date? You begin to claim depreciation when your property is placed in service for either use in a trade or business or the production of income. Students filing taxes The placed in service date for your property is the date the property is ready and available for a specific use. Students filing taxes It is therefore not necessarily the date it is first used. Students filing taxes 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. Students filing taxes See Placed in Service under When Does Depreciation Begin and End in chapter 1 for examples illustrating when property is placed in service. Students filing taxes 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. Students filing taxes For a discussion of business/investment use, see Partial business or investment use under Property Used in Your Business or Income-Producing Activity in chapter 1 . Students filing taxes Reduce that amount by any credits and deductions allocable to the property. Students filing taxes The following are examples of some credits and deductions that reduce basis. Students filing taxes Any deduction for section 179 property. Students filing taxes Any deduction under section 179B of the Internal Revenue Code for capital costs to comply with Environmental Protection Agency sulfur regulations. Students filing taxes Any deduction under section 179C of the Internal Revenue Code for certain qualified refinery property placed in service after August 8, 2005, and before January 1, 2014. Students filing taxes Any deduction under section 179D of the Internal Revenue Code for certain energy efficient commercial building property placed in service after December 31, 2005, and before January 1, 2014. Students filing taxes Any deduction under section 179E of the Internal Revenue Code for qualified advanced mine safety equipment property placed in service after December 20, 2006, and before January 1, 2014 . Students filing taxes Any deduction for removal of barriers to the disabled and the elderly. Students filing taxes Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. Students filing taxes Any special depreciation allowance. Students filing taxes Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. Students filing taxes For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. Students filing taxes Enter the basis for depreciation under column (c) in Part III of Form 4562. Students filing taxes For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property in chapter 1 . Students filing taxes Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. Students filing taxes It is determined based on the depreciation system (GDS or ADS) used. Students filing taxes Recovery Periods Under GDS Under GDS, property that is not qualified Indian reservation property is depreciated over one of the following recovery periods. Students filing taxes Property Class Recovery Period 3-year property   3 years 1   5-year property   5 years     7-year property   7 years     10-year property   10 years     15-year property   15 years 2   20-year property   20 years     25-year property   25 years 3   Residential rental property   27. Students filing taxes 5 years     Nonresidential real property   39 years 4   15 years for qualified rent-to-own property placed in service before August 6, 1997. Students filing taxes 239 years for property that is a retail motor fuels outlet placed in service before August 20, 1996 (31. Students filing taxes 5 years if placed in service before May 13, 1993), unless you elected to depreciate it over 15 years. Students filing taxes 320 years for property placed in service before June 13, 1996, or under a binding contract in effect before June 10, 1996. Students filing taxes 431. Students filing taxes 5 years for property placed in service before May 13, 1993 (or before January 1, 1994, if the purchase or construction of the property is under a binding contract in effect before May 13, 1993, or if construction began before May 13, 1993). Students filing taxes The GDS recovery periods for property not listed above can be found in Appendix B, Table of Class Lives and Recovery Periods. Students filing taxes Residential rental property and nonresidential real property are defined earlier under Which Depreciation System (GDS or ADS) Applies. Students filing taxes Enter the appropriate recovery period on Form 4562 under column (d) in section B of Part III, unless already shown (for 25-year property, residential rental property, and nonresidential real property). Students filing taxes Office in the home. Students filing taxes   If your home is a personal-use single family residence and you begin to use part of your home as an office, depreciate that part of your home as nonresidential real property over 39 years (31. Students filing taxes 5 years if you began using it for business before May 13, 1993). Students filing taxes However, if your home is an apartment in an apartment building that you own and the building is residential rental property as defined earlier under Which Depreciation System (GDS or ADS) Applies , depreciate the part used as an office as residential rental property over 27. Students filing taxes 5 years. Students filing taxes See Publication 587 for a discussion of the tests you must meet to claim expenses, including depreciation, for the business use of your home. Students filing taxes Home changed to rental use. Students filing taxes   If you begin to rent a home that was your personal home before 1987, you depreciate it as residential rental property over 27. Students filing taxes 5 years. Students filing taxes Indian Reservation Property The recovery periods for qualified property you placed in service on an Indian reservation after 1993 and before 2014 are shorter than those listed earlier. Students filing taxes The following table shows these shorter recovery periods. Students filing taxes Property Class Recovery  Period 3-year property 2 years 5-year property 3 years 7-year property 4 years 10-year property 6 years 15-year property 9 years 20-year property 12 years Nonresidential real property 22 years Nonresidential real property is defined earlier under Which Property Class Applies Under GDS . Students filing taxes Use this chart to find the correct percentage table to use for qualified Indian reservation property. Students filing taxes IF your recovery period is: THEN use the following table in Appendix A: 2 years A-21 3 years A-1, A-2, A-3, A-4, or A-5 4 years A-22 6 years A-23 9 years A-14, A-15, A-16, A-17, or A-18 12 years A-14, A-15, A-16, A-17, or A-18 22 years A-24 Qualified property. Students filing taxes   Property eligible for the shorter recovery periods are 3-, 5-, 7-, 10-, 15-, and 20-year property and nonresidential real property. Students filing taxes You must use this property predominantly in the active conduct of a trade or business within an Indian reservation. Students filing taxes The rental of real property that is located on an Indian reservation is treated as the active conduct of a trade or business within an Indian reservation. Students filing taxes   The following property is not qualified property. Students filing taxes Property used or located outside an Indian reservation on a regular basis, other than qualified infrastructure property. Students filing taxes Property acquired directly or indirectly from a related person. Students filing taxes Property placed in service for purposes of conducting or housing class I, II, or III gaming activities. Students filing taxes These activities are defined in section 4 of the Indian Regulatory Act (25 U. Students filing taxes S. Students filing taxes C. Students filing taxes 2703). Students filing taxes Any property you must depreciate under ADS. Students filing taxes Determine whether property is qualified without regard to the election to use ADS and after applying the special rules for listed property not used predominantly for qualified business use (discussed in chapter 5). Students filing taxes Qualified infrastructure property. Students filing taxes   Item (1) above does not apply to qualified infrastructure property located outside the reservation that is used to connect with qualified infrastructure property within the reservation. Students filing taxes Qualified infrastructure property is property that meets all the following rules. Students filing taxes It is qualified property, as defined earlier, except that it is outside the reservation. Students filing taxes It benefits the tribal infrastructure. Students filing taxes It is available to the general public. Students filing taxes It is placed in service in connection with the active conduct of a trade or business within a reservation. Students filing taxes Infrastructure property includes, but is not limited to, roads, power lines, water systems, railroad spurs, and communications facilities. Students filing taxes Related person. Students filing taxes   For purposes of item (2) above, see Related persons in the discussion on property owned or used in 1986 under What Method Can You Use To Depreciate Your Property in chapter 1 for a description of related persons. Students filing taxes Indian reservation. Students filing taxes   The term Indian reservation means a reservation as defined in section 3(d) of the Indian Financing Act of 1974 (25 U. Students filing taxes S. Students filing taxes C. Students filing taxes 1452(d)) or section 4(10) of the Indian Child Welfare Act of 1978 (25 U. Students filing taxes S. Students filing taxes C. Students filing taxes 1903(10)). Students filing taxes Section 3(d) of the Indian Financing Act of 1974 defines reservation to include former Indian reservations in Oklahoma. Students filing taxes For a definition of the term “former Indian reservations in Oklahoma,” see Notice 98-45 in Internal Revenue Bulletin 1998-35. Students filing taxes Recovery Periods Under ADS The recovery periods for most property generally are longer under ADS than they are under GDS. Students filing taxes The following table shows some of the ADS recovery periods. Students filing taxes Property Recovery  Period Rent-to-own property 4 years Automobiles and light duty trucks 5 years Computers and peripheral equipment 5 years High technology telephone station equipment installed on customer premises 5 years High technology medical equipment 5 years Personal property with no class life 12 years Natural gas gathering lines 14 years Single purpose agricultural and horticultural structures 15 years Any tree or vine bearing fruit or nuts 20 years Initial clearing and grading land  improvements for gas utility property 20 years Initial clearing and grading land  improvements for electric utility  transmission and distribution plants 25 years Electric transmission property used in the transmission at 69 or more kilovolts of electricity 30 years Natural gas distribution lines 35 years Any qualified leasehold improvement property 39 years Any qualified restaurant property 39 years Nonresidential real property 40 years Residential rental property 40 years Section 1245 real property not listed in Appendix B 40 years Railroad grading and tunnel bore 50 years The ADS recovery periods for property not listed above can be found in the tables in Appendix B. Students filing taxes Rent-to-own property, qualified leasehold improvement property, qualified restaurant property, residential rental property, and nonresidential real property are defined earlier under Which Property Class Applies Under GDS . Students filing taxes Tax-exempt use property subject to a lease. Students filing taxes   The ADS recovery period for any property leased under a lease agreement to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership) cannot be less than 125% of the lease term. Students filing taxes Additions and Improvements An addition or improvement you make to depreciable property is treated as separate depreciable property. Students filing taxes See How Do You Treat Repairs and Improvements in chapter 1 for a definition of improvements. Students filing taxes Its property class and recovery period are the same as those that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. Students filing taxes The recovery period begins on the later of the following dates. Students filing taxes The date you place the addition or improvement in service. Students filing taxes The date you place in service the property to which you made the addition or improvement. Students filing taxes If the improvement you make is qualified leasehold improvement property, qualified restaurant property, or qualified retail improvement property, the GDS recovery period is 15 years (39 years under ADS). Students filing taxes Example. Students filing taxes You own a rental home that you have been renting out since 1981. Students filing taxes If you put an addition on the home and place the addition in service this year, you would use MACRS to figure your depreciation deduction for the addition. Students filing taxes Under GDS, the property class for the addition is residential rental property and its recovery period is 27. Students filing taxes 5 years because the home to which the addition is made would be residential rental property if you had placed it in service this year. Students filing taxes Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. Students filing taxes 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. Students filing taxes The mid-month convention. Students filing taxes   Use this convention for nonresidential real property, residential rental property, and any railroad grading or tunnel bore. Students filing taxes   Under this convention, you treat all property placed in service or disposed of during a month as placed in service or disposed of at the midpoint of the month. Students filing taxes This means that a one-half month of depreciation is allowed for the month the property is placed in service or disposed of. Students filing taxes   Your use of the mid-month convention is indicated by the “MM” already shown under column (e) in Part III of Form 4562. Students filing taxes The mid-quarter convention. Students filing taxes   Use this convention if the mid-month convention does not apply and the total depreciable bases of MACRS property you placed in service during the last 3 months of the tax year (excluding nonresidential real property, residential rental property, any railroad grading or tunnel bore, property placed in service and disposed of in the same year, and property that is being depreciated under a method other than MACRS) are more than 40% of the total depreciable bases of all MACRS property you placed in service during the entire year. Students filing taxes   Under this convention, you treat all property placed in service or disposed of during any quarter of the tax year as placed in service or disposed of at the midpoint of that quarter. Students filing taxes This means that 1½ months of depreciation is allowed for the quarter the property is placed in service or disposed of. Students filing taxes   If you use this convention, enter “MQ” under column (e) in Part III of Form 4562. Students filing taxes    For purposes of determining whether the mid-quarter convention applies, the depreciable basis of property you placed in service during the tax year reflects the reduction in basis for amounts expensed under section 179 and the part of the basis of property attributable to personal use. Students filing taxes However, it does not reflect any reduction in basis for any special depreciation allowance. Students filing taxes The half-year convention. Students filing taxes   Use this convention if neither the mid-quarter convention nor the mid-month convention applies. Students filing taxes   Under this convention, you treat all property placed in service or disposed of during a tax year as placed in service or disposed of at the midpoint of the year. Students filing taxes This means that a one-half year of depreciation is allowed for the year the property is placed in service or disposed of. Students filing taxes   If you use this convention, enter “HY” under column (e) in Part III of Form 4562. Students filing taxes Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. Students filing taxes The 200% declining balance method over a GDS recovery period. Students filing taxes The 150% declining balance method over a GDS recovery period. Students filing taxes The straight line method over a GDS recovery period. Students filing taxes The straight line method over an ADS recovery period. Students filing taxes For property placed in service before 1999, you could have elected the 150% declining balance method using the ADS recovery periods for certain property classes. Students filing taxes If you made this election, continue to use the same method and recovery period for that property. Students filing taxes Table 4–1 lists the types of property you can depreciate under each method. Students filing taxes It also gives a brief explanation of the method, including any benefits that may apply. Students filing taxes Depreciation Methods for Farm Property If you place personal property in service in a farming business after 1988, you generally must depreciate it under GDS using the 150% declining balance method unless you are a farmer who must depreciate the property under ADS using the straight line method or you elect to depreciate the property under GDS or ADS using the straight line method. Students filing taxes You can depreciate real property using the straight line method under either GDS or ADS. Students filing taxes Fruit or nut trees and vines. Students filing taxes   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a recovery period of 10 years. Students filing taxes ADS required for some farmers. Students filing taxes   If you elect not to apply the uniform capitalization rules to any plant produced in your farming business, you must use ADS. Students filing taxes You must use ADS for all property you place in service in any year the election is in effect. Students filing taxes See the regulations under section 263A of the Internal Revenue Code for information on the uniform capitalization rules that apply to farm property. Students filing taxes Electing a Different Method As shown in Table 4–1 , you can elect a different method for depreciation for certain types of property. Students filing taxes You must make the election by the due date of the return (including extensions) for the year you placed the property in service. Students filing taxes However, if you timely filed your return for the year without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Students filing taxes Attach the election to the amended return and write “Filed pursuant to section 301. Students filing taxes 9100-2” on the election statement. Students filing taxes File the amended return at the same address you filed the original return. Students filing taxes Once you make the election, you cannot change it. Students filing taxes 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. Students filing taxes However, you can make the election on a property-by-property basis for nonresidential real and residential rental property. Students filing taxes 150% election. Students filing taxes   Instead of using the 200% declining balance method over the GDS recovery period for nonfarm property in the 3-, 5-, 7-, and 10-year property classes, you can elect to use the 150% declining balance method. Students filing taxes Make the election by entering “150 DB” under column (f) in Part III of Form 4562. Students filing taxes Straight line election. Students filing taxes   Instead of using either the 200% or 150% declining balance methods over the GDS recovery period, you can elect to use the straight line method over the GDS recovery period. Students filing taxes Make the election by entering  “S/L” under column (f) in Part III of Form 4562. Students filing taxes Election of ADS. Students filing taxes   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. Students filing taxes ADS uses the straight line method of depreciation over fixed ADS recovery periods. Students filing taxes Most ADS recovery periods are listed in Appendix B, or see the table under Recovery Periods Under ADS , earlier. Students filing taxes   Make the election by completing line 20 in Part III of Form 4562. Students filing taxes Farm property. Students filing taxes   Instead of using the 150% declining balance method over a GDS recovery period for property you use in a farming business (other than real property), you can elect to depreciate it using either of the following methods. Students filing taxes The straight line method over a GDS recovery period. Students filing taxes The straight line method over an ADS recovery period. Students filing taxes Table 4-1. Students filing taxes Depreciation Methods Note. Students filing taxes The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. Students filing taxes Method Type of Property Benefit GDS using 200% DB • Nonfarm 3-, 5-, 7-, and 10-year property • Provides a greater deduction during the earlier recovery years • Changes to SL when that method provides an equal or greater deduction GDS using 150% DB • All farm property (except real property) • All 15- and 20-year property (except qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property placed in service before January 1, 2014) • Nonfarm 3-, 5-, 7-, and 10-year property • Provides a greater deduction during the earlier recovery years • Changes to SL when that method provides an equal or greater deduction1 GDS using SL • Nonresidential real property • Qualified leasehold improvement property placed in service before January 1, 2014 • Qualified restaurant property placed in service before January 1, 2014 • Qualified retail improvement property placed in service before January 1, 2014 • Residential rental property • Trees or vines bearing fruit or nuts • Water utility property • All 3-, 5-, 7-, 10-, 15-, and 20-year property2 • Property for which you elected section 168(k)(4) • Provides for equal yearly deductions (except for the first and last years) ADS using SL • Listed property used 50% or less for business • Property used predominantly outside the U. Students filing taxes S. Students filing taxes  • Tax-exempt property • Tax-exempt bond-financed property • Farm property used when an election not to apply the uniform capitalization rules is in effect • Imported property3 • Any property for which you elect to use this method4 • Provides for equal yearly deductions (except for the first and last years) 1The MACRS percentage tables in Appendix A have the switch to the straight line method built into their rates 2See section 168(b)(5) of the Internal Revenue Code. Students filing taxes 3See section 168(g)(6) of the Internal Revenue Code 4See section 168(g)(7) of the Internal Revenue Code How Is the Depreciation Deduction Figured? To figure your depreciation deduction under MACRS, you first determine the depreciation system, property class, placed in service date, basis amount, recovery period, convention, and depreciation method that applies to your property. Students filing taxes Then, you are ready to figure your depreciation deduction. Students filing taxes You can figure it using a percentage table provided by the IRS, or you can figure it yourself without using the table. Students filing taxes 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. Students filing taxes These percentage tables are in Appendix A near the end of this publication. Students filing taxes Which table to use. Students filing taxes    Appendix A contains the MACRS Percentage Table Guide, which is designed to help you locate the correct percentage table to use for depreciating your property. Students filing taxes The percentage tables immediately follow the guide. Students filing taxes Rules Covering the Use of the Tables The following rules cover the use of the percentage tables. Students filing taxes You must apply the rates in the percentage tables to your property's unadjusted basis. Students filing taxes You cannot use the percentage tables for a short tax year. Students filing taxes See Figuring the Deduction for a Short Tax Year, later, for information on the short tax year rules. Students filing taxes Once you start using the percentage tables for any item of property, you generally must continue to use them for the entire recovery period of the property. Students filing taxes You must stop using the tables if you adjust the basis of the property for any reason other than— Depreciation allowed or allowable, or An addition or improvement to that property that is depreciated as a separate item of property. Students filing taxes Basis adjustments other than those made due to the items listed in (4) include an increase in basis for the recapture of a clean-fuel deduction or credit and a reduction in basis for a casualty loss. Students filing taxes Basis adjustment due to recapture of clean-fuel vehicle deduction or credit. Students filing taxes   If you increase the basis of your property because of the recapture of part or all of a deduction for clean-fuel vehicles or the credit for clean-fuel vehicle refueling property placed in service before January 1, 2006, you cannot continue to use the percentage tables. Students filing taxes For the year of the adjustment and the remaining recovery period, you must figure the depreciation deduction yourself using the property's adjusted basis at the end of the year. Students filing taxes See Figuring the Deduction Without Using the Tables, later. Students filing taxes Basis adjustment due to casualty loss. Students filing taxes   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. Students filing taxes 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. Students filing taxes See Figuring the Deduction Without Using the Tables, later. Students filing taxes Example. Students filing taxes On October 26, 2012, Sandra Elm, a calendar year taxpayer, bought and placed in service in her business a new item of 7-year property. Students filing taxes It cost $39,000 and she elected a section 179 deduction of $24,000. Students filing taxes She also took a special depreciation allowance of $7,500 [50% of $15,000 ($39,000 − $24,000)]. Students filing taxes Her unadjusted basis after the section 179 deduction and special depreciation allowance was $7,500 ($15,000 − $7,500). Students filing taxes She figured her MACRS depreciation deduction using the percentage tables. Students filing taxes For 2012, her MACRS depreciation deduction was $268. Students filing taxes In July 2013, the property was vandalized and Sandra had a deductible casualty loss of $3,000. Students filing taxes She must adjust the property's basis for the casualty loss, so she can no longer use the percentage tables. Students filing taxes Her adjusted basis at the end of 2013, before figuring her 2013 depreciation, is $4,232. Students filing taxes She figures that amount by subtracting the 2012 MACRS depreciation of $268 and the casualty loss of $3,000 from the unadjusted basis of $7,500. Students filing taxes She must now figure her depreciation for 2013 without using the percentage tables. Students filing taxes Figuring the Unadjusted Basis of Your Property You must apply the table rates to your property's unadjusted basis each year of the recovery period. Students filing taxes Unadjusted basis is the same basis amount you would use to figure gain on a sale, but you figure it without reducing your original basis by any MACRS depreciation taken in earlier years. Students filing taxes However, you do reduce your original basis by other amounts, including the following. Students filing taxes Any amortization taken on the property. Students filing taxes Any section 179 deduction claimed. Students filing taxes Any special depreciation allowance taken on the property. Students filing taxes For business property you purchase during the year, the unadjusted basis is its cost minus these and other applicable adjustments. Students filing taxes If you trade property, your unadjusted basis in the property received is the cash paid plus the adjusted basis of the property traded minus these adjustments. Students filing taxes MACRS Worksheet You can use this worksheet to help you figure your depreciation deduction using the percentage tables. Students filing taxes Use a separate worksheet for each item of property. Students filing taxes Then, use the information from this worksheet to prepare Form 4562. Students filing taxes Do not use this worksheet for automobiles. Students filing taxes Use the Depreciation Worksheet for Passenger Automobiles in chapter 5. Students filing taxes MACRS Worksheet Part I   1. Students filing taxes MACRS system (GDS or ADS)   2. Students filing taxes Property class   3. Students filing taxes Date placed in service   4. Students filing taxes Recovery period   5. Students filing taxes Method and convention   6. Students filing taxes Depreciation rate (from tables)   Part II   7. Students filing taxes Cost or other basis* $     8. Students filing taxes Business/investment use   %   9. Students filing taxes Multiply line 7 by line 8   $ 10. Students filing taxes Total claimed for section 179 deduction and other items   $ 11. Students filing taxes Subtract line 10 from line 9. Students filing taxes This is your tentative basis for depreciation   $ 12. Students filing taxes Multiply line 11 by . Students filing taxes 50 if the 50% special depreciation allowance applies. Students filing taxes This is your special depreciation allowance. Students filing taxes Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance   $ 13. Students filing taxes Subtract line 12 from line 11. Students filing taxes This is your basis for depreciation     14. Students filing taxes Depreciation rate (from line 6)     15. Students filing taxes Multiply line 13 by line 14. Students filing taxes This is your MACRS depreciation deduction   $ *If real estate, do not include cost (basis) of land. Students filing taxes The following example shows how to figure your MACRS depreciation deduction using the percentage tables and the MACRS worksheet. Students filing taxes Example. Students filing taxes You bought office furniture (7-year property) for $10,000 and placed it in service on August 11, 2013. Students filing taxes You use the furniture only for business. Students filing taxes This is the only property you placed in service this year. Students filing taxes You did not elect a section 179 deduction and the property is not qualified property for purposes of claiming a special depreciation allowance so your property's unadjusted basis is its cost, $10,000. Students filing taxes You use GDS and the half-year convention to figure your depreciation. Students filing taxes You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-1. Students filing taxes Multiply your property's unadjusted basis each year by the percentage for 7-year property given in Table A-1. Students filing taxes You figure your depreciation deduction using the MACRS worksheet as follows. Students filing taxes MACRS Worksheet Part I 1. Students filing taxes MACRS system (GDS or ADS) GDS 2. Students filing taxes Property class 7-year 3. Students filing taxes Date placed in service 8/11/13 4. Students filing taxes Recovery period 7-Year 5. Students filing taxes Method and convention 200%DB/Half-Year 6. Students filing taxes Depreciation rate (from tables) . Students filing taxes 1429 Part II 7. Students filing taxes Cost or other basis* $10,000     8. Students filing taxes Business/investment use 100 %   9. Students filing taxes Multiply line 7 by line 8   $10,000 10. Students filing taxes Total claimed for section 179 deduction and other items   -0- 11. Students filing taxes Subtract line 10 from line 9. Students filing taxes This is your tentative basis for depreciation   $10,000 12. Students filing taxes Multiply line 11 by . Students filing taxes 50 if the 50% special depreciation allowance applies. Students filing taxes This is your special depreciation allowance. Students filing taxes Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance   -0- 13. Students filing taxes Subtract line 12 from line 11. Students filing taxes This is your basis for depreciation   $10,000 14. Students filing taxes Depreciation rate (from line 6)   . Students filing taxes 1429 15. Students filing taxes Multiply line 13 by line 14. Students filing taxes This is your MACRS depreciation deduction   $1,429 *If real estate, do not include cost (basis) of land. Students filing taxes If there are no adjustments to the basis of the property other than depreciation, your depreciation deduction for each subsequent year of the recovery period will be as follows. Students filing taxes Year   Basis Percentage Deduction 2014 $ 10,000 24. Students filing taxes 49%   $2,449   2015   10,000 17. Students filing taxes 49   1,749   2016   10,000 12. Students filing taxes 49   1,249   2017   10,000 8. Students filing taxes 93   893   2018   10,000 8. Students filing taxes 92   892   2019   10,000 8. Students filing taxes 93   893   2020   10,000 4. Students filing taxes 46   446   Examples The following examples are provided to show you how to use the percentage tables. Students filing taxes In both examples, assume the following. Students filing taxes You use the property only for business. Students filing taxes You use the calendar year as your tax year. Students filing taxes You use GDS for all the properties. Students filing taxes Example 1. Students filing taxes You bought a building and land for $120,000 and placed it in service on March 8. Students filing taxes The sales contract showed that the building cost $100,000 and the land cost $20,000. Students filing taxes It is nonresidential real property. Students filing taxes The building's unadjusted basis is its original cost, $100,000. Students filing taxes You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-7a. Students filing taxes March is the third month of your tax year, so multiply the building's unadjusted basis, $100,000, by the percentages for the third month in Table A-7a. Students filing taxes Your depreciation deduction for each of the first 3 years is as follows: Year   Basis Percentage Deduction 1st $ 100,000 2. Students filing taxes 033%   $2,033   2nd   100,000 2. Students filing taxes 564   2,564   3rd   100,000 2. Students filing taxes 564   2,564   Example 2. Students filing taxes During the year, you bought a machine (7-year property) for $4,000, office furniture (7-year property) for $1,000, and a computer (5-year property) for $5,000. Students filing taxes You placed the machine in service in January, the furniture in September, and the computer in October. Students filing taxes You do not elect a section 179 deduction and none of these items is qualified property for purposes of claiming a special depreciation allowance. Students filing taxes You placed property in service during the last 3 months of the year, so you must first determine if you have to use the mid-quarter convention. Students filing taxes The total bases of all property you placed in service during the year is $10,000. Students filing taxes The $5,000 basis of the computer, which you placed in service during the last 3 months (the fourth quarter) of your tax year, is more than 40% of the total bases of all property ($10,000) you placed in service during the year. Students filing taxes Therefore, you must use the mid-quarter convention for all three items. Students filing taxes You refer to the MACRS Percentage Table Guide in Appendix A to determine which table you should use under the mid-quarter convention. Students filing taxes The machine is 7-year property placed in service in the first quarter, so you use Table A-2. Students filing taxes The furniture is 7-year property placed in service in the third quarter, so you use Table A-4. Students filing taxes Finally, because the computer is 5-year property placed in service in the fourth quarter, you use Table A-6. Students filing taxes Knowing what table to use for each property, you figure the depreciation for the first 2 years as follows. Students filing taxes Year Property Basis Percentage Deduction 1st Machine $4,000 25. Students filing taxes 00 $1,000   2nd Machine 4,000 21. Students filing taxes 43 857   1st Furniture 1,000 10. Students filing taxes 71 107   2nd Furniture 1,000 25. Students filing taxes 51 255   1st Computer 5,000 5. Students filing taxes 00 250   2nd Computer 5,000 38. Students filing taxes 00 1,900   Sale or Other Disposition Before the Recovery Period Ends If you sell or otherwise dispose of your property before the end of its recovery period, your depreciation deduction for the year of the disposition will be only part of the depreciation amount for the full year. Students filing taxes You have disposed of your property if you have permanently withdrawn it from use in your business or income-producing activity because of its sale, exchange, retirement, abandonment, involuntary conversion, or destruction. Students filing taxes After you figure the full-year depreciation amount, figure the deductible part using the convention that applies to the property. Students filing taxes Half-year convention used. Students filing taxes   For property for which you used a half-year convention, the depreciation deduction for the year of the disposition is half the depreciation determined for the full year. Students filing taxes Mid-quarter convention used. Students filing taxes   For property for which you used the mid-quarter convention, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter in which you disposed of the property. Students filing taxes Quarter Percentage First 12. Students filing taxes 5% Second 37. Students filing taxes 5 Third 62. Students filing taxes 5 Fourth 87. Students filing taxes 5 Example. Students filing taxes On December 2, 2010, you placed in service an item of 5-year property costing $10,000. Students filing taxes You did not claim a section 179 deduction and the property does not qualify for a special depreciation allowance. Students filing taxes Your unadjusted basis for the property was $10,000. Students filing taxes You used the mid-quarter convention because this was the only item of business property you placed in service in 2010 and it was placed in service during the last 3 months of your tax year. Students filing taxes Your property is in the 5-year property class, so you used Table A-5 to figure your depreciation deduction. Students filing taxes Your deductions for 2010, 2011, and 2012 were $500 (5% of $10,000), $3,800 (38% of $10,000), and $2,280 (22. Students filing taxes 80% of $10,000). Students filing taxes You disposed of the property on April 6, 2013. Students filing taxes To determine your depreciation deduction for 2013, first figure the deduction for the full year. Students filing taxes This is $1,368 (13. Students filing taxes 68% of $10,000). Students filing taxes April is in the second quarter of the year, so you multiply $1,368 by 37. Students filing taxes 5% to get your depreciation deduction of $513 for 2013. Students filing taxes Mid-month convention used. Students filing taxes   If you dispose of residential rental or nonresidential real property, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by a fraction. Students filing taxes The numerator of the fraction is the number of months (including partial months) in the year that the property is considered in service. Students filing taxes The denominator is 12. Students filing taxes Example. Students filing taxes On July 2, 2011, you purchased and placed in service residential rental property. Students filing taxes The property cost $100,000, not including the cost of land. Students filing taxes You used Table A-6 to figure your MACRS depreciation for this property. Students filing taxes You sold the property on March 2, 2013. Students filing taxes You file your tax return based on the calendar year. Students filing taxes A full year of depreciation for 2013 is $3,636. Students filing taxes This is $100,000 multiplied by . Students filing taxes 03636 (the percentage for the seventh month of the third recovery year) from Table A-6 . Students filing taxes You then apply the mid-month convention for the 2½ months of use in 2013. Students filing taxes Treat the month of disposition as one-half month of use. Students filing taxes Multiply $3,636 by the fraction, 2. Students filing taxes 5 over 12, to get your 2013 depreciation deduction of $757. Students filing taxes 50. Students filing taxes Figuring the Deduction Without Using the Tables Instead of using the rates in the percentage tables to figure your depreciation deduction, you can figure it yourself. Students filing taxes Before making the computation each year, you must reduce your adjusted basis in the property by the depreciation claimed the previous year. Students filing taxes Figuring MACRS deductions without using the tables generally will result in a slightly different amount than using the tables. Students filing taxes Declining Balance Method When using a declining balance method, you apply the same depreciation rate each year to the adjusted basis of your property. Students filing taxes You must use the applicable convention for the first tax year and you must switch to the straight line method beginning in the first year for which it will give an equal or greater deduction. Students filing taxes The straight line method is explained later. Students filing taxes You figure depreciation for the year you place property in service as follows. Students filing taxes Multiply your adjusted basis in the property by the declining balance rate. Students filing taxes Apply the applicable convention. Students filing taxes You figure depreciation for all other years (before the year you switch to the straight line method) as follows. Students filing taxes Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years. Students filing taxes Multiply this new adjusted basis by the same declining balance rate used in earlier years. Students filing taxes If you dispose of property before the end of its recovery period, see Using the Applicable Convention, later, for information on how to figure depreciation for the year you dispose of it. Students filing taxes Figuring depreciation under the declining balance method and switching to the straight line method is illustrated in Example 1 , later, under Examples. Students filing taxes Declining balance rate. Students filing taxes   You figure your declining balance rate by dividing the specified declining balance percentage (150% or 200% changed to a decimal) by the number of years in the property's recovery period. Students filing taxes For example, for 3-year property depreciated using the 200% declining balance method, divide 2. Students filing taxes 00 (200%) by 3 to get 0. Students filing taxes 6667, or a 66. Students filing taxes 67% declining balance rate. Students filing taxes For 15-year property depreciated using the 150% declining balance method, divide 1. Students filing taxes 50 (150%) by 15 to get 0. Students filing taxes 10, or a 10% declining balance rate. Students filing taxes   The following table shows the declining balance rate for each property class and the first year for which the straight line method gives an equal or greater deduction. Students filing taxes Property Class Method Declining Balance Rate Year 3-year 200% DB 66. Students filing taxes 667% 3rd 5-year 200% DB 40. Students filing taxes 0 4th 7-year 200% DB 28. Students filing taxes 571 5th 10-year 200% DB 20. Students filing taxes 0 7th 15-year 150% DB 10. Students filing taxes 0 7th 20-year 150% DB 7. Students filing taxes 5 9th Straight Line Method When using the straight line method, you apply a different depreciation rate each year to the adjusted basis of your property. Students filing taxes You must use the applicable convention in the year you place the property in service and the year you dispose of the property. Students filing taxes You figure depreciation for the year you place property in service as follows. Students filing taxes Multiply your adjusted basis in the property by the straight line rate. Students filing taxes Apply the applicable convention. Students filing taxes You figure depreciation for all other years (including the year you switch from the declining balance method to the straight line method) as follows. Students filing taxes Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years (under any method). Students filing taxes Determine the depreciation rate for the year. Students filing taxes Multiply the adjusted basis figured in (1) by the depreciation rate figured in (2). Students filing taxes If you dispose of property before the end of its recovery period, see Using the Applicable Convention , later, for information on how to figure depreciation for the year you dispose of it. Students filing taxes Straight line rate. Students filing taxes   You determine the straight line depreciation rate for any tax year by dividing the number 1 by the years remaining in the recovery period at the beginning of that year. Students filing taxes When figuring the number of years remaining, you must take into account the convention used in the year you placed the property in service. Students filing taxes If the number of years remaining is less than 1, the depreciation rate for that tax year is 1. Students filing taxes 0 (100%). Students filing taxes Using the Applicable Convention The applicable convention (discussed earlier under Which Convention Applies ) affects how you figure your depreciation deduction for the year you place your property in service and for the year you dispose of it. Students filing taxes It determines how much of the recovery period remains at the beginning of each year, so it also affects the depreciation rate for property you depreciate under the straight line method. Students filing taxes See Straight line rate in the previous discussion. Students filing taxes Use the applicable convention as explained in the following discussions. Students filing taxes Half-year convention. Students filing taxes   If this convention applies, you deduct a half-year of depreciation for the first year and the last year that you depreciate the property. Students filing taxes You deduct a full year of depreciation for any other year during the recovery period. Students filing taxes   Figure your depreciation deduction for the year you place the property in service by dividing the depreciation for a full year by 2. Students filing taxes If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. Students filing taxes If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final 6 months of the recovery period is the amount of your unrecovered basis in the property. Students filing taxes Mid-quarter convention. Students filing taxes   If this convention applies, the depreciation you can deduct for the first year you depreciate the property depends on the quarter in which you place the property in service. Students filing taxes   A quarter of a full 12-month tax year is a period of 3 months. Students filing taxes The first quarter in a year begins on the first day of the tax year. Students filing taxes The second quarter begins on the first day of the fourth month of the tax year. Students filing taxes The third quarter begins on the first day of the seventh month of the tax year. Students filing taxes The fourth quarter begins on the first day of the tenth month of the tax year. Students filing taxes A calendar year is divided into the following quarters. Students filing taxes Quarter Months First January, February, March Second April, May, June Third July, August, September Fourth October, November, December   Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by the percentage listed below for the quarter you place the property in service. Students filing taxes Quarter Percentage First 87. Students filing taxes 5% Second 62. Students filing taxes 5 Third 37. Students filing taxes 5 Fourth 12. Students filing taxes 5   If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter you dispose of the property. Students filing taxes Quarter Percentage First 12. Students filing taxes 5% Second 37. Students filing taxes 5 Third 62. Students filing taxes 5 Fourth 87. Students filing taxes 5   If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final quarter of the recovery period is the amount of your unrecovered basis in the property. Students filing taxes Mid-month convention. Students filing taxes   If this convention applies, the depreciation you can deduct for the first year that you depreciate the property depends on the month in which you place the property in service. Students filing taxes Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by a fraction. Students filing taxes The numerator of the fraction is the number of full months in the year that the property is in service plus ½ (or 0. Students filing taxes 5). Students filing taxes The denominator is 12. Students filing taxes   If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. Students filing taxes If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final month of the recovery period is the amount of your unrecovered basis in the property. Students filing taxes Example. Students filing taxes You use the calendar year and place nonresidential real property in service in August. Students filing taxes The property is in service 4 full months (September, October, November, and December). Students filing taxes Your numerator is 4. Students filing taxes 5 (4 full months plus 0. Students filing taxes 5). Students filing taxes You multiply the depreciation for a full year by 4. Students filing taxes 5/12, or 0. Students filing taxes 375. Students filing taxes Examples The following examples show how to figure depreciation under MACRS without using the percentage tables. Students filing taxes Figures are rounded for purposes of the examples. Students filing taxes Assume for all the examples that you use a calendar year as your tax year. Students filing taxes Example 1—200% DB method and half-year convention. Students filing taxes In February, you placed in service depreciable property with a 5-year recovery period and a basis of $1,000. Students filing taxes You do not elect to take the section 179 deduction and the property does not qualify for a special depreciation allowance. Students filing taxes You use GDS and the 200% declining balance (DB) method to figure your depreciation. Students filing taxes When the straight line (SL) method results in an equal or larger deduction, you switch to the SL method. Students filing taxes You did not place any property in service in the last 3 months of the year, so you must use the half-year convention. Students filing taxes First year. Students filing taxes You figure the depreciation rate under the 200% DB method by dividing 2 (200%) by 5 (the number of years in the recovery period). Students filing taxes The result is 40%. Students filing taxes You multiply the adjusted basis of the property ($1,000) by the 40% DB rate. Students filing taxes You apply the half-year convention by dividing the result ($400) by 2. Students filing taxes Depreciation for the first year under the 200% DB method is $200. Students filing taxes You figure the depreciation rate under the straight line (SL) method by dividing 1 by 5, the number of years in the recovery period. Students filing taxes The result is 20%. Students filing taxes You multiply the adjusted basis of the property ($1,000) by the 20% SL rate. Students filing taxes You apply the half-year convention by dividing the result ($200) by 2. Students filing taxes Depreciation for the first year under the SL method is $100. Students filing taxes The DB method provides a larger deduction, so you deduct the $200 figured under the 200% DB method. Students filing taxes Second year. Students filing taxes You reduce the adjusted basis ($1,000) by the depreciation claimed in the first year ($200). Students filing taxes You multiply the result ($800) by the DB rate (40%). Students filing taxes Depreciation for the second year under the 200% DB method is $320. Students filing taxes You figure the SL depreciation rate by dividing 1 by 4. Students filing taxes 5, the number of years remaining in the recovery period. Students filing taxes (Based on the half-year convention, you used only half a year of the recovery period in the first year. Students filing taxes ) You multiply the reduced adjusted basis ($800) by the result (22. Students filing taxes 22%). Students filing taxes Depreciation under the SL method for the second year is $178. Students filing taxes The DB method provides a larger deduction, so you deduct the $320 figured under the 200% DB method. Students filing taxes Third year. Students filing taxes You reduce the adjusted basis ($800) by the depreciation claimed in the second year ($320). Students filing taxes You multiply the result ($480) by the DB rate (40%). Students filing taxes Depreciation for the third year under the 200% DB method is $192. Students filing taxes You figure the SL depreciation rate by dividing 1 by 3. Students filing taxes 5. Students filing taxes You multiply the reduced adjusted basis ($480) by the result (28. Students filing taxes 57%). Students filing taxes Depreciation under the SL method for the third year is $137. Students filing taxes The DB method provides a larger deduction, so you deduct the $192 figured under the 200% DB method. Students filing taxes Fourth year. Students filing taxes You reduce the adjusted basis ($480) by the de