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Www Irs Gov Form1040a

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Www Irs Gov Form1040a

Www irs gov form1040a 5. Www irs gov form1040a   Recordkeeping Table of Contents How To Prove ExpensesWhat Are Adequate Records? What If I Have Incomplete Records? Separating and Combining Expenses How Long To Keep Records and Receipts Examples of Records If you deduct travel, entertainment, gift, or transportation expenses, you must be able to prove (substantiate) certain elements of expense. Www irs gov form1040a This chapter discusses the records you need to keep to prove these expenses. Www irs gov form1040a If you keep timely and accurate records, you will have support to show the IRS if your tax return is ever examined. Www irs gov form1040a You will also have proof of expenses that your employer may require if you are reimbursed under an accountable plan. Www irs gov form1040a These plans are discussed in chapter 6 under Reimbursements . Www irs gov form1040a How To Prove Expenses Table 5-1 is a summary of records you need to prove each expense discussed in this publication. Www irs gov form1040a You must be able to prove the elements listed across the top portion of the chart. Www irs gov form1040a You prove them by having the information and receipts (where needed) for the expenses listed in the first column. Www irs gov form1040a You cannot deduct amounts that you approximate or estimate. Www irs gov form1040a You should keep adequate records to prove your expenses or have sufficient evidence that will support your own statement. Www irs gov form1040a You must generally prepare a written record for it to be considered adequate. Www irs gov form1040a This is because written evidence is more reliable than oral evidence alone. Www irs gov form1040a However, if you prepare a record on a computer, it is considered an adequate record. Www irs gov form1040a What Are Adequate Records? You should keep the proof you need in an account book, diary, log, statement of expense, trip sheets, or similar record. Www irs gov form1040a You should also keep documentary evidence that, together with your record, will support each element of an expense. Www irs gov form1040a Documentary evidence. Www irs gov form1040a   You generally must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses. Www irs gov form1040a Exception. Www irs gov form1040a   Documentary evidence is not needed if any of the following conditions apply. Www irs gov form1040a You have meals or lodging expenses while traveling away from home for which you account to your employer under an accountable plan, and you use a per diem allowance method that includes meals and/or lodging. Www irs gov form1040a ( Accountable plans and per diem allowances are discussed in chapter 6. Www irs gov form1040a ) Your expense, other than lodging, is less than $75. Www irs gov form1040a You have a transportation expense for which a receipt is not readily available. Www irs gov form1040a Adequate evidence. Www irs gov form1040a   Documentary evidence ordinarily will be considered adequate if it shows the amount, date, place, and essential character of the expense. Www irs gov form1040a   For example, a hotel receipt is enough to support expenses for business travel if it has all of the following information. Www irs gov form1040a The name and location of the hotel. Www irs gov form1040a The dates you stayed there. Www irs gov form1040a Separate amounts for charges such as lodging, meals, and telephone calls. Www irs gov form1040a   A restaurant receipt is enough to prove an expense for a business meal if it has all of the following information. Www irs gov form1040a The name and location of the restaurant. Www irs gov form1040a The number of people served. Www irs gov form1040a The date and amount of the expense. Www irs gov form1040a If a charge is made for items other than food and beverages, the receipt must show that this is the case. Www irs gov form1040a Canceled check. Www irs gov form1040a   A canceled check, together with a bill from the payee, ordinarily establishes the cost. Www irs gov form1040a However, a canceled check by itself does not prove a business expense without other evidence to show that it was for a business purpose. Www irs gov form1040a Duplicate information. Www irs gov form1040a   You do not have to record information in your account book or other record that duplicates information shown on a receipt as long as your records and receipts complement each other in an orderly manner. Www irs gov form1040a   You do not have to record amounts your employer pays directly for any ticket or other travel item. Www irs gov form1040a However, if you charge these items to your employer, through a credit card or otherwise, you must keep a record of the amounts you spend. Www irs gov form1040a Timely-kept records. Www irs gov form1040a   You should record the elements of an expense or of a business use at or near the time of the expense or use and support it with sufficient documentary evidence. Www irs gov form1040a A timely-kept record has more value than a statement prepared later when generally there is a lack of accurate recall. Www irs gov form1040a   You do not need to write down the elements of every expense on the day of the expense. Www irs gov form1040a If you maintain a log on a weekly basis that accounts for use during the week, the log is considered a timely-kept record. Www irs gov form1040a   If you give your employer, client, or customer an expense account statement, it can also be considered a timely-kept record. Www irs gov form1040a This is true if you copy it from your account book, diary, log, statement of expense, trip sheets, or similar record. Www irs gov form1040a Proving business purpose. Www irs gov form1040a   You must generally provide a written statement of the business purpose of an expense. Www irs gov form1040a However, the degree of proof varies according to the circumstances in each case. Www irs gov form1040a If the business purpose of an expense is clear from the surrounding circumstances, then you do not need to give a written explanation. Www irs gov form1040a Example. Www irs gov form1040a If you are a sales representative who calls on customers on an established sales route, you do not have to give a written explanation of the business purpose for traveling that route. Www irs gov form1040a You can satisfy the requirements by recording the length of the delivery route once, the date of each trip at or near the time of the trips, and the total miles you drove the car during the tax year. Www irs gov form1040a You could also establish the date of each trip with a receipt, record of delivery, or other documentary evidence. Www irs gov form1040a Confidential information. Www irs gov form1040a   You do not need to put confidential information relating to an element of a deductible expense (such as the place, business purpose, or business relationship) in your account book, diary, or other record. Www irs gov form1040a However, you do have to record the information elsewhere at or near the time of the expense and have it available to fully prove that element of the expense. Www irs gov form1040a What If I Have Incomplete Records? If you do not have complete records to prove an element of an expense, then you must prove the element with: Your own written or oral statement containing specific information about the element, and Other supporting evidence that is sufficient to establish the element. Www irs gov form1040a If the element is the description of a gift, or the cost, time, place, or date of an expense, the supporting evidence must be either direct evidence or documentary evidence. Www irs gov form1040a Direct evidence can be written statements or the oral testimony of your guests or other witnesses setting forth detailed information about the element. Www irs gov form1040a Documentary evidence can be receipts, paid bills, or similar evidence. Www irs gov form1040a If the element is either the business relationship of your guests or the business purpose of the amount spent, the supporting evidence can be circumstantial rather than direct. Www irs gov form1040a For example, the nature of your work, such as making deliveries, provides circumstantial evidence of the use of your car for business purposes. Www irs gov form1040a Invoices of deliveries establish when you used the car for business. Www irs gov form1040a Table 5-1. Www irs gov form1040a How To Prove Certain Business Expenses IF you have expenses for . Www irs gov form1040a . Www irs gov form1040a THEN you must keep records that show details of the following elements . Www irs gov form1040a . Www irs gov form1040a . Www irs gov form1040a   Amount Time Place or  Description Business Purpose Business Relationship Travel Cost of each separate expense for travel, lodging, and meals. Www irs gov form1040a Incidental expenses may be totaled in reasonable categories such as taxis, fees and tips, etc. Www irs gov form1040a Dates you left and returned for each trip and number of days spent on business. Www irs gov form1040a Destination or area of your travel (name of city, town, or other designation). Www irs gov form1040a Purpose: Business purpose for the expense or the business benefit gained or expected to be gained. Www irs gov form1040a    Relationship: N/A Entertainment Cost of each separate expense. Www irs gov form1040a Incidental expenses such as taxis, telephones, etc. Www irs gov form1040a , may be totaled on a daily basis. Www irs gov form1040a Date of entertainment. Www irs gov form1040a (Also see Business Purpose. Www irs gov form1040a ) Name and address or location of place of entertainment. Www irs gov form1040a Type of entertainment if not otherwise apparent. Www irs gov form1040a (Also see Business Purpose. Www irs gov form1040a ) Purpose: Business purpose for the expense or the business benefit gained or expected to be gained. Www irs gov form1040a  For entertainment, the nature of the business discussion or activity. Www irs gov form1040a If the entertainment was directly before or after a business discussion: the date, place, nature, and duration of the business discussion, and the identities of the persons who took part in both the business discussion and the entertainment activity. Www irs gov form1040a    Relationship: Occupations or other information (such as names, titles, or other designations) about the recipients that shows their business relationship to you. Www irs gov form1040a  For entertainment, you must also prove that you or your employee was present if the entertainment was a business meal. Www irs gov form1040a Gifts Cost of the gift. Www irs gov form1040a Date of the gift. Www irs gov form1040a Description of the gift. Www irs gov form1040a   Transportation Cost of each separate expense. Www irs gov form1040a For car expenses, the cost of the car and any improvements, the date you started using it for business, the mileage for each business use, and the total miles for the year. Www irs gov form1040a Date of the expense. Www irs gov form1040a For car expenses, the date of the use of the car. Www irs gov form1040a Your business destination. Www irs gov form1040a Purpose: Business purpose for the expense. Www irs gov form1040a    Relationship: N/A Sampling. Www irs gov form1040a   You can keep an adequate record for parts of a tax year and use that record to prove the amount of business or investment use for the entire year. Www irs gov form1040a You must demonstrate by other evidence that the periods for which an adequate record is kept are representative of the use throughout the tax year. Www irs gov form1040a Example. Www irs gov form1040a You use your car to visit the offices of clients, meet with suppliers and other subcontractors, and pick up and deliver items to clients. Www irs gov form1040a There is no other business use of the car, but you and your family use the car for personal purposes. Www irs gov form1040a You keep adequate records during the first week of each month that show that 75% of the use of the car is for business. Www irs gov form1040a Invoices and bills show that your business use continues at the same rate during the later weeks of each month. Www irs gov form1040a Your weekly records are representative of the use of the car each month and are sufficient evidence to support the percentage of business use for the year. Www irs gov form1040a Exceptional circumstances. Www irs gov form1040a   You can satisfy the substantiation requirements with other evidence if, because of the nature of the situation in which an expense is made, you cannot get a receipt. Www irs gov form1040a This applies if all the following are true. Www irs gov form1040a You were unable to obtain evidence for an element of the expense or use that completely satisfies the requirements explained earlier under What Are Adequate Records . Www irs gov form1040a You are unable to obtain evidence for an element that completely satisfies the two rules listed earlier under What If I Have Incomplete Records . Www irs gov form1040a You have presented other evidence for the element that is the best proof possible under the circumstances. Www irs gov form1040a Destroyed records. Www irs gov form1040a   If you cannot produce a receipt because of reasons beyond your control, you can prove a deduction by reconstructing your records or expenses. Www irs gov form1040a Reasons beyond your control include fire, flood, and other casualties. Www irs gov form1040a    Table 5-2. Www irs gov form1040a Daily Business Mileage and Expense Log Name:       Odometer Readings Expenses Date Destination  (City, Town, or Area) Business Purpose Start Stop Miles  this trip Type  (Gas, oil, tolls, etc. Www irs gov form1040a ) Amount                                                                                                                   Weekly  Total             Total Year-to-Date             Separating and Combining Expenses This section explains when expenses must be kept separate and when expenses can be combined. Www irs gov form1040a Separating expenses. Www irs gov form1040a   Each separate payment is generally considered a separate expense. Www irs gov form1040a For example, if you entertain a customer or client at dinner and then go to the theater, the dinner expense and the cost of the theater tickets are two separate expenses. Www irs gov form1040a You must record them separately in your records. Www irs gov form1040a Season or series tickets. Www irs gov form1040a   If you buy season or series tickets for business use, you must treat each ticket in the series as a separate item. Www irs gov form1040a To determine the cost of individual tickets, divide the total cost (but not more than face value) by the number of games or performances in the series. Www irs gov form1040a You must keep records to show whether you use each ticket as a gift or entertainment. Www irs gov form1040a Also, you must be able to prove the cost of nonluxury box seat tickets if you rent a skybox or other private luxury box for more than one event. Www irs gov form1040a See Entertainment tickets in chapter 2. Www irs gov form1040a Combining items. Www irs gov form1040a   You can make one daily entry in your record for reasonable categories of expenses. Www irs gov form1040a Examples are taxi fares, telephone calls, or other incidental travel costs. Www irs gov form1040a Meals should be in a separate category. Www irs gov form1040a You can include tips for meal-related services with the costs of the meals. Www irs gov form1040a   Expenses of a similar nature occurring during the course of a single event are considered a single expense. Www irs gov form1040a For example, if during entertainment at a cocktail lounge, you pay separately for each serving of refreshments, the total expense for the refreshments is treated as a single expense. Www irs gov form1040a Car expenses. Www irs gov form1040a   You can account for several uses of your car that can be considered part of a single use, such as a round trip or uninterrupted business use, with a single record. Www irs gov form1040a Minimal personal use, such as a stop for lunch on the way between two business stops, is not an interruption of business use. Www irs gov form1040a Example. Www irs gov form1040a You make deliveries at several different locations on a route that begins and ends at your employer's business premises and that includes a stop at the business premises between two deliveries. Www irs gov form1040a You can account for these using a single record of miles driven. Www irs gov form1040a Gift expenses. Www irs gov form1040a   You do not always have to record the name of each recipient of a gift. Www irs gov form1040a A general listing will be enough if it is evident that you are not trying to avoid the $25 annual limit on the amount you can deduct for gifts to any one person. Www irs gov form1040a For example, if you buy a large number of tickets to local high school basketball games and give one or two tickets to each of many customers, it is usually enough to record a general description of the recipients. Www irs gov form1040a Allocating total cost. Www irs gov form1040a   If you can prove the total cost of travel or entertainment but you cannot prove how much it cost for each person who participated in the event, you may have to allocate the total cost among you and your guests on a pro rata basis. Www irs gov form1040a To do so, you must establish the number of persons who participated in the event. Www irs gov form1040a   An allocation would be needed, for example, if you did not have a business relationship with all of your guests. Www irs gov form1040a See Allocating between business and nonbusiness in chapter 2. Www irs gov form1040a If your return is examined. Www irs gov form1040a    If your return is examined, you may have to provide additional information to the IRS. Www irs gov form1040a This information could be needed to clarify or to establish the accuracy or reliability of information contained in your records, statements, testimony, or documentary evidence before a deduction is allowed. Www irs gov form1040a    THIS IS NOT AN OFFICIAL INTERNAL REVENUE FORM Table 5-3. Www irs gov form1040a Weekly Traveling Expense and Entertainment Record From: To: Name: Expenses Sunday Monday Tuesday Wednesday Thursday Friday Saturday Total 1. Www irs gov form1040a Travel Expenses: Airlines                                 Excess Baggage                                 Bus – Train                                 Cab and Limousine                                 Tips                                 Porter                                 2. Www irs gov form1040a Meals and Lodging:  Breakfast                                 Lunch                                 Dinner                                 Hotel and Motel  (Detail in Schedule B)                                 3. Www irs gov form1040a Entertainment  (Detail in Schedule C)                                 4. Www irs gov form1040a Other Expenses:  Postage                                 Telephone & Telegraph                                 Stationery & Printing                                 Stenographer                                 Sample Room                                 Advertising                                 Assistant(s)                                 Trade Shows                                 5. Www irs gov form1040a Car Expenses: (List all car expenses - the division between business and personal expenses may be made at the end of the year. Www irs gov form1040a ) (Detail mileage in Schedule A. Www irs gov form1040a ) Gas, oil, lube, wash                                 Repairs, parts                                 Tires, supplies                                 Parking fees, tolls                                 6. Www irs gov form1040a Other (Identify)                                 Total                                 Note: Attach receipted bills for (1) ALL lodging and (2) any other expenses of $75. Www irs gov form1040a 00 or more. Www irs gov form1040a Schedule A – Car Mileage: End                 Start                 Total                 Business Mileage                 Schedule B – Lodging Hotel or Motel Name                 City                 Schedule C – Entertainment Date Item Place Amount Business Purpose Business Relationship                                             WEEKLY REIMBURSEMENTS:     Travel and transportation expenses     Other reimbursements     TOTAL   How Long To Keep Records and Receipts You must keep records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Www irs gov form1040a Generally, this means you must keep records that support your deduction (or an item of income) for 3 years from the date you file the income tax return on which the deduction is claimed. Www irs gov form1040a A return filed early is considered filed on the due date. Www irs gov form1040a For a more complete explanation of how long to keep records, see Publication 583, Starting a Business and Keeping Records. Www irs gov form1040a You must keep records of the business use of your car for each year of the recovery period. Www irs gov form1040a See More-than-50%-use test in chapter 4 under Depreciation Deduction. Www irs gov form1040a Reimbursed for expenses. Www irs gov form1040a   Employees who give their records and documentation to their employers and are reimbursed for their expenses generally do not have to keep copies of this information. Www irs gov form1040a However, you may have to prove your expenses if any of the following conditions apply. Www irs gov form1040a You claim deductions for expenses that are more than reimbursements. Www irs gov form1040a Your expenses are reimbursed under a nonaccountable plan. Www irs gov form1040a Your employer does not use adequate accounting procedures to verify expense accounts. Www irs gov form1040a You are related to your employer as defined under Per Diem and Car Allowances , in chapter 6. Www irs gov form1040a Reimbursements , adequate accounting , and nonaccountable plans are discussed in chapter 6. Www irs gov form1040a Examples of Records Table 5-2 and Table 5-3 are examples of worksheets which can be used for tracking business expenses. Www irs gov form1040a Prev  Up  Next   Home   More Online Publications
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The Www Irs Gov Form1040a

Www irs gov form1040a 7. Www irs gov form1040a   Depreciation, Depletion, and Amortization Table of Contents What's New for 2013 Introduction Topics - This chapter discusses: Useful Items - You may want to see: Overview of DepreciationWhat Property Can Be Depreciated? What Property Cannot Be Depreciated? When Does Depreciation Begin and End? Can You Use MACRS To Depreciate Your Property? What Is the Basis of Your Depreciable Property? How Do You Treat Repairs and Improvements? Do You Have To File Form 4562? How Do You Correct Depreciation Deductions? Section 179 Expense DeductionWhat Property Qualifies? What Property Does Not Qualify? How Much Can You Deduct? How Do You Elect the Deduction? When Must You Recapture the Deduction? Claiming the Special Depreciation AllowanceWhat is Qualified Property? How Can You Elect Not To Claim the Allowance? When Must You Recapture an Allowance Figuring Depreciation Under MACRSWhich Depreciation System (GDS or ADS) Applies? Which Property Class Applies Under GDS? What Is the Placed-in-Service Date? What Is the Basis for Depreciation? Which Recovery Period Applies? Which Convention Applies? Which Depreciation Method Applies? How Is the Depreciation Deduction Figured? How Do You Use General Asset Accounts? When Do You Recapture MACRS Depreciation? Additional Rules for Listed PropertyWhat Is Listed Property? What Is the Business-Use Requirement? Do the Passenger Automobile Limits Apply? Depletion Who Can Claim Depletion? Figuring Depletion AmortizationBusiness Start-Up Costs Reforestation Costs Section 197 Intangibles What's New for 2013 Increased section 179 expense deduction dollar limits. Www irs gov form1040a  The maximum amount you can elect to deduct for most section 179 property you placed in service in 2013 is $500,000. Www irs gov form1040a This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2 million. Www irs gov form1040a See Dollar Limits under Section 179 Expense Deduction , later. Www irs gov form1040a Extension of special depreciation allowance for certain qualified property acquired after December 31, 2007. Www irs gov form1040a . Www irs gov form1040a  You may be able to take a 50% special depreciation allowance for certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Www irs gov form1040a See Claiming the Special Depreciation Allowance , later. Www irs gov form1040a Expiration of the 3- year recovery period for certain race horses. Www irs gov form1040a  The 3-year recovery period for race horses two years old or younger will expire for such horses placed in service after December 31, 2013. Www irs gov form1040a Introduction If you buy or make improvements to farm property such as machinery, equipment, livestock, or a structure with a useful life of more than a year, you generally cannot deduct its entire cost in one year. Www irs gov form1040a Instead, you must spread the cost over the time you use the property and deduct part of it each year. Www irs gov form1040a For most types of property, this is called depreciation. Www irs gov form1040a This chapter gives information on depreciation methods that generally apply to property placed in service after 1986. Www irs gov form1040a For information on depreciating pre-1987 property, see Publication 534, Depreciating Property Placed in Service Before 1987. Www irs gov form1040a Topics - This chapter discusses: Overview of depreciation Section 179 expense deduction Special depreciation allowance Modified Accelerated Cost Recovery System (MACRS) Listed property Basic information on cost depletion (including timber depletion) and percentage depletion Amortization of the costs of going into business, reforestation costs, the costs of pollution control facilities, and the costs of section 197 intangibles Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) T (Timber), Forest Activities Schedule 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. Www irs gov form1040a It is important to keep good records for property you depreciate. Www irs gov form1040a Do not file these records with your return. Www irs gov form1040a Instead, you should keep them as part of the permanent records of the depreciated property. Www irs gov form1040a They will help you verify the accuracy of the depreciation of assets placed in service in the current and previous tax years. Www irs gov form1040a For general information on recordkeeping, see Publication 583, Starting a Business and Keeping Records. Www irs gov form1040a For specific information on keeping records for section 179 property and listed property, see Publication 946, How To Depreciate Property. Www irs gov form1040a Overview of Depreciation This overview discusses basic information on the following. Www irs gov form1040a What property can be depreciated. Www irs gov form1040a What property cannot be depreciated. Www irs gov form1040a When depreciation begins and ends. Www irs gov form1040a Whether MACRS can be used to figure depreciation. Www irs gov form1040a What is the basis of your depreciable property. Www irs gov form1040a How to treat repairs and improvements. Www irs gov form1040a When you must file Form 4562. Www irs gov form1040a How you can correct depreciation claimed incorrectly. Www irs gov form1040a What Property Can Be Depreciated? You can depreciate most types of tangible property (except land), such as buildings, machinery, equipment, vehicles, certain livestock, and furniture. Www irs gov form1040a You can also depreciate certain intangible property, such as copyrights, patents, and computer software. Www irs gov form1040a To be depreciable, the property must meet all the following requirements. Www irs gov form1040a It must be property you own. Www irs gov form1040a It must be used in your business or income-producing activity. Www irs gov form1040a It must have a determinable useful life. Www irs gov form1040a It must have a useful life that extends substantially beyond the year you place it in service. Www irs gov form1040a Property You Own To claim depreciation, you usually must be the owner of the property. Www irs gov form1040a You are considered as owning property even if it is subject to a debt. Www irs gov form1040a Leased property. Www irs gov form1040a   You can depreciate leased property only if you retain the incidents of ownership in the property. Www irs gov form1040a This means you bear the burden of exhaustion of the capital investment in the property. Www irs gov form1040a Therefore, if you lease property from someone to use in your trade or business or for the production of income, you generally cannot depreciate its cost because you do not retain the incidents of ownership. Www irs gov form1040a You can, however, depreciate any capital improvements you make to the leased property. Www irs gov form1040a See Additions and Improvements under Which Recovery Period Applies in chapter 4 of Publication 946. Www irs gov form1040a   If you lease property to someone, you generally can depreciate its cost even if the lessee (the person leasing from you) has agreed to preserve, replace, renew, and maintain the property. Www irs gov form1040a However, you cannot depreciate the cost of the property if the lease provides that the lessee is to maintain the property and return to you the same property or its equivalent in value at the expiration of the lease in as good condition and value as when leased. Www irs gov form1040a Life tenant. Www irs gov form1040a   Generally, if you hold business or investment property as a life tenant, you can depreciate it as if you were the absolute owner of the property. Www irs gov form1040a See Certain term interests in property , later, for an exception. Www irs gov form1040a Property Used in Your Business or Income-Producing Activity To claim depreciation on property, you must use it in your business or income-producing activity. Www irs gov form1040a If you use property to produce income (investment use), the income must be taxable. Www irs gov form1040a You cannot depreciate property that you use solely for personal activities. Www irs gov form1040a However, if you use property for business or investment purposes and for personal purposes, you can deduct depreciation based only on the percentage of business or investment use. Www irs gov form1040a Example 1. Www irs gov form1040a   If you use your car for farm business, you can deduct depreciation based on its percentage of use in farming. Www irs gov form1040a If you also use it for investment purposes, you can depreciate it based on its percentage of investment use. Www irs gov form1040a Example 2. Www irs gov form1040a   If you use part of your home for business, you may be able to deduct depreciation on that part based on its business use. Www irs gov form1040a For more information, see Business Use of Your Home in chapter 4. Www irs gov form1040a Inventory. Www irs gov form1040a   You can never depreciate inventory because it is not held for use in your business. Www irs gov form1040a Inventory is any property you hold primarily for sale to customers in the ordinary course of your business. Www irs gov form1040a Livestock. Www irs gov form1040a   Livestock purchased for draft, breeding, or dairy purposes can be depreciated only if they are not kept in an inventory account. Www irs gov form1040a Livestock you raise usually has no depreciable basis because the costs of raising them are deducted and not added to their basis. Www irs gov form1040a However, see Immature livestock under When Does Depreciation Begin and End , later, for a special rule. Www irs gov form1040a Property Having a Determinable Useful Life To be depreciable, your property must have a determinable useful life. Www irs gov form1040a This means it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Www irs gov form1040a Irrigation systems and water wells. Www irs gov form1040a   Irrigation systems and wells used in a trade or business can be depreciated if their useful life can be determined. Www irs gov form1040a You can depreciate irrigation systems and wells composed of masonry, concrete, tile, metal, or wood. Www irs gov form1040a In addition, you can depreciate costs for moving dirt to construct irrigation systems and water wells composed of these materials. Www irs gov form1040a However, land preparation costs for center pivot irrigation systems are not depreciable. Www irs gov form1040a Dams, ponds, and terraces. Www irs gov form1040a   In general, you cannot depreciate earthen dams, ponds, and terraces unless the structures have a determinable useful life. Www irs gov form1040a What Property Cannot Be Depreciated? Certain property cannot be depreciated, even if the requirements explained earlier are met. Www irs gov form1040a This includes the following. Www irs gov form1040a Land. Www irs gov form1040a You can never depreciate the cost of land because land does not wear out, become obsolete, or get used up. Www irs gov form1040a The cost of land generally includes the cost of clearing, grading, planting, and landscaping. Www irs gov form1040a Although you cannot depreciate land, you can depreciate certain costs incurred in preparing land for business use. Www irs gov form1040a See chapter 1 of Publication 946. Www irs gov form1040a Property placed in service and disposed of in the same year. Www irs gov form1040a Determining when property is placed in service is explained later. Www irs gov form1040a Equipment used to build capital improvements. Www irs gov form1040a You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Www irs gov form1040a Intangible property such as section 197 intangibles. Www irs gov form1040a This property does not have a determinable useful life and generally cannot be depreciated. Www irs gov form1040a However, see Amortization , later. Www irs gov form1040a Special rules apply to computer software (discussed below). Www irs gov form1040a Certain term interests (discussed below). Www irs gov form1040a Computer software. Www irs gov form1040a   Computer software is generally not a section 197 intangible even if acquired in connection with the acquisition of a business, if it meets all of the following tests. Www irs gov form1040a It is readily available for purchase by the general public. Www irs gov form1040a It is subject to a nonexclusive license. Www irs gov form1040a It has not been substantially modified. Www irs gov form1040a   If the software meets the tests above, it can be depreciated and may qualify for the section 179 expense deduction and the special depreciation allowance (if applicable), discussed later. Www irs gov form1040a Certain term interests in property. Www irs gov form1040a   You cannot depreciate a term interest in property created or acquired after July 27, 1989, for any period during which the remainder interest is held, directly or indirectly, by a person related to you. Www irs gov form1040a This rule does not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. Www irs gov form1040a For more information, see chapter 1 of Publication 946. Www irs gov form1040a When Does Depreciation Begin and End? You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income. Www irs gov form1040a You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first. Www irs gov form1040a Placed in Service Property is placed in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. Www irs gov form1040a Even if you are not using the property, it is in service when it is ready and available for its specific use. Www irs gov form1040a Example. Www irs gov form1040a You bought a planter for use in your farm business. Www irs gov form1040a The planter was delivered in December 2012 after harvest was over. Www irs gov form1040a You begin to depreciate the planter for 2012 because it was ready and available for its specific use in 2012, even though it will not be used until the spring of 2013. Www irs gov form1040a If your planter comes unassembled in December 2012 and is put together in February 2013, it is not placed in service until 2013. Www irs gov form1040a You begin to depreciate it in 2013. Www irs gov form1040a If your planter was delivered and assembled in February 2013 but not used until April 2013, it is placed in service in February 2013, because this is when the planter was ready for its specified use. Www irs gov form1040a You begin to depreciate it in 2013. Www irs gov form1040a Fruit or nut trees and vines. Www irs gov form1040a   If you acquire an orchard, grove, or vineyard before the trees or vines have reached the income-producing stage, and they have a preproductive period of more than 2 years, you must capitalize the preproductive-period costs under the uniform capitalization rules (unless you elect not to use these rules). Www irs gov form1040a See chapter 6 for information about the uniform capitalization rules. Www irs gov form1040a Your depreciation begins when the trees and vines reach the income-producing stage (that is, when they bear fruit, nuts, or grapes in quantities sufficient to commercially warrant harvesting). Www irs gov form1040a Immature livestock. Www irs gov form1040a   Depreciation for livestock begins when the livestock reaches the age of maturity. Www irs gov form1040a If you bought immature livestock for drafting purposes, depreciation begins when they can be worked. Www irs gov form1040a If you bought immature livestock for dairy purposes, depreciation begins when they can be milked. Www irs gov form1040a If you bought immature livestock for breeding purposes, depreciation begins when they can be bred. Www irs gov form1040a Your basis for depreciation is your initial cost for the immature livestock. Www irs gov form1040a Idle Property Continue to claim a deduction for depreciation on property used in your business or for the production of income even if it is temporarily idle. Www irs gov form1040a For example, if you stop using a machine because there is a temporary lack of a market for a product made with that machine, continue to deduct depreciation on the machine. Www irs gov form1040a Cost or Other Basis Fully Recovered You stop depreciating property when you have fully recovered your cost or other basis. Www irs gov form1040a This happens when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property. Www irs gov form1040a Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. Www irs gov form1040a You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events. Www irs gov form1040a You sell or exchange the property. Www irs gov form1040a You convert the property to personal use. Www irs gov form1040a You abandon the property. Www irs gov form1040a You transfer the property to a supplies or scrap account. Www irs gov form1040a The property is destroyed. Www irs gov form1040a For information on abandonment of property, see chapter 8. Www irs gov form1040a For information on destroyed property, see chapter 11 and Publication 547, Casualties, Disasters, and Thefts. Www irs gov form1040a Can You Use MACRS To Depreciate Your Property? You must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most business and investment property placed in service after 1986. Www irs gov form1040a MACRS is explained later under Figuring Depreciation Under MACRS . Www irs gov form1040a You cannot use MACRS to depreciate the following property. Www irs gov form1040a Property you placed in service before 1987. Www irs gov form1040a Use the methods discussed in Publication 534. Www irs gov form1040a Certain property owned or used in 1986. Www irs gov form1040a See chapter 1 of Publication 946. Www irs gov form1040a Intangible property. Www irs gov form1040a Films, video tapes, and recordings. Www irs gov form1040a Certain corporate or partnership property acquired in a nontaxable transfer. Www irs gov form1040a Property you elected to exclude from MACRS. Www irs gov form1040a For more information, see chapter 1 of Publication 946. Www irs gov form1040a What Is the Basis of Your Depreciable Property? To figure your depreciation deduction, you must determine the basis of your property. Www irs gov form1040a To determine basis, you need to know the cost or other basis of your property. Www irs gov form1040a Cost or other basis. Www irs gov form1040a   The basis of property you buy is usually its cost plus amounts you paid for items such as sales tax, freight charges, and installation and testing fees. Www irs gov form1040a The cost includes the amount you pay in cash, debt obligations, other property, or services. Www irs gov form1040a   There are times when you cannot use cost as basis. Www irs gov form1040a In these situations, the fair market value (FMV) or the adjusted basis of the property may be used. Www irs gov form1040a Adjusted basis. Www irs gov form1040a   To find your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service. Www irs gov form1040a Basis adjustment for depreciation allowed or allowable. Www irs gov form1040a   After you place your property in service, you must reduce the basis of the property by the depreciation allowed or allowable, whichever is greater. Www irs gov form1040a Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). Www irs gov form1040a Depreciation allowable is depreciation you are entitled to deduct. Www irs gov form1040a   If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the full amount of depreciation allowable. Www irs gov form1040a   If you deduct more depreciation than you should, you must reduce your basis by any amount deducted from which you received a tax benefit (the depreciation allowed). Www irs gov form1040a   For more information, see chapter 6. Www irs gov form1040a How Do You Treat Repairs and Improvements? You generally deduct the cost of repairing business property in the same way as any other business expense. Www irs gov form1040a However, if a repair or replacement increases the value of your property, makes it more useful, or lengthens its life, you must treat it as an improvement and depreciate it. Www irs gov form1040a Treat improvements as separate depreciable property. Www irs gov form1040a See chapter 1 of Publication 946 for more information. Www irs gov form1040a Example. Www irs gov form1040a You repair a small section on a corner of the roof of a barn that you rent to others. Www irs gov form1040a You deduct the cost of the repair as a business expense. Www irs gov form1040a However, if you replace the entire roof, the new roof is considered to be an improvement because it increases the value and lengthens the life for the property. Www irs gov form1040a You depreciate the cost of the new roof. Www irs gov form1040a Improvements to rented property. Www irs gov form1040a   You can depreciate permanent improvements you make to business property you rent from someone else. Www irs gov form1040a Do You Have To File Form 4562? Use Form 4562 to claim your deduction for depreciation and amortization. Www irs gov form1040a You must complete and attach Form 4562 to your tax return if you are claiming any of the following. Www irs gov form1040a A section 179 expense deduction for the current year or a section 179 carryover from a prior year. Www irs gov form1040a Depreciation for property placed in service during the current year. Www irs gov form1040a Depreciation on any vehicle or other listed property, regardless of when it was placed in service. Www irs gov form1040a Amortization of costs that began in the current year. Www irs gov form1040a For more information, see the Instructions for Form 4562. Www irs gov form1040a How Do You Correct Depreciation Deductions? If you deducted an incorrect amount of depreciation in any year, you may be able to make a correction by filing an amended return for that year. Www irs gov form1040a You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. Www irs gov form1040a You claimed the incorrect amount because of a mathematical error made in any year. Www irs gov form1040a You claimed the incorrect amount because of a posting error made in any year, for example, omitting an asset from the depreciation schedule. Www irs gov form1040a You have not adopted a method of accounting for the property placed in service by you in tax years ending after December 29, 2003. Www irs gov form1040a You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. Www irs gov form1040a Note. Www irs gov form1040a You have adopted a method of accounting if you used the same incorrect method of depreciation for two or more consecutively filed returns. Www irs gov form1040a If you are not allowed to make the correction on an amended return, you may be able to change your accounting method to claim the correct amount of depreciation. Www irs gov form1040a See the Instructions for Form 3115. Www irs gov form1040a Section 179 Expense Deduction You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. Www irs gov form1040a This is the section 179 expense deduction. Www irs gov form1040a You can elect the section 179 expense deduction instead of recovering the cost by taking depreciation deductions. Www irs gov form1040a This part of the chapter explains the rules for the section 179 expense deduction. Www irs gov form1040a It explains what property qualifies for the deduction, what property does not qualify for the deduction, the limits that may apply, how to elect the deduction, and when you may have to recapture the deduction. Www irs gov form1040a For more information, see chapter 2 of Publication 946. Www irs gov form1040a What Property Qualifies? To qualify for the section 179 expense deduction, your property must meet all the following requirements. Www irs gov form1040a It must be eligible property. Www irs gov form1040a It must be acquired for business use. Www irs gov form1040a It must have been acquired by purchase. Www irs gov form1040a Eligible Property To qualify for the section 179 expense deduction, your property must be one of the following types of depreciable property. Www irs gov form1040a Tangible personal property. Www irs gov form1040a Qualified real property. Www irs gov form1040a (Special rules apply to qualified real property that you elect to treat as qualified section 179 real property. Www irs gov form1040a For more information, see chapter 2 of Publication 946 and section 179(f) of the Internal Revenue Code. Www irs gov form1040a ) Other tangible property (except buildings and their structural components) used as: An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services; A research facility used in connection with any of the activities in (a) above; or A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities. Www irs gov form1040a Single purpose agricultural (livestock) or horticultural structures. Www irs gov form1040a Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum. Www irs gov form1040a Off-the-shelf computer software that is readily available for purchase by the general public, is subject to a nonexclusive lease, and has not been substantially modified. Www irs gov form1040a Tangible personal property. Www irs gov form1040a   Tangible personal property is any tangible property that is not real property. Www irs gov form1040a It includes the following property. Www irs gov form1040a Machinery and equipment. Www irs gov form1040a Property contained in or attached to a building (other than structural components), such as milk tanks, automatic feeders, barn cleaners, and office equipment. Www irs gov form1040a Gasoline storage tanks and pumps at retail service stations. Www irs gov form1040a Livestock, including horses, cattle, hogs, sheep, goats, and mink and other fur-bearing animals. Www irs gov form1040a Facility used for the bulk storage of fungible commodities. Www irs gov form1040a   A facility used for the bulk storage of fungible commodities is qualifying property for purposes of the section 179 expense deduction if it is used in connection with any of the activities listed earlier in item (3)(a). Www irs gov form1040a Bulk storage means the storage of a commodity in a large mass before it is used. Www irs gov form1040a Grain bins. Www irs gov form1040a   A grain bin is an example of a storage facility that is qualifying section 179 property. Www irs gov form1040a It is a facility used in connection with the production of grain or livestock for the bulk storage of fungible commodities. Www irs gov form1040a Single purpose agricultural or horticultural structures. Www irs gov form1040a   A single purpose agricultural (livestock) or horticultural structure is qualifying property for purposes of the section 179 expense deduction. Www irs gov form1040a Agricultural structure. Www irs gov form1040a   A single purpose agricultural (livestock) structure is any building or enclosure specifically designed, constructed, and used for both the following reasons. Www irs gov form1040a To house, raise, and feed a particular type of livestock and its produce. Www irs gov form1040a To house the equipment, including any replacements, needed to house, raise, or feed the livestock. Www irs gov form1040a For this purpose, livestock includes poultry. Www irs gov form1040a   Single purpose structures are qualifying property if used, for example, to breed chickens or hogs, produce milk from dairy cattle, or produce feeder cattle or pigs, broiler chickens, or eggs. Www irs gov form1040a The facility must include, as an integral part of the structure or enclosure, equipment necessary to house, raise, and feed the livestock. Www irs gov form1040a Horticultural structure. Www irs gov form1040a   A single purpose horticultural structure is either of the following. Www irs gov form1040a A greenhouse specifically designed, constructed, and used for the commercial production of plants. Www irs gov form1040a A structure specifically designed, constructed, and used for the commercial production of mushrooms. Www irs gov form1040a Use of structure. Www irs gov form1040a   A structure must be used only for the purpose that qualified it. Www irs gov form1040a For example, a hog barn will not be qualifying property if you use it to house poultry. Www irs gov form1040a Similarly, using part of your greenhouse to sell plants will make the greenhouse nonqualifying property. Www irs gov form1040a   If a structure includes work space, the work space can be used only for the following activities. Www irs gov form1040a Stocking, caring for, or collecting livestock or plants or their produce. Www irs gov form1040a Maintaining the enclosure or structure. Www irs gov form1040a Maintaining or replacing the equipment or stock enclosed or housed in the structure. Www irs gov form1040a Property Acquired by Purchase To qualify for the section 179 expense deduction, your property must have been acquired by purchase. Www irs gov form1040a For example, property acquired by gift or inheritance does not qualify. Www irs gov form1040a Property acquired from a related person (that is, your spouse, ancestors, or lineal descendants) is not considered acquired by purchase. Www irs gov form1040a Example. Www irs gov form1040a Ken is a farmer. Www irs gov form1040a He purchased two tractors, one from his brother and one from his father. Www irs gov form1040a He placed both tractors in service in the same year he bought them. Www irs gov form1040a The tractor purchased from his father does not qualify for the section 179 expense deduction because he is a related person (as defined above). Www irs gov form1040a The tractor purchased from his brother does qualify for the deduction because Ken is not a related person (as defined above). Www irs gov form1040a What Property Does Not Qualify? Land and improvements. Www irs gov form1040a   Land and land improvements, do not qualify as section 179 property. Www irs gov form1040a Land improvements include nonagricultural fences, swimming pools, paved parking areas, wharves, docks, bridges, and fences. Www irs gov form1040a However, agricultural fences do qualify as section 179 property. Www irs gov form1040a Similarly, field drainage tile also qualifies as section 179 property. Www irs gov form1040a Excepted property. Www irs gov form1040a   Even if the requirements explained in the preceding discussions are met, farmers cannot elect the section 179 expense deduction for the following property. Www irs gov form1040a Certain property you lease to others (if you are a noncorporate lessor). Www irs gov form1040a Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging. Www irs gov form1040a Property used by a tax-exempt organization (other than a tax-exempt farmers' cooperative) unless the property is used mainly in a taxable unrelated trade or business. Www irs gov form1040a Property used by governmental units or foreign persons or entities (except property used under a lease with a term of less than 6 months). Www irs gov form1040a How Much Can You Deduct? Your section 179 expense deduction is generally the cost of the qualifying property. Www irs gov form1040a However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. Www irs gov form1040a These limits apply to each taxpayer, not to each business. Www irs gov form1040a However, see Married individuals under Dollar Limits , later. Www irs gov form1040a See also the special rules for applying the limits for partnerships and S corporations under Partnerships and S Corporations , later. Www irs gov form1040a If you deduct only part of the cost of qualifying property as a section 179 expense deduction, you can generally depreciate the cost you do not deduct. Www irs gov form1040a Use Part I of Form 4562 to figure your section 179 expense deduction. Www irs gov form1040a Partial business use. Www irs gov form1040a   When you use property for business and nonbusiness purposes, you can elect the section 179 expense deduction only if you use it more than 50% for business in the year you place it in service. Www irs gov form1040a If you used the property more than 50% for business, multiply the cost of the property by the percentage of business use. Www irs gov form1040a Use the resulting business cost to figure your section 179 expense deduction. Www irs gov form1040a Trade-in of other property. Www irs gov form1040a   If you buy qualifying property with cash and a trade-in, its cost for purposes of the section 179 expense deduction includes only the cash you paid. Www irs gov form1040a For example, if you buy (for cash and a trade-in) a new tractor for use in your business, your cost for the section 179 expense deduction is the cash you paid. Www irs gov form1040a It does not include the adjusted basis of the old tractor you trade for the new tractor. Www irs gov form1040a Example. Www irs gov form1040a J-Bar Farms traded two cultivators having a total adjusted basis of $6,800 for a new cultivator costing $13,200. Www irs gov form1040a They received an $8,000 trade-in allowance for the old cultivators and paid $5,200 cash for the new cultivator. Www irs gov form1040a J-Bar also traded a used pickup truck with an adjusted basis of $8,000 for a new pickup truck costing $35,000. Www irs gov form1040a They received a $5,000 trade-in allowance and paid $30,000 cash for the new pickup truck. Www irs gov form1040a Only the cash paid by J-Bar qualifies for the section 179 expense deduction. Www irs gov form1040a J-Bar's business costs that qualify for a section 179 expense deduction are $35,200 ($5,200 + $30,000). Www irs gov form1040a Dollar Limits The total amount you can elect to deduct under section 179 for most property placed in service in 2013 is $500,000. Www irs gov form1040a If you acquire and place in service more than one item of qualifying property during the year, you can allocate the section 179 expense deduction among the items in any way, as long as the total deduction is not more than $500,000. Www irs gov form1040a Qualified real property that you elect to treat as section 179 property is limited to $250,000 of the maximum section 179 deduction of $500,000 for 2013. Www irs gov form1040a You do not have to claim the full $500,000. Www irs gov form1040a For specific information on the section 179 dollar limits, see chapter 2 of Publication 946. Www irs gov form1040a Reduced dollar limit for cost exceeding $2 million. Www irs gov form1040a   If the cost of your qualifying section 179 property placed in service in 2013 is over $2 million, you must reduce the dollar limit (but not below zero) by the amount of cost over $2 million. Www irs gov form1040a If the cost of your section 179 property placed in service during 2013 is $2,500,000 or more, you cannot take a section 179 expense deduction and you cannot carry over the cost that is more than $2,500,000. Www irs gov form1040a Example. Www irs gov form1040a This year, James Smith placed in service machinery costing $2,050,000. Www irs gov form1040a Because this cost is $50,000 more than $2 million, he must reduce his dollar limit to $450,000 ($500,000 − $50,000). Www irs gov form1040a Limits for sport utility vehicles. Www irs gov form1040a   The total amount you can elect to deduct for certain sport utility vehicles and certain other vehicles placed in service in 2013 is $25,000. Www irs gov form1040a This rule applies to any 4-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, and highways that is rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight. Www irs gov form1040a   For more information, see chapter 2 of Publication 946. Www irs gov form1040a Limits for passenger automobiles. Www irs gov form1040a   For a passenger automobile that is placed in service in 2013, the total section 179 and depreciation deduction is limited. Www irs gov form1040a See Do the Passenger Automobile Limits Apply , later. Www irs gov form1040a Married individuals. Www irs gov form1040a   If you are married, how you figure your section 179 expense deduction depends on whether you file jointly or separately. Www irs gov form1040a If you file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service. Www irs gov form1040a If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit, including the reduction for costs over $2 million. Www irs gov form1040a You must allocate the dollar limit (after any reduction) equally between you, unless you both elect a different allocation. Www irs gov form1040a If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you. Www irs gov form1040a Joint return after separate returns. Www irs gov form1040a   If you and your spouse elect to amend your separate returns by filing a joint return after the due date for filing your return, the dollar limit on the joint return is the lesser of the following amounts. Www irs gov form1040a The dollar limit (after reduction for any cost of section 179 property over $2 million). Www irs gov form1040a The total cost of section 179 property you and your spouse elected to expense on your separate returns. Www irs gov form1040a Business Income Limit The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. Www irs gov form1040a Generally, you are considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business. Www irs gov form1040a Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. Www irs gov form1040a See Carryover of disallowed deduction , later. Www irs gov form1040a Taxable income. Www irs gov form1040a   In general, figure taxable income for this purpose by totaling the net income and losses from all trades and businesses you actively conducted during the year. Www irs gov form1040a In addition to net income or loss from a sole proprietorship, partnership, or S corporation, net income or loss derived from a trade or business also includes the following items. Www irs gov form1040a Section 1231 gains (or losses) as discussed in chapter 9. Www irs gov form1040a Interest from working capital of your trade or business. Www irs gov form1040a Wages, salaries, tips, or other pay earned by you (or your spouse if you file a joint return) as an employee of any employer. Www irs gov form1040a   In addition, figure taxable income without regard to any of the following. Www irs gov form1040a The section 179 expense deduction. Www irs gov form1040a The self-employment tax deduction. Www irs gov form1040a Any net operating loss carryback or carryforward. Www irs gov form1040a Any unreimbursed employee business expenses. Www irs gov form1040a Two different taxable income limits. Www irs gov form1040a   In addition to the business income limit for your section 179 expense deduction, you may have a taxable income limit for some other deduction (for example, charitable contributions). Www irs gov form1040a You may have to figure the limit for this other deduction taking into account the section 179 expense deduction. Www irs gov form1040a If so, complete the following steps. Www irs gov form1040a Step Action 1 Figure taxable income without the section 179 expense deduction or the other deduction. Www irs gov form1040a 2 Figure a hypothetical section 179 expense deduction using the taxable income figured in Step 1. Www irs gov form1040a 3 Subtract the hypothetical section 179 expense deduction figured in Step 2 from the taxable income figured in Step 1. Www irs gov form1040a 4 Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income. Www irs gov form1040a 5 Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in  Step 1. Www irs gov form1040a 6 Figure your actual section 179 expense deduction using the taxable income figured in Step 5. Www irs gov form1040a 7 Subtract your actual section 179 expense deduction figured in Step 6 from the taxable income figured in Step 1. Www irs gov form1040a 8 Figure your actual other deduction using the taxable income figured in Step 7. Www irs gov form1040a Example. Www irs gov form1040a On February 1, 2013, the XYZ farm corporation purchased and placed in service qualifying section 179 property that cost $500,000. Www irs gov form1040a It elects to expense the entire $500,000 cost under section 179. Www irs gov form1040a In June, the corporation gave a charitable contribution of $10,000. Www irs gov form1040a A corporation's limit on charitable contributions is figured after subtracting any section 179 expense deduction. Www irs gov form1040a The business income limit for the section 179 expense deduction is figured after subtracting any allowable charitable contributions. Www irs gov form1040a XYZ's taxable income figured without the section 179 expense deduction or the deduction for charitable contributions is $520,000. Www irs gov form1040a XYZ figures its section 179 expense deduction and its deduction for charitable contributions as follows. Www irs gov form1040a Step 1. Www irs gov form1040a Taxable income figured without either deduction is $520,000. Www irs gov form1040a Step 2. Www irs gov form1040a Using $520,000 as taxable income, XYZ's hypothetical section 179 expense deduction is $500,000. Www irs gov form1040a Step 3. Www irs gov form1040a $20,000 ($520,000 − $500,000). Www irs gov form1040a Step 4. Www irs gov form1040a Using $20,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable income) is $2,000. Www irs gov form1040a Step 5. Www irs gov form1040a $518,000 ($520,000 − $2,000). Www irs gov form1040a Step 6. Www irs gov form1040a Using $518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 expense deduction. Www irs gov form1040a Because the taxable income is at least $500,000, XYZ can take a $500,000 section 179 expense deduction. Www irs gov form1040a Step 7. Www irs gov form1040a $20,000 ($520,000 − $500,000). Www irs gov form1040a Step 8. Www irs gov form1040a Using $20,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable income) is $2,000. Www irs gov form1040a Carryover of disallowed deduction. Www irs gov form1040a   You can carry over for an unlimited number of years the cost of any section 179 property you elected to expense but were unable to because of the business income limit. Www irs gov form1040a   The amount you carry over is used in determining your section 179 expense deduction in the next year. Www irs gov form1040a However, it is subject to the limits in that year. Www irs gov form1040a If you place more than one property in service in a year, you can select the properties for which all or a part of the cost will be carried forward. Www irs gov form1040a Your selections must be shown in your books and records. Www irs gov form1040a Example. Www irs gov form1040a Last year, Joyce Jones placed in service a machine that cost $8,000 and elected to deduct all $8,000 under section 179. Www irs gov form1040a The taxable income from her business (determined without regard to both a section 179 expense deduction for the cost of the machine and the self-employment tax deduction) was $6,000. Www irs gov form1040a Her section 179 expense deduction was limited to $6,000. Www irs gov form1040a The $2,000 cost that was not allowed as a section 179 expense deduction (because of the business income limit) is carried to this year. Www irs gov form1040a This year, Joyce placed another machine in service that cost $9,000. Www irs gov form1040a Her taxable income from business (determined without regard to both a section 179 expense deduction for the cost of the machine and the self-employment tax deduction) is $10,000. Www irs gov form1040a Joyce can deduct the full cost of the machine ($9,000) but only $1,000 of the carryover from last year because of the business income limit. Www irs gov form1040a She can carry over the balance of $1,000 to next year. Www irs gov form1040a Partnerships and S Corporations The section 179 expense deduction limits apply both to the partnership or S corporation and to each partner or shareholder. Www irs gov form1040a The partnership or S corporation determines its section 179 expense deduction subject to the limits. Www irs gov form1040a It then allocates the deduction among its partners or shareholders. Www irs gov form1040a If you are a partner in a partnership or shareholder of an S corporation, you add the amount allocated from the partnership or S corporation to any section 179 costs not related to the partnership or S corporation and then apply the dollar limit to this total. Www irs gov form1040a To determine any reduction in the dollar limit for costs over $560,000, you do not include any of the cost of section 179 property placed in service by the partnership or S corporation. Www irs gov form1040a After you apply the dollar limit, you apply the business income limit to any remaining section 179 costs. Www irs gov form1040a For more information, see chapter 2 of Publication 946. Www irs gov form1040a Example. Www irs gov form1040a In 2013, Partnership P placed in service section 179 property with a total cost of $2,160,000. Www irs gov form1040a P must reduce its dollar limit by $160,000 ($2,160,000 − $2,000,000). Www irs gov form1040a Its maximum section 179 expense deduction is $340,000 ($500,000 − $160,000), and it elects to expense that amount. Www irs gov form1040a Because P's taxable income from the active conduct of all its trades or businesses for the year was $400,000, it can deduct the full $340,000. Www irs gov form1040a P allocates $100,000 of its section 179 expense deduction and $110,000 of its taxable income to John, one of its partners. Www irs gov form1040a John also conducts a business as a sole proprietor and in 2013, placed in service in that business, section 179 property costing $28,000. Www irs gov form1040a John's taxable income from that business was $10,000. Www irs gov form1040a In addition to the $100,000 allocated from P, he elects to expense the $28,000 of his sole proprietorship's section 179 costs. Www irs gov form1040a However, John's deduction is limited to his business taxable income of $120,000 ($110,000 from P plus $10,000 from his sole proprietorship). Www irs gov form1040a He carries over $8,000 ($128,000 − $120,000) of the elected section 179 costs to 2014. Www irs gov form1040a How Do You Elect the Deduction? You elect to take the section 179 expense deduction by completing Part I of Form 4562. Www irs gov form1040a If you elect the deduction for listed property, complete Part V of  Form 4562 before completing Part I. Www irs gov form1040a   File Form 4562 with either of the following: Your original tax return (whether or not you filed it timely), or An amended return filed within the time prescribed by law. Www irs gov form1040a An election made on an amended return must specify the item of section 179 property to which the election applies and the part of the cost of each such item to be taken into account. Www irs gov form1040a The amended return must also include any resulting adjustments to taxable income. Www irs gov form1040a Revoking an election. Www irs gov form1040a   An election (or any specification made in the election) to take a section 179 expense deduction for 2013 can be revoked without IRS approval by filing an amended return. Www irs gov form1040a The amended return must be filed within the time prescribed by law. Www irs gov form1040a The amended return must also include any resulting adjustments to taxable income (for example, allowable depreciation in that tax year for the item of section 179 property for which the election pertains. Www irs gov form1040a ) Once made, the revocation is irrevocable. Www irs gov form1040a When Must You Recapture the Deduction? You may have to recapture the section 179 expense deduction if, in any year during the property's recovery period, the percentage of business use drops to 50% or less. Www irs gov form1040a In the year the business use drops to 50% or less, you include the recapture amount as ordinary income. Www irs gov form1040a You also increase the basis of the property by the recapture amount. Www irs gov form1040a Recovery periods for property are discussed later. Www irs gov form1040a If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. Www irs gov form1040a Instead, use the rules for recapturing depreciation explained in  chapter 9 under Section 1245 Property. Www irs gov form1040a   If the property is listed property, do not figure the recapture amount under the rules explained in this discussion when the percentage of business use drops to 50% or less. Www irs gov form1040a Instead, use the rules for recapturing depreciation explained in chapter 5 of Publication 946 under Recapture of Excess Depreciation. Www irs gov form1040a Figuring the recapture amount. Www irs gov form1040a   To figure the amount to recapture, take the following steps. Www irs gov form1040a Figure the allowable depreciation for the section 179 expense deduction you claimed. Www irs gov form1040a Begin with the year you placed the property in service and include the year of recapture. Www irs gov form1040a Subtract the depreciation figured in (1) from the section 179 expense deduction you actually claimed. Www irs gov form1040a The result is the amount you must recapture. Www irs gov form1040a Example. Www irs gov form1040a In January 2011, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. Www irs gov form1040a The property is not listed property. Www irs gov form1040a He elected a $5,000 section 179 expense deduction for the property and also elected not to claim a special depreciation allowance. Www irs gov form1040a He used the property only for business in 2011 and 2012. Www irs gov form1040a During 2013, he used the property 40% for business and 60% for personal use. Www irs gov form1040a He figures his recapture amount as follows. Www irs gov form1040a Section 179 expense deduction claimed (2011) $5,000 Minus: Allowable depreciation (instead of section 179 expense deduction):   2011 $1,250   2012 1,875   2013 ($1,250 × 40% (business)) 500 3,625 2013 — Recapture amount $1,375     Paul must include $1,375 in income for 2013. Www irs gov form1040a Where to report recapture. Www irs gov form1040a   Report any recapture of the section 179 expense deduction as ordinary income in Part IV of Form 4797 and include it in income on Schedule F (Form 1040). Www irs gov form1040a Recapture for qualified section 179 GO Zone property. Www irs gov form1040a   If any qualified section 179 GO Zone property ceases to be used in the GO Zone in a later year, you must recapture the benefit of the increased section 179 expense deduction as “other income. Www irs gov form1040a ” Claiming the Special Depreciation Allowance For qualified property (defined below) placed in service in 2013, you can take an additional 50% special depreciation allowance. Www irs gov form1040a The allowance is an additional deduction you can take after any section 179 expense deduction and before you figure regular depreciation under MACRS. Www irs gov form1040a Figure the special depreciation allowance by multiplying the depreciable basis of the qualified property by 50%. Www irs gov form1040a What is Qualified Property? For farmers, qualified property generally is certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Www irs gov form1040a Certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Www irs gov form1040a   Certain qualified property (defined below) acquired after December 31, 2007, and before January 1, 2014, is eligible for a 50% special depreciation allowance. Www irs gov form1040a   Qualified property includes the following: Tangible property depreciated under the Modified Accelerated Cost Recovery System (MACRS) with a recovery period of 20 years or less. Www irs gov form1040a Water utility property. Www irs gov form1040a Off-the-shelf computer software. Www irs gov form1040a Qualified leasehold improvement property. Www irs gov form1040a   Qualified property must also meet all of the following tests: You must have acquired qualified property by purchase after December 31, 2007. Www irs gov form1040a If a binding contract to acquire the property existed before January 1, 2008, the property does not qualify. Www irs gov form1040a Qualified property must be placed in service after December 31, 2007 and placed in service before January 1, 2014 (before January 1, 2015 for certain property with a long production period and for certain aircraft). Www irs gov form1040a The original use of the property must begin with you after December 31, 2007. Www irs gov form1040a For more information, see chapter 3 of Publication 946. Www irs gov form1040a How Can You Elect Not To Claim the Allowance? You can elect, for any class of property, not to deduct the special depreciation allowance for all property in such class placed in service during the tax year. Www irs gov form1040a To make the election, attach a statement to your return indicating the class of property for which you are making the election. Www irs gov form1040a Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service. Www irs gov form1040a However, if you timely filed your return for the year without making the election, you still can make the election by filing an amended return within 6 months of the due date of the original return (not including extensions). Www irs gov form1040a Attach the election statement to the amended return. Www irs gov form1040a On the amended return, write “Filed pursuant to section 301. Www irs gov form1040a 9100-2. Www irs gov form1040a ” Once made, the election may not be revoked without IRS consent. Www irs gov form1040a If you elect not to have the special depreciation allowance apply, the property may be subject to an alternative minimum tax adjustment for depreciation. Www irs gov form1040a When Must You Recapture an Allowance When you dispose of property for which you claimed a special depreciation allowance, any gain on the disposition is generally recaptured (included in income) as ordinary income up to the amount of the special depreciation allowance previously allowed or allowable. Www irs gov form1040a For more information, see chapter 3 of Publication 946. Www irs gov form1040a Figuring Depreciation Under MACRS The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. Www irs gov form1040a MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Www irs gov form1040a Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. Www irs gov form1040a To be sure you can use MACRS to figure depreciation for your property, see Can You Use MACRS To Depreciate Your Property, earlier. Www irs gov form1040a This part explains how to determine which MACRS depreciation system applies to your property. Www irs gov form1040a It also discusses the following information that you need to know before you can figure depreciation under MACRS. Www irs gov form1040a Property's recovery class. Www irs gov form1040a Placed-in-service date. Www irs gov form1040a Basis for depreciation. Www irs gov form1040a Recovery period. Www irs gov form1040a Convention. Www irs gov form1040a Depreciation method. Www irs gov form1040a Finally, this part explains how to use this information to figure your depreciation deduction. Www irs gov form1040a 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. Www irs gov form1040a You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Www irs gov form1040a Required use of ADS. Www irs gov form1040a   You must use ADS for the following property. Www irs gov form1040a 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. Www irs gov form1040a Listed property used 50% or less in a qualified business use. Www irs gov form1040a See Additional Rules for Listed Property , later. Www irs gov form1040a Any tax-exempt use property. Www irs gov form1040a Any tax-exempt bond-financed property. Www irs gov form1040a 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. Www irs gov form1040a Any tangible property used predominantly outside the United States during the year. Www irs gov form1040a If you are required to use ADS to depreciate your property, you cannot claim the special depreciation allowance. Www irs gov form1040a Electing ADS. Www irs gov form1040a   Although your property may qualify for GDS, you can elect to use ADS. Www irs gov form1040a The election generally must cover all property in the same property class you placed in service during the year. Www irs gov form1040a However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. Www irs gov form1040a Once you make this election, you can never revoke it. Www irs gov form1040a   You make the election by completing line 20 in Part III of Form 4562. Www irs gov form1040a Which Property Class Applies Under GDS? The following is a list of the nine property classes under GDS. Www irs gov form1040a 3-year property. Www irs gov form1040a 5-year property. Www irs gov form1040a 7-year property. Www irs gov form1040a 10-year property. Www irs gov form1040a 15-year property. Www irs gov form1040a 20-year property. Www irs gov form1040a 25-year property. Www irs gov form1040a Residential rental property. Www irs gov form1040a Nonresidential real property. Www irs gov form1040a See Which Property Class Applies Under GDS in chapter 4 of Publication 946 for examples of the types of property included in each class. Www irs gov form1040a What Is the Placed-in-Service Date? You begin to claim depreciation when your property is placed in service for use either in a trade or business or for the production of income. Www irs gov form1040a The placed-in-service date for your property is the date the property is ready and available for a specific use. Www irs gov form1040a It is therefore not necessarily the date it is first used. Www irs gov form1040a 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. Www irs gov form1040a See Placed in Service under When Does Depreciation Begin and End , earlier, for examples illustrating when property is placed in service. Www irs gov form1040a 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. Www irs gov form1040a Reduce that amount by any credits and deductions allocable to the property. Www irs gov form1040a The following are examples of some of the credits and deductions that reduce basis. Www irs gov form1040a Any deduction for section 179 property. Www irs gov form1040a Any deduction for removal of barriers to the disabled and the elderly. Www irs gov form1040a Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. Www irs gov form1040a Any special depreciation allowance. Www irs gov form1040a Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. Www irs gov form1040a For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property , earlier. Www irs gov form1040a Also, see chapter 6. Www irs gov form1040a For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. Www irs gov form1040a Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. Www irs gov form1040a It is determined based on the depreciation system (GDS or ADS) used. Www irs gov form1040a See Table 7-1 for recovery periods under both GDS and ADS for some commonly used assets. Www irs gov form1040a For a complete list of recovery periods, see the Table of Class Lives and Recovery Periods in Appendix B of Publication 946. Www irs gov form1040a House trailers for farm laborers. Www irs gov form1040a   To depreciate a house trailer you supply as housing for those who work on your farm, use one of the following recovery periods if the house trailer is mobile (it has wheels and a history of movement). Www irs gov form1040a A 7-year recovery period under GDS. Www irs gov form1040a A 10-year recovery period under ADS. Www irs gov form1040a   However, if the house trailer is not mobile (its wheels have been removed and permanent utilities and pipes attached to it), use one of the following recovery periods. Www irs gov form1040a A 20-year recovery period under GDS. Www irs gov form1040a A 25-year recovery period under ADS. Www irs gov form1040a Water wells. Www irs gov form1040a   Water wells used to provide water for raising poultry and livestock are land improvements. Www irs gov form1040a If they are depreciable, use one of the following recovery periods. Www irs gov form1040a A 15-year recovery period under GDS. Www irs gov form1040a A 20-year recovery period under ADS. Www irs gov form1040a   The types of water wells that can be depreciated were discussed earlier in Irrigation systems and water wells under Property Having a Determinable Useful Life . Www irs gov form1040a Table 7-1. Www irs gov form1040a Farm Property Recovery Periods   Recovery Period in Years Assets GDS ADS Agricultural structures (single purpose) 10 15 Automobiles 5 5 Calculators and copiers 5 6 Cattle (dairy or breeding) 5 7 Communication equipment1 7 10 Computer and peripheral equipment 5 5 Drainage facilities 15 20 Farm buildings2 20 25 Farm machinery and equipment 7 10 Fences (agricultural) 7 10 Goats and sheep (breeding) 5 5 Grain bin 7 10 Hogs (breeding) 3 3 Horses (age when placed in service)     Breeding and working (12 years or less) 7 10 Breeding and working (more than 12 years) 3 10 Racing horses 3 12 Horticultural structures (single purpose) 10 15 Logging machinery and equipment3 5 6 Nonresidential real property 394 40 Office furniture, fixtures, and equipment (not calculators, copiers, or typewriters) 7 10 Paved lots 15 20 Residential rental property 27. Www irs gov form1040a 5 40 Tractor units (over-the-road) 3 4 Trees or vines bearing fruit or nuts 10 20 Truck (heavy duty, unloaded weight 13,000 lbs. Www irs gov form1040a or more) 5 6 Truck (actual weight less than 13,000 lbs) 5 5 Water wells 15 20 1 Not including communication equipment listed in other classes. Www irs gov form1040a 2 Not including single purpose agricultural or horticultural structures. Www irs gov form1040a 3 Used by logging and sawmill operators for cutting of timber. Www irs gov form1040a 4 For property placed in service after May 12, 1993; for property placed in service before May 13, 1993,  the recovery period is 31. Www irs gov form1040a 5 years. Www irs gov form1040a Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. Www irs gov form1040a 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. Www irs gov form1040a Use one of the following conventions. Www irs gov form1040a The half-year convention. Www irs gov form1040a The mid-month convention. Www irs gov form1040a The mid-quarter convention. Www irs gov form1040a For a detailed explanation of each convention, see Which Convention Applies in chapter 4 of Publication 946. Www irs gov form1040a Also, see the Instructions for Form 4562. Www irs gov form1040a Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. Www irs gov form1040a The 200% declining balance method over a GDS recovery period. Www irs gov form1040a The 150% declining balance method over a GDS recovery period. Www irs gov form1040a The straight line method over a GDS recovery period. Www irs gov form1040a The straight line method over an ADS recovery period. Www irs gov form1040a Depreciation Table. Www irs gov form1040a   The following table lists the types of property you can depreciate under each method. Www irs gov form1040a The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. Www irs gov form1040a Depreciation Table System/Method   Type of Property GDS using  150% DB • All property used in a farming business (except real property)   • All 15- and 20-year property   • Nonfarm 3-, 5-, 7-, and 10-year property1 GDS using SL • Nonresidential real property   • Residential rental property   • Trees or vines bearing fruit or nuts   • All 3-, 5-, 7-, 10-, 15-, and 20-year property1 ADS using SL • Property used predomi- nantly outside the United States   • Farm property used when an election not to apply the uniform capitalization rules is in effect   • Tax-exempt property   • Tax-exempt bond-financed property   • Imported property2   • Any property for which you elect to use this method1 GDS using  200% DB • Nonfarm 3-, 5-, 7-, and 10-year property 1Elective method 2See section 168(g)(6) of the Internal Revenue  Code Property used in farming business. Www irs gov form1040a   For personal property placed in service after 1988 in a farming business, you must use the 150% declining balance method over a GDS recovery period or you can elect one of the following methods. Www irs gov form1040a The straight line method over a GDS recovery period. Www irs gov form1040a The straight line method over an ADS recovery period. Www irs gov form1040a For property placed in service before 1999, you could have elected to use the 150% declining balance method using the ADS recovery periods for certain property classes. Www irs gov form1040a If you made this election, continue to use the same method and recovery period for that property. Www irs gov form1040a Real property. Www irs gov form1040a   You can depreciate real property using the straight line method under either GDS or ADS. Www irs gov form1040a Switching to straight line. Www irs gov form1040a   If you use a declining balance method, you switch to the straight line method in the year it provides an equal or greater deduction. Www irs gov form1040a If you use the MACRS percentage tables, discussed later under How Is the Depreciation Deduction Figured , you do not need to determine in which year your deduction is greater using the straight line method. Www irs gov form1040a The tables have the switch to the straight line method built into their rates. Www irs gov form1040a Fruit or nut trees and vines. Www irs gov form1040a   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a 10-year recovery period. Www irs gov form1040a ADS required for some farmers. Www irs gov form1040a   If you elect not to apply the uniform capitalization rules to any plant shown in Table 6-1 of chapter 6 and produced in your farming business, you must use ADS for all property you place in service in any year the election is in effect. Www irs gov form1040a See chapter 6 for a discussion of the application of the uniform capitalization rules to farm property. Www irs gov form1040a Electing a different method. Www irs gov form1040a   As shown in the Depreciation Table , you can elect a different method for depreciation for certain types of property. Www irs gov form1040a You must make the election by the due date of the return (including extensions) for the year you placed the property in service. Www irs gov form1040a However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). Www irs gov form1040a Attach the election to the amended return and write “Filed pursuant to section 301. Www irs gov form1040a 9100-2” on the election statement. Www irs gov form1040a File the amended return at the same address you filed the original return. Www irs gov form1040a Once you make the election, you cannot change it. Www irs gov form1040a    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. Www irs gov form1040a However, you can make the election on a property-by-property basis for residential rental and nonresidential real property. Www irs gov form1040a Straight line election. Www irs gov form1040a   Instead of using the declining balance method, you can elect to use the straight line method over the GDS recovery period. Www irs gov form1040a Make the election by entering “S/L” under column (f) in Part III of Form 4562. Www irs gov form1040a ADS election. Www irs gov form1040a   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. Www irs gov form1040a ADS uses the straight line method of depreciation over the ADS recovery periods, which are generally longer than the GDS recovery periods. Www irs gov form1040a The ADS recovery periods for many assets used in the business of farming are listed in Table 7–1. Www irs gov form1040a Additional ADS recovery periods for other classes of property may be found in the Table of Class Lives and Recovery Periods in Appendix B of Publication 946. Www irs gov form1040a 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. Www irs gov form1040a Then you are ready to figure your depreciation deduction. Www irs gov form1040a You can figure it in one of two ways. Www irs gov form1040a You can use the percentage tables provided by the IRS. Www irs gov form1040a You can figure your own deduction without using the tables. Www irs gov form1040a Figuring your own MACRS deduction will generally result in a slightly different amount than using the tables. Www irs gov form1040a 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. Www irs gov form1040a These percentage tables are in Appendix A of Publication 946. Www irs gov form1040a Rules for using the tables. Www irs gov form1040a   The following rules cover the use of the percentage tables. Www irs gov form1040a You must apply the rates in the percentage tables to your property's unadjusted basis. Www irs gov form1040a Unadjusted basis is the same basis amount you would use to figure gain on a sale but figured without reducing your original basis by any MACRS depreciation taken in earlier years. Www irs gov form1040a You cannot use the percentage tables for a short tax year. Www irs gov form1040a See chapter 4 of Publication 946 for information on how to figure the deduction for a short tax year. Www irs gov form1040a You generally must continue to use them for the entire recovery period of the property. Www irs gov form1040a You must stop using the tables if you adjust the basis of the property for any reason other than— Depreciation allowed or allowable, or An addition or improvement to the property, which is depreciated as a separate property. Www irs gov form1040a Basis adjustment due to casualty loss. Www irs gov form1040a   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. Www irs gov form1040a 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. Www irs gov form1040a See Figuring the Deduction Without Using the Tables in chapter 4 of Publication 946. Www irs gov form1040a Figuring depreciation using the 150% DB method and half-year convention. Www irs gov form1040a    Table 7-2 has the percentages for 3-, 5-, 7-, and 20-year property. Www irs gov form1040a The percentages are based on the 150% declining balance method with a change to the straight line method. Www irs gov form1040a This table covers only the half-year convention and the first 8 years for 20-year property. Www irs gov form1040a See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. Www irs gov form1040a   The following examples show how to figure depreciation under MACRS using the percentages in Table 7-2 . Www irs gov form1040a Example 1. Www irs gov form1040a During the year, you bought an item of 7-year property for $10,000 and placed it in service. Www irs gov form1040a You do not elect a section 179 expense deduction for this property. Www irs gov form1040a In addition, the property is not qualified property for purposes of the special depreciation allowance. Www irs gov form1040a The unadjusted basis of the property is $10,000. Www irs gov form1040a You use the percentages in Table 7-2 to figure your deduction. Www irs gov form1040a Since this is 7-year property, you multiply $10,000 by 10. Www irs gov form1040a 71% to get this year's depreciation of $1,071. Www irs gov form1040a For next year, your depreciation will be $1,913 ($10,000 × 19. Www irs gov form1040a 13%). Www irs gov form1040a Example 2. Www irs gov form1040a You had a barn constructed on your farm at a cost of $20,000. Www irs gov form1040a You placed the barn in service this year. Www irs gov form1040a You elect not to claim the special depreciation allowance. Www irs gov form1040a The barn is 20-year property and you use the table percentages to figure your deduction. Www irs gov form1040a You figure this year's depreciation by multiplying $20,000 (unadjusted basis) by 3. Www irs gov form1040a 75% to get $750. Www irs gov form1040a For next year, your depreciation will be $1,443. Www irs gov form1040a 80 ($20,000 × 7. Www irs gov form1040a 219%). Www irs gov form1040a Table 7-2. Www irs gov form1040a 150% Declining Balance Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 25. Www irs gov form1040a 0 % 15. Www irs gov form1040a 00 % 10. Www irs gov form1040a 71 % 3. Www irs gov form1040a 750 % 2 37. Www irs gov form1040a 5   25. Www irs gov form1040a 50   19. Www irs gov form1040a 13   7. Www irs gov form1040a 219   3 25. Www irs gov form1040a 0   17. Www irs gov form1040a 85   15. Www irs gov form1040a 03   6. Www irs gov form1040a 677   4 12. Www irs gov form1040a 5   16. Www irs gov form1040a 66   12. Www irs gov form1040a 25   6. Www irs gov form1040a 177   5     16. Www irs gov form1040a 66   12. Www irs gov form1040a 25   5. Www irs gov form1040a 713   6     8. Www irs gov form1040a 33   12. Www irs gov form1040a 25   5. Www irs gov form1040a 285   7         12. Www irs gov form1040a 25   4. Www irs gov form1040a 888   8         6. Www irs gov form1040a 13   4. Www irs gov form1040a 522   Figuring depreciation using the straight line method and half-year convention. Www irs gov form1040a   The following table has the straight line percentages for 3-, 5-, 7-, and 20-year property using the half-year convention. Www irs gov form1040a The table covers only the first 8 years for 20-year property. Www irs gov form1040a See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. Www irs gov form1040a Table 7-3. Www irs gov form1040a Straight Line Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 16. Www irs gov form1040a 67 % 10 % 7. Www irs gov form1040a 14 % 2. Www irs gov form1040a 5 % 2 33. Www irs gov form1040a 33   20   14. Www irs gov form1040a 29   5. Www irs gov form1040a 0   3 33. Www irs gov form1040a 33   20   14. Www irs gov form1040a 29   5. Www irs gov form1040a 0   4 16. Www irs gov form1040a 67   20   14. Www irs gov form1040a 28   5. Www irs gov form1040a 0   5     20   14. Www irs gov form1040a 29   5. Www irs gov form1040a 0   6     10   14. Www irs gov form1040a 28   5. Www irs gov form1040a 0   7         14. Www irs gov form1040a 29   5. Www irs gov form1040a 0   8         7. Www irs gov form1040a 14   5. Www irs gov form1040a 0