You can take a special
depreciation allowance or
special Liberty Zone
depreciation allowance to
recover part of the cost of
qualified property or qualified
Liberty Zone property placed in
service during the tax year. The
allowance applies only for the
first year you place the
property in service. For
qualified property placed in
service in 2004, you can take an
additional 50% (or 30%, if
applicable) special allowance.
The allowance is an additional
deduction you can take after any
section 179 deduction and before
you figure regular depreciation
under MACRS for the year you
place the property in service.
You cannot claim the
special Liberty Zone
depreciation allowance for
property eligible for the
special depreciation allowance
(explained later under What Is
Qualified Property ). Qualified
property is eligible for only
one special depreciation
allowance.
This chapter explains what is
qualified property and what is
qualified Liberty Zone property.
It also includes rules common to
both the special depreciation
allowance and the special
Liberty Zone depreciation
allowance regarding how to
figure an allowance, how to
elect not to claim an allowance,
and when you must recapture an
allowance.
Useful Items - You
may want to see:
Form
(and Instructions)
4562
Depreciation and
Amortization
See chapter 7 for information
about getting publications and
forms.
What Is Qualified
Property?
Terms you may
need to know
(see Glossary):
Business/investment
use
Improvement
Nonresidential
real property
Placed in
service
Structural
components
You can take the special
depreciation allowance for
qualified property. The
requirements that have to be met
for property to be qualified are
the same for both the 30%
special depreciation allowance
and the 50% special depreciation
allowance, except for certain
tests explained later under
Other
Tests To Be Met.
Your property is qualified
property if it meets the
following requirements.
It is new property
of one of the following
types.
Tangible
property
depreciated
under the
modified
accelerated cost
recovery system
(MACRS) with a
recovery period
of 20 years or
less. Generally,
every type of
property except
real property
has a recovery
period of 20
years or less.
Water
utility property
(25-year
property
described under
Which
Property Class
Applies under
GDS
in chapter 4).
Computer
software that is
readily
available for
purchase by the
general public,
is subject to a
nonexclusive
license, and has
not been
substantially
modified. (The
cost of some
computer
software is
treated as part
of the cost of
hardware and is
depreciated
under MACRS.)
It is property that
meets certain tests
(explained later under
Other Tests To Be
Met).
Qualified
leasehold improvement
property.
Generally, this is any
improvement to an interior
part of a building that is
nonresidential real
property, if all the
following requirements are
met.
The improvement
is made under or
according to a lease
by the lessee (or
any sublessee) or
the lessor of that
part of the
building.
That part of the
building is to be
occupied exclusively
by the lessee (or
any sublessee) of
that part.
The improvement
is placed in service
more than 3 years
after the date the
building was first
placed in service by
any person.
The improvement
is section 1250
property. See
chapter 3 in
Publication 544,
Sales and Other
Dispositions of
Assets, for the
definition of
section 1250
property.
However, a qualified
leasehold improvement does
not include any improvement
for which the expenditure is
attributable to any of the
following.
The enlargement
of the building.
Any elevator or
escalator.
Any structural
component benefiting
a common area.
The internal
structural framework
of the building.
Generally, a binding
commitment to enter into a
lease is treated as a lease
and the parties to the
commitment are treated as
the lessor and lessee.
However, a lease between
related persons is not
treated as a lease.
Related
persons.
For this purpose, the
following are related
persons.
Members of an
affiliated group.
An individual
and a member of his
or her family,
including only a
spouse, child,
parent, brother,
sister,
half-brother,
half-sister,
ancestor, and lineal
descendant.
A corporation
and an individual
who directly or
indirectly owns 80%
or more of the value
of the outstanding
stock of that
corporation.
Two corporations
that are members of
the same controlled
group.
A trust
fiduciary and a
corporation if 80%
or more of the value
of the outstanding
stock is directly or
indirectly owned by
or for the trust or
grantor of the
trust.
The grantor and
fiduciary, and the
fiduciary and
beneficiary, of any
trust.
The fiduciaries
of two different
trusts, and the
fiduciaries and
beneficiaries of two
different trusts, if
the same person is
the grantor of both
trusts.
Certain
educational and
charitable
organizations and
any person (or, if
that person is an
individual, a member
of that person's
family) who directly
or indirectly
controls the
organization.
Two S
corporations, and an
S corporation and a
regular corporation,
if the same persons
own 80% or more of
the value of the
outstanding stock of
each corporation.
A corporation
and a partnership if
the same persons own
both of the
following.
80% or
more of the
value of the
outstanding
stock of the
corporation.
80% or
more of the
capital or
profits
interest in
the
partnership.
The executor and
beneficiary of any
estate.
Other Tests
To Be Met
To be qualified property
for purposes of the special
allowance, the property must
also meet all of the
following tests.
Acquisition date test.
To qualify for the 50%
special allowance, you
must have acquired the
property after May 5,
2003, and before January
1, 2005. If a written
binding contract to
acquire the property
existed before May 6,
2003, the property does
not qualify.
The 30% special
allowance applies to
qualified property for
which the 50% special
allowance does not
apply. To qualify for
the 30% special
allowance, you must have
acquired the property
after September 10,
2001, and before January
1, 2005. If a written
binding contract to
acquire the property
existed before September
11, 2001, the property
does not qualify.
You can elect to
claim the 30% special
allowance instead of the
50% allowance for
property that qualifies
for the 50% allowance.
This election applies to
all property in the same
property class placed in
service during the tax
year. See How Can You
Elect Not To Claim an
Allowance , later.
Property you
manufacture, construct,
or produce for your own
use meets this test if
you began the
manufacture,
construction, or
production of the
property after May 5,
2003 (after September
10, 2001, for the 30%
special allowance, if
applicable), and before
January 1, 2005.
Property that is
manufactured,
constructed, or produced
for your use by another
person under a written
binding contract entered
into before the
manufacture,
construction, or
production of the
property, is considered
to be manufactured,
constructed, or produced
by you.
Placed
in service date test.
Generally, qualified
property must be placed
in service before
January 1, 2005.
However, certain long
production period
property, transportation
property, and
non-commercial aircraft
placed in service by you
before January 1, 2006,
qualify for the special
allowance.
Long production period
property and
transportation property
must meet the following
requirements.
The property
must meet all of
the requirements
discussed
earlier under
What Is
Qualified
Property.
The property
has a recovery
period of at
least 10 years
or the property
is
transportation
property.
Transportation
property is
tangible
personal
property used in
the trade or
business of
transporting
persons or
property.
The property
must be subject
to section 263A.
The property
must have an
estimated
production
period exceeding
2 years or have
an estimated
production
period exceeding
1 year and an
estimated
production cost
exceeding
$1,000,000.
Non-commercial
aircraft must meet the
following requirements.
The aircraft
must not be
tangible
personal
property used in
the trade or
business of
transporting
persons or
property (except
for agricultural
or firefighting
purposes).
The aircraft
must be
purchased by a
purchaser who at
the time of the
contract for
purchase, makes
a nonrefundable
deposit of the
lesser of 10% of
the cost or
$100,000.
The aircraft
must have an
estimated
production
period exceeding
four months and
a cost exceeding
$200,000.
The aircraft
must meet all of
the tests
discussed under
Other Tests
To Be Met.
Sale-leaseback.
If you sold qualified
property you placed in
service after May 5,
2003 (after September
10, 2001, if
applicable), and leased
it back within 3 months
after you originally
placed it in service,
the property is treated
as originally placed in
service no earlier than
the date it is used by
you under the leaseback.
The property will not
qualify for the special
allowance if the lessee
or a related person to
the lessee or lessor had
a written binding
contract in effect for
the acquisition of the
property before May 6,
2003 (before September
11, 2001, if
applicable).
Syndicated leasing
transactions.
If qualified property
is originally placed in
service by a lessor
after September 10,
2001, the property is
sold within 3 months of
the date it was placed
in service, and the user
of the property does not
change, then the
property is treated as
originally placed in
service by the taxpayer
no earlier than the date
of the last sale.
Multiple units of
property subject to the
same lease sold after
June 4, 2004, will
qualify as originally
placed in service no
earlier than the date of
the last sale if the
property is sold within
3 months after the final
unit is placed in
service and the period
between the time the
first and last units are
placed in service does
not exceed 12 months.
For special rules
explaining when property
involved in certain
other transactions is
treated as originally
placed in service, see
section
1.168(k)-1T(b)(5) of the
regulations.
Original use test.
The original use of
the property must have
begun with you after May
5, 2003, for the 50%
special allowance (after
September 10, 2001, for
the 30% special
allowance, if
applicable). Original
use means the first use
to which the property is
put, whether or not by
you. Therefore, property
used by any person
before May 6, 2003
(before September 11,
2001, if applicable),
does not meet the
original use test.
Additional capital
expenditures you
incurred to recondition
or rebuild your property
meet the original use
test. However, the cost
of reconditioned or
rebuilt property you
acquired does not meet
this test. Property
containing used parts
will not be treated as
reconditioned or rebuilt
if the cost of the used
parts is not more than
20 percent of the total
cost of the property.
If you sold new
property you placed in
service after May 5,
2003 (after September
10, 2001, if
applicable), and you
leased it back within 3
months after the
property was originally
placed in service by
you, the lessor is
considered to be the
original user of the
property.
For special rules
identifying the original
user of property
involved in certain
other transactions and
the original user of
fractional interests in
property, see section
1.168(k)-1T(b)(3) of the
regulations.
Change in use.
If you acquire new
property for personal
use and then use the
property in your trade
or business or for the
production of income,
you are considered to be
the original user. New
property acquired by you
for personal use after
September 10, 2001, and
placed in service in
your trade or business
or for the production of
income before January 1,
2005, may be qualified
property.
Excepted
Property
Qualified property does
not include any of the
following.
Property placed
in service and
disposed of in the
same tax year.
Property
converted from
business use to
personal use in the
same tax year it is
acquired. (Property
converted from
personal use to
business use in the
same or later tax
year may be
qualified property.
See
Change in use,
above.)
Property
required to be
depreciated using
the Alternative
Depreciation System
(ADS). This includes
listed property used
50% or less in a
qualified business
use. For other
property required to
be depreciated using
ADS, see
Required use of
ADS
under
Which
Depreciation System
(GDS or ADS) Applies,
in Chapter 4.
Qualified New
York Liberty Zone
(Liberty Zone)
leasehold
improvement property
(defined next).
Property for
which you elected
not to claim any
special depreciation
allowance (discussed
later).
Qualified Liberty Zone
leasehold improvement
property.
This is any qualified
leasehold improvement
property (as defined
earlier) if all the
following requirements
are met.
The
improvement is
made to a
building located
in the Liberty
Zone (defined
under
Liberty Zone
Property
in chapter 2).
The
improvement is
placed in
service after
September 10,
2001, and before
January 1, 2007.
No written
binding contract
for the
improvement was
in effect before
September 11,
2001.
What Is Qualified
Liberty Zone
Property?
Terms you may
need to know
(see Glossary):
Business/investment
use
Nonresidential
real property
Placed in
service
Residential
rental property
Structural
components
You can take the special
Liberty Zone depreciation
allowance for qualified Liberty
Zone property. For 2004, your
property is qualified Liberty
Zone property if it meets the
following requirements.
It is one of the
following types of
property.
Used
property
depreciated
under the
modified
accelerated cost
recovery system
(MACRS) with a
recovery period
of 20 years or
less. See
Can You Use
MACRS To
Depreciate Your
Property
in chapter 1.
Used water
utility
property, which
is either of the
following.
Property
that is
an
integral
part of
the
gathering,
treatment,
or
commercial
distribution
of
water,
and
that,
without
regard
to this
provision,
would be
20-year
property.
Any
municipal
sewer.
Used
computer
software that is
readily
available for
purchase by the
general public,
is subject to a
nonexclusive
license, and has
not been
substantially
modified. (The
cost of some
computer
software is
treated as part
of the cost of
hardware and is
depreciated
under MACRS.)
Certain
nonresidential
real property
and residential
rental property
(defined next).
It is property that
meets certain tests
(explained later under
Other Tests To Be
Met).
Nonresidential real property
and residential rental
property. This
property is qualified
Liberty Zone property only
to the extent it
rehabilitates real property
damaged, or replaces real
property destroyed or
condemned, as a result of
the terrorist attacks of
September 11, 2001. Property
is treated as replacing
destroyed or condemned
property if, as part of an
integrated plan, such
property replaces real
property included in a
continuous area that
includes real property
destroyed or condemned.
For these purposes, real
property is considered
destroyed (or condemned)
only if an entire building
or structure was destroyed
(or condemned) as a result
of the terrorist attacks.
Otherwise, the property is
considered damaged real
property. For example, if
certain structural
components of a building
(such as walls, floors, and
plumbing fixtures) are
damaged or destroyed as a
result of the terrorist
attacks, but the building is
not destroyed (or
condemned), then only costs
related to replacing the
damaged or destroyed
structural components
qualify for the special
Liberty Zone depreciation
allowance.
Other Tests
To Be Met
To be qualified Liberty
Zone property, the property
must also meet all of the
following tests.
Acquisition date test.
You must have acquired
the property by purchase
after September 10,
2001, and there must not
have been a binding
written contract for the
acquisition in effect
before September 11,
2001.
For information on the
acquisition of property
by purchase, see
Property Acquired by
Purchase in
chapter 2.
Property you
manufacture, construct,
or produce for your own
use meets this test if
you began the
manufacture,
construction, or
production of the
property after September
10, 2001. Property that
is manufactured,
constructed, or produced
for your use by another
person under a written
binding contract entered
into before the
manufacture,
construction, or
production of the
property, is considered
to be manufactured,
constructed, or produced
by you.
Placed
in service date test.
Generally, the
property must be placed
in service for use in
your trade or business
or for the production of
income before January 1,
2007 (January 1, 2010,
in the case of
qualifying
nonresidential real
property and residential
rental property).
Sale-leaseback.
If you sold qualified
property you placed in
service after September
10, 2001, and leased it
back within 3 months
after you originally
placed it in service,
the property is treated
as originally placed in
service no earlier than
the date it is used by
you under the leaseback.
The property will not
qualify for the special
allowance if the lessee
or a related person to
the lessee or lessor had
a written binding
contract in effect for
the acquisition of the
property before
September 11, 2001.
Syndicated leasing
transactions.
If qualified property
is originally placed in
service by a lessor
after September 10,
2001, the property is
sold within 3 months of
the date it was placed
in service, and the user
of the property does not
change, then the
property is treated as
originally placed in
service by the taxpayer
no earlier than the date
of the last sale.
Multiple units of
property subject to the
same lease sold after
June 4, 2004, will
qualify as originally
placed in service no
earlier than the date of
sale if the property is
sold within 3 months
after the final unit is
placed in service and
the period between the
time the first and last
units are placed in
service does not exceed
12 months.
For special rules
explaining when property
involved in certain
other transactions is
treated as originally
placed in service, see
section
1.168(k)-1T(b)(5) of the
regulations.
Substantial use test.
Substantially all (80
percent or more) of the
use of the property must
be in the Liberty Zone
and in the active
conduct of your trade or
business in the Liberty
Zone.
Original use test.
The original use of
the property in the
Liberty Zone must have
begun with you after
September 10, 2001.
Used property can be
qualified Liberty Zone
property if it has not
previously been used
within the Liberty Zone.
Also, additional capital
expenditures you
incurred after September
10, 2001, to recondition
or rebuild your property
meet the original use
test if the original use
of the property in the
Liberty Zone began with
you. However, the cost
of reconditioned or
rebuilt property you
acquired does not meet
this test. Property
containing used parts
will not be treated as
reconditioned or rebuilt
if the cost of the used
parts is not more than
20 percent of the total
cost of the property.
If you sold property
you placed in service
after September 10,
2001, and you leased it
back within 3 months
after the property was
originally placed in
service by you, the
lessor is considered to
be the original user of
the property.
For special rules
identifying the original
user of property
involved in certain
other transactions and
the original user of
fractional interests in
property, see section
1.168(k)-1T(b)(3) of the
regulations.
Excepted
Property
Qualified Liberty Zone
property does not include
any of the following.
Property placed
in service and
disposed of in the
same tax year.
Property
converted from
business use to
personal use in the
same tax year it is
acquired. (Property
converted from
personal use to
business use in the
same or later tax
year is not excepted
property.)
Property that
also qualifies for
the special
depreciation
allowance.
Property
required to be
depreciated using
the Alternative
Depreciation System
(ADS). This includes
listed property used
50% or less in a
qualified business
use. For other
property required to
be depreciated using
ADS, see
Required use of
ADS
under
Which
Depreciation System
(GDS or ADS)
Applies,
in Chapter 4.
Qualified New
York Liberty Zone
leasehold
improvement property
(see
Qualified New
York Liberty Zone
leasehold
improvement property,
earlier, in the
discussion on
excepted property
under
What Is
Qualified Property).
Property for
which you elected
not to claim the
special Liberty Zone
depreciation
allowance (discussed
later).
How Much Can You
Deduct?
Terms you may
need to know
(see Glossary):
Adjusted basis
Basis
Placed in
service
The special depreciation
allowance for qualified property
is 50% of the property's
depreciable basis if the 50%
special depreciation allowance
applies. It is 30% of the
property's depreciable basis if
the 30% special depreciation
allowance applies. The special
Liberty Zone depreciation
allowance for qualified Liberty
Zone property is 30% of the
property's depreciable basis.
For qualified property (or
qualified Liberty Zone property)
other than listed property,
enter the special allowance on
line 14 in Part II of Form 4562.
For qualified property or
qualified Liberty Zone property
that is listed property, enter
the special allowance on line 25
in Part V of Form 4562.
If you place qualified
property (or qualified Liberty
Zone property) in service in a
short tax year, you can take the
full amount of a special
depreciation allowance (or
special Liberty Zone
depreciation allowance).
Depreciable
basis.
This is the property's
cost or other basis
multiplied by the percentage
of business/investment use
and then reduced by the
following items allocable to
the property.
Any section 179
deduction.
Any deduction
for removal of
barriers to the
disabled and the
elderly.
Any disabled
access credit,
enhanced oil
recovery credit, and
credit for
employer-provided
childcare facilities
and services.
Basis adjustment
to investment credit
property under
section 50(c) of the
Internal Revenue
Code.
For information about how to
determine the cost or other
basis of property, see
What Is the Basis of Your
Depreciable Property
in chapter 1. For a
discussion of
business/investment use, see
Partial business or
investment use
under Property Used in Your
Business or Income-Producing
Activity in
chapter 1.
Depreciating the remaining
cost. After you figure
your special depreciation
allowance or special Liberty
Zone depreciation allowance
for your qualified property
or qualified Liberty Zone
property, you can use the
remaining cost to figure
your regular MACRS
depreciation deduction
(discussed in chapter 4).
Therefore, you must reduce
the depreciable basis of the
property by the allowance
before figuring your regular
MACRS depreciation
deduction.
Example
1.
On November 1, 2004, Tom
Brown bought and placed in
service in his business
qualified property that cost
$200,000. He did not elect
to claim a section 179
deduction. He deducts 50% of
the cost ($100,000) as a
special depreciation
allowance for 2004. He uses
the remaining $100,000 of
cost to figure his regular
MACRS depreciation deduction
for 2004 and later years.
Example
2.
The facts are the same as
in Example 1, except that
Tom chooses to deduct
$100,000 of the property's
cost as a section 179
deduction. He uses the
remaining $100,000 of cost
to figure his special
depreciation allowance of
$50,000 ($100,000 × 50%). He
uses the remaining $50,000
of cost to figure his
regular MACRS depreciation
deduction for 2004 and later
years.
Like-kind
exchanges and involuntary
conversions. If you
acquire qualified property
in a like-kind exchange or
involuntary conversion, the
carryover basis of the
acquired property is
eligible for a special
depreciation allowance.
After you figure your
special depreciation
allowance, you can use the
remaining carryover basis to
figure your regular MACRS
depreciation deduction. In
the year you claim the
allowance (the year you
place in service the
property received in the
exchange or dispose of
involuntarily converted
property), you must reduce
the carryover basis of the
property by the allowance
before figuring your regular
MACRS depreciation
deduction. See
Figuring the Deduction for
Property Acquired in a
Nontaxable Exchange,
in chapter 4, under
How Is the Depreciation
Deduction Figured.
The excess basis (the part
of the acquired property's
basis that exceeds its
carryover basis) is also
eligible for a special
depreciation allowance.
How Can You Elect
Not To Claim an
Allowance?
Terms you may
need to know
(see Glossary):
Property class
For qualified property
acquired after May 5, 2003, you
can elect, for any class of
property, either:
To deduct the 30%
special allowance,
instead of the 50%
allowance, for all
property in such class
placed in service during
the tax year, or
Not to deduct any
special allowances for
all property in such
class placed in service
during the tax year.
For qualified property
acquired before May 6, 2003, and
for qualified Liberty Zone
property, you can elect, for any
class of property, not to deduct
the 30% special allowance for
all property in such class
placed in service during the
year.
To make an election, attach a
statement to your return
indicating what election you are
making and the class of property
for which you are making the
election.
When to
make election.
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.
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
the original return (not
including extensions).
Attach the election
statement to the amended
return. On the amended
return, write “Filed
pursuant to section
301.9100-2.”
Revoking an
election. Once you
elect not to deduct a
special depreciation
allowance (or special
Liberty Zone depreciation
allowance) for a class of
property, you cannot revoke
the election without IRS
consent. A request to revoke
the election is a change in
method of accounting for
depreciation. See
Changing Your Accounting
Method in
chapter 1.
When Must You
Recapture the
Allowance?
Terms you may
need to know
(see Glossary):
Disposition
Recapture
When you dispose of property
that you depreciated, any gain
on the disposition is generally
recaptured (included in income)
as ordinary income up to the
amount of the depreciation
previously allowed or allowable
for the property. A special
depreciation allowance (or
special Liberty Zone
depreciation allowance) deducted
for qualified property (or
qualified Liberty Zone property)
is considered to be depreciation
for this purpose and is
therefore subject to recapture.
See
When Do You Recapture MACRS
Depreciation in
chapter 4 for more information.
