The Modified Accelerated Cost
Recovery System (MACRS) is used
to recover the basis of most
business and investment property
placed in service after 1986.
MACRS consists of two
depreciation systems, the
General Depreciation System
(GDS) and the Alternative
Depreciation System (ADS).
Generally, these systems provide
different methods and recovery
periods to use in figuring
depreciation deductions.
To be sure you can use
MACRS to figure depreciation for
your property, see Can You Use
MACRS To Depreciate Your
Property in chapter 1.
This chapter explains how to
determine which MACRS
depreciation system applies to
your property. It also discusses
other information you need to
know before you can figure
depreciation under MACRS. This
information includes the
property's recovery class,
placed-in-service date, and
basis, as well as the applicable
recovery period, convention, and
depreciation method. It explains
how to use this information to
figure your depreciation
deduction and how to use a
general asset account to
depreciate a group of
properties. Finally, it explains
when and how to recapture MACRS
depreciation.
Useful Items - You
may want to see:
Publication
225
Farmer's Tax Guide
463
Travel, Entertainment,
Gift, and Car
Expenses
544
Sales and Other
Dispositions of Assets
551
Basis of Assets
587
Business Use of Your
Home (Including Use by
Daycare Providers)
Form
(and Instructions)
2106
Employee Business
Expenses
2106-EZ
Unreimbursed Employee
Business Expenses
4562
Depreciation and
Amortization
See chapter 7 for information
about getting publications and
forms.
Which Depreciation
System (GDS or ADS)
Applies?
Terms you may
need to know
(see Glossary):
Listed property
Nonresidential
real property
Placed in
service
Property class
Recovery period
Residential
rental property
Tangible
property
Tax exempt
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. You generally must use GDS
unless you are specifically
required by law to use ADS or
you elect to use ADS.
If you placed your property
in service in 2004, complete
Part III of Form 4562 to report
depreciation using MACRS.
Complete section B of Part III
to report depreciation using
GDS, and complete section C of
Part III to report depreciation
using ADS. If you placed your
property in service before 2004
and are required to file Form
4562 (as explained in chapter 1
under Do You Have To File Form
4562), report
depreciation using either GDS or
ADS on line 17 in Part III.
Required
use of ADS.
You must use ADS for the
following property.
Listed property
used 50% or less in
a qualified business
use. (See chapter 5
for information on
listed property.)
Any tangible
property used
predominantly
outside the United
States during the
year.
Any tax-exempt
use property.
Any tax-exempt
bond-financed
property.
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.
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.
If you are required to
use ADS to depreciate your
property, you cannot claim a
special depreciation allowance
or special Liberty Zone
depreciation allowance
(discussed in chapter 3) for the
property.
Electing
ADS.
Although your property may
qualify for GDS, you can
elect to use ADS. The
election generally must
cover all property in the
same property class that you
placed in service during the
year. However, the election
for residential rental
property and nonresidential
real property can be made on
a property-by-property
basis. Once you make this
election, you can never
revoke it.
You make the election by
completing line 20 in Part
III of Form 4562.
Which Property Class
Applies Under GDS?
Terms you may
need to know
(see Glossary):
Class life
Nonresidential
real property
Placed in
service
Property class
Recovery period
Residential
rental property
Section 1250
property
The following is a list of
the nine property
classifications under GDS and
examples of the types of
property included in each class.
These property classes are also
listed under column (a) in
section B, Part III, of Form
4562.
3-year property.
Tractor
units for
over-the-road
use.
Any race
horse over 2
years old when
placed in
service.
Any other
horse (other
than a race
horse) over 12
years old when
placed in
service.
Qualified
rent-to-own
property
(defined later).
5-year property.
Automobiles,
taxis, buses,
and trucks.
Computers
and peripheral
equipment.
Office
machinery (such
as typewriters,
calculators, and
copiers).
Any property
used in research
and
experimentation.
Breeding
cattle and dairy
cattle.
Appliances,
carpets,
furniture, etc.,
used in a
residential
rental real
estate activity.
Any
qualified
Liberty Zone
leasehold
improvement
property. See
Qualified
Liberty Zone
leasehold
improvement
property
under
Excepted
Property
in chapter 3.
You can elect
not to treat
this property as
5-year property.
If you make this
election, the
property will be
depreciable
under the rules
for
nonresidential
real property if
placed in
service before
October 23,
2004, and under
the rules for
qualified
leasehold
improvement
property if
placed in
service after
October 22,
2004. To make
the election,
attach a
statement to
your return
indicating that
you are making
this election
under section
1400L(c)(5). The
election applies
to all qualified
Liberty Zone
leasehold
improvement
property placed
in service
during the year.
Rules similar to
the rules for
electing out of
the special
depreciation
allowance apply.
Gasoline
pump canopies
that are not
permanent
structures. (Any
supporting
concrete
footings are
permanent
structures and
are land
improvements
classified as
15-year
property.)
7-year property.
Office
furniture and
fixtures (such
as desks, files,
and safes).
Agricultural
machinery and
equipment.
Any property
that does not
have a class
life and has not
been designated
by law as being
in any other
class.
Certain
motorsports
entertainment
complex property
placed in
service after
October 22,
2004, and before
January 1, 2008.
10-year property.
Vessels,
barges, tugs,
and similar
water
transportation
equipment.
Any single
purpose
agricultural or
horticultural
structure.
Any tree or
vine bearing
fruits or nuts.
15-year property.
Certain
improvements
made directly to
land or added to
it (such as
shrubbery,
fences, roads,
and bridges).
Any retail
motor fuels
outlet (defined
later), such as
a convenience
store.
Any
municipal
wastewater
treatment plant.
Any
qualified
leasehold
improvement
property
(defined later)
placed in
service after
October 22,
2004, and before
January 1, 2006.
Any
qualified
restaurant
property
(defined later)
placed in
service after
October 22,
2004, and before
January 1, 2006.
Initial
clearing and
grading land
improvements for
gas utility
property placed
in service after
October 22,
2004.
20-year property.
Farm
buildings (other
than single
purpose
agricultural or
horticultural
structures).
Municipal
sewers not
classified as
25-year
property.
Initial
clearing and
grading land
improvements for
electric utility
transmission and
distribution
plants placed in
service after
October 22,
2004.
25-year property.
This class is 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.
Municipal
sewers placed in
service after
June 12, 1996,
other than
property placed
in service under
a binding
contract in
effect at all
times since June
9, 1996.
Residential rental
property.This is any building
or structure, such as a
rental home (including a
mobile home), if 80% or
more of its gross rental
income for the tax year
is from dwelling units.
A dwelling unit is a
house or apartment used
to provide living
accommodations in a
building or structure.
It does not include a
unit in a hotel, motel,
or other establishment
where more than half the
units are used on a
transient basis. If you
occupy any part of the
building or structure
for personal use, its
gross rental income
includes the fair rental
value of the part you
occupy.
Nonresidential real
property.This is section 1250
property, such as an
office building, store,
or warehouse, that is
neither residential
rental property nor
property with a class
life of less than 27.5
years.
If your property is not
listed above, you can determine
its property class from the
Table
of Class Lives and Recovery
Periods in Appendix
B. The property class is
generally the same as the GDS
recovery period indicated in the
table.
Qualified
rent-to-own property.
Qualified rent-to-own
property is property held by
a rent-to-own dealer for
purposes of being subject to
a rent-to-own contract. It
is tangible personal
property generally used in
the home for personal use.
It includes computers and
peripheral equipment,
televisions, videocassette
recorders, stereos,
camcorders, appliances,
furniture, washing machines
and dryers, refrigerators,
and other similar consumer
durable property. Consumer
durable property does not
include real property,
aircraft, boats, motor
vehicles, or trailers.
If some of the property
you rent to others under a
rent-to-own agreement is of
a type that may be used by
the renters for either
personal or business
purposes, you still can
treat this property as
qualified property as long
as it does not represent a
significant portion of your
leasing property. However,
if this dual-use property
does represent a significant
portion of your leasing
property, you must prove
that this property is
qualified rent-to-own
property.
Rent-to-own dealer.
You are a rent-to-own
dealer if you meet all the
following requirements.
You regularly
enter into
rent-to-own
contracts in the
ordinary course of
your business for
the use of consumer
property.
A substantial
portion of these
contracts end with
the customer
returning the
property before
making all the
payments required to
transfer ownership.
The property is
tangible personal
property of a type
generally used
within the home for
personal use.
Rent-to-own contract.
This is any lease for the
use of consumer property
between a rent-to-own dealer
and a customer who is an
individual which—
Is titled “Rent-to-Own
Agreement,” “Lease
Agreement with
Ownership Option,”
or other similar
language.
Provides a
beginning date and a
maximum period of
time, not to exceed
156 weeks or 36
months from the
beginning date, for
which the contract
can be in effect
(including renewals
or options to
extend).
Provides for
regular periodic
(weekly or monthly)
payments that can be
either level or
decreasing. If the
payments are
decreasing, no
payment can be less
than 40 percent of
the largest payment.
Provides for
total payments that
generally exceed the
normal retail price
of the property plus
interest.
Provides for
total payments that
do not exceed
$10,000 for each
item of property.
Provides that
the customer has no
legal obligation to
make all payments
outlined in the
contract and that,
at the end of each
weekly or monthly
payment period, the
customer can either
continue to use the
property by making
the next payment or
return the property
in good working
order with no
further obligations
and no entitlement
to a return of any
prior payments.
Provides that
legal title to the
property remains
with the rent-to-own
dealer until the
customer makes
either all the
required payments or
the early purchase
payments required
under the contract
to acquire legal
title.
Provides that
the customer has no
right to sell,
sublease, mortgage,
pawn, pledge, or
otherwise dispose of
the property until
all contract
payments have been
made.
Retail
motor fuels outlet.
Real property is a retail
motor fuels outlet if it is
used to a substantial extent
in the retail marketing of
petroleum or petroleum
products (whether or not it
is also used to sell food or
other convenience items) and
meets any one of the
following three tests.
It is not larger
than 1,400 square
feet.
50% or more of
the gross revenues
generated from the
property are derived
from petroleum
sales.
50% or more of
the floor space in
the property is
devoted to petroleum
marketing sales.
A retail motor fuels outlet
does not include any
facility related to
petroleum and natural gas
trunk pipelines.
Qualified
leasehold improvement
property.
Generally, this is any
improvement to an interior
part of a building that is
nonresidential real
property, provided all of
the requirements discussed
in chapter 3 under
Qualified leasehold
improvement property
are met.
In addition, an
improvement made by the
lessor does not qualify as
qualified leasehold
improvement property to any
subsequent owner unless it
is acquired from the
original lessor for one of
the following reasons.
Death of the
lessor,
A transaction to
which section 381(a)
applies,
A mere change in
the form of
conducting the trade
or business so long
as the property is
retained in the
trade or business as
qualified leasehold
improvement property
and the taxpayer
retains a
substantial interest
in the trade or
business,
The property is
acquired in a
like-kind exchange,
involuntary
conversion, or
reacquisition of
real property to the
extent that the
basis in the
property represents
the carryover basis,
or
Property that is
acquired in certain
nonrecognition
transactions to the
extent that your
basis in the
property is
determined by
reference to the
transferor's or
distributor's basis
in the property.
Examples include the
following.
A
complete
liquidation
of a
subsidiary.
A
transfer to
a
corporation
controlled
by the
transferor.
An
exchange of
property by
a
corporation
solely for
stock or
securities
in another
corporation
in a
reorganization.
Qualified
restaurant property.
Qualified restaurant
property is any section 1250
property that is an
improvement to a building
and meets the following
requirements.
The improvement
is placed in service
more than 3 years
after the date the
building was first
placed in service,
and
More than 50% of
the building's
square footage is
devoted to
preparation of meals
and seating for
on-premise
consumption of
prepared meals.
What Is the
Placed-in-Service
Date?
Terms you may
need to know
(see Glossary):
Placed in
service
You begin to claim
depreciation when your property
is placed in service for either
use in a trade or business or
the production of income. The
placed-in-service date for your
property is the date the
property is ready and available
for a specific use. It is
therefore not necessarily the
date it is first used. 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.
See
Placed in Service
under When Does Depreciation Begin
and End in chapter 1
for examples illustrating when
property is placed in service.
What Is the Basis
for Depreciation?
Terms you may
need to know
(see Glossary):
Basis
The basis for depreciation of
MACRS property is the property's
cost or other basis multiplied
by the percentage of
business/investment use. (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.) Reduce that
amount by the following items.
Any deduction for
section 179 property.
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.
Any special
depreciation allowance
or Liberty Zone
depreciation allowance.
Basis adjustment for
investment credit
property under section
50(c) of the Internal
Revenue Code.
Enter the basis for
depreciation under column (c) in
Part III of Form 4562. 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.
Which Recovery
Period Applies?
Terms you may
need to know
(see Glossary):
Active conduct
of a trade or
business
Basis
Improvement
Listed property
Nonresidential
real property
Placed in
service
Property class
Recovery period
Residential
rental property
Section 1245
property
The recovery period of
property is the number of years
over which you recover its cost
or other basis. It is determined
based on the depreciation system
(GDS or ADS) used.
Recovery
Periods Under
GDS
Under GDS, property that
is not qualified Indian
reservation property is
depreciated over one of the
following recovery periods.
Property
Class
Recovery
Period
3-year property
3 years
1
5-year property
5 years
7-year property
7 years
10-year property
10 years
15-year property
15 years
2
20-year property
20 years
25-year property
25 years
3
Residential
rental property
27.5 years
Nonresidential
real property
39 years
4
15
years for
qualified
rent-to-own
property placed
in service
before August 6,
1997.
239
years for
property that is
a retail motor
fuels outlet
placed in
service before
August 20, 1996
(31.5 years if
placed in
service before
May 13, 1993),
unless you
elected to
depreciate it
over 15 years.
320
years for
property placed
in service
before June 13,
1996, or under a
binding contract
in effect before
June 10, 1996.
431.5
years for
property placed
in service
before May 13,
1993 (or before
January 1, 1994,
if the purchase
or construction
of the property
is under a
binding contract
in effect before
May 13, 1993, or
if construction
began before May
13, 1993).
The GDS recovery periods
for property not listed
above can be found in
Appendix B,
Table of Class Lives and
Recovery Periods.
Residential rental property
and nonresidential real
property are defined earlier
under Which Property Class
Applies Under GDS.
Enter the appropriate
recovery period on Form 4562
under column (d) in section
B of Part III, unless
already shown (for 25-year
property, residential rental
property, and nonresidential
real property).
Office
in the home.
If you begin to use
part of your home as an
office, depreciate that
part of your home as
nonresidential real
property over 39 years
(31.5 years if you began
using it for business
before May 13, 1993).
See Publication 587 for
a discussion of the
tests you must meet to
claim expenses,
including depreciation,
for the business use of
your home.
Home
changed to rental use.
If you begin to rent a
home that was your
personal home before
1987, you depreciate it
as residential rental
property over 27.5
years.
Indian
Reservation
Property
The recovery periods
for qualified property
you placed in service on
an Indian reservation
after 1993 and before
2006 are shorter than
those listed earlier.
The following table
shows these shorter
recovery periods.
Property
Class
Recovery Period
3-year
property
2 years
5-year
property
3 years
7-year
property
4 years
10-year
property
6 years
15-year
property
9 years
20-year
property
12 years
Nonresidential
real
property
22 years
Nonresidential real
property is defined
earlier under
Which Property Class
Applies Under GDS.
Qualified property.
Property eligible
for the shorter
recovery periods are
3-, 5-, 7-, 10-,
15-, and 20-year
property and
nonresidential real
property. You must
use this property
predominantly in the
active conduct of a
trade or business
within an Indian
reservation. The
rental of real
property that is
located on an Indian
reservation is
treated as the
active conduct of a
trade or business
within an Indian
reservation.
The following
property is not
qualified property.
Property
used or
located
outside an
Indian
reservation
on a regular
basis, other
than
qualified
infrastructure
property.
Property
acquired
directly or
indirectly
from a
related
person.
Property
placed in
service for
purposes of
conducting
or housing
class I, II,
or III
gaming
activities.
(These
activities
are defined
in section 4
of the
Indian
Regulatory
Act (25
U.S.C.
2703).)
Any
property you
must
depreciate
under ADS.
Determine
whether
property is
qualified
without
regard to
the election
to use ADS
and after
applying the
special
rules for
listed
property not
used
predominantly
for
qualified
business use
(discussed
in chapter
5).
Qualified
infrastructure
property.
Item (1) above
does not apply to
qualified
infrastructure
property located
outside the
reservation that is
used to connect with
qualified
infrastructure
property within the
reservation.
Qualified
infrastructure
property is property
that meets all the
following rules.
It is
qualified
property, as
defined
earlier,
except that
it is
outside the
reservation.
It
benefits the
tribal
infrastructure.
It is
available to
the general
public.
It is
placed in
service in
connection
with the
active
conduct of a
trade or
business
within a
reservation.
Infrastructure
property includes,
but is not limited
to, roads, power
lines, water
systems, railroad
spurs, and
communications
facilities.
Related person.
For purposes of
item (2) above, see
Related persons
in the discussion on
property owned or
used in 1986 under
Can You Use
MACRS To Depreciate
Your Property
in chapter 1 for a
description of
related persons.
Indian reservation.
The term Indian
reservation means a
reservation as
defined in section
3(d) of the Indian
Financing Act of
1974 (25 U.S.C.
1452(d)) or section
4(10) of the Indian
Child Welfare Act of
1978 (25 U.S.C.
1903(10)). Section
3(d) of the Indian
Financing Act of
1974 defines
reservation to
include former
Indian reservations
in Oklahoma. For a
definition of the
term “former
Indian reservations
in Oklahoma”,
see Notice 98-45 in
Internal Revenue
Bulletin 1998-35.
Recovery
Periods Under
ADS
The recovery periods for
most property generally are
longer under ADS than they
are under GDS. The following
table shows some of the ADS
recovery periods.
Property
Recovery Period
Rent-to-own
property
4 years
Automobiles and
light duty
trucks
5 years
Computers and
peripheral
equipment
5 years
High technology
telephone
station
equipment
installed on
customer
premises
5 years
High technology
medical
equipment
5 years
Personal
property with no
class life
12 years
Single purpose
agricultural and
horticultural
structures
15 years
Any tree or vine
bearing fruit or
nuts
20 years
Initial clearing
and grading land
improvements for
gas utility
property
placed in
service after
October 22, 2004
20 years
Initial clearing
and grading land
improvements for
electric utility
transmission and
distribution
plants
placed in
service after
October 22, 2004
25 years
Any qualified
leasehold
improvement
property placed
in service after
October 22, 2004
39 years
Any qualified
restaurant
property placed
in service after
October 22, 2004
39 years
Nonresidential
real property
40 years
Residential
rental property
40 years
Section 1245
real property
not listed in
Appendix B
40 years
Railroad grading
and tunnel bore
50 years
The ADS recovery periods
for property not listed
above can be found in the
tables in Appendix B.
Rent-to-own property,
residential rental property,
and nonresidential real
property are defined earlier
under Which Property Class
Applies Under GDS.
Tax-exempt use property
subject to a lease.
The ADS recovery
period for any property
leased under a lease
agreement to a
tax-exempt organization,
governmental unit, or
foreign person or entity
(other than a
partnership) cannot be
less than 125 percent of
the lease term.
Additions
and Improvements
An addition or
improvement you make to
depreciable property is
treated as separate
depreciable property. (See
How Do You Treat
Improvements in
chapter 1.) Its property
class and recovery period
are the same as those that
would apply to the original
property if you had placed
it in service at the same
time you placed the addition
or improvement in service.
The recovery period begins
on the later of the
following dates.
The date you
place the addition
or improvement in
service.
The date you
place in service the
property to which
you made the
addition or
improvement.
Example.
You own a rental home
that you have been
renting out since 1981.
If you put an addition
on the home and place
the addition in service
this year, you would use
MACRS to figure your
depreciation deduction
for the addition. Under
GDS, the property class
for the addition is
residential rental
property and its
recovery period is 27.5
years because the home
to which the addition is
made would be
residential rental
property if you had
placed it in service
this year.
Which Convention
Applies?
Terms you may
need to know
(see Glossary):
Basis
Convention
Disposition
Nonresidential
real property
Placed in
service
Recovery period
Residential
rental property
Under MACRS, averaging
conventions establish when the
recovery period begins and ends.
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.
The
mid-month convention.
Use this convention for
nonresidential real
property, residential rental
property, and any railroad
grading or tunnel bore.
Under this convention, you
treat all property placed in
service or disposed of
during a month as placed in
service or disposed of at
the midpoint of the month.
This means that a one-half
month of depreciation is
allowed for the month the
property is placed in
service or disposed of.
Your use of the mid-month
convention is indicated by
the “MM”
under column (e) in Part III
of Form 4562.
The
mid-quarter convention.
Use this convention if the
mid-month convention does
not apply and the total
depreciable bases of MACRS
property you placed in
service during the last
three months of the tax year
(excluding nonresidential
real property, residential
rental property, any
railroad grading or tunnel
bore, and property placed in
service and disposed of in
the same year) are more than
40% of the total depreciable
bases of all MACRS property
you placed in service during
the entire year.
Under this convention, you
treat all property placed in
service or disposed of
during any quarter of the
tax year as placed in
service or disposed of at
the midpoint of that
quarter. This means that 1½
months of depreciation is
allowed for the quarter the
property is placed in
service or disposed of.
If you use this
convention, enter “MQ”
under column (e) in Part III
of Form 4562.
For purposes of
determining whether the
mid-quarter convention
applies, the depreciable
basis of property you placed
in service during the tax
year does not reflect any
reduction in basis for the
special depreciation
allowance or the special
Liberty Zone depreciation
allowance.
The
half-year convention.
Use this convention if
neither the mid-quarter
convention nor the mid-month
convention applies.
Under this convention, you
treat all property placed in
service or disposed of
during a tax year as placed
in service or disposed of at
the midpoint of the year.
This means that a one-half
year of depreciation is
allowed for the year the
property is placed in
service or disposed of.
If you use this
convention, enter “HY”
under column (e) in Part III
of Form 4562.
Which Depreciation
Method Applies?
Terms you may
need to know
(see Glossary):
Declining
balance method
Listed property
Nonresidential
real property
Placed in
service
Property class
Recovery period
Residential
rental property
Straight line
method
Tax exempt
MACRS provides three
depreciation methods under GDS
and one depreciation method
under ADS.
The 200% declining
balance method over a
GDS recovery period.
The 150% declining
balance method over a
GDS recovery period.
The straight line
method over a GDS
recovery period.
The straight line
method over an ADS
recovery period.
For property placed in
service before 1999, you could
have elected the 150% declining
balance method using the ADS
recovery periods for certain
property classes. If you made
this election, continue to use
the same method and recovery
period for that property.
Table 4-1 lists the
types of property you can
depreciate under each method. It
also gives a brief explanation
of the method, including any
benefits that may apply.
Qualified
leasehold improvement and
qualified restaurant
property. For
qualified leasehold
improvement property and
qualified restaurant
property placed in service
after October 22, 2004, and
before January 1, 2006, you
must use the straight line
method over the GDS or ADS
recovery period. You must
also use the half-year
convention unless the
mid-quarter convention
applies.
Depreciation
Methods for Farm
Property
If you place personal
property in service in a
farming business after 1988,
you generally must
depreciate it under GDS
using the 150% declining
balance method unless you
must depreciate the property
under ADS using the straight
line method or you elect to
depreciate the property
under GDS or ADS using the
straight line method. (See
ADS required for some
farmers, later,
and Farm property
under Electing a Different
Method, later.)
You can depreciate real
property using the straight
line method under either GDS
or ADS.
Farming
business.
A farming business is
any trade or business
involving cultivating
land or raising or
harvesting any
agricultural or
horticultural commodity.
A farming business
includes the following.
Operating a
nursery or sod
farm.
Raising or
harvesting
crops.
Raising or
harvesting trees
bearing fruit,
nuts, or other
crops.
Raising
ornamental
trees. An
evergreen tree
is not an
ornamental tree
if it is more
than 6 years old
when it is
severed from its
roots.
Raising,
shearing,
feeding, caring
for, training,
and managing
animals.
Processing activities.
In general, a farming
business includes
processing activities
that are normally part
of the growing, raising,
or harvesting of
agricultural products.
However, a farming
business generally does
not include the
processing of
commodities or products
beyond those activities
that are normally part
of the growing, raising,
or harvesting of such
products.
Fruit
or nut trees and vines.
Depreciate trees and
vines bearing fruit or
nuts under GDS using the
straight line method
over a recovery period
of 10 years.
ADS
required for some
farmers. If you
elect not to apply the
uniform capitalization
rules to any plant
produced in your farming
business, you must use
ADS. You must use ADS
for all property you
place in service in any
year the election is in
effect. See the
regulations under
section 263A of the
Internal Revenue Code
for information on the
uniform capitalization
rules that apply to farm
property.
Electing a
Different Method
As shown in
Table 4-1, you
can elect a different method
for depreciation for certain
types of property. You must
make the election by the due
date of the return
(including extensions) for
the year you placed the
property in service.
However, if you timely filed
your return for the year
without making the election,
you still can make the
election by filing an
amended return within 6
months of the due date of
the return (excluding
extensions). Attach the
election to the amended
return and write “Filed
pursuant to section
301.9100-2” on the
election statement. File the
amended return at the same
address you filed the
original return. Once you
make the election, you
cannot change it.
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
in the year of the election.
However, you can make the
election on a
property-by-property basis
for nonresidential real and
residential rental property.
150%
election.
Instead of using the
200% declining balance
method over the GDS
recovery period for
nonfarm property in the
3-, 5-, 7-, and 10-year
property classes, you
can elect to use the
150% declining balance
method. Make the
election by entering “150
DB” under column
(f) in Part III of Form
4562.
Straight line election.
Instead of using
either the 200% or 150%
declining balance
methods over the GDS
recovery period, you can
elect to use the
straight line method
over the GDS recovery
period. Make the
election by entering
“S/L”
under column (f) in Part
III of Form 4562.
Election of ADS.
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. ADS uses the
straight line method of
depreciation over fixed
ADS recovery periods.
Most ADS recovery
periods are listed in
Appendix B, or see the
table under
Recovery Periods
Under ADS,
earlier.
Make the election by
completing line 20 in
Part III of Form 4562.
Farm
property. Instead
of using the 150%
declining balance rate
over a GDS recovery
period for property you
use in a farming
business (other than
real property), you can
elect to depreciate it
using either of the
following methods.
The straight
line method over
a GDS recovery
period.
The straight
line method over
an ADS recovery
period.
Table 4-1.
Depreciation Methods
Note.
The
declining
balance
method
is
abbreviated
as DB
and the
straight
line
method
is
abbreviated
as SL.
Method
Type of
Property
Benefit
GDS using
200% DB
• Nonfarm
3-, 5-, 7-,
and 10-year
property
• Provides a
greater
deduction
during the
earlier
recovery
years
• Changes to
SL when that
method
provides an
equal or
greater
deduction
GDS using
150% DB
• All farm
property
(except real
property)
• All 15-
and 20-year
property
(except
qualified
leasehold
improvement
property and
qualified
restaurant
property)
• Nonfarm
3-, 5-, 7-,
and 10-year
property
• Provides a
greater
deduction
during the
earlier
recovery
years
• Changes to
SL when that
method
provides an
equal or
greater
deduction
1
GDS using SL
•
Nonresidential
real
property
• Qualified
leasehold
improvement
property
placed in
service
after
October 22,
2004
• Qualified
restaurant
property
placed in
service
after
October 22,
2004
•
Residential
rental
property
• Trees or
vines
bearing
fruit or
nuts
• Water
utility
property
• All 3-,
5-, 7-, 10-,
15-, and
20-year
property
2
• Provides
for equal
yearly
deductions
(except for
the first
and last
years)
ADS using SL
• Listed
property
used 50% or
less for
business
• Property
used
predominantly
outside the
U.S.
• Qualified
leasehold
improvement
property
placed in
service
after
October 22,
2004
• Qualified
restaurant
property
placed in
service
after
October 22,
2004
• Tax-exempt
property
• Tax-exempt
bond-financed
property
• Farm
property
used when an
election not
to apply the
uniform
capitalization
rules is in
effect
• Imported
property
3
• Any
property for
which you
elect to use
this method
2
• Provides
for equal
yearly
deductions
1The
MACRS
percentage
tables in
Appendix A
have the
switch to
the straight
line method
built into
their rates
2Elective
method
3See
section
168(g)(6) of
the Internal
Revenue Code
How Is the
Depreciation
Deduction Figured?
Terms you may
need to know
(see Glossary):
Adjusted basis
Amortization
Basis
Business/investment
use
Clean-fuel
vehicle
Clean-fuel
vehicle refueling
property
Convention
Declining
balance method
Disposition
Exchange
Nonresidential
real property
Placed in
service
Property class
Recovery period
Straight line
method
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. Then, you are ready to
figure your depreciation
deduction. You can figure it
using a percentage table
provided by the IRS, or you can
figure it yourself without using
the table.
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. These percentage
tables are in Appendix A
near the end of this
publication.
Which
table to use.
Appendix A contains
the
MACRS Percentage
Table Guide, which is designed
to help you locate the
correct percentage table
to use for depreciating
your property. The
percentage tables
immediately follow the
guide.
Rules
Covering the
Use of the
Tables
The following rules
cover the use of the
percentage tables.
You must
apply the rates
in the
percentage
tables to your
property's
unadjusted
basis.
You cannot
use the
percentage
tables for a
short tax year.
See
Figuring the
Deduction for a
Short Tax Year,
later, for
information on
the short tax
year rules.
Once you
start using the
percentage
tables for any
item of
property, you
generally must
continue to use
them for the
entire recovery
period of the
property.
You must
stop using the
tables if you
adjust the basis
of the property
for any reason
other than—
Depreciation
allowed
or
allowable,
or
An
addition
or
improvement
to that
property
that is
depreciated
as a
separate
item of
property.
Basis adjustments
other than those made
due to the items listed
in (4) include an
increase in basis for
the recapture of a
clean-fuel deduction or
credit and a reduction
in basis for a casualty
loss.
Basis adjustment due
to recapture of
clean-fuel vehicle
deduction or credit.
If you increase
the basis of your
property because of
the recapture of
part or all of a
deduction for
clean-fuel vehicles
or the credit for
clean-fuel vehicle
refueling property,
you cannot continue
to use the
percentage tables.
For the year of the
adjustment and the
remaining recovery
period, you must
figure the
depreciation
deduction yourself
using the property's
adjusted basis at
the end of the year.
See
Figuring the
Deduction Without
Using the Tables,
later.
Basis adjustment due
to casualty loss.
If you reduce the
basis of your
property because of
a casualty, you
cannot continue to
use the percentage
tables. 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. See
Figuring the
Deduction Without
Using the Tables,
later.
Example.
On October
26, 2003, Sandra
Elm, a calendar
year taxpayer,
bought and
placed in
service in her
business a new
item of 7-year
property. It
cost $39,000 and
she elected a
section 179
deduction of
$24,000. She
also took a
special
depreciation
allowance of
$7,500 [50% of
$15,000 ($39,000
- $24,000)]. Her
unadjusted basis
after the
section 179
deduction and
special
depreciation
allowance was
$7,500 ($15,000
- $7,500). She
figured her
MACRS
depreciation
deduction using
the percentage
tables. For
2003, her MACRS
depreciation
deduction was
$268.
In July 2004,
the property was
vandalized and
Sandra had a
deductible
casualty loss of
$3,000. She must
adjust the
property's basis
for the casualty
loss, so she can
no longer use
the percentage
tables. Her
adjusted basis
at the end of
2004, before
figuring her
2004
depreciation, is
$4,232. She
figures that
amount by
subtracting the
2003 MACRS
depreciation of
$268 and the
casualty loss of
$3,000 from the
unadjusted basis
of $7,500. She
must now figure
her depreciation
for 2004 without
using the
percentage
tables.
Figuring the
Unadjusted
Basis of
Your
Property
You must apply the
table rates to your
property's unadjusted
basis each year of the
recovery period.
Unadjusted basis is the
same basis amount you
would use to figure gain
on a sale, but you
figure it without
reducing your original
basis by any MACRS
depreciation taken in
earlier years. However,
you do reduce your
original basis by the
following amounts.
Any
amortization
taken on the
property.
Any section
179 deduction
claimed.
Any special
depreciation
allowance (or
Liberty Zone
depreciation
allowance) taken
on the property.
Any
deduction
claimed for a
clean-fuel
vehicle or
clean-fuel
vehicle
refueling
property.
Any electric
vehicle credit.
The clean-fuel
vehicle and clean-fuel
vehicle refueling
property deductions and
the electric vehicle
credit are discussed in
chapter 12 of
Publication 535.
For business property
you purchase during the
year, the unadjusted
basis is its cost minus
these adjustments. If
you trade property, your
unadjusted basis in the
property received is the
cash paid plus the
adjusted basis of the
property traded minus
these adjustments.
MACRS
Worksheet
You can use this
worksheet to help you
figure your depreciation
deduction using the
percentage tables. (Use
a separate worksheet for
each item of property.)
Then, use the
information from this
worksheet to prepare
Form 4562.
Do not use this
worksheet for
automobiles. Use the
Depreciation Worksheet
for Passenger
Automobiles in chapter
5.
MACRS Worksheet
Part
I
1.
MACRS
system
(GDS or
ADS)
2.
Property
class
3.
Date
placed
in
service
4.
Recovery
period
5.
Method
and
convention
6.
Depreciation
rate
(from
tables)
Part
II
7.
Cost or
other
basis*
$
8.
Business/investment
use
%
9.
Multiply
line 7
by line
8
$
10.
Total
claimed
for
section
179
deduction
and
other
items,
including
deduction
for
clean-fuel
vehicle
refueling
property
$
11.
Subtract
line 10
from
line 9.
This is
your
tentative
basis
for
depreciation
$
12.
Multiply
line 11
by .30
if the
30%
special
depreciation
allowance
(or
Liberty
Zone
depreciation
allowance)
applies.
Multiply
line 11
by .50
if the
50%
special
depreciation
allowance
applies.
This is
your
special
depreciation
allowance
(or
Liberty
Zone
depreciation
allowance).
Enter
-0- if
this is
not the
year you
placed
the
property
in
service,
the
property
is not
qualified
property
(or
Liberty
Zone
property),
or you
elected
not to
claim a
special
allowance
$
13.
Subtract
line 12
from
line 11.
This is
your
basis
for
depreciation
14.
Depreciation
rate
(from
line 6)
15.
Multiply
line 13
by line
14. This
is your
MACRS
depreciation
deduction
$
*If real
estate,
do not
include
cost
(basis)
of land.
The following example
shows how to figure your
MACRS depreciation
deduction using the
percentage tables and
the MACRS worksheet.
Example.
You bought office
furniture (7-year
property) for
$10,000 and placed
it in service on
August 11, 2004. You
use the furniture
only for business.
This is the only
property you placed
in service this
year. You did not
elect a section 179
deduction and
elected not to claim
a special
depreciation
allowance. You use
GDS and the
half-year convention
to figure your
depreciation. You
refer to the
MACRS Percentage
Table Guide in Appendix A
and find that you
should use Table
A-1. You did not
elect a section 179
deduction and
elected not to claim
a special
depreciation
allowance, so your
property's
unadjusted basis is
its cost, $10,000.
Multiply your
property's
unadjusted basis
each year by the
percentage for
7-year property
given in Table A-1.
You figure your
depreciation
deduction using the
MACRS worksheet as
follows.
MACRS
Worksheet
Part
I
1.
MACRS
system
(GDS
or
ADS)
GDS
2.
Property
class
7-year
3.
Date
placed
in
service
8/11/04
4.
Recovery
period
7-Year
5.
Method
and
convention
200%DB/Half-Year
6.
Depreciation
rate
(from
tables)
.1429
Part
II
7.
Cost
or
other
basis*
$10,000
8.
Business/investment
use
100
%
9.
Multiply
line
7 by
line
8
$10,000
10.
Total
claimed
for
section
179
deduction
and
other
items,
including
deduction
for
clean-fuel
vehicle
refueling
property
-0-
11.
Subtract
line
10
from
line
9.
This
is
your
tentative
basis
for
depreciation
$10,000
12.
Multiply
line
11
by
.30
if
the
30%
special
depreciation
allowance
(or
Liberty
Zone
depreciation
allowance)
applies.
Multiply
line
11
by
.50
if
the
50%
special
depreciation
allowance
applies.
This
is
your
special
depreciation
allowance
(or
Liberty
Zone
depreciation
allowance).
Enter
-0-
if
this
is
not
the
year
you
placed
the
property
in
service,
the
property
is
not
qualified
property
(or
Liberty
Zone
property),
or
you
elected
not
to
claim
a
special
allowance
$-0-
13.
Subtract
line
12
from
line
11.
This
is
your
basis
for
depreciation
$10,000
14.
Depreciation
rate
(from
line
6)
.1429
15.
Multiply
line
13
by
line
14.
This
is
your
MACRS
depreciation
deduction
$1,429
*If
real
estate,
do
not
include
cost
(basis)
of
land.
If there are no
adjustments to the basis
of the property other
than depreciation, your
depreciation deduction
for each subsequent year
of the recovery period
will be as follows.
Year
Basis
Percentage
Deduction
2005
$
10,000
24.49%
$2,449
2006
10,000
17.49
1,749
2007
10,000
12.49
1,249
2008
10,000
8.93
893
2009
10,000
8.92
892
2010
10,000
8.93
893
2011
10,000
4.46
446
Examples
The following
examples are provided to
show you how to use the
percentage tables. In
both examples, assume
the following.
You use the
property only
for business.
You use the
calendar year as
your tax year.
You use GDS
for all the
properties.
Example 1.
You bought a
building and land
for $120,000 and
placed it in service
on March 8. The
sales contract
showed the building
cost $100,000 and
the land cost
$20,000. It is
nonresidential real
property. The
building's
unadjusted basis is
its original cost,
$100,000.
You refer to the
MACRS Percentage
Table Guide in Appendix A
and find that you
should use Table
A-7a. March is the
third month of your
tax year, so
multiply the
building's
unadjusted basis,
$100,000, by the
percentages for the
third month in Table
A-7a. Your
depreciation
deduction for each
of the first 3 years
is as follows:
Year
Basis
Percentage
Deduction
1st
$
100,000
2.033%
$2,033
2nd
100,000
2.564
2,564
3rd
100,000
2.564
2,564
Example 2.
During the year,
you bought a machine
(7-year property)
for $4,000, office
furniture (7-year
property) for
$1,000, and a
computer (5-year
property) for
$5,000. You placed
the machine in
service in January,
the furniture in
September, and the
computer in October.
You do not elect a
section 179
deduction and elect
not to claim a
special depreciation
allowance for these
items.
You placed
property in service
during the last
three months of the
year, so you must
first determine if
you have to use the
mid-quarter
convention. The
total bases of all
property you placed
in service during
the year is $10,000.
The $5,000 basis of
the computer, which
you placed in
service during the
last 3 months (the
fourth quarter) of
your tax year, is
more than 40% of the
total bases of all
property ($10,000)
you placed in
service during the
year. Therefore, you
must use the
mid-quarter
convention for all
three items.
You refer to the
MACRS Percentage
Table Guide in Appendix A
to determine which
table you should use
under the
mid-quarter
convention. The
machine is 7-year
property placed in
service in the first
quarter, so you use
Table A-2. The
furniture is 7-year
property placed in
service in the third
quarter, so you use
Table A-4. Finally,
because the computer
is 5-year property
placed in service in
the fourth quarter,
you use Table A-5.
Knowing what table
to use for each
property, you figure
the depreciation for
the first 2 years as
follows.
Year
Property
Basis
Percentage
Deduction
1st
Machine
$4,000
25.00
$1,000
2nd
Machine
4,000
21.43
857
1st
Furniture
1,000
10.71
107
2nd
Furniture
1,000
25.51
255
1st
Computer
5,000
5.00
250
2nd
Computer
5,000
38.00
1,900
Sale or
Other
Disposition
Before the
Recovery
Period Ends
If you sell or
otherwise dispose of
your property before the
end of its recovery
period, your
depreciation deduction
for the year of the
disposition will be only
part of the depreciation
amount for the full
year. You have disposed
of your property if you
have permanently
withdrawn it from use in
your business or
income-producing
activity because of its
sale, exchange,
retirement, abandonment,
involuntary conversion,
or destruction. After
you figure the full-year
depreciation amount,
figure the deductible
part using the
convention that applies
to the property.
Half-year convention
used. For
property for which
you used a half-year
convention, the
depreciation
deduction for the
year of the
disposition is half
the depreciation
determined for the
full year.
Mid-quarter
convention used.
For property for
which you used the
mid-quarter
convention, figure
your depreciation
deduction for the
year of the
disposition by
multiplying a full
year of depreciation
by the percentage
listed below for the
quarter in which you
disposed of the
property.
Quarter
Percentage
First
12.5%
Second
37.5
Third
62.5
Fourth
87.5
Example.
On December
2, 2001, you
placed an item
of 5-year
property in
service in your
business. The
property cost
$10,000 and you
did not claim a
section 179
deduction and
the property
does not qualify
for the special
depreciation
allowance. Your
unadjusted basis
for the property
was $10,000. You
used the
mid-quarter
convention
because this was
the only item of
business
property you
placed in
service in 2001
and it was
placed in
service during
the last 3
months of your
tax year. Your
property is in
the 5-year
property class,
so you used
Table A-5 to
figure your
depreciation
deduction. Your
deductions for
2001, 2002, and
2003 were $500
(5% of $10,000),
$3,800 (38% of
$10,000), and
$2,280 (22.80%
of $10,000). You
disposed of the
property on
April 6, 2004.
To determine
your
depreciation
deduction for
2004, first
figure the
deduction for
the full year.
This is $1,368
(13.68% of
$10,000). April
is in the second
quarter of the
year, so you
multiply $1,368
by 37.5% to get
your
depreciation
deduction of
$513 for 2004.
Mid-month convention
used. If you
dispose of
residential rental
or nonresidential
real property,
figure your
depreciation
deduction for the
year of the
disposition by
multiplying a full
year of depreciation
by a fraction. The
numerator of the
fraction is the
number of months
(including partial
months) in the year
that the property is
considered in
service. The
denominator is 12.
Example.
On July 2,
2002, you
purchased and
placed in
service
residential
rental property.
The property
cost $100,000,
not including
the cost of
land. You used
Table A-6 to
figure your
MACRS
depreciation for
this property.
You sold the
property on
March 2, 2004.
You file your
tax return based
on the calendar
year.
A full year
of depreciation
for 2004 is
$3,636. This is
$100,000
multiplied by
.03636 (the
percentage for
the seventh
month of the
third recovery
year) from Table
A-6. You then
apply the
mid-month
convention for
the 2½ months of
use in 2004.
(Treat the month
of disposition
as one-half
month of use.)
Multiply $3,636
by 2.5 and
divide by 12 to
get your 2004
depreciation
deduction of
$757.50.
Figuring the
Deduction
Without Using
the Tables
Instead of using the
rates in the percentage
tables to figure your
depreciation deduction, you
can figure it yourself.
Before making the
computation each year, you
must reduce your adjusted
basis in the property by the
depreciation claimed the
previous year.
Figuring MACRS
deductions without using the
tables generally will result
in a slightly different
amount than using the
tables.
Declining
Balance
Method
When using a
declining balance
method, you apply the
same depreciation rate
each year to the
adjusted basis of your
property. You must use
the applicable
convention for the first
tax year and you must
switch to the straight
line method beginning in
the first year for which
it will give an equal or
greater deduction. The
straight line method is
explained later.
You figure
depreciation for the
year you place property
in service as follows.
Multiply
your adjusted
basis in the
property by the
declining
balance rate.
Apply the
applicable
convention.
You figure
depreciation for all
other years (before the
year you switch to the
straight line method) as
follows.
Reduce your
adjusted basis
in the property
by the
depreciation
allowed or
allowable in
earlier years.
Multiply
this new
adjusted basis
by the same
declining
balance rate
used in earlier
years.
If you dispose of
property before the end
of its recovery period,
see
Using the Applicable
Convention,
later, for information
on how to figure
depreciation for the
year you dispose of it.
Figuring depreciation
under the declining
balance method and
switching to the
straight line method is
illustrated in
Example 1,
later, under
Examples.
Declining balance
rate.
You figure your
declining balance
rate by dividing the
specified declining
balance percentage
(150% or 200%
changed to a
decimal) by the
number of years in
the property's
recovery period. For
example, for 3-year
property depreciated
using the 200%
declining balance
method, divide 2.00
(200%) by 3 to get
0.6667, or a 66.67%
declining balance
rate. For 15-year
property depreciated
using the 150%
declining balance
method, divide 1.50
(150%) by 15 to get
0.10, or a 10%
declining balance
rate.
The following
table shows the
declining balance
rate for each
property class and
the first year for
which the straight
line method gives an
equal or greater
deduction.
Property
Class
Method
Declining
Balance
Rate
Year
3-year
200% DB
66.667%
3rd
5-year
200% DB
40.0
4th
7-year
200% DB
28.571
5th
10-year
200% DB
20.0
7th
15-year
150% DB
10.0
7th
20-year
150% DB
7.5
9th
Straight
Line Method
When using the
straight line method,
you apply a different
depreciation rate each
year to the adjusted
basis of your property.
You must use the
applicable convention in
the year you place the
property in service and
the year you dispose of
the property.
You figure
depreciation for the
year you place property
in service as follows.
Multiply
your adjusted
basis in the
property by the
straight line
rate.
Apply the
applicable
convention.
You figure
depreciation for all
other years (including
the year you switch from
the declining balance
method to the straight
line method) as follows.
Reduce your
adjusted basis
in the property
by the
depreciation
allowed or
allowable in
earlier years
(under any
method).
Determine
the depreciation
rate for the
year.
Multiply the
adjusted basis
figured in (1)
by the
depreciation
rate figured in
(2).
If you dispose of
property before the end
of its recovery period,
see
Using the Applicable
Convention,
later, for information
on how to figure
depreciation for the
year you dispose of it.
Straight line rate.
You determine the
straight line
depreciation rate
for any tax year by
dividing the number
1 by the years
remaining in the
recovery period at
the beginning of
that year. When
figuring the number
of years remaining,
you must take into
account the
convention used in
the year you placed
the property in
service. If the
number of years
remaining is less
than 1, the
depreciation rate
for that tax year is
1.0 (100%).
Using the
Applicable
Convention
The applicable
convention (discussed
earlier under
Which Convention
Applies)
affects how you figure
your depreciation
deduction for the year
you place your property
in service and for the
year you dispose of it.
It determines how much
of the recovery period
remains at the beginning
of each year, so it also
affects the depreciation
rate for property you
depreciate under the
straight line method.
See
Straight line rate
in the previous
discussion. Use the
applicable convention as
explained in the
following discussions.
Half-year
convention. If
this convention
applies, you deduct
a half-year of
depreciation for the
first year and the
last year that you
depreciate the
property. You deduct
a full year of
depreciation for any
other year during
the recovery period.
Figure your
depreciation
deduction for the
year you place the
property in service
by dividing the
depreciation for a
full year by 2. If
you dispose of the
property before the
end of the recovery
period, figure your
depreciation
deduction for the
year of the
disposition the same
way. If you hold the
property for the
entire recovery
period, your
depreciation
deduction for the
year that includes
the final 6 months
of the recovery
period is the amount
of your unrecovered
basis in the
property.
Mid-quarter
convention. If
this convention
applies, the
depreciation you can
deduct for the first
year you depreciate
the property depends
on the quarter in
which you place the
property in service.
A quarter of a
full 12-month tax
year is a period of
three months. The
first quarter in a
year begins on the
first day of the tax
year. The second
quarter begins on
the first day of the
fourth month of the
tax year. The third
quarter begins on
the first day of the
seventh month of the
tax year. The fourth
quarter begins on
the first day of the
tenth month of the
tax year. A calendar
year is divided into
the following
quarters.
Quarter
Months
First
January,
February,
March
Second
April,
May,
June
Third
July,
August,
September
Fourth
October,
November,
December
Figure your
depreciation
deduction for the
year you place the
property in service
by multiplying the
depreciation for a
full year by the
percentage listed
below for the
quarter you place
the property in
service.
Quarter
Percentage
First
87.5%
Second
62.5
Third
37.5
Fourth
12.5
If you dispose of
the property before
the end of the
recovery period,
figure your
depreciation
deduction for the
year of the
disposition by
multiplying a full
year of depreciation
by the percentage
listed below for the
quarter you dispose
of the property.
Quarter
Percentage
First
12.5%
Second
37.5
Third
62.5
Fourth
87.5
If you hold the
property for the
entire recovery
period, your
depreciation
deduction for the
year that includes
the final quarter of
the recovery period
is the amount of
your unrecovered
basis in the
property.
Mid-month
convention. If
this convention
applies, the
depreciation you can
deduct for the first
year that you
depreciate the
property depends on
the month in which
you place the
property in service.
Figure your
depreciation
deduction for the
year you place the
property in service
by multiplying the
depreciation for a
full year by a
fraction. The
numerator (top
number) of the
fraction is the
number of full
months in the year
that the property is
in service plus 1/
(or 0.5). The
denominator (bottom
number) is 12.
If you dispose of
the property before
the end of the
recovery period,
figure your
depreciation
deduction for the
year of the
disposition the same
way. If you hold the
property for the
entire recovery
period, your
depreciation
deduction for the
year that includes
the final month of
the recovery period
is the amount of
your unrecovered
basis in the
property.
Example.
You use the
calendar year
and place
nonresidential
real property in
service in
August. The
property is in
service 4 full
months
(September,
October,
November, and
December). Your
numerator is 4.5
(4 full months
plus 0.5). You
multiply the
depreciation for
a full year by
4.5/12, or
0.375.
Examples
The following
examples show how to
figure depreciation
under MACRS without
using the percentage
tables. Figures are
rounded for purposes of
the examples. Assume for
all the examples that
you use a calendar year
as your tax year.
Example 1-200% DB
method and half-year
convention.
In February, you
placed in service
depreciable property
with a 5-year
recovery period and
a basis of $1,000.
You do not elect to
take the section 179
deduction and elect
not to claim a
special depreciation
allowance. You use
GDS and the 200%
declining balance
(DB) method to
figure your
depreciation. When
the straight line
(SL) method results
in an equal or
larger deduction,
you switch to the SL
method. You did not
place any property
in service in the
last three months of
the year, so you
must use the
half-year
convention.
First year.
You figure the
depreciation rate
under the 200% DB
method by dividing 2
(200%) by 5 (the
number of years in
the recovery
period). The result
is 40%. You multiply
the adjusted basis
of the property
($1,000) by the 40%
DB rate. You apply
the half-year
convention by
dividing the result
($400) by 2.
Depreciation for the
first year under the
200% DB method is
$200.
You figure the
depreciation rate
under the straight
line (SL) method by
dividing 1 by 5, the
number of years in
the recovery period.
The result is
20%.You multiply the
adjusted basis of
the property
($1,000) by the 20%
SL rate. You apply
the half-year
convention by
dividing the result
($200) by 2.
Depreciation for the
first year under the
SL method is $100.
The DB method
provides a larger
deduction, so you
deduct the $200
figured under the
200% DB method.
Second year.
You reduce the
adjusted basis
($1,000) by the
depreciation claimed
in the first year
($200). You multiply
the result ($800) by
the DB rate (40%).
Depreciation for the
second year under
the 200% DB method
is $320.
You figure the SL
depreciation rate by
dividing 1 by 4.5,
the number of years
remaining in the
recovery period.
(Based on the
half-year
convention, you used
only half a year of
the recovery period
in the first year.)
You multiply the
reduced adjusted
basis ($800) by the
result (22.22%).
Depreciation under
the SL method for
the second year is
$178.
The DB method
provides a larger
deduction, so you
deduct the $320
figured under the
200% DB method.
Third year.
You reduce the
adjusted basis
($800) by the
depreciation claimed
in the second year
($320). You multiply
the result ($480) by
the DB rate (40%).
Depreciation for the
third year under the
200% DB method is
$192.
You figure the SL
depreciation rate by
dividing 1 by 3.5.
You multiply the
reduced adjusted
basis ($480) by the
result (28.57%).
Depreciation under
the SL method for
the third year is
$137.
The DB method
provides a larger
deduction, so you
deduct the $192
figured under the
200% DB method.
Fourth year.
You reduce the
adjusted basis
($480) by the
depreciation claimed
in the third year
($192). You multiply
the result ($288) by
the DB rate (40%).
Depreciation for the
fourth year under
the 200% DB method
is $115.
You figure the SL
depreciation rate by
dividing 1 by 2.5.
You multiply the
reduced adjusted
basis ($288) by the
result (40%).
Depreciation under
the SL method for
the fourth year is
$115.
The SL method
provides an equal
deduction, so you
switch to the SL
method and deduct
the $115.
Fifth year.
You reduce the
adjusted basis
($288) by the
depreciation claimed
in the fourth year
($115) to get the
reduced adjusted
basis of $173. You
figure the SL
depreciation rate by
dividing 1 by 1.5.
You multiply the
reduced adjusted
basis ($173) by the
result (66.67%).
Depreciation under
the SL method for
the fifth year is
$115.
Sixth year.
You reduce the
adjusted basis
($173) by the
depreciation claimed
in the fifth year
($115) to get the
reduced adjusted
basis of $58. There
is less than one
year remaining in
the recovery period,
so the SL
depreciation rate
for the sixth year
is 100%. You
multiply the reduced
adjusted basis ($58)
by 100% to arrive at
the depreciation
deduction for the
sixth year ($58).
Example 2-SL method
and mid-month
convention.
In January, you
bought and placed in
service a building
for $100,000 that is
nonresidential real
property with a
recovery period of
39 years. The
adjusted basis of
the building is its
cost of $100,000.
You use GDS, the
straight line (SL)
method, and the
mid-month convention
to figure your
depreciation.
First year.
You figure the SL
depreciation rate
for the building by
dividing 1 by 39
years. The result is
.02564. The
depreciation for a
full year is $2,564
($100,000 × .02564).
Under the mid-month
convention, you
treat the property
as placed in service
in the middle of
January. You get
11.5 months of
depreciation for the
year. Expressed as a
decimal, the
fraction of 11.5
months divided by 12
months is .958. Your
first-year
depreciation for the
building is $2,456
($2,564 × .958).
Second year.
You subtract $2,456
from $100,000 to get
your adjusted basis
of $97,544 for the
second year. The SL
rate is .02629. This
is 1 divided by the
remaining recovery
period of 38.042
years (39 years
reduced by 11.5
months or .958
year). Your
depreciation for the
building for the
second year is
$2,564 ($97,544 ×
.02629).
Third year.
The adjusted basis
is $94,980 ($97,544
- $2,564). The SL
rate is .027 (1
divided by 37.042
remaining years).
Your depreciation
for the third year
is $2,564 ($94,980 ×
.027).
Example 3-200% DB
method and
mid-quarter
convention.
During the year,
you bought and
placed in service in
your business the
following items.
Item
Month
Placed
in
Service
Cost
Safe
January
$4,000
Office
furniture
September
1,000
Computer
(not
listed
property)
October
5,000
You do not elect
a section 179
deduction and elect
not to claim a
special depreciation
allowance for these
items. You use GDS
and the 200%
declining balance
(DB) method to
figure the
depreciation. The
total bases of all
property you placed
in service this year
is $10,000. The
basis of the
computer ($5,000) is
more than 40% of the
total bases of all
property placed in
service during the
year ($10,000), so
you must use the
mid-quarter
convention. This
convention applies
to all three items
of property. The
safe and office
furniture are 7-year
property and the
computer is 5-year
property.
First and second
year depreciation
for safe. The
200% DB rate for
7-year property is
.28571. You
determine this by
dividing 2.00 (200%)
by 7 years. The
depreciation for the
safe for a full year
is $1,143 ($4,000 ×
.28571). You placed
the safe in service
in the first quarter
of your tax year, so
you multiply $1,143
by 87.5% (the
mid-quarter
percentage for the
first quarter). The
result, $1,000, is
your deduction for
depreciation on the
safe for the first
year.
For the second
year, the adjusted
basis of the safe is
$3,000. You figure
this by subtracting
the first year's
depreciation
($1,000) from the
basis of the safe
($4,000). Your
depreciation
deduction for the
second year is $857
($3,000 × .28571).
First and second
year depreciation
for furniture.
The furniture is
also 7-year
property, so you use
the same 200% DB
rate of .28571. You
multiply the basis
of the furniture
($1,000) by .28571
to get the
depreciation of $286
for the full year.
You placed the
furniture in service
in the third quarter
of your tax year, so
you multiply $286 by
37.5% (the
mid-quarter
percentage for the
third quarter). The
result, $107, is
your deduction for
depreciation on the
furniture for the
first year.
For the second
year, the adjusted
basis of the
furniture is $893.
You figure this by
subtracting the
first year's
depreciation ($107)
from the basis of
the furniture
($1,000). Your
depreciation for the
second year is $255
($893 × .28571).
First and second
year depreciation
for computer.
The 200% DB rate for
5-year property is
.40. You determine
this by dividing
2.00 (200%) by 5
years. The
depreciation for the
computer for a full
year is $2,000
($5,000 × .40). You
placed the computer
in service in the
fourth quarter of
your tax year, so
you multiply the
$2,000 by 12.5% (the
mid-quarter
percentage for the
fourth quarter). The
result, $250, is
your deduction for
depreciation on the
computer for the
first year.
For the second
year, the adjusted
basis of the
computer is $4,750.
You figure this by
subtracting the
first year's
depreciation ($250)
from the basis of
the computer
($5,000). Your
depreciation
deduction for the
second year is
$1,900 ($4,750 ×
.40).
Example 4-200% DB
method and half-year
convention.
Last year, in
July, you bought and
placed in service in
your business a new
item of 7-year
property. This was
the only item of
property you placed
in service last
year. The property
cost $39,000 and you
elected a $24,000
section 179
deduction. You also
took a special
depreciation
allowance of $4,500.
Your unadjusted
basis for the
property is $10,500.
Because you did not
place any property
in service in the
last 3 months of
your tax year, you
used the half-year
convention. You
figured your
deduction using the
percentages in Table
A-1 for 7-year
property. Last year,
your depreciation
was $1,500 ($10,500
× 14.29%).
In July of this
year, your property
was vandalized. You
had a deductible
casualty loss of
$3,000. You spent
$3,500 to put the
property back in
operational order.
Your adjusted basis
at the end of this
year is $9,500. You
figured this by
first subtracting
the first year's
depreciation
($1,500) and the
casualty loss
($3,000) from the
unadjusted basis of
$10,500. To this
amount ($6,000), you
then added the
$3,500 repair cost.
You cannot use
the table
percentages to
figure your
depreciation for
this property for
this year because of
the adjustments to
basis. You must
figure the deduction
yourself. You
determine the DB
rate by dividing
2.00 (200%) by 7
years. The result is
.28571 or 28.571%.
You multiply the
adjusted basis of
your property
($9,500) by the
declining balance
rate of .28571 to
get your
depreciation
deduction of $2,714
for this year.
Figuring the
Deduction for
Property
Acquired in a
Nontaxable
Exchange
If your property has a
carryover basis because you
acquired it in nontaxable
transfer such as a like-kind
exchange or involuntary
conversion, you must figure
depreciation for the
property as if the transfer
had not occurred. See
Like-kind exchanges and
involuntary conversions,
earlier, in chapter 3 under
How Much Can You Deduct
and Property Acquired in a
Like-kind Exchange or
Involuntary Conversion,
next.
Property
Acquired in
a Like-kind
Exchange or
Involuntary
Conversion
You generally must
depreciate the carryover
basis of property
acquired after February
27, 2004, in a like-kind
exchange or involuntary
conversion over the
remaining recovery
period of the property
exchanged or
involuntarily converted.
You also generally
continue to use the same
depreciation method and
convention used for the
exchanged or
involuntarily converted
property. This applies
only to acquired
property with the same
or a shorter recovery
period and the same or
more accelerated
depreciation method than
the property exchanged
or involuntarily
converted. The excess
basis, if any, of the
acquired property is
treated as newly placed
in service property.
For acquired property
that has a longer
recovery period or less
accelerated depreciation
method than the
exchanged or
involuntarily converted
property, you generally
must depreciate the
carryover basis of the
acquired property as if
it were placed in
service in the same tax
year as the exchanged or
involuntarily converted
property. You also
generally continue to
use the longer recovery
period and less
accelerated depreciation
method of the acquired
property.
If the MACRS property
you acquired in the
exchange or involuntary
conversion is qualified
property (or Liberty
Zone property),
discussed earlier in
chapter 3 under
What Is Qualified
Property and
What Is Qualified
Liberty Zone Property,
you can claim a special
depreciation allowance
(or Liberty Zone
depreciation allowance)
on the carryover basis.
Special rules apply
to vehicles acquired in
a trade-in. For
information on how to
figure depreciation for
a vehicle acquired in a
trade-in that is subject
to the passenger
automobile limits, see
Deductions For
Passenger Automobiles
Acquired in a Trade-in
under
Do the Passenger
Automobile Limits Apply
in chapter 5.
For a like-kind
exchange or involuntary
conversion for which the
date of disposition,
replacement, or both was
before February 28,
2004, you may follow
these rules or rely on
prior IRS guidance using
any reasonable and
consistent method of
figuring depreciation.
Election out.
Instead of using
the above rules, you
can elect, for
depreciation
purposes, to treat
the adjusted basis
of the exchanged or
involuntarily
converted property
as if disposed of at
the time of the
exchange or
involuntary
conversion. Treat
the carryover basis
and excess basis, if
any, for the
acquired property as
if placed in service
the later of the
date you acquired it
or the time of the
disposition of the
exchanged or
involuntarily
converted property.
The depreciable
basis of the new
property is the
adjusted basis of
the exchanged or
involuntarily
converted property
plus any additional
amount you paid for
it. The election, if
made, applies to
both the acquired
property and the
exchanged or
involuntarily
converted property.
This election does
not affect the
amount of gain or
loss recognized on
the exchange or
involuntary
conversion.
When to make the
election.
You must make the
election on a timely
filed return
(including
extensions) for the
year of replacement.
The election must be
made separately by
each person
acquiring
replacement property
(for example, by the
partnership, by the
S corporation, or by
the common parent of
a consolidated
group). Once made,
the election may not
be revoked without
IRS consent.
For more
information and
special rules, see
the Instructions for
Form 4562.
Property
Acquired in
a Nontaxable
Transfer
You must depreciate
MACRS property acquired
by a corporation or
partnership in certain
nontaxable transfers
over the property's
remaining recovery
period in the
transferor's hands, as
if the transfer had not
occurred. You must
continue to use the same
depreciation method and
convention as the
transferor. You can
depreciate the part of
the property's basis
that exceeds its
carried-over basis (the
transferor's adjusted
basis in the property)
as newly purchased MACRS
property.
The nontaxable
transfers covered by
this rule include the
following.
A
distribution in
complete
liquidation of a
subsidiary.
A transfer
to a corporation
controlled by
the transferor.
An exchange
of property
solely for
corporate stock
or securities in
a
reorganization.
A
contribution of
property to a
partnership in
exchange for a
partnership
interest.
A
partnership
distribution of
property to a
partner.
Figuring the
Deduction for a
Short Tax Year
You cannot use the MACRS
percentage tables to
determine depreciation for a
short tax year. A short tax
year is any tax year with
less than 12 full months.
This section discusses the
rules for determining the
depreciation deduction for
property you place in
service or dispose of in a
short tax year. It also
discusses the rules for
determining depreciation
when you have a short tax
year during the recovery
period (other than the year
the property is placed in
service or disposed of).
For more information on
figuring depreciation for a
short tax year, see Revenue
Procedure 89-15 in Internal
Revenue Bulletin 1989-9.
Using the
Applicable
Convention
in a Short
Tax Year
The applicable
convention establishes
the date property is
treated as placed in
service and disposed of.
Depreciation is
allowable only for that
part of the tax year the
property is treated as
in service. The recovery
period begins on the
placed-in-service date
determined by applying
the convention. The
remaining recovery
period at the beginning
of the next tax year is
the full recovery period
less the part for which
depreciation was
allowable in the first
tax year.
The following
discussions explain how
to use the applicable
convention in a short
tax year.
Mid-month
convention.
Under the
mid-month
convention, you
always treat your
property as placed
in service or
disposed of on the
midpoint of the
month it is placed
in service or
disposed of. You
apply this rule
without regard to
your tax year.
Half-year
convention.
Under the
half-year
convention, you
treat property as
placed in service or
disposed of on the
midpoint of the tax
year it is placed in
service or disposed
of.
First or last
day of month.
For a short tax
year beginning on
the first day of a
month or ending on
the last day of a
month, the tax year
consists of the
number of months in
the tax year. If the
short tax year
includes part of a
month, you generally
include the full
month in the number
of months in the tax
year. You determine
the midpoint of the
tax year by dividing
the number of months
in the tax year by
2. For the half-year
convention, you
treat property as
placed in service or
disposed of on
either the first day
or the midpoint of a
month.
For example, a
short tax year that
begins on June 20
and ends on December
31 consists of 7
months. You use only
full months for this
determination, so
you treat the tax
year as beginning on
June 1 instead of
June 20. The
midpoint of the tax
year is the middle
of September (3½
months from the
beginning of the tax
year). You treat
property as placed
in service or
disposed of on this
midpoint.
Example.
Tara
Corporation, a
calendar year
taxpayer, was
incorporated on
March 15. For
purposes of the
half-year
convention, it
has a short tax
year of 10
months, ending
on December 31,
2004. During the
short tax year,
Tara placed
property in
service for
which it uses
the half-year
convention. Tara
treats this
property as
placed in
service on the
first day of the
sixth month of
the short tax
year, or August
1, 2004.
Not on first or
last day of month.
For a short tax
year not beginning
on the first day of
a month and not
ending on the last
day of a month, the
tax year consists of
the number of days
in the tax year. You
determine the
midpoint of the tax
year by dividing the
number of days in
the tax year by 2.
For the half-year
convention, you
treat property as
placed in service or
disposed of on
either the first day
or the midpoint of a
month. If the result
of dividing the
number of days in
the tax year by 2 is
not the first day or
the midpoint of a
month, you treat the
property as placed
in service or
disposed of on the
nearest preceding
first day or
midpoint of a month.
Mid-quarter
convention. To
determine if you
must use the
mid-quarter
convention, compare
the basis of
property you place
in service in the
last 3 months of
your tax year to
that of property you
place in service
during the full tax
year. The length of
your tax year does
not matter. If you
have a short tax
year of 3 months or
less, use the
mid-quarter
convention for all
applicable property
you place in service
during that tax
year.
You treat property
under the
mid-quarter
convention as placed
in service or
disposed of on the
midpoint of the
quarter of the tax
year in which it is
placed in service or
disposed of. Divide
a short tax year
into 4 quarters and
determine the
midpoint of each
quarter.
For a short tax
year of 4 or 8 full
calendar months,
determine quarters
on the basis of
whole months. The
midpoint of each
quarter is either
the first day or the
midpoint of a month.
Treat property as
placed in service or
disposed of on this
midpoint.
To determine the
midpoint of a
quarter for a short
tax year of other
than 4 or 8 full
calendar months,
complete the
following steps.
Determine
the number
of days in
your short
tax year.
Determine
the number
of days in
each quarter
by dividing
the number
of days in
your short
tax year by
4.
Determine
the midpoint
of each
quarter by
dividing the
number of
days in each
quarter by
2.
If the result of
(3) gives you a
midpoint of a
quarter that is on a
day other than the
first day or
midpoint of a month,
treat the property
as placed in service
or disposed of on
the nearest
preceding first day
or midpoint of that
month.
Example.
Tara Corporation,
a calendar year
taxpayer, was
incorporated and
began business on
March 15. It has a
short tax year of 9½
months, ending on
December 31. During
December, it placed
property in service
for which it must
use the mid-quarter
convention. This is
a short tax year of
other than 4 or 8
full calendar
months, so it must
determine the
midpoint of each
quarter.
First,
it
determines
that its
short tax
year
beginning
March 15 and
ending
December 31
consists of
292 days.
Next, it
divides 292
by 4 to
determine
the length
of each
quarter, 73
days.
Finally,
it divides
73 by 2 to
determine
the midpoint
of each
quarter, the
37th day.
The following
table shows the
quarters of Tara
Corporation's short
tax year, the
midpoint of each
quarter, and the
date in each quarter
that Tara must treat
its property as
placed in service.
Quarter
Midpoint
Placed
in
Service
3/15 –
5/26
4/20
4/15
5/27 –
8/07
7/02
7/01
8/08 –
10/19
9/13
9/01
10/20 –
12/31
11/25
11/15
The last quarter
of the short tax
year begins on
October 20, which is
73 days from
December 31, the end
of the tax year. The
37th day of the last
quarter is November
25, which is the
midpoint of the
quarter. November 25
is not the first day
or the midpoint of
November, so Tara
Corporation must
treat the property
as placed in service
in the middle of
November (the
nearest preceding
first day or
midpoint of that
month).
Property
Placed in
Service in a
Short Tax
Year
If you place property
in service in a short
tax year, you can take
the full amount of a
special depreciation
allowance (or Liberty
Zone depreciation
allowance) for qualified
property (or Liberty
Zone property). To
figure your MACRS
depreciation deduction
for the short tax year,
you must first determine
the depreciation for a
full tax year. You do
this by multiplying your
basis in the property by
the applicable
depreciation rate. Then,
determine the
depreciation for the
short tax year. Do this
by multiplying the
depreciation for a full
tax year by a fraction.
The numerator (top
number) of the fraction
is the number of months
(including parts of a
month) the property is
treated as in service
during the tax year
(applying the applicable
convention). The
denominator (bottom
number) is 12. See
Depreciation After a
Short Tax Year,
later, for information
on how to figure
depreciation in later
years.
Example 1-half-year
convention.
Tara Corporation,
with a short tax
year beginning March
15 and ending
December 31, placed
in service on March
16 an item of 5-year
property with a
basis of $1,000.
This is the only
property the
corporation placed
in service during
the short tax year.
Tara does not elect
to claim a section
179 deduction and
elects not to claim
a special
depreciation
allowance. The
depreciation method
for this property is
the 200% declining
balance method. The
depreciation rate is
40% and Tara applies
the half-year
convention.
Tara treats the
property as placed
in service on August
1. (This August 1
date on which Tara
treats its property
as placed in service
is explained in the
first example under
Using the
Applicable
Convention in a
Short Tax Year,
earlier.) Tara is
allowed 5 months of
depreciation for the
short tax year that
consists of 10
months. The
corporation first
multiplies the basis
($1,000) by 40% (the
declining balance
rate) to get the
depreciation for a
full tax year of
$400. The
corporation then
multiplies $400 by
5/12 to get the
short tax year
depreciation of
$167.
Example
2-mid-quarter
convention.
Tara Corporation,
with a short tax
year beginning March
15 and ending on
December 31, placed
in service on
October 16 an item
of 5-year property
with a basis of
$1,000. Tara does
not elect to claim a
section 179
deduction and elects
not to claim a
special depreciation
allowance. The
depreciation method
for this property is
the 200% declining
balance method. The
depreciation rate is
40%. The corporation
must apply the
mid-quarter
convention because
the property was the
only item placed in
service that year
and it was placed in
service in the last
3 months of the tax
year.
Tara treats the
property as placed
in service on
September 1. (The
second example under
Using the
Applicable
Convention in a
Short Tax Year,
earlier, provides a
table that shows
this September 1
placed-in-service
date for property
that Tara
Corporation placed
in service during
the quarter that
begins on August 8
and ends on October
19.) Under MACRS,
Tara is allowed 4
months of
depreciation for the
short tax year that
consists of 10
months. The
corporation first
multiplies the basis
($1,000) by 40% to
get the depreciation
for a full tax year
of $400. The
corporation then
multiplies $400 by
4/12 to get the
short tax year
depreciation of
$133.
Property
Placed in
Service
Before a
Short Tax
Year
If you have a short
tax year after the tax
year in which you began
depreciating property,
you must change the way
you figure depreciation
for that property. If
you were using the
percentage tables, you
can no longer use them.
You must figure
depreciation for the
short tax year and each
later tax year as
explained next.
Depreciation
After a
Short Tax
Year
You can use either of
the following methods to
figure the depreciation
for years after a short
tax year.
The
simplified
method.
The
allocation
method.
You must use the
method you choose
consistently.
Using the simplified
method for a
12-month year.
Under the
simplified method,
you figure the
depreciation for a
later 12-month year
in the recovery
period by
multiplying the
adjusted basis of
your property at the
beginning of the
year by the
applicable
depreciation rate.
Example.
Assume the same
facts as in
Example 1
under
Property Placed
in Service in a
Short Tax Year,
earlier. The Tara
Corporation claimed
depreciation of $167
for its short tax
year. The adjusted
basis on January 1
of the next year is
$833 ($1,000 -
$167). Tara's
depreciation for
that next year is
40% of $833, or
$333.
Using the simplified
method for a short
year. If a
later tax year in
the recovery period
is a short tax year,
you figure
depreciation for
that year by
multiplying the
adjusted basis of
the property at the
beginning of the tax
year by the
applicable
depreciation rate,
and then by a
fraction. The
fraction's numerator
(top number) is the
number of months
(including parts of
a month) in the tax
year. Its
denominator (bottom
number) is 12.
Using the simplified
method for an early
disposition.
If you dispose of
property in a later
tax year before the
end of the recovery
period, determine
the depreciation for
the year of
disposition by
multiplying the
adjusted basis of
the property at the
beginning of the tax
year by the
applicable
depreciation rate
and then multiplying
the result by a
fraction. The
fraction's numerator
(top number) is the
number of months
(including parts of
a month) the
property is treated
as in service during
the tax year
(applying the
applicable
convention). Its
denominator (bottom
number) is 12.
Using the allocation
method for a
12-month or short
tax year.
Under the
allocation method,
you figure the
depreciation for
each later tax year
by allocating to
that year the
depreciation
attributable to the
parts of the
recovery years that
fall within that
year. Whether your
tax year is a
12-month or short
tax year, you figure
the depreciation by
determining which
recovery years are
included in that
year. For each
recovery year
included, multiply
the depreciation
attributable to that
recovery year by a
fraction. The
fraction's numerator
(top number) is the
number of months
(including parts of
a month) that are
included in both the
tax year and the
recovery year. Its
denominator (bottom
number) is 12. The
allowable
depreciation for the
tax year is the sum
of the depreciation
figured for each
recovery year.
Example.
Assume the same
facts as in
Example 1
under
Property Placed
in Service in a
Short Tax Year.
The Tara
Corporation's first
tax year after the
short tax year is a
full year of 12
months, beginning
January 1 and ending
December 31. The
first recovery year
for the 5-year
property placed in
service during the
short tax year
extends from August
1 to July 31. Tara
deducted 5 months of
the first recovery
year on its
short-year tax
return. Seven months
of the first
recovery year and 5
months of the second
recovery year fall
within the next tax
year. The
depreciation for the
next tax year is
$333, which is the
sum of the
following.
$233—The
depreciation
for the
first
recovery
year
($400 ×
7/12).
$100—The
depreciation
for the
second
recovery
year. This
is figured
by
multiplying
the adjusted
basis of
$600 ($1,000
- $400) by
40%, then
multiplying
the $240
result by
5/12.
Using the allocation
method for an early
disposition.
If you dispose of
property before the
end of the recovery
period in a later
tax year, determine
the depreciation for
the year of
disposition by
multiplying the
depreciation figured
for each recovery
year or part of a
recovery year
included in the tax
year by a fraction.
The numerator (top
number) of the
fraction is the
number of months
(including parts of
months) the property
is treated as in
service in the tax
year (applying the
applicable
convention). The
denominator (bottom
number) is 12. If
there is more than
one recovery year in
the tax year, you
add together the
depreciation for
each recovery year.
How Do You Use
General Asset
Accounts?
Terms you may
need to know
(see Glossary):
Adjusted basis
Amortization
Amount realized
Basis
Clean-fuel
vehicle
Clean-fuel
vehicle refueling
property
Convention
Disposition
Exchange
Placed in
service
Recovery period
Section 1245
property
Unadjusted basis
To make it easier to figure
MACRS depreciation, you can
group separate properties into
one or more general asset
accounts (GAAs). You then can
depreciate all the properties in
each account as a single item of
property.
Property
you cannot include.
You cannot include
property in a GAA if you use
it in both a personal
activity and a trade or
business (or for the
production of income) in the
year in which you first
place it in service. If
property you included in a
GAA is later used in a
personal activity, see
Terminating GAA Treatment,
later.
Property
generating foreign source
income. For
information on the GAA
treatment of property that
generates foreign source
income, see section
1.168(i)-1(f) of the
regulations.
Change in
use. Special rules
apply to figuring
depreciation for property in
a GAA for which the use
changes during the tax year.
Examples include a change in
use resulting in a shorter
recovery period and/or more
accelerated depreciation
method or a change in use
resulting in a longer
recovery period and/or a
less accelerated
depreciation method. See
sections 1.168(i)-1(h) and
1.168(i)-4 of the
regulations.
Like-kind
exchanges or involuntary
conversions. For
information on like-kind
exchanges or involuntary
conversions of property in a
GAA after February 27, 2004,
see sections 1.168(i)-1 and
1.168(i)-1T of the
regulations.
Grouping
Property
Each GAA must include
only property you placed in
service in the same year and
that has the following in
common.
Asset class, if
any.
Recovery period.
Depreciation
method.
Convention.
The following rules also
apply when you establish a
GAA.
No asset class.
Properties
without an asset
class, but with the
same depreciation
method, recovery
period, and
convention, can be
grouped into the
same GAA.
Mid-quarter
convention.
Property subject to
the mid-quarter
convention can only
be grouped into a
GAA with property
placed in service in
the same quarter.
Mid-month
convention.
Property subject to
the mid-month
convention can only
be grouped into a
GAA with property
placed in service in
the same month.
Passenger
automobiles.
Passenger
automobiles subject
to the limits on
passenger automobile
depreciation must be
grouped into a
separate GAA.
Figuring
Depreciation for
a GAA
After you have set up a
GAA, you generally figure
the MACRS depreciation for
it by using the applicable
depreciation method,
recovery period, and
convention for the property
in the GAA. For each GAA,
record the depreciation
allowance in a separate
depreciation reserve
account.
Example.
Make & Sell, a
calendar-year
corporation, set up a
GAA for ten machines.
The machines cost a
total of $10,000 and
were placed in service
in June 2004. One of the
machines cost $8,200 and
the rest cost a total of
$1,800. This GAA is
depreciated under the
200% declining balance
method with a 5-year
recovery period and a
half-year convention.
Make & Sell did not
claim the section 179
deduction on the
machines and elected not
to claim a special
depreciation allowance.
The depreciation
allowance for 2004 is
$2,000 [($10,000 × 40%)
÷ 2]. As of January 1,
2005, the depreciation
reserve account is
$2,000.
Passenger automobiles.
To figure depreciation
on passenger automobiles
in a GAA, apply the
deduction limits
discussed in chapter 5
under
Do the Passenger
Automobile Limits Apply.
Multiply the amount
determined using these
limits by the number of
automobiles originally
included in the account,
reduced by the total
number of automobiles
removed from the GAA as
discussed in
Terminating GAA
Treatment,
later.
Disposing of
GAA Property
When you dispose of
property included in a GAA,
the following rules
generally apply.
Neither the
depreciable basis
nor the depreciation
reserve account of
the GAA is affected.
You continue to
depreciate the
account as if the
disposition had not
occurred.
The property is
treated as having an
adjusted basis of
zero, so you cannot
realize a loss on
the disposition. If
the property is
transferred to a
supplies, scrap, or
similar account, its
basis in that
account is zero.
Any amount
realized on the
disposition is
treated as ordinary
income. (See
Treatment of
amount realized,
later in
this discussion.)
However, these rules do
not apply to any disposition
described later under
Terminating GAA Treatment.
Disposition.
Property in a GAA is
considered disposed of
when you do any of the
following.
Permanently
withdraw it from
use in your
trade or
business or from
the production
of income.
Transfer it
to a supplies,
scrap, or
similar account.
Sell,
exchange,
retire,
physically
abandon, or
destroy it.
The retirement of a
structural component of
real property is not a
disposition.
Treatment of amount
realized. When you
dispose of property in a
GAA, you must recognize
any amount realized from
the disposition as
ordinary income, up to a
limit. The limit is:
The
unadjusted
depreciable
basis of the GAA
plus
Any expensed
costs for
property in the
GAA that are
subject to
recapture as
depreciation
(not including
any expensed
costs for
property that
you removed from
the GAA under
the rules
discussed later
under
Terminating
GAA Treatment),
minus
Any amount
previously
recognized as
ordinary income
upon the
disposition of
other property
from the GAA.
Unadjusted depreciable
basis. The
unadjusted depreciable
basis of a GAA is the
total of the unadjusted
depreciable bases of all
the property in the GAA.
The unadjusted
depreciable basis of an
item of property in a
GAA is the amount you
would use to figure gain
or loss on its sale, but
figured without reducing
your original basis by
any depreciation allowed
or allowable in earlier
years. However, you do
reduce your original
basis by any
amortization deduction,
section 179 deduction,
deduction for a
clean-fuel vehicle or
clean-fuel vehicle
refueling property, or
electric vehicle credit.
Expensed costs.
Expensed costs that
are subject to recapture
as depreciation include
the following.
The section
179 deduction.
The
deduction for
clean-fuel
vehicles or
clean-fuel
vehicle
refueling
property.
Amortization
deductions for
the following.
Pollution
control
facilities.
Removal
of
barriers
for the
elderly
and
disabled.
Tertiary
injectants.
Reforestation
expenses.
Example 1.
The facts are the
same as in the example
under
Figuring
Depreciation for a GAA,
earlier. In
February 2005, Make &
Sell sells the machine
that cost $8,200 to an
unrelated person for
$9,000. The machine is
treated as having an
adjusted basis of zero.
On its 2005 tax
return, Make & Sell
recognizes the $9,000
amount realized as
ordinary income because
it is not more than the
GAA's unadjusted
depreciable basis
($10,000) plus any
expensed cost (for
example, the section 179
deduction) for property
in the GAA ($0), minus
any amounts previously
recognized as ordinary
income because of
dispositions of other
property from the GAA
($0).
The unadjusted
depreciable basis and
depreciation reserve of
the GAA are not affected
by the sale of the
machine. The
depreciation allowance
for the GAA in 2005 is
$3,200 [($10,000 -
$2,000) × 40%].
Example 2.
Assume the same facts
as in
Example 1.
In June 2006, Make &
Sell sells seven
machines to an unrelated
person for a total of
$1,100. These machines
are treated as having an
adjusted basis of zero.
On its 2006 tax
return, Make & Sell
recognizes $1,000 as
ordinary income. This is
the GAA's unadjusted
depreciable basis
($10,000) plus the
expensed costs ($0),
minus the amount
previously recognized as
ordinary income
($9,000). The remaining
amount realized of $100
($1,100 - $1,000) is
section 1231 gain
(discussed in chapter 3
of Publication 544).
The unadjusted
depreciable basis and
depreciation reserve of
the GAA are not affected
by the disposition of
the machines. The
depreciation allowance
for the GAA in 2006 is
$1,920 [($10,000 -
$5,200) × 40%].
Terminating
GAA Treatment
You must remove the
following property from a
GAA.
Property you
dispose of in a
nonrecognition
transaction or an
abusive transaction.
Property you
dispose of in a
qualifying
disposition or in a
disposition of all
the property in the
GAA, if you choose
to terminate GAA
treatment.
Property you
change to personal
use.
Property for
which you must
recapture the
investment credit,
the credit for
qualified electric
vehicles, the
section 179
deduction, or the
deduction for
clean-fuel vehicles
and clean-fuel
vehicle refueling
property.
If you remove property
from a GAA, you must make
the following adjustments.
Reduce the
unadjusted
depreciable basis of
the GAA by the
unadjusted
depreciable basis of
the property as of
the first day of the
tax year in which
the disposition,
change in use, or
recapture event
occurs. (You can use
any reasonable
method that is
consistently applied
to determine the
unadjusted
depreciable basis of
the property you
remove from a GAA.)
Reduce the
depreciation reserve
account by the
depreciation allowed
or allowable for the
property (computed
in the same way as
computed for the
GAA) as of the end
of the tax year
immediately
preceding the year
in which the
disposition, change
in use, or recapture
event occurs.
These adjustments have no
effect on the recognition
and character of prior
dispositions subject to the
rules discussed earlier
under Disposing of GAA
Property.
Nonrecognition
transactions.
If you dispose of GAA
property in a
nonrecognition
transaction, you must
remove it from the GAA.
The following are
nonrecognition
transactions.
The
distribution to
one corporation
of property in
complete
liquidation of
another
corporation.
The transfer
of property to a
corporation
solely in
exchange for
stock in that
corporation if
the transferor
is in control of
the corporation
immediately
after the
exchange.
The transfer
of property by a
corporation that
is a party to a
reorganization
in exchange
solely for stock
and securities
in another
corporation that
is also a party
to the
reorganization.
The
contribution of
property to a
partnership in
exchange for an
interest in the
partnership.
The
distribution of
property
(including
money) from a
partnership to a
partner.
Any
transaction
between members
of the same
affiliated group
during any year
for which the
group makes a
consolidated
return.
Rules for recipient
(transferee).
The recipient of the
property (the person to
whom it is transferred)
must include your (the
transferor's) adjusted
basis in the property in
a GAA. If you
transferred either all
of the property or the
last item of property in
a GAA, the recipient's
basis in the property is
the result of the
following.
The adjusted
depreciable
basis of the GAA
as of the
beginning of
your tax year in
which the
transaction
takes place,
minus
The
depreciation
allowable to you
for the year of
the transfer.
For this purpose, the
adjusted depreciable
basis of a GAA is the
unadjusted depreciable
basis of the GAA minus
any depreciation allowed
or allowable for the
GAA.
Abusive
transactions.
If you dispose of GAA
property in an abusive
transaction, you must
remove it from the GAA.
A disposition is an
abusive transaction if
it is not a
nonrecognition
transaction (described
earlier) and a main
purpose for the
disposition is to get a
tax benefit or a result
that would not be
available without the
use of a GAA. Examples
of abusive transactions
include the following.
A
transaction with
a main purpose
of shifting
income or
deductions among
taxpayers in a
way that would
not be possible
without choosing
to use a GAA to
take advantage
of differing
effective tax
rates.
A choice to
use a GAA with a
main purpose of
disposing of
property from
the GAA so that
you can use an
expiring net
operating loss
or credit. For
example, if you
have a net
operating loss
carryover or a
credit
carryover, the
following
transactions
will be
considered
abusive
transactions
unless there is
strong evidence
to the contrary.
A
transfer
of GAA
property
to a
related
person.
A
transfer
of GAA
property
under an
agreement
where
the
property
continues
to be
used, or
is
available
for use,
by you.
Figuring gain or loss.
You must determine the
gain, loss, or other
deduction due to an
abusive transaction by
taking into account the
property's adjusted
basis. The adjusted
basis of the property at
the time of the
disposition is the
result of the following:
The
unadjusted
depreciable
basis of the
property,
minus
The
depreciation
allowed or
allowable for
the property
figured by using
the depreciation
method, recovery
period, and
convention that
applied to the
GAA in which the
property was
included.
If there is a gain,
the amount subject to
recapture as ordinary
income is the smaller of
the following.
The
depreciation
allowed or
allowable for
the property,
including any
expensed cost
(such as section
179 deductions
or the
additional
depreciation
allowed or
allowable for
the property).
The result
of the
following:
The
original
unadjusted
depreciable
basis of
the GAA
(plus,
for
section
1245
property
originally
included
in the
GAA, any
expensed
cost),
minus
The
total
gain
previously
recognized
as
ordinary
income
on the
disposition
of
property
from the
GAA.
Qualifying dispositions.
If you dispose of GAA
property in a qualifying
disposition, you can
choose to remove the
property from the GAA. A
qualifying disposition
is one that does not
involve all the
property, or the last
item of property,
remaining in a GAA and
that is described by any
of the following.
A
disposition that
is a direct
result of fire,
storm,
shipwreck, other
casualty, or
theft.
A charitable
contribution for
which a
deduction is
allowed.
A
disposition that
is a direct
result of a
cessation,
termination, or
disposition of a
business,
manufacturing or
other income
producing
process,
operation,
facility, plant,
or other unit
(other than by
transfer to a
supplies, scrap,
or similar
account).
A nontaxable
transaction,
such as a
like-kind
exchange or an
involuntary
conversion,
other than a
nonrecognition
transaction
(described
earlier) or a
transaction that
is nontaxable
only because it
is a disposition
from a GAA. For
like-kind
exchanges or
involuntary
conversions
after February
27, 2004, see
sections
1.168(i)-1 and
1.168(i)-1T of
the regulations.
If you choose to
remove the property from
the GAA, figure your
gain, loss, or other
deduction resulting from
the disposition in the
manner described earlier
under
Abusive transactions.
Example.
Sankofa, a
calendar-year
corporation, maintains
one GAA for 12 machines.
Each machine costs
$15,000 and was placed
in service in 2004. Of
the 12 machines, nine
cost a total of $135,000
and are used in
Sankofa's New York plant
and three machines cost
$45,000 and are used in
Sankofa's New Jersey
plant. Assume this GAA
uses the 200% declining
balance depreciation
method, a 5-year
recovery period, and a
half-year convention.
Sankofa does not claim
the section 179
deduction and elects not
to claim a special
depreciation allowance
for any of the machines.
As of January 1, 2006,
the depreciation reserve
account for the GAA is
$93,600.
In May 2006, Sankofa
sells its entire
manufacturing plant in
New Jersey to an
unrelated person. The
sales proceeds allocated
to each of the three
machines at the New
Jersey plant is $5,000.
This transaction is a
qualifying disposition,
so Sankofa chooses to
remove the three
machines from the GAA
and figure the gain,
loss, or other deduction
by taking into account
their adjusted bases.
For Sankofa's 2006
return, the depreciation
allowance for the GAA is
figured as follows. As
of December 31, 2005,
the depreciation allowed
or allowable for the
three machines at the
New Jersey plant is
$23,400. As of January
1, 2006, the unadjusted
depreciable basis of the
GAA is reduced from
$180,000 to $135,000
($180,000 minus the
$45,000 unadjusted
depreciable bases of the
three machines), and the
depreciation reserve
account is decreased
from $93,600 to $70,200
($93,600 minus $23,400
depreciation allowed or
allowable for the three
machines as of December
31, 2005.) The
depreciation allowance
for the GAA in 2006 is
$25,920 [($135,000 -
$70,200) × 40%].
For Sankofa's 2006
return, gain or loss for
each of the three
machines at the New
Jersey plant is
determined as follows.
The depreciation allowed
or allowable in 2006 for
each machine is $1,440
[(($15,000 - $7,800) ×
40%) ÷ 2]. The adjusted
basis of each machine is
$5,760 (the adjusted
depreciable basis of
$7,200 removed from the
account less the $1,440
depreciation allowed or
allowable in 2006). As a
result, the loss
recognized in 2006 for
each machine is $760
($5,000 - $5,760). This
loss is subject to
section 1231 treatment.
See chapter 3 of
Publication 544 for
information on section
1231 losses.
Disposition of all
property in a GAA.
If you dispose of all
the property, or the
last item of property,
in a GAA, you can choose
to end the GAA. If you
make this choice, you
figure the gain or loss
by comparing the
adjusted depreciable
basis of the GAA with
the amount realized.
If there is a gain,
the amount subject to
recapture as ordinary
income is limited to the
result of the following.
The
depreciation
allowed or
allowable for
the GAA,
including any
expensed cost
(such as section
179 deductions
or the
additional
depreciation
allowed or
allowable for
the GAA),
minus
The total
gain previously
recognized as
ordinary income
on the
disposition of
property from
the GAA.
Example.
Duforcelf, a
calendar-year
corporation,
maintains a GAA for
1,000 calculators
that cost a total of
$60,000 and were
placed in service in
2004. Assume this
GAA is depreciated
under the 200%
declining balance
method, has a
recovery period of 5
years, and uses a
half-year
convention.
Duforcelf does not
claim the section
179 deduction and
elects not to claim
a special
depreciation
allowance for the
calculators. In
2005, Duforcelf
sells 200 of the
calculators to an
unrelated person for
$10,000. The $10,000
is recognized as
ordinary income.
In March 2006,
Duforcelf sells the
remaining
calculators in the
GAA to an unrelated
person for $35,000.
Duforcelf decides to
end the GAA.
On the date of
the disposition, the
adjusted depreciable
basis of the account
is $23,040
(unadjusted
depreciable basis of
$60,000 minus the
depreciation allowed
or allowable of
$36,960). In 2006,
Duforcelf recognizes
a gain of $11,960.
This is the amount
realized of $35,000
minus the adjusted
depreciable basis of
$23,040. The gain
subject to recapture
as ordinary income
is limited to the
depreciation allowed
or allowable minus
the amounts
previously
recognized as
ordinary income
($36,960 - $10,000 =
$26,960). Therefore,
the entire gain of
$11,960 is
recaptured as
ordinary income.
Electing To
Use a GAA
An election to include
property in a GAA is made
separately by each owner of
the property. This means
that an election to include
property in a GAA must be
made at the partnership or S
corporation level and not by
each partner or shareholder
separately.
How to
make the election.
Make the election by
completing line 18 of
Form 4562.
When to
make the election.
You must make the
election on a timely
filed tax return
(including extensions)
for the year in which
you place in service the
property included in the
GAA. 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
six months of the due
date of the return
(excluding extensions).
Attach the election to
the amended return and
write “Filed
pursuant to section
301.9100-2” on
the election statement.
You must maintain
records that identify the
property included in each
GAA, that establish the
unadjusted depreciable basis
and depreciation reserve of
the GAA, and that reflect
the amount realized during
the year upon dispositions
from each GAA. However, see
chapter 2 for the
recordkeeping requirements
for section 179 property.
Revoking an election.
You can revoke an
election to use a GAA
only in the following
situations.
You include
in the GAA
property that
generates
foreign source
income, both
United States
and foreign
source income,
or combined
gross income of
an FSC, a DISC,
or a possessions
corporation and
its related
supplier, and
that inclusion
results in a
substantial
distortion of
income.
You remove
property from
the GAA as
described under
Terminating
GAA Treatment,
earlier.
When Do You
Recapture MACRS
Depreciation?
Terms you may
need to know
(see Glossary):
Clean-fuel
vehicle
Clean-fuel
vehicle refueling
property
Disposition
Nonresidential
real property
Recapture
Residential
rental property
When you dispose of property
that you depreciated using
MACRS, any gain on the
disposition generally is
recaptured (included in income)
as ordinary income up to the
amount of the depreciation
previously allowed or allowable
for the property. Depreciation,
for this purpose, includes any
section 179 deduction claimed on
the property, any special
depreciation allowance or
Liberty Zone depreciation
allowance available for the
property (unless you elected not
to claim it), and any deduction
claimed for clean-fuel vehicles
and clean-fuel vehicle refueling
property. There is no recapture
for residential rental and
nonresidential real property
unless that property is
qualified property (or Liberty
Zone property) for which you
claimed a special depreciation
allowance (or Liberty Zone
depreciation allowance), which
is discussed in chapter 3. For
more information on depreciation
recapture, see Publication 544.
