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.
