DEPRECIATION
Depreciation - In Service and Retirement Time Period - Generally Acceptable
Alternative One
Fixed Assets Acquired
Acquired during the first half of the year Calculate depreciation for the full year.
Acquired during the second half of the year No depreciation.
Existing Assets Calculate full year depreciation.
Fixed Assets Retired or Disposed
Retired during the first half of the year No depreciation.
Retired during the second half of the year Calculate depreciation for the full year.
Alternative Two
Fixed Assets Acquired
Acquired during the year Calculate depreciation for one-half year.
Existing Assets Calculate full year depreciation.
Fixed Assets Retired or Disposed
Retired during the year Calculate depreciation for one-half year.
Alternative Three
Fixed Assets Acquired
Acquired on or before the 15th of month Calculate depreciation for the full month.
Acquired after the 15th of month No depreciation for that month.
Existing Assets Calculate full year depreciation.
Fixed Assets Retired or Disposed
Retired after the 15th of the month Calculate depreciation for the full month.
Retired on or before the 15th of month No depreciation for that month.
Alternative Four
Fixed Assets
Account balance beginning of year Calculate full year depreciation.
Alternative Five
Fixed Assets
Account balance end of year Calculate full year depreciation.
Depreciation - In Service and Retirement Time Period - Tax Purposes
Publication 534 (11/1995), Depreciating Property Placed in Service Before 1987
http://www.irs.gov/publications/p534/index.html
Publication 946 (2009), How To Depreciate Property
http://www.irs.gov/publications/p946/index.html
DEPRECIATION
The Modified Accelerated Cost Recovery System (MACRS) are the tax rules for calculating
depreciation of property used in a trade or business or for the production of income (investment use) that is
placed in service after 1986.
MACRS consists of two systems that determine how to depreciate property. The main system is the General
Depreciation System (GDS). The second system is the Alternative Depreciation System (ADS). The main
difference between the two systems is that ADS generally provides for a longer period for depreciation and uses
the straight line method of depreciation. Both systems calculate In Service and Retirement Time Period by three
conventions. These conventions determine the number of months in the year of acquisition and the year of
disposition that the cost of the property is depreciated over.
Real Property - Nonresidential and Residential Rental Property
Mid-month convention. Under this convention all property placed in service or disposed of during a month is
considered placed in service or disposed of at the midpoint of the month.
If nonresidential and residential rental property is disposed of before the end of its recovery period depreciation
is allowed using the mid-month convention. Under the mid-month convention property disposed of anytime
during a month is treated as disposed of in the middle of that month. Count the month of disposition as half a
month. The amount of depreciation to claim is determined by calculating the depreciation for the year and then
multiplying it by the months and partial month in service divided by twelve. For example if property was sold
anytime in March the property is in service for 2.5 months.
Tangible Personal Property
Half-year convention or the mid-quarter convention. If the cost of property placed in service during the last
three months of the tax year (excluding property placed in service and disposed of in the same year and any
section 179 deduction) exceeds 40% of the cost of all property placed in service for the entire year the mid-
quarter convention must be used for all property acquired in that year. Under the half-year convention all
property placed in service or disposed of during the year is considered placed in service or disposed of at the
middle of the year. Under the mid-quarter convention all property placed in service or disposed of during any
quarter is considered placed in service or disposed of at the middle of the quarter.
If tangible personal property is disposed of before the end of its recovery period depreciation is allowed using
the half-year convention or the mid-quarter convention.
Under the half-year convention property disposed of anytime during the year is treated as disposed of in the
middle of the year. The amount of depreciation to claim is determined by calculating the depreciation for the
year and then claiming half of that amount. For example if property was sold anytime during the year the
property is in service for 6 months.
Under the mid-quarter convention property disposed of anytime during the year is treated as disposed of in the
middle of the quarter. The amount of depreciation to claim is determined by calculating the depreciation for the
year and then claiming a percentage of that amount. The percentages are as follows:
First quarter of the year 12.5% (1.5 months /12)
Second quarter of the year 37.5% (4.5 months /12)
Third quarter of the year 62.5% (7.5 months /12)
Fourth quarter of the year 87.5% (10.5 months /12)
For example if property was sold anytime during the third quarter the property is in service for 7.5 months.
DEPRECIATION
Under MACRS property is assigned to one of several property classes. These property classes establish the
number of years the property is depreciated over.
Main Classes - General Depreciation System (GDS)
5-year property Automobiles, trucks, computers and peripheral equipment and office machinery.
7-year property Office furniture and fixtures.
15-year property Depreciable improvements made directly to the land or added to the land including
shrubbery, fences, roads, bridges, sidewalks, parking lots and curbs.
20-year property Farm buildings other than agricultural of horticultural structures.
27.5-year property Residential rental property.
31.5-year property Nonresidential real property placed in service before May 13, 1993.
39-year property Nonresidential real property placed in service after May 12, 1993.
Main Classes - Alternative Depreciation System (ADS)
5-year property Information systems including computers and peripheral equipment.
Automobiles, light general purpose trucks weight less than 13,000 pounds.
6-year property Data handling equipment except computers including copiers and calculators.
Heavy general purpose trucks weight 13,000 pounds or more.
10-year property Office furniture fixtures and communication equipment.
12-year property Personal property with no class life.
15-year property Single purpose agricultural and horticultural structures.
20-year property Land Improvements.
40-year property Residential rental property and nonresidential real property.
Depreciation Methods GDS System
Classes 5 and 7 (nonfarm) use the 200% declining balance rate (also called double declining balance). Tables A-
1 through A-5.
Classes 5 and 7 (farm) use the 150% declining balance rate. Tables A-14 through A-18.
Classes 15 and 20 (nonfarm and farm) use 150% declining balance rate . Tables A-14 through A-18 or Tables A-1
through A-5
Class 27.5 use straight line. Table A-6
Class 31.5 use straight line. Table A-7 Property in service prior to May 13,1993
Class 39 use straight line. Table A-7a Property in service after May 12, 1993
Classes 5, 7, 15 and 20 if elected use straight line. Tables A-8 through A-12. See note below.
Classes 5 and 7 use 150% declining balance over an ADS recovery period. Tables A-14 through A-18.
Note: The election to use the straight line method for one item in a property class applies to all property in that
class placed in service in the tax year of the election. Once made, the election cannot be changed.
DEPRECIATION
Depreciation Methods ADS System
Classes 5,6,10,12,15 and 20 use straight line. Tables A-8 through A-12.
Class 40 use straight line. Table A-13
Election to Use Alternative Depreciation System (ADS)
To use the Alternative Depreciation System (ADS) there must be an election which is included on From 4562.
ADS uses the straight line method of depreciation over fixed ADS recovery periods. The election must be made
by the tax return due date (including extensions) for the year the property is placed in service.
The election to use ADS for one item in a property class generally applies to all property in that class placed in
service in the tax year of the election. However, the election to use ADS for residential rental property and
nonresidential real property can be made on a property by property basis. Once made the election to use ADS
cannot be changed.
Depreciation and the Alternative Minimum Tax
For alternative minimum tax purposes depreciation is calculated as follows:
Property placed in service after 1986 and before 1999.
GDS Class 5 and 7 year property
AMT depreciation is computed using the 150% declining balance method and the ADS recovery period.
Tables A-14 through A-18.
GDS Class 15 and 20 year property
If the 150% declining balance method is used then the 150% declining balance method and the ADS recovery
period is used for AMT purposes. Tables A-14 through A-18.
GDS Class 27.5, 31.5, and 39 year property
AMT depreciation is computed using the straight-line method and ADS recovery period of 40 years. Table A-13
If the straight-line election is in effect for regular tax purposes (Tables A-8 through A-12) then for AMT purposes
the straight-line method and ADS recovery period must be used.
If the MACRS ADS method is used for regular tax purposes then no adjustment is required for AMT purposes as
AMT and regular tax depreciation are computed the same way on real and tangible personal property.
Property placed in service after 1998.
GDS Class 5 and 7 year property
AMT depreciation is computed using the 150% declining balance method and the GDS recovery period.
Tables A-14 through A-18.
All Other Property
For all other property placed in service after 1998 no AMT adjustment is required as AMT and regular tax
depreciation are the same.
DEPRECIATION
Listed Property
Passenger automobiles weighing 6,000 pounds or less.
A passenger automobile is any four-wheeled vehicle made primarily for use on public streets, roads, and
highways and rated at 6,000 pounds or less of unloaded gross vehicle weight (6,000 pounds or less of gross
vehicle weight for trucks and vans). It includes any part, component, or other item physically attached to the
automobile at the time of purchase or usually included in the purchase price of an automobile.
Any other property used for transportation, unless it is an excepted vehicle
Other property used for transportation includes trucks, buses, boats, airplanes, motorcycles, and any other
vehicles used to transport persons or goods.
Computers and related peripheral equipment, unless used only at a regular business establishment and owned
or leased by the person operating the establishment. A regular business establishment includes a portion of a
dwelling unit that is used both regularly and exclusively for business..
A computer is a programmable, electronically activated device capable of accepting information, applying
prescribed processes to the information, and supplying the results of those processes with or without human
intervention. It consists of a central processing unit with extensive storage, logic, arithmetic, and control
capabilities.
Cellular telephones (or similar telecommunication equipment).
Listed Property Does Not Include
The following vehicles are not considered passenger automobiles for these purposes.
An ambulance, hearse, or combination ambulance-hearse used directly in a trade or business.
A vehicle used directly in the trade or business of transporting persons or property for pay or hire.
including taxicabs.
A truck or van that is a qualified non personal use vehicle.
Clearly marked police and fire vehicles.
Unmarked vehicles used by law enforcement officers if the use is officially authorized.
Any vehicle with a loaded gross vehicle weight of over 14,000 pounds that is designed to carry cargo.
Bucket trucks (cherry pickers), cement mixers, dump trucks (including garbage trucks), flatbed trucks
and refrigerated trucks.
Delivery trucks with seating only for the driver, or only for the driver plus a folding jump seat.
Combines, cranes and derricks, and forklifts.
Delivery trucks with seating only for the driver, or only for the driver plus a folding jump seat.
Qualified moving vans
Qualified specialized utility repair trucks.
School buses used in transporting students and employees of schools
Other buses with a capacity of at least 20 passengers that are used as passenger buses.
Tractors and other special purpose farm vehicles
You can claim the section 179 deduction for listed property and depreciate listed property using GDS and a
declining balance method if the property meets the business-use requirement. To meet this requirement, listed
property must be used predominantly (more than 50% of its total use) for qualified business use. If business use
is 50% or less no section 179 deduction is allowed and the property must be depreciated by using ADS the
straight-line method over the ADS recovery period.
DEPRECIATION
The use of property to produce income in a non business activity (investment use) is not a qualified business use.
However, you can treat the investment use as business use to figure the depreciation deduction for the property
in a given year. For example if the property is used 45% for investment use and 45% for business use a total of
90% of the cost basis of the property (basis for depreciation) can be depreciated.
Special Rules for Passenger Automobiles
Unloaded Gross Vehicle Weight - 6,000 Pounds or Less
The depreciation deduction, including the Section 179 deduction, you can claim for a passenger automobile each
year is limited. The maximum depreciation deduction including Section 179 deduction for a passenger
automobile with 100% business use placed in service in year 2009 is:
Year 2009 First year $2,960
Second year $4,800
Third year $2,850
Fourth and layer years $1,775
If business use is less than 100% these limits must be reduced to the business use percentage.
Under MACRS a passenger automobile is class 5 year property. If the passenger automobile with a depreciable
basis of $12,000 was placed in service during the current year the depreciation would be calculated from Table
A-1 at 20% of the depreciable basis amounting to $2,400. The $2,400 is below the maximum deduction allowed
of $2,960. Therefore the depreciation deduction is $2,400.
If the passenger automobile has a depreciable basis of $15,000 the depreciation amounts to $3,000. The $3,000
is above the maximum deduction allowed of $2,960. Therefore the depreciation deduction is $2,960.
Special Rules for Passenger Automobiles - Trucks and Vans
Gross Vehicle Weight - 6,000 Pounds or Less
The maximum depreciation deduction including Section 179 deduction for trucks and vans with 100% business
use placed in service in year 2009 is:
Year 2009 First year $3,060
Second year $4,900
Third year $2,950
Fourth and layer years $1,775
If business use is less than 100% these limits must be reduced to the business use percentage.
Under MACRS a passenger automobile - trucks and vans - is class 5 year property. If the passenger automobile -
truck or van - with a cost basis of $18,000 was placed in service during the current year and the business use
percentage is 60% the depreciable basis is $10,800. The depreciation would be calculated from Table A-1 at
20% of the depreciable basis amounting to $2,160. The maximum amount allowed is $3,060 times the business
use percentage of 60% amounts to $1,836. The $1,836 is below the maximum deduction allowed of $2,160.
Therefore the depreciation deduction is $1,836.
DEPRECIATION
Electing the Section 179 Deduction
General Information
You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the
year you place the property in service. This is the section 179 deduction. You can elect the section 179 deduction
instead of recovering the cost by taking depreciation deductions.
To qualify for the section 179 deduction, your property must be one of the following types of depreciable
property:
Tangible personal property is any tangible property that is not real property. It includes the following property:
Machinery and equipment
Office equipment and signs.
Off-the-shelf computer software placed in service during the tax year is qualifying property for purposes of the
section 179 deduction. This is computer software that is readily available for purchase by the general public, is
subject to a nonexclusive license.
To qualify for the section 179 deduction, your property must have been acquired for use in your trade or
business. Property you acquire only for the production of income, such as investment property, rental property
(if renting property is not your trade or business), and property that produces royalties, does not qualify.
Partial business use. When you use property for both business and non business purposes, you can elect the
section 179 deduction only if you use the property more than 50% for business in the year you place it in service.
If you use the property more than 50% for business, multiply the cost of the property by the percentage of
business use. Use the resulting business cost to figure your section 179 deduction.
Your section 179 deduction is generally the cost of the qualifying property. However, the total amount you can
elect to deduct under section 179 is subject to a dollar limit and a business income limit. These limits apply to
each taxpayer, not to each business. Also, special rules for applying the limits for partnerships and S
corporations. For a passenger automobile, the total section 179 deduction and depreciation deduction are
limited.
Dollar Limit
The total amount you can elect to deduct under section 179 for most property placed in service in 2009 generally
cannot be more than $250,000. If you acquire and place in service more than one item of qualifying property
during the year, you can allocate the section 179 deduction among the items in any way, as long as the total
deduction is not more than $250,000. You do not have to claim the full $250,000.
Under certain circumstances, the general dollar limits on the section 179 deduction may be reduced or increased
or there may be additional dollar limits. The general dollar limit is affected by any of the following situations:
If the cost of your qualifying section 179 property placed in service in a year is more than $800,000, you
generally must reduce the dollar limit (but not below zero) by the amount of cost over $800,000. If the cost of
your section 179 property placed in service during 2009 is $1,050,000 or more, you cannot take a section 179
deduction.
If you are married, how you figure your section 179 deduction depends on whether you file jointly or separately.
If you file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the
dollar limit, regardless of which of you purchased the property or placed it in service. If you and your spouse file
separate returns, you are treated as one taxpayer for the dollar limit, including the reduction for costs over
$800,000. You must allocate the dollar limit (after any reduction) between you equally, unless you both elect a
different allocation. If the percentages elected by each of you do not total 100%, 50% will be allocated to each of
you.
DEPRECIATION
You cannot elect to expense more than $25,000 of the cost of any heavy sport utility vehicle (SUV) and certain
other vehicles placed in service during the tax year. This rule applies to any 4-wheeled vehicle primarily
designed or used to carry passengers over public streets, roads, or highways, that is rated at more than 6,000
pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight. However, the $25,000 limit
does not apply to any vehicle:
Designed to seat more than nine passengers behind the driver's seat,
Business Income Limit
After you apply the dollar limit to determine a tentative deduction, you must apply the business income limit to
determine your actual section 179 deduction.
The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the
active conduct of any trade or business during the year. Generally, you are considered to actively conduct a trade
or business if you meaningfully participate in the management or operations of the trade or business.
Section 179 Deduction
If you deduct only part of the cost of qualifying property as a section 179 deduction, you can generally depreciate
the cost you do not deduct.
If you buy qualifying property with cash and a trade-in, its cost for purposes of the section 179 deduction
includes only the cash you paid.
The amount you can elect to deduct is not affected if you place qualifying property in service in a short tax year
or if you place qualifying property in service for only a part of a 12-month tax year. It does not matter if under
MACRS the property was place in service in the fourth quarter and you have to use the mid-quarter convention.
Carryover Section 179 Deduction
Any cost not deductible in one year under section 179 can be carried to the next year.
You can carry over for an unlimited number of years the cost of any section 179 property you elected to expense
but were unable to because of the business income limit. This disallowed deduction amount is shown on line 13
of Form 4562. You use the amount you carry over to determine your section 179 deduction in the next year.
Enter that amount on line 10 of your Form 4562 for the next year.
If you place more than one property in service in a year, you can select the properties for which all or a part of
the costs will be carried forward. Your selections must be shown in your books and records. For this purpose,
treat section 179 costs allocated from a partnership or an S corporation as one item of section 179 property. If
you do not make a selection, the total carryover will be allocated equally among the properties you elected to
expense for the year.
Recapture Section 179 Deduction
You may have to recapture the section 179 deduction if, in any year during the property's recovery period, the
percentage of business use drops to 50% or less. In the year the business use drops to 50% or less, you include
the recapture amount as ordinary income in Part IV of Form 4797. You also increase the basis of the property by
the recapture amount.
DEPRECIATION
Revoking Section 179 Election
An election to take a section 179 deduction for 2009 can be revoked without IRS approval by filing an amended
return. The amended return must be filed within the time prescribed by law. The amended return must also
include any resulting adjustments to taxable income. Once made, the revocation is irrevocable.
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