2017 Publication 946 Amana Air Conditioner RCB18C2CP1247513C P946

User Manual: Amana Air Conditioner RCB18C2CP1247513C

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Department of the Treasury
Internal Revenue Service
Publication 946
Cat. No. 13081F
How To
Depreciate
Property
• Section 179 Deduction
• Special Depreciation
Allowance
• MACRS
• Listed Property
For use in preparing
2017 Returns
Get forms and other information faster and easier at:
•IRS.gov (English)
•IRS.gov/Spanish (Español)
•IRS.gov/Chinese (中文)
•IRS.gov/Korean (한국어)
•IRS.gov/Russian (Pусский)
•IRS.gov/Vietnamese (TiếngViệt)
Contents
Future Developments ....................... 2
What's New for 2017 ........................ 2
What's New for 2018 ........................ 2
Reminders ............................... 3
Introduction .............................. 3
Chapter 1. Overview of Depreciation .......... 3
What Property Can Be Depreciated? .......... 4
What Property Cannot Be Depreciated? ........ 6
When Does Depreciation Begin and End? ...... 7
What Method Can You Use To Depreciate
Your Property? ........................ 8
What Is the Basis of Your Depreciable
Property? ........................... 11
How Do You Treat Repairs and
Improvements? ...................... 13
Do You Have To File Form 4562? ........... 13
How Do You Correct Depreciation
Deductions? ......................... 13
Chapter 2. Electing the Section 179
Deduction ............................ 15
What Property Qualifies? .................. 15
What Property Does Not Qualify? ........... 18
How Much Can You Deduct? ............... 19
How Do You Elect the Deduction? ........... 23
When Must You Recapture the Deduction? .... 23
Chapter 3. Claiming the Special Depreciation
Allowance ............................ 24
What Is Qualified Property? ................ 24
Election To Accelerate Certain Credits in Lieu
of the Special Depreciation Allowance ...... 28
How Much Can You Deduct? ............... 28
How Can You Elect Not To Claim an
Allowance? ......................... 29
When Must You Recapture an Allowance? ..... 29
Chapter 4. Figuring Depreciation Under
MACRS .............................. 29
Which Depreciation System (GDS or ADS)
Applies? ........................... 30
Which Property Class Applies Under GDS? .... 31
What Is the Placed in Service Date? .......... 34
What Is the Basis for Depreciation? .......... 34
Which Recovery Period Applies? ............ 35
Which Convention Applies? ................ 37
Which Depreciation Method Applies? ......... 38
How Is the Depreciation Deduction Figured? ... 40
How Do You Use General Asset Accounts? .... 50
When Do You Recapture MACRS
Depreciation? ........................ 54
Feb 28, 2018
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Chapter 5. Additional Rules for Listed
Property ............................. 55
What Is Listed Property? .................. 55
Can Employees Claim a Deduction? ......... 57
What Is the Business-Use Requirement? ...... 58
Do the Passenger Automobile Limits Apply? .... 62
What Records Must Be Kept? .............. 66
How Is Listed Property Information
Reported? .......................... 67
Chapter 6. How To Get Tax Help ............. 68
Appendix A .............................. 71
Appendix B .............................. 99
Glossary ............................... 111
Index ................................. 113
Future Developments
For the latest information about developments related to
Pub. 946, such as legislation enacted after this publication
was published, go to IRS.gov/Pub946.
What's New for 2017
Increased section 179 deduction dollar limits. The
maximum amount you can elect to deduct for most sec-
tion 179 property you placed in service in tax years begin-
ning in 2017 is $510,000 ($545,000 for qualified enter-
prise zone property). This limit is reduced by the amount
by which the cost of section 179 property placed in serv-
ice during the tax year exceeds $2,030,000. See Dollar
Limits in chapter 2.
Special depreciation allowance for certain property.
You may be able to take a 50% special depreciation al-
lowance for certain property acquired before September
28, 2017, and placed in service before January 1, 2018,
and certain plants bearing fruits and nuts, planted or graf-
ted before September 28, 2017. The special allowance
will be phased down to 40% for certain property acquired
before September 28, 2017, and placed in service in
2018. Also, you may be able to take a 100% special de-
preciation allowance for certain property and certain
plants bearing fruits and nuts acquired or planted or graf-
ted after September 27, 2017, and placed in service or
planted or grafted after September 27, 2017, and placed
in service or planted or grafted before January 1, 2023.
You may elect to apply a 50% special depreciation allow-
ance instead of the 100% allowance for the first tax year
ending after September 27, 2017. See Certain qualified
property acquired before September 28, 2017, Certain
property acquired after September 27, 2017, and Certain
plants bearing fruits and nuts, later.
Special depreciation allowance for qualified second
generation biofuel plant property. The special depre-
ciation allowance will not apply to qualified second
generation biofuel plant property placed in service after
December 31, 2017. See Qualified Second Generation Bi-
ofuel Plant Property in chapter 3.
Certain race horses. The 3-year recovery period for
race horses two years old or younger will not apply to
horses placed in service after December 31, 2017. See
Which Property Class Applies Under GDS in chapter 4.
Qualified motor sports entertainment complexes.
Qualified motor sports entertainment complex property
placed in service after December 31, 2017, will not be
treated as 7-year property under MACRS. See Which
Property Class Applies Under GDS in chapter 4.
Accelerated depreciation for qualified Indian reser-
vation property. The accelerated depreciation of prop-
erty on an Indian reservation will not apply to property
placed in service after December 31, 2017, or, if you
make an irrevocable election out of all property in a class
of property that is placed in service in a tax year beginning
after December 31, 2016. See Indian Reservation Prop-
erty in chapter 4.
Depreciation limits on business vehicles. The total
section 179 deduction and depreciation you can deduct
for a passenger automobile (that is not a truck or van) you
use in your business and first placed in service in 2017 is
$3,160, if the special depreciation allowance does not ap-
ply. The maximum deduction you can take for a truck or
van you use in your business and first placed in service in
2017 is $3,560, if the special depreciation allowance does
not apply. See Maximum Depreciation Deduction in chap-
ter 5.
What's New for 2018
Section 179 deduction dollar limits. The maximum
amount you can elect to deduct for most section 179 prop-
erty you placed in service in tax years beginning in 2018 is
$1,000,000. This limit is reduced by the amount by which
the cost of section 179 property placed in service during
the tax year exceeds $2,500,000.
Section 179 qualified real property. For property
placed in service in tax years beginning after December
31, 2017, section 179 qualified real property is qualified
improvement property (as defined in section 168(e)(6)),
and certain specified improvements to nonresidential real
property placed in service after the nonresidential real
property was first placed in service.
Computers and related peripheral equipment. Com-
puters and related peripheral equipment placed in service
after December 31, 2017, in tax years ending after De-
cember 31, 2017, are not listed property.
Electing real property trade or business and electing
farm business. An electing real property trade or busi-
ness (as defined in section 163(j)(7)(B)) and electing
farming business (as defined in section 163(j)(7)(C)) are
required to use the alternative depreciation system for
certain property to figure depreciation under MACRS for
tax years beginning after December 31, 2017.
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Reminders
Photographs of missing children. The Internal Reve-
nue Service is a proud partner with the National Center for
Missing & Exploited Children® (NCMEC). Photographs of
missing children selected by the Center may appear in
this publication on pages that would otherwise be blank.
You can help bring these children home by looking at the
photographs and calling 1-800-THE-LOST
(1-800-843-5678) if you recognize a child.
Introduction
This publication explains how you can recover the cost of
business or income-producing property through deduc-
tions for depreciation (for example, the special deprecia-
tion allowance and deductions under the Modified Accel-
erated Cost Recovery System (MACRS)). It also explains
how you can elect to take a section 179 deduction, in-
stead of depreciation deductions, for certain property, and
the additional rules for listed property.
The depreciation methods discussed in this publi-
cation generally do not apply to property placed in
service before 1987. For more information, see
Pub. 534, Depreciating Property Placed in Service Before
1987.
Definitions. Many of the terms used in this publication
are defined in the Glossary near the end of the publica-
tion. Glossary terms used in each discussion under the
major headings are listed before the beginning of each
discussion throughout the publication.
Do you need a different publication? The following ta-
ble shows where you can get more detailed information
when depreciating certain types of property.
For information
on depreciating:
See Publication:
A car 463, Travel, Entertainment, Gift, and
Car Expenses
Residential rental
property
527, Residential Rental Property
(Including Rental of Vacation Home)
Office space in
your home
587, Business Use of Your Home
(Including Use by Daycare Providers)
Farm property 225, Farmer's Tax Guide
Comments and suggestions. We welcome your com-
ments about this publication and your suggestions for fu-
ture editions.
You can send us comments from IRS.gov/
FormsComments. Or you can write to:
Internal Revenue Service
Tax Forms and Publications
1111 Constitution Ave. NW, IR-6526
Washington, DC 20224
CAUTION
!
Although we cannot respond individually to each com-
ment received, we do appreciate your feedback and will
consider your comments as we revise our tax products.
Ordering forms and publications. Visit IRS.gov/
FormsPubs to download forms and publications. Other-
wise, you can go to IRS.gov/OrderForms to order current
and prior-year forms and instructions. Your order should
arrive within 10 business days.
Tax questions. If you have a tax question not an-
swered by this publication, check IRS.gov and How To
Get Tax Help at the end of this publication.
1.
Overview of Depreciation
Introduction
Depreciation is an annual income tax deduction that al-
lows you to recover the cost or other basis of certain prop-
erty over the time you use the property. It is an allowance
for the wear and tear, deterioration, or obsolescence of
the property.
This chapter discusses the general rules for depreciat-
ing property and answers the following questions.
What property can be depreciated?
What property cannot be depreciated?
When does depreciation begin and end?
What method can you use to depreciate your prop-
erty?
What is the basis of your depreciable property?
How do you treat repairs and improvements?
Do you have to file Form 4562?
How do you correct depreciation deductions?
Useful Items
You may want to see:
Publication
Depreciating Property Placed in Service Before
1987
Business Expenses
Accounting Periods and Methods
Basis of Assets
Form (and Instructions)
Profit or Loss From Business
Net Profit From Business
534
535
538
551
Sch C (Form 1040)
Sch C-EZ (Form 1040)
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Employee Business Expenses
Unreimbursed Employee Business
Expenses
Application for Change in Accounting Method
Depreciation and Amortization
See chapter 6 for information about getting publications
and forms.
What Property Can Be
Depreciated?
Terms you may need to know
(see Glossary):
Adjusted basis
Basis
Commuting
Disposition
Fair market value
Intangible property
Listed property
Placed in service
Tangible property
Term interest
Useful life
You can depreciate most types of tangible property (ex-
cept land), such as buildings, machinery, vehicles, furni-
ture, and equipment. You also can depreciate certain in-
tangible property, such as patents, copyrights, and
computer software.
To be depreciable, the property must meet all the fol-
lowing requirements.
It must be property you own.
It must be used in your business or income-producing
activity.
It must have a determinable useful life.
It must be expected to last more than one year.
The following discussions provide information about these
requirements.
Property You Own
To claim depreciation, you usually must be the owner of
the property. You are considered as owning property even
if it is subject to a debt.
Example 1. You made a down payment to purchase
rental property and assumed the previous owner's mort-
gage. You own the property and you can depreciate it.
2106
2106-EZ
3115
4562
Example 2. You bought a new van that you will use
only for your courier business. You will be making pay-
ments on the van over the next 5 years. You own the van
and you can depreciate it.
Leased property. You can depreciate leased property
only if you retain the incidents of ownership in the property
(explained below). This means you bear the burden of ex-
haustion of the capital investment in the property. There-
fore, if you lease property from someone to use in your
trade or business or for the production of income, you
generally cannot depreciate its cost because you do not
retain the incidents of ownership. You can, however, de-
preciate any capital improvements you make to the prop-
erty. See How Do You Treat Repairs and Improvements
later in this chapter, and Additions and Improvements un-
der Which Recovery Period Applies in chapter 4.
If you lease property to someone, you generally can
depreciate its cost even if the lessee (the person leasing
from you) has agreed to preserve, replace, renew, and
maintain the property. However, if the lease provides that
the lessee is to maintain the property and return to you the
same property or its equivalent in value at the expiration of
the lease in as good condition and value as when leased,
you cannot depreciate the cost of the property.
Incidents of ownership. Incidents of ownership in
property include the following.
The legal title to the property.
The legal obligation to pay for the property.
The responsibility to pay maintenance and operating
expenses.
The duty to pay any taxes on the property.
The risk of loss if the property is destroyed, con-
demned, or diminished in value through obsolescence
or exhaustion.
Life tenant. Generally, if you hold business or investment
property as a life tenant, you can depreciate it as if you
were the absolute owner of the property. However, see
Certain term interests in property under Excepted Prop-
erty, later.
Cooperative apartments. If you are a tenant-stock-
holder in a cooperative housing corporation and use your
cooperative apartment in your business or for the produc-
tion of income, you can depreciate your stock in the cor-
poration, even though the corporation owns the apart-
ment.
Figure your depreciation deduction as follows.
1. Figure the depreciation for all the depreciable real
property owned by the corporation in which you have
a proprietary lease or right of tenancy. If you bought
your cooperative stock after its first offering, figure the
depreciable basis of this property as follows.
a. Multiply your cost per share by the total number of
outstanding shares, including any shares held by
the corporation.
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b. Add to the amount figured in (a) any mortgage
debt on the property on the date you bought the
stock.
c. Subtract from the amount figured in (b) any mort-
gage debt that is not for the depreciable real prop-
erty, such as the part for the land.
2. Subtract from the amount figured in (1) any deprecia-
tion for space owned by the corporation that can be
rented but cannot be lived in by tenant-stockholders.
3. Divide the number of your shares of stock by the total
number of outstanding shares, including any shares
held by the corporation.
4. Multiply the result of (2) by the percentage you figured
in (3). This is your depreciation on the stock.
Your depreciation deduction for the year cannot be
more than the part of your adjusted basis in the stock of
the corporation that is allocable to your business or in-
come-producing property. You must also reduce your de-
preciation deduction if only a portion of the property is
used in a business or for the production of income.
Example. You figure your share of the cooperative
housing corporation's depreciation to be $30,000. Your
adjusted basis in the stock of the corporation is $50,000.
You use one half of your apartment solely for business
purposes. Your depreciation deduction for the stock for
the year cannot be more than $25,000 (12 of $50,000).
Change to business use. If you change your cooper-
ative apartment to business use, figure your allowable de-
preciation as explained earlier. The basis of all the depre-
ciable real property owned by the cooperative housing
corporation is the smaller of the following amounts.
The fair market value of the property on the date you
change your apartment to business use. This is con-
sidered to be the same as the corporation's adjusted
basis minus straight line depreciation, unless this
value is unrealistic.
The corporation's adjusted basis in the property on
that date. Do not subtract depreciation when figuring
the corporation's adjusted basis.
If you bought the stock after its first offering, the corpo-
ration's adjusted basis in the property is the amount fig-
ured in (1) above. The fair market value of the property is
considered to be the same as the corporation's adjusted
basis figured in this way minus straight line depreciation,
unless the value is unrealistic.
For a discussion of fair market value and adjusted ba-
sis, see Pub. 551.
Property Used in Your Business or
Income-Producing Activity
To claim depreciation on property, you must use it in your
business or income-producing activity. If you use property
to produce income (investment use), the income must be
taxable. You cannot depreciate property that you use
solely for personal activities.
Partial business or investment use. If you use prop-
erty for business or investment purposes and for personal
purposes, you can deduct depreciation based only on the
business or investment use. For example, you cannot de-
duct depreciation on a car used only for commuting, per-
sonal shopping trips, family vacations, driving children to
and from school, or similar activities.
You must keep records showing the business, in-
vestment, and personal use of your property. For
more information on the records you must keep
for listed property, such as a car, see What Records Must
Be Kept in chapter 5.
Although you can combine business and invest-
ment use of property when figuring depreciation
deductions, do not treat investment use as quali-
fied business use when determining whether the busi-
ness-use requirement for listed property is met. For infor-
mation about qualified business use of listed property, see
What Is the Business-Use Requirement in chapter 5.
Office in the home. If you use part of your home as
an office, you may be able to deduct depreciation on that
part based on its business use. For information about de-
preciating your home office, see Pub. 587.
Inventory. You cannot depreciate inventory because it is
not held for use in your business. Inventory is any property
you hold primarily for sale to customers in the ordinary
course of your business.
If you are a rent-to-own dealer, you may be able to treat
certain property held in your business as depreciable
property rather than as inventory. See Rent-to-own dealer
under Which Property Class Applies Under GDS in chap-
ter 4.
In some cases, it is not clear whether property is held
for sale (inventory) or for use in your business. If it is un-
clear, examine carefully all the facts in the operation of the
particular business. The following example shows how a
careful examination of the facts in two similar situations re-
sults in different conclusions.
Example. Maple Corporation is in the business of
leasing cars. At the end of their useful lives, when the cars
are no longer profitable to lease, Maple sells them. Maple
does not have a showroom, used car lot, or individuals to
sell the cars. Instead, it sells them through wholesalers or
by similar arrangements in which a dealer's profit is not in-
tended or considered. Maple can depreciate the leased
cars because the cars are not held primarily for sale to
customers in the ordinary course of business, but are
leased.
If Maple buys cars at wholesale prices, leases them for
a short time, and then sells them at retail prices or in sales
in which a dealer's profit is intended, the cars are treated
as inventory and are not depreciable property. In this sit-
uation, the cars are held primarily for sale to customers in
the ordinary course of business.
Containers. Generally, containers for the products
you sell are part of inventory and you cannot depreciate
them. However, you can depreciate containers used to
RECORDS
CAUTION
!
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ship your products if they have a life longer than one year
and meet the following requirements.
They qualify as property used in your business.
Title to the containers does not pass to the buyer.
To determine if these requirements are met, consider
the following questions.
Does your sales contract, sales invoice, or other type
of order acknowledgment indicate whether you have
retained title?
Does your invoice treat the containers as separate
items?
Do any of your records state your basis in the contain-
ers?
Property Having a Determinable
Useful Life
To be depreciable, your property must have a determina-
ble useful life. This means that it must be something that
wears out, decays, gets used up, becomes obsolete, or
loses its value from natural causes.
Property Lasting More Than One Year
To be depreciable, property must have a useful life that
extends substantially beyond the year you place it in serv-
ice.
Example. You maintain a library for use in your profes-
sion. You can depreciate it. However, if you buy technical
books, journals, or information services for use in your
business that have a useful life of one year or less, you
cannot depreciate them. Instead, you deduct their cost as
a business expense.
What Property Cannot Be
Depreciated?
Terms you may need to know
(see Glossary):
Amortization
Basis
Goodwill
Intangible property
Remainder interest
Term interest
Certain property cannot be depreciated. This includes
land and certain excepted property.
Land
You cannot depreciate the cost of land because land does
not wear out, become obsolete, or get used up. The cost
of land generally includes the cost of clearing, grading,
planting, and landscaping.
Although you cannot depreciate land, you can depreci-
ate certain land preparation costs, such as landscaping
costs, incurred in preparing land for business use. These
costs must be so closely associated with other deprecia-
ble property that you can determine a life for them along
with the life of the associated property.
Example. You constructed a new building for use in
your business and paid for grading, clearing, seeding, and
planting bushes and trees. Some of the bushes and trees
were planted right next to the building, while others were
planted around the outer border of the lot. If you replace
the building, you would have to destroy the bushes and
trees right next to it. These bushes and trees are closely
associated with the building, so they have a determinable
useful life. Therefore, you can depreciate them. Add your
other land preparation costs to the basis of your land be-
cause they have no determinable life and you cannot de-
preciate them.
Excepted Property
Even if the requirements explained in the preceding dis-
cussions are met, you cannot depreciate the following
property.
Property placed in service and disposed of in the
same year. Determining when property is placed in
service is explained later.
Equipment used to build capital improvements. You
must add otherwise allowable depreciation on the
equipment during the period of construction to the ba-
sis of your improvements. See Uniform Capitalization
Rules in Pub. 551.
Section 197 intangibles. You must amortize these
costs. Section 197 intangibles are discussed in detail
in chapter 8 of Pub. 535. Intangible property, such as
certain computer software, that is not section 197 in-
tangible property, can be depreciated if it meets cer-
tain requirements. See Intangible Property, later.
Certain term interests.
Certain term interests in property. You cannot depre-
ciate a term interest in property created or acquired after
July 27, 1989, for any period during which the remainder
interest is held, directly or indirectly, by a person related to
you. A term interest in property means a life interest in
property, an interest in property for a term of years, or an
income interest in a trust.
Related persons. For a description of related per-
sons, see Related Persons, later. For this purpose, how-
ever, treat as related persons only the relationships listed
in items (1) through (10) of that discussion and substitute
“50%” for “10%” each place it appears.
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Basis adjustments. If you would be allowed a depre-
ciation deduction for a term interest in property except that
the holder of the remainder interest is related to you, you
generally must reduce your basis in the term interest by
any depreciation or amortization not allowed.
If you hold the remainder interest, you generally must
increase your basis in that interest by the depreciation not
allowed to the term interest holder. However, do not in-
crease your basis for depreciation not allowed for periods
during which either of the following situations applies.
The term interest is held by an organization exempt
from tax.
The term interest is held by a nonresident alien indi-
vidual or foreign corporation, and the income from the
term interest is not effectively connected with the con-
duct of a trade or business in the United States.
Exceptions. The above rules do not apply to the
holder of a term interest in property acquired by gift, be-
quest, or inheritance. They also do not apply to the holder
of dividend rights that were separated from any stripped
preferred stock if the rights were purchased after April 30,
1993, or to a person whose basis in the stock is deter-
mined by reference to the basis in the hands of the pur-
chaser.
When Does Depreciation
Begin and End?
Terms you may need to know
(see Glossary):
Basis
Exchange
Placed in service
You begin to depreciate your property when you place it in
service for use in your trade or business or for the produc-
tion of income. You stop depreciating property either
when you have fully recovered your cost or other basis or
when you retire it from service, whichever happens first.
Placed in Service
You place property in service when it is ready and availa-
ble for a specific use, whether in a business activity, an in-
come-producing activity, a tax-exempt activity, or a per-
sonal activity. Even if you are not using the property, it is
in service when it is ready and available for its specific
use.
Example 1. Donald Steep bought a machine for his
business. The machine was delivered last year. However,
it was not installed and operational until this year. It is con-
sidered placed in service this year. If the machine had
been ready and available for use when it was delivered, it
would be considered placed in service last year even if it
was not actually used until this year.
Example 2. On April 6, Sue Thorn bought a house to
use as residential rental property. She made several re-
pairs and had it ready for rent on July 5. At that time, she
began to advertise it for rent in the local newspaper. The
house is considered placed in service in July when it was
ready and available for rent. She can begin to depreciate
it in July.
Example 3. James Elm is a building contractor who
specializes in constructing office buildings. He bought a
truck last year that had to be modified to lift materials to
second-story levels. The installation of the lifting equip-
ment was completed and James accepted delivery of the
modified truck on January 10 of this year. The truck was
placed in service on January 10, the date it was ready and
available to perform the function for which it was bought.
Conversion to business use. If you place property in
service in a personal activity, you cannot claim deprecia-
tion. However, if you change the property's use to use in a
business or income-producing activity, then you can begin
to depreciate it at the time of the change. You place the
property in service in the business or income-producing
activity on the date of the change.
Example. You bought a home and used it as your per-
sonal home several years before you converted it to rental
property. Although its specific use was personal and no
depreciation was allowable, you placed the home in serv-
ice when you began using it as your home. You can begin
to claim depreciation in the year you converted it to rental
property because its use changed to an income-produc-
ing use at that time.
Idle Property
Continue to claim a deduction for depreciation on property
used in your business or for the production of income
even if it is temporarily idle (not in use). For example, if
you stop using a machine because there is a temporary
lack of a market for a product made with that machine,
continue to deduct depreciation on the machine.
Cost or Other Basis Fully Recovered
You stop depreciating property when you have fully recov-
ered your cost or other basis. You recover your basis
when your section 179 and allowed or allowable deprecia-
tion deductions equal your cost or investment in the prop-
erty. See What Is the Basis of Your Depreciable Property,
later.
Retired From Service
You stop depreciating property when you retire it from
service, even if you have not fully recovered its cost or
other basis. You retire property from service when you
permanently withdraw it from use in a trade or business or
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from use in the production of income because of any of
the following events.
You sell or exchange the property.
You convert the property to personal use.
You abandon the property.
You transfer the property to a supplies or scrap ac-
count.
The property is destroyed.
If you included the property in a general asset ac-
count, see How Do You Use General Asset Ac-
counts in chapter 4 for the rules that apply when
you dispose of that property.
What Method Can You Use To
Depreciate Your Property?
Terms you may need to know
(see Glossary):
Adjusted basis
Basis
Convention
Exchange
Fiduciary
Grantor
Intangible property
Nonresidential real property
Placed in service
Related persons
Residential rental property
Salvage value
Section 1245 property
Section 1250 property
Standard mileage rate
Straight line method
Unit-of-production method
Useful life
You must use the Modified Accelerated Cost Recovery
System (MACRS) to depreciate most property. MACRS is
discussed in chapter 4.
You cannot use MACRS to depreciate the following
property.
Property you placed in service before 1987.
Certain property owned or used in 1986.
Intangible property.
CAUTION
!
Films, video tapes, and recordings.
Certain corporate or partnership property acquired in
a nontaxable transfer.
Property you elected to exclude from MACRS.
The following discussions describe the property listed
above and explain what depreciation method should be
used.
Property You Placed in Service
Before 1987
You cannot use MACRS for property you placed in serv-
ice before 1987 (except property you placed in service af-
ter July 31, 1986, if MACRS was elected). Property placed
in service before 1987 must be depreciated under the
methods discussed in Pub. 534.
For a discussion of when property is placed in service,
see When Does Depreciation Begin and End, earlier.
Use of real property changed. You generally must use
MACRS to depreciate real property that you acquired for
personal use before 1987 and changed to business or in-
come-producing use after 1986.
Improvements made after 1986. You must treat an im-
provement made after 1986 to property you placed in
service before 1987 as separate depreciable property.
Therefore, you can depreciate that improvement as sepa-
rate property under MACRS if it is the type of property that
otherwise qualifies for MACRS depreciation. For more in-
formation about improvements, see How Do You Treat
Repairs and Improvements, later, and Additions and Im-
provements under Which Recovery Period Applies in
chapter 4.
Property Owned or Used in 1986
You may not be able to use MACRS for property you ac-
quired and placed in service after 1986 if any of the situa-
tions described below apply. If you cannot use MACRS,
the property must be depreciated under the methods dis-
cussed in Pub. 534.
For the following discussions, do not treat prop-
erty as owned before you placed it in service. If
you owned property in 1986 but did not place it in
service until 1987, you do not treat it as owned in 1986.
Personal property. You cannot use MACRS for per-
sonal property (section 1245 property) in any of the follow-
ing situations.
1. You or someone related to you owned or used the
property in 1986.
2. You acquired the property from a person who owned
it in 1986 and as part of the transaction the user of the
property did not change.
CAUTION
!
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3. You lease the property to a person (or someone rela-
ted to this person) who owned or used the property in
1986.
4. You acquired the property in a transaction in which:
a. The user of the property did not change, and
b. The property was not MACRS property in the
hands of the person from whom you acquired it
because of (2) or (3) above.
Real property. You generally cannot use MACRS for
real property (section 1250 property) in any of the follow-
ing situations.
You or someone related to you owned the property in
1986.
You lease the property to a person who owned the
property in 1986 (or someone related to that person).
You acquired the property in a like-kind exchange, in-
voluntary conversion, or repossession of property you
or someone related to you owned in 1986. MACRS
applies only to that part of your basis in the acquired
property that represents cash paid or unlike property
given up. It does not apply to the carried-over part of
the basis.
Exceptions. The rules above do not apply to the follow-
ing.
1. Residential rental property or nonresidential real prop-
erty.
2. Any property if, in the first tax year it is placed in serv-
ice, the deduction under the Accelerated Cost Recov-
ery System (ACRS) is more than the deduction under
MACRS using the half-year convention. For informa-
tion on how to figure depreciation under ACRS, see
Pub. 534.
3. Property that was MACRS property in the hands of
the person from whom you acquired it because of (2)
above.
Related persons. For this purpose, the following are re-
lated persons.
1. An individual and a member of his or her family, in-
cluding only a spouse, child, parent, brother, sister,
half-brother, half-sister, ancestor, and lineal descend-
ant.
2. A corporation and an individual who directly or indi-
rectly owns more than 10% of the value of the out-
standing stock of that corporation.
3. Two corporations that are members of the same con-
trolled group.
4. A trust fiduciary and a corporation if more than 10% of
the value of the outstanding stock is directly or indi-
rectly owned by or for the trust or grantor of the trust.
5. The grantor and fiduciary, and the fiduciary and bene-
ficiary, of any trust.
6. The fiduciaries of two different trusts, and the fiducia-
ries and beneficiaries of two different trusts, if the
same person is the grantor of both trusts.
7. A tax-exempt educational or charitable organization
and any person (or, if that person is an individual, a
member of that person's family) who directly or indi-
rectly controls the organization.
8. Two S corporations, and an S corporation and a regu-
lar corporation, if the same persons own more than
10% of the value of the outstanding stock of each cor-
poration.
9. A corporation and a partnership if the same persons
own both of the following.
a. More than 10% of the value of the outstanding
stock of the corporation.
b. More than 10% of the capital or profits interest in
the partnership.
10.
The executor and beneficiary of any estate.
11.
A partnership and a person who directly or indirectly
owns more than 10% of the capital or profits interest
in the partnership.
12.
Two partnerships, if the same persons directly or indi-
rectly own more than 10% of the capital or profits in-
terest in each.
13.
The related person and a person who is engaged in
trades or businesses under common control. See
section 52(a) and 52(b) of the Internal Revenue Code.
When to determine relationship. You must deter-
mine whether you are related to another person at the
time you acquire the property.
A partnership acquiring property from a terminating
partnership must determine whether it is related to the ter-
minating partnership immediately before the event caus-
ing the termination. For this rule, a terminating partnership
is one that sells or exchanges, within 12 months, 50% or
more of its total interest in partnership capital or profits.
Constructive ownership of stock or partnership in-
terest. To determine whether a person directly or indi-
rectly owns any of the outstanding stock of a corporation
or an interest in a partnership, apply the following rules.
1. Stock or a partnership interest directly or indirectly
owned by or for a corporation, partnership, estate, or
trust is considered owned proportionately by or for its
shareholders, partners, or beneficiaries. However, for
a partnership interest owned by or for a C corporation,
this applies only to shareholders who directly or indi-
rectly own 5% or more of the value of the stock of the
corporation.
2. An individual is considered to own the stock or part-
nership interest directly or indirectly owned by or for
the individual's family.
3. An individual who owns, except by applying rule (2),
any stock in a corporation is considered to own the
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stock directly or indirectly owned by or for the individ-
ual's partner.
4. For purposes of rule (1), (2), or (3), stock or a partner-
ship interest considered to be owned by a person un-
der rule (1) is treated as actually owned by that per-
son. However, stock or a partnership interest
considered to be owned by an individual under rule
(2) or (3) is not treated as owned by that individual for
reapplying either rule (2) or (3) to make another per-
son considered to be the owner of the same stock or
partnership interest.
Intangible Property
Generally, if you can depreciate intangible property, you
usually use the straight line method of depreciation. How-
ever, you can choose to depreciate certain intangible
property under the income forecast method (discussed
later).
You cannot depreciate intangible property that is
a section 197 intangible or that otherwise does
not meet all the requirements discussed earlier
under What Property Can Be Depreciated.
Straight Line Method
This method lets you deduct the same amount of depreci-
ation each year over the useful life of the property. To fig-
ure your deduction, first determine the adjusted basis, sal-
vage value, and estimated useful life of your property.
Subtract the salvage value, if any, from the adjusted ba-
sis. The balance is the total depreciation you can take
over the useful life of the property.
Divide the balance by the number of years in the useful
life. This gives you your yearly depreciation deduction.
Unless there is a big change in adjusted basis or useful
life, this amount will stay the same throughout the time
you depreciate the property. If, in the first year, you use
the property for less than a full year, you must prorate your
depreciation deduction for the number of months in use.
Example. In April, Frank bought a patent for $5,100
that is not a section 197 intangible. He depreciates the
patent under the straight line method, using a 17-year
useful life and no salvage value. He divides the $5,100
basis by 17 years to get his $300 yearly depreciation de-
duction. He only used the patent for 9 months during the
first year, so he multiplies $300 by 912 to get his deduction
of $225 for the first year. Next year, Frank can deduct
$300 for the full year.
Patents and copyrights. If you can depreciate the cost
of a patent or copyright, use the straight line method over
the useful life. The useful life of a patent or copyright is the
lesser of the life granted to it by the government or the re-
maining life when you acquire it. However, if the patent or
copyright becomes valueless before the end of its useful
life, you can deduct in that year any of its remaining cost
or other basis.
CAUTION
!
Computer software. Computer software is generally a
section 197 intangible and cannot be depreciated if you
acquired it in connection with the acquisition of assets
constituting a business or a substantial part of a business.
However, computer software is not a section 197 intan-
gible and can be depreciated, even if acquired in connec-
tion with the acquisition of a business, if it meets all of the
following tests.
It is readily available for purchase by the general pub-
lic.
It is subject to a nonexclusive license.
It has not been substantially modified.
If the software meets the tests above, it may also qual-
ify for the section 179 deduction and the special deprecia-
tion allowance, discussed later. If you can depreciate the
cost of computer software, use the straight line method
over a useful life of 36 months.
Tax-exempt use property subject to a lease. The
useful life of computer software leased under a lease
agreement entered into after March 12, 2004, to a tax-ex-
empt organization, governmental unit, or foreign person or
entity (other than a partnership), cannot be less than
125% of the lease term.
Certain created intangibles. You can amortize certain
intangibles created on or after December 31, 2003, over a
15-year period using the straight line method and no sal-
vage value, even though they have a useful life that can-
not be estimated with reasonable accuracy. For example,
amounts paid to acquire memberships or privileges of in-
definite duration, such as a trade association member-
ship, are eligible costs.
The following are not eligible.
Any intangible asset acquired from another person.
Created financial interests.
Any intangible asset that has a useful life that can be
estimated with reasonable accuracy.
Any intangible asset that has an amortization period or
limited useful life that is specifically prescribed or pro-
hibited by the Code, regulations, or other published
IRS guidance.
Any amount paid to facilitate an acquisition of a trade
or business, a change in the capital structure of a
business entity, and certain other transactions.
You also must increase the 15-year safe harbor amorti-
zation period to a 25-year period for certain intangibles re-
lated to benefits arising from the provision, production, or
improvement of real property. For this purpose, real prop-
erty includes property that will remain attached to the real
property for an indefinite period of time, such as roads,
bridges, tunnels, pavements, and pollution control facili-
ties.
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Income Forecast Method
You can choose to use the income forecast method in-
stead of the straight line method to depreciate the
following depreciable intangibles.
Motion picture films or video tapes.
Sound recordings.
Copyrights.
Books.
Patents.
Under the income forecast method, each year's depre-
ciation deduction is equal to the cost of the property, mul-
tiplied by a fraction. The numerator of the fraction is the
current year's net income from the property, and the de-
nominator is the total income anticipated from the property
through the end of the 10th taxable year following the tax-
able year the property is placed in service. For more infor-
mation, see section 167(g) of the Internal Revenue Code.
Films, video tapes, and recordings. You cannot use
MACRS for motion picture films, video tapes, and sound
recordings. For this purpose, sound recordings are discs,
tapes, or other phonorecordings resulting from the fixation
of a series of sounds. You can depreciate this property us-
ing either the straight line method or the income forecast
method.
Participations and residuals. You can include partici-
pations and residuals in the adjusted basis of the property
for purposes of computing your depreciation deduction
under the income forecast method. The participations and
residuals must relate to income to be derived from the
property before the end of the 10th taxable year after the
property is placed in service. For this purpose, participa-
tions and residuals are defined as costs which by contract
vary with the amount of income earned in connection with
the property.
Instead of including these amounts in the adjusted ba-
sis of the property, you can deduct the costs in the taxable
year that they are paid.
Videocassettes. If you are in the business of renting
videocassettes, you can depreciate only those videocas-
settes bought for rental. If the videocassette has a useful
life of one year or less, you can currently deduct the cost
as a business expense.
Corporate or Partnership Property
Acquired in a Nontaxable Transfer
MACRS does not apply to property used before 1987 and
transferred after 1986 to a corporation or partnership (ex-
cept property the transferor placed in service after July 31,
1986, if MACRS was elected) to the extent its basis is car-
ried over from the property's adjusted basis in the trans-
feror's hands. You must continue to use the same depre-
ciation method as the transferor and figure depreciation
as if the transfer had not occurred. However, if MACRS
would otherwise apply, you can use it to depreciate the
part of the property's basis that exceeds the carried-over
basis.
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.
Election To Exclude Property
From MACRS
If you can properly depreciate any property under a
method not based on a term of years, such as the
unit-of-production method, you can elect to exclude that
property from MACRS. You make the election by report-
ing your depreciation for the property on line 15 in Part II
of Form 4562 and attaching a statement as described in
the Instructions for Form 4562. You must make this elec-
tion by the return due date (including extensions) for the
tax year you place your property in service. However, if
you timely filed your return for the year without making the
election, you can still make the election by filing an amen-
ded return within six months of the due date of the return
(excluding extensions). Attach the election to the amen-
ded 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.
Use of standard mileage rate. If you use the standard
mileage rate to figure your tax deduction for your business
automobile, you are treated as having made an election to
exclude the automobile from MACRS. See Pub. 463 for a
discussion of the standard mileage rate.
What Is the Basis of Your
Depreciable Property?
Terms you may need to know
(see Glossary):
Abstract fees
Adjusted basis
Basis
Exchange
Fair market value
To figure your depreciation deduction, you must deter-
mine the basis of your property. To determine basis, you
need to know the cost or other basis of your property.
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Cost as Basis
The basis of property you buy is its cost plus amounts you
paid for items such as sales tax (see Exception below),
freight charges, and installation and testing fees. The cost
includes the amount you pay in cash, debt obligations,
other property, or services.
Exception. You can elect to deduct state and local
general sales taxes instead of state and local income
taxes as an itemized deduction on Schedule A (Form
1040). If you make that choice, you cannot include those
sales taxes as part of your cost basis.
Assumed debt. If you buy property and assume (or buy
subject to) an existing mortgage or other debt on the prop-
erty, your basis includes the amount you pay for the prop-
erty plus the amount of the assumed debt.
Example. You make a $20,000 down payment on
property and assume the seller's mortgage of $120,000.
Your total cost is $140,000, the cash you paid plus the
mortgage you assumed.
Settlement costs. The basis of real property also in-
cludes certain fees and charges you pay in addition to the
purchase price. These generally are shown on your settle-
ment statement and include the following.
Legal and recording fees.
Abstract fees.
Survey charges.
Owner's title insurance.
Amounts the seller owes that you agree to pay, such
as back taxes or interest, recording or mortgage fees,
charges for improvements or repairs, and sales com-
missions.
For fees and charges you cannot include in the basis of
property, see Real Property in Pub. 551.
Property you construct or build. If you construct, build,
or otherwise produce property for use in your business,
you may have to use the uniform capitalization rules to de-
termine the basis of your property. For information about
the uniform capitalization rules, see Pub. 551 and the reg-
ulations under section 263A of the Internal Revenue
Code.
Other Basis
Other basis usually refers to basis that is determined by
the way you received the property. For example, your ba-
sis is other than cost if you acquired the property in ex-
change for other property, as payment for services you
performed, as a gift, or as an inheritance. If you acquired
property in this or some other way, see Pub. 551 to deter-
mine your basis.
Property changed from personal use. If you held prop-
erty for personal use and later use it in your business or
income-producing activity, your depreciable basis is the
lesser of the following.
1. The fair market value (FMV) of the property on the
date of the change in use.
2. Your original cost or other basis adjusted as follows.
a. Increased by the cost of any permanent improve-
ments or additions and other costs that must be
added to basis.
b. Decreased by any deductions you claimed for
casualty and theft losses and other items that re-
duced your basis.
Example. Several years ago, Nia paid $160,000 to
have her home built on a lot that cost her $25,000. Before
changing the property to rental use last year, she paid
$20,000 for permanent improvements to the house and
claimed a $2,000 casualty loss deduction for damage to
the house. Land is not depreciable, so she includes only
the cost of the house when figuring the basis for deprecia-
tion.
Nia's adjusted basis in the house when she changed its
use was $178,000 ($160,000 + $20,000 − $2,000). On the
same date, her property had an FMV of $180,000, of
which $15,000 was for the land and $165,000 was for the
house. The basis for depreciation on the house is the
FMV on the date of change ($165,000), because it is less
than her adjusted basis ($178,000).
Property acquired in a nontaxable transaction. Gen-
erally, if you receive property in a nontaxable exchange,
the basis of the property you receive is the same as the
adjusted basis of the property you gave up. Special rules
apply in determining the basis and figuring the MACRS
depreciation deduction and special depreciation allow-
ance for property acquired in a like-kind exchange or in-
voluntary conversion. See Like-kind exchanges and invol-
untary conversions under How Much Can You Deduct in
chapter 3, and Figuring the Deduction for Property Ac-
quired in a Nontaxable Exchange in chapter 4.
There are also special rules for determining the basis of
MACRS property involved in a like-kind exchange or invol-
untary conversion when the property is contained in a
general asset account. See How Do You Use General As-
set Accounts in chapter 4.
Adjusted Basis
To find your property's basis for depreciation, you may
have to make certain adjustments (increases and decrea-
ses) to the basis of the property for events occurring be-
tween the time you acquired the property and the time you
placed it in service. These events could include the follow-
ing.
Installing utility lines.
Paying legal fees for perfecting the title.
Settling zoning issues.
Receiving rebates.
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Incurring a casualty or theft loss.
For a discussion of adjustments to the basis of your prop-
erty, see Adjusted Basis in Pub. 551.
If you depreciate your property under MACRS, you also
may have to reduce your basis by certain deductions and
credits with respect to the property. For more information,
see What Is the Basis for Depreciation in chapter 4.
Basis adjustment for depreciation allowed or allowa-
ble. You must reduce the basis of property by the depre-
ciation allowed or allowable, whichever is greater. Depre-
ciation allowed is depreciation you actually deducted
(from which you received a tax benefit). Depreciation al-
lowable is depreciation you are entitled to deduct.
If you do not claim depreciation you are entitled to de-
duct, you must still reduce the basis of the property by the
full amount of depreciation allowable.
If you deduct more depreciation than you should, you
must reduce your basis by any amount deducted from
which you received a tax benefit (the depreciation al-
lowed).
How Do You Treat Repairs and
Improvements?
If you improve depreciable property, you must treat the
improvement as separate depreciable property. Improve-
ment means an addition to or partial replacement of prop-
erty that is a betterment to the property, restores the prop-
erty, or adapts it to a new or different use. See section
1.263(a)-3 of the regulations.
You generally deduct the cost of repairing business
property in the same way as any other business expense.
However, if the cost is for a betterment to the property, to
restore the property, or to adapt the property to a new or
different use, you must treat it as an improvement and de-
preciate it.
Example. You repair a small section on one corner of
the roof of a rental house. You deduct the cost of the re-
pair as a rental expense. However, if you completely re-
place the roof, the new roof is an improvement because it
is a restoration of the building. You depreciate the cost of
the new roof.
Improvements to rented property. You can depreciate
permanent improvements you make to business property
you rent from someone else.
Do You Have To File
Form 4562?
Terms you may need to know
(see Glossary):
Amortization
Listed property
Placed in service
Standard mileage rate
Use Form 4562 to figure your deduction for depreciation
and amortization. Attach Form 4562 to your tax return for
the current tax year if you are claiming any of the following
items.
A section 179 deduction for the current year or a sec-
tion 179 carryover from a prior year. See chapter 2 for
information on the section 179 deduction.
Depreciation for property placed in service during the
current year.
Depreciation on any vehicle or other listed property,
regardless of when it was placed in service. See
chapter 5 for information on listed property.
A deduction for any vehicle if the deduction is reported
on a form other than Schedule C (Form 1040) or
Schedule C-EZ (Form 1040).
Amortization of costs if the current year is the first year
of the amortization period.
Depreciation or amortization on any asset on a corpo-
rate income tax return (other than Form 1120S, U.S.
Income Tax Return for an S Corporation) regardless
of when it was placed in service.
You must submit a separate Form 4562 for each
business or activity on your return for which a
Form 4562 is required.
Table 1-1 presents an overview of the purpose of the
various parts of Form 4562.
Employee. Do not use Form 4562 if you are an em-
ployee and you deduct job-related vehicle expenses using
either actual expenses (including depreciation) or the
standard mileage rate. Instead, use either Form 2106 or
Form 2106-EZ. Use Form 2106-EZ if you are claiming the
standard mileage rate and you are not reimbursed by your
employer for any expenses.
How Do You Correct
Depreciation Deductions?
If you deducted an incorrect amount of depreciation in any
year, you may be able to make a correction by filing an
amended return for that year. See Filing an Amended Re-
turn, next. If you are not allowed to make the correction on
an amended return, you may be able to change your ac-
counting method to claim the correct amount of deprecia-
tion. See Changing Your Accounting Method, later.
CAUTION
!
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Filing an Amended Return
You can file an amended return to correct the amount of
depreciation claimed for any property in any of the follow-
ing situations.
You claimed the incorrect amount because of a math-
ematical error made in any year.
You claimed the incorrect amount because of a post-
ing error made in any year.
You have not adopted a method of accounting for
property placed in service by you in tax years ending
after December 29, 2003.
You claimed the incorrect amount on property placed
in service by you in tax years ending before December
30, 2003.
Adoption of accounting method defined. Generally,
you adopt a method of accounting for depreciation by us-
ing a permissible method of determining depreciation
when you file your first tax return, or by using the same im-
permissible method of determining depreciation in two or
more consecutively filed tax returns.
For an exception to the 2-year rule, see Revenue Pro-
cedure 2017-30 on page 1139 of Internal Revenue Bulle-
tin 2017-18, available at www.irs.gov/irb/2017-18_IRB.
When to file. If an amended return is allowed, you must
file it by the later of the following.
3 years from the date you filed your original return for
the year in which you did not deduct the correct
amount. A return filed before an unextended due date
is considered filed on that due date.
2 years from the time you paid your tax for that year.
Changing Your Accounting Method
Generally, you must get IRS approval to change your
method of accounting. You generally must file Form 3115,
Application for Change in Accounting Method, to request
a change in your method of accounting for depreciation.
The following are examples of a change in method of
accounting for depreciation.
A change from an impermissible method of determin-
ing depreciation for depreciable property, if the imper-
missible method was used in two or more consecu-
tively filed tax returns.
A change in the treatment of an asset from nondepre-
ciable to depreciable or vice versa.
A change in the depreciation method, period of recov-
ery, or convention of a depreciable asset.
A change from not claiming to claiming the special de-
preciation allowance if you did not make the election
to not claim any special allowance.
A change from claiming a 50% special depreciation al-
lowance to claiming a 30% special depreciation allow-
ance for qualified property (including property that is
included in a class of property for which you elected a
30% special allowance instead of a 50% special al-
lowance).
Changes in depreciation that are not a change in
method of accounting (and may only be made on an
amended return) include the following.
An adjustment in the useful life of a depreciable asset
for which depreciation is determined under section
167.
A change in use of an asset in the hands of the same
taxpayer.
Making a late depreciation election or revoking a
timely valid depreciation election (including the elec-
tion not to deduct the special depreciation allowance).
If you elected not to claim any special depreciation al-
lowance, a change from not claiming to claiming the
special depreciation allowance is a revocation of the
election and is not an accounting method change.
Generally, you must get IRS approval to make a late
depreciation election or revoke a depreciation elec-
tion. You must submit a request for a letter ruling to
make a late election or revoke an election.
Any change in the placed in service date of a depreci-
able asset.
See section 1.446-1(e)(2)(ii)(d) of the regulations for
more information and examples.
IRS approval. If your change in method of accounting for
depreciation is described in Revenue Procedure 2017-30,
you may be able to get approval from the IRS to make that
change under the automatic change request procedures
generally covered in Revenue Procedure 2015-13 on
page 419 of Internal Revenue Bulletin 2015-5. If you do
not qualify to use the automatic procedures to get appro-
val, you must use the advance consent request proce-
dures generally covered in Revenue Procedure 2015-13.
Also see the Instructions for Form 3115 for more informa-
tion on getting approval, including lists of scope limitations
and automatic accounting method changes.
Additional guidance. For additional guidance and
special procedures for changing your accounting method,
automatic change procedures, amending your return, and
filing Form 3115, see Revenue Procedure 2015-13 on
page 419 of Internal Revenue Bulletin 2015-5 and Reve-
nue Procedure 2017-30 on page 1131 of Internal Reve-
nue Bulletin 2017-18, available at www.irs.gov/irb/
2017-18_IRB.
Section 481(a) adjustment. If you file Form 3115 and
change from an impermissible method to a permissible
method of accounting for depreciation, you can make a
section 481(a) adjustment for any unclaimed or excess
amount of allowable depreciation. The adjustment is the
difference between the total depreciation actually deduc-
ted for the property and the total amount allowable prior to
the year of change. If no depreciation was deducted, the
adjustment is the total depreciation allowable prior to the
year of change. A negative section 481(a) adjustment
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results in a decrease in taxable income. It is taken into ac-
count in the year of change and is reported on your busi-
ness tax returns as “other expenses.” A positive section
481(a) adjustment results in an increase in taxable in-
come. It is generally taken into account over 4 tax years
and is reported on your business tax returns as “other in-
come.” However, you can elect to use a one-year adjust-
ment period and report the adjustment in the year of
change if the total adjustment is less than $50,000. Make
the election by completing the appropriate line on
Form 3115.
If you file a Form 3115 and change from one permissi-
ble method to another permissible method, the section
481(a) adjustment is zero.
2.
Electing the Section 179
Deduction
Introduction
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 in-
stead of recovering the cost by taking depreciation deduc-
tions.
Estates and trusts cannot elect the section 179
deduction.
This chapter explains what property does and does not
qualify for the section 179 deduction, what limits apply to
the deduction (including special rules for partnerships and
corporations), and how to elect it. It also explains when
and how to recapture the deduction.
Useful Items
You may want to see:
Publication
Installment Sales
Sales and Other Dispositions of Assets
Tax Incentives for Distressed Communities
Form (and Instructions)
Depreciation and Amortization
Sales of Business Property
See chapter 6 for information about getting publications
and forms.
What Property Qualifies?
Terms you may need to know
(see Glossary):
Adjusted basis
Basis
Class life
CAUTION
!
537
544
954
4562
4797
Purpose of Form 4562
This table describes the purpose of the various parts of Form 4562. For more information, see Form 4562
and its instructions.
Part Purpose
I • Electing the section 179 deduction
• Figuring the maximum section 179 deduction for the current year
• Figuring any section 179 deduction carryover to the next year
II • Reporting the special depreciation allowance for property (other than listed property) placed in
service during the tax year
• Reporting depreciation deductions on property being depreciated under any method other than
Modified Accelerated Cost Recovery System (MACRS)
III • Reporting MACRS depreciation deductions for property placed in service before this year
• Reporting MACRS depreciation deductions for property (other than listed property) placed in
service during the current year
IV • Summarizing other parts
V • Reporting the special depreciation allowance for automobiles and other listed property
• Reporting MACRS depreciation on automobiles and other listed property
• Reporting the section 179 cost elected for automobiles and other listed property
• Reporting information on the use of automobiles and other transportation vehicles
VI • Reporting amortization deductions
Table 1-1.
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Structural components
Tangible property
To qualify for the section 179 deduction, your property
must meet all the following requirements.
It must be eligible property.
It must be acquired for business use.
It must have been acquired by purchase.
It must not be property described later under What
Property Does Not Qualify.
The following discussions provide information about
these requirements and exceptions.
Eligible Property
To qualify for the section 179 deduction, your property
must be one of the following types of depreciable prop-
erty.
1. Tangible personal property.
2. Other tangible property (except buildings and their
structural components) used as:
a. An integral part of manufacturing, production, or
extraction, or of furnishing transportation, commu-
nications, electricity, gas, water, or sewage dis-
posal services,
b. A research facility used in connection with any of
the activities in (a) above, or
c. A facility used in connection with any of the activi-
ties in (a) for the bulk storage of fungible commod-
ities.
3. Single-purpose agricultural (livestock) or horticultural
structures. See chapter 7 of Pub. 225 for definitions
and information regarding the use requirements that
apply to these structures.
4. Storage facilities (except buildings and their structural
components) used in connection with distributing pe-
troleum or any primary product of petroleum.
5. Off-the-shelf computer software.
6. Qualified real property (described below).
Tangible personal property. Tangible personal prop-
erty is any tangible property that is not real property. It in-
cludes the following property.
Machinery and equipment.
Property contained in or attached to a building (other
than structural components), such as refrigerators,
grocery store counters, office equipment, printing
presses, testing equipment, and signs.
Gasoline storage tanks and pumps at retail service
stations.
Livestock, including horses, cattle, hogs, sheep,
goats, and mink and other furbearing animals.
Portable air conditioners or heaters placed in service
by you in tax years beginning after 2015.
The treatment of property as tangible personal property
for the section 179 deduction is not controlled by its treat-
ment under local law. For example, property may not be
tangible personal property for the deduction even if trea-
ted so under local law, and some property (such as fix-
tures) may be tangible personal property for the deduction
even if treated as real property under local law.
Off-the-shelf computer software. Off-the-shelf com-
puter software 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, and has not been sub-
stantially modified. It includes any program designed to
cause a computer to perform a desired function. However,
a database or similar item is not considered computer
software unless it is in the public domain and is incidental
to the operation of otherwise qualifying software.
Qualified real property. You can elect to treat certain
qualified real property you placed in service during the tax
year as section 179 property. If this election is made, the
term “section 179 property” will include any qualified real
property that is:
Qualified leasehold improvement property as descri-
bed in section 168(e)(6) of the Internal Revenue
Code, as in effect before the enactment of Public Law
115-97, placed in service in tax years beginning be-
fore January 1, 2018,
Qualified restaurant property, as described in section
168(e)(7) of the Internal Revenue Code, as in effect
before the enactment of Public Law 115-97, placed in
service in tax years beginning before January 1, 2018,
or
Qualified retail improvement property as described in
section 168(e)(8) of the Internal Revenue Code, as in
effect before the enactment of Public Law 115-97,
placed in service in tax years beginning before Janu-
ary 1, 2018.
For more information, see Special rules for qualified sec-
tion 179 real property, later.
Qualified leasehold improvement property. Gener-
ally, this is any improvement to an interior portion of a
building that is nonresidential real property, provided all of
the requirements discussed in chapter 4 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 origi-
nal lessor by reason of the lessor’s death or in any of the
following types of transactions.
1. A transaction to which section 381(a) applies,
2. 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
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property and the taxpayer retains a substantial inter-
est in the trade or business,
3. A like-kind exchange, involuntary conversion, or
re-acquisition of real property to the extent that the
basis in the property represents the carryover basis,
or
4. 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. A complete liquidation of a subsidiary.
b. A transfer to a corporation controlled by the trans-
feror.
c. 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 a building or
an improvement to a building placed in service during the
tax year. Also, more than 50% of the building’s square
footage must be devoted to preparation of meals and
seating for on-premise consumption of prepared meals.
Qualified retail improvement property. Generally,
this is any improvement to an interior portion of nonresi-
dential real property if it meets the following requirements.
1. The portion is open to the general public and is used
in the retail trade or business of selling tangible prop-
erty to the general public.
2. The improvement is placed in service more than 3
years after the date the building was first placed in
service.
3. The expenses are not for the enlargement of the
building, any elevator or escalator, any structural
components benefiting a common area, or the inter-
nal structural framework of the building.
In addition, an improvement made by the lessor does not
qualify as qualified retail improvement property to any
subsequent owner unless it is acquired from the original
lessor by reason of the lessor’s death or in any of the fol-
lowing types of transactions.
1. A transaction to which section 381(a) applies,
2. 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 inter-
est in the trade or business,
3. A like-kind exchange, involuntary conversion, or
re-acquisition of real property to the extent that the
basis in the property represents the carryover basis,
or
4. 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. A complete liquidation of a subsidiary.
b. A transfer to a corporation controlled by the trans-
feror.
c. An exchange of property by a corporation solely
for stock or securities in another corporation in a
reorganization.
Property Acquired for Business Use
To qualify for the section 179 deduction, your property
must have been acquired for use in your trade or busi-
ness. Property you acquire only for the production of in-
come, such as investment property, rental property (if
renting property is not your trade or business), and prop-
erty that produces royalties, does not qualify.
Partial business use. When you use property for both
business and nonbusiness 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.
Example. May Oak bought and placed in service an
item of section 179 property costing $11,000. She used
the property 80% for her business and 20% for personal
purposes. The business part of the cost of the property is
$8,800 (80% × $11,000).
Property Acquired by Purchase
To qualify for the section 179 deduction, your property
must have been acquired by purchase. For example,
property acquired by gift or inheritance does not qualify.
Property is not considered acquired by purchase in the
following situations.
1. It is acquired by one component member of a control-
led group from another component member of the
same group.
2. Its basis is determined either—
a. In whole or in part by its adjusted basis in the
hands of the person from whom it was acquired,
or
b. Under the stepped-up basis rules for property ac-
quired from a decedent.
3. It is acquired from a related person.
Related persons. Related persons are described under
Related persons, earlier. However, to determine whether
property qualifies for the section 179 deduction, treat as
an individual's family only his or her spouse, ancestors,
and lineal descendants and substitute "50%" for "10%"
each place it appears.
Example. Ken Larch is a tailor. He bought two indus-
trial sewing machines from his father. He placed both
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machines in service in the same year he bought them.
They do not qualify as section 179 property because Ken
and his father are related persons. He cannot claim a sec-
tion 179 deduction for the cost of these machines.
What Property Does Not
Qualify?
Terms you may need to know
(see Glossary):
Basis
Class life
Certain property does not qualify for the section 179 de-
duction. This includes the following.
Land and Improvements
Land and land improvements do not qualify as section
179 property. Land improvements include swimming
pools, paved parking areas, wharves, docks, bridges, and
fences.
Excepted Property
Even if the requirements explained earlier under What
Property Qualifies are met, you cannot elect the section
179 deduction for the following property.
Certain property you lease to others (if you are a non-
corporate lessor).
Certain property used predominantly to furnish lodg-
ing or in connection with the furnishing of lodging.
Property used predominantly outside the United
States, except property described in section 168(g)(4)
of the Internal Revenue Code.
Property used by certain tax-exempt organizations,
except property used in connection with the produc-
tion of income subject to the tax on unrelated trade or
business income.
Property used by governmental units or foreign per-
sons or entities, except property used under a lease
with a term of less than 6 months.
Leased property. Generally, you cannot claim a section
179 deduction based on the cost of property you lease to
someone else. This rule does not apply to corporations.
However, you can claim a section 179 deduction for the
cost of the following property.
1. Property you manufacture or produce and lease to
others.
2. Property you purchase and lease to others if both the
following tests are met.
a. The term of the lease (including options to renew)
is less than 50% of the property's class life.
b. For the first 12 months after the property is trans-
ferred to the lessee, the total business deductions
you are allowed on the property (other than rents
and reimbursed amounts) are more than 15% of
the rental income from the property.
Property used for lodging. Generally, you cannot claim
a section 179 deduction for property used predominantly
to furnish lodging or in connection with the furnishing of
lodging. However, this does not apply to the following
types of property.
Nonlodging commercial facilities that are available to
those not using the lodging facilities on the same ba-
sis as they are available to those using the lodging fa-
cilities.
Property used by a hotel or motel in connection with
the trade or business of furnishing lodging where the
predominant portion of the accommodations is used
by transients.
Any certified historic structure to the extent its basis is
due to qualified rehabilitation expenditures.
Any energy property.
Energy property. Energy property is property that
meets the following requirements.
1. It is one of the following types of property.
a. Equipment that uses solar energy to generate
electricity, to heat or cool a structure, to provide
hot water for use in a structure, or to provide solar
process heat, except for equipment used to gen-
erate energy to heat a swimming pool.
b. Equipment placed in service after December 31,
2005, and before January 1, 2017, that uses solar
energy to illuminate the inside of a structure using
fiber-optic distributed sunlight.
c. Equipment used to produce, distribute, or use en-
ergy derived from a geothermal deposit. For elec-
tricity generated by geothermal power, this in-
cludes equipment up to (but not including) the
electrical transmission stage.
d. Qualified fuel cell property or qualified microtur-
bine property placed in service after December
31, 2005, and before January 1, 2017.
2. The construction, reconstruction, or erection of the
property must be completed by you.
3. For property you acquire, the original use of the prop-
erty must begin with you.
4. The property must meet the performance and quality
standards, if any, prescribed by Income Tax Regula-
tions in effect at the time you get the property.
For periods before February 14, 2008, energy property
does not include any property that is public utility property
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as defined by section 46(f)(5) of the Internal Revenue
Code (as in effect on November 4, 1990).
How Much Can You Deduct?
Terms you may need to know
(see Glossary):
Adjusted basis
Basis
Placed in service
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. However, see Mar-
ried Individuals under Dollar Limits, later. For a passenger
automobile, the total section 179 deduction and deprecia-
tion deduction are limited. See Do the Passenger Automo-
bile Limits Apply in chapter 5.
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.
Trade-in of other property. If you buy qualifying prop-
erty with cash and a trade-in, its cost for purposes of the
section 179 deduction includes only the cash you paid.
Example. Silver Leaf, a retail bakery, traded two
ovens having a total adjusted basis of $680 for a new
oven costing $1,320. They received an $800 trade-in al-
lowance for the old ovens and paid $520 in cash for the
new oven. The bakery also traded a used van with an ad-
justed basis of $4,500 for a new van costing $9,000. They
received a $4,800 trade-in allowance on the used van and
paid $4,200 in cash for the new van.
Only the portion of the new property's basis paid by
cash qualifies for the section 179 deduction. Therefore,
Silver Leaf's qualifying costs for the section 179 deduction
are $4,720 ($520 + $4,200).
Dollar Limits
The total amount you can elect to deduct under section
179 for most property placed in service in tax years begin-
ning in 2017 generally cannot be more than $510,000. 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 $510,000.
You do not have to claim the full $510,000.
The amount you can elect to deduct is not affec-
ted 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.
TIP
After you apply the dollar limit to determine a ten-
tative deduction, you must apply the business in-
come limit (described later) to determine your ac-
tual section 179 deduction.
Example. In 2017, you bought and placed in service
$510,000 in machinery and a $25,000 circular saw for
your business. You elect to deduct $485,000 for the ma-
chinery and the entire $25,000 for the saw, a total of
$510,000. This is the maximum amount you can deduct.
Your $25,000 deduction for the saw completely recovered
its cost. Your basis for depreciation is zero. The basis for
depreciation of your machinery is $25,000. You figure this
by subtracting your $485,000 section 179 deduction for
the machinery from the $510,000 cost of the machinery.
Situations affecting dollar limit. Under certain circum-
stances, the general dollar limits on the section 179 de-
duction may be reduced or increased or there may be ad-
ditional dollar limits. The general dollar limit is affected by
any of the following situations.
The cost of your section 179 property placed in serv-
ice exceeds $2,030,000.
Your business is an enterprise zone business.
You placed in service a sport utility or certain other ve-
hicles.
You are married filing a joint or separate return.
Costs Exceeding $2,030,000
If the cost of your qualifying section 179 property placed in
service in a year is more than $2,030,000, you generally
must reduce the dollar limit (but not below zero) by the
amount of cost over $2,030,000. If the cost of your section
179 property placed in service during 2017 is $2,540,000
or more, you cannot take a section 179 deduction.
Example. In 2017, Jane Ash placed in service machi-
nery costing $2,130,000. This cost is $100,000 more than
$2,030,000, so she must reduce her dollar limit to
$410,000 ($510,000 − $100,000).
Enterprise Zone Businesses
An increased section 179 deduction is available to enter-
prise zone businesses for qualified zone property placed
in service during the tax year, in an empowerment zone.
For more information including the definitions of “enter-
prise zone business” and “qualified zone property,” see
sections 1397A, 1397C, and 1397D of the Internal Reve-
nue Code.
The dollar limit on the section 179 deduction is in-
creased by the smaller of:
$35,000, or
The cost of section 179 property that is also qualified
zone property placed in service before January 1,
2018 (including such property placed in service by
your spouse, even if you are filing a separate return).
CAUTION
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Note. You take into account only 50% (instead of 100%)
of the cost of qualified zone property placed in service in a
year when figuring the reduced dollar limit for costs ex-
ceeding $2,030,000 (explained earlier).
Sport Utility and Certain Other Vehicles
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,
Equipped with a cargo area (either open or enclosed
by a cap) of at least 6 feet in interior length that is not
readily accessible from the passenger compartment,
or
That has an integral enclosure fully enclosing the
driver compartment and load carrying device, does
not have seating rearward of the driver's seat, and has
no body section protruding more than 30 inches
ahead of the leading edge of the windshield.
Married Individuals
If you are married, how you figure your section 179 deduc-
tion 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 $2,030,000.
You must allocate the dollar limit (after any reduction) be-
tween you equally, unless you both elect a different allo-
cation. If the percentages elected by each of you do not
total 100%, 50% will be allocated to each of you.
Example. Jack Elm is married. He and his wife file
separate returns. Jack bought and placed in service
$2,030,000 of qualified farm machinery in 2017. His wife
has her own business, and she bought and placed in serv-
ice $30,000 of qualified business equipment. Their com-
bined dollar limit is $480,000. This is because they must
figure the limit as if they were one taxpayer. They reduce
the $510,000 dollar limit by the $30,000 excess of their
costs over $2,030,000.
They elect to allocate the $480,000 dollar limit as fol-
lows.
$456,000 ($480,000 x 95%) to Mr. Elm's machinery.
$24,000 ($480,000 x 5%) to Mrs. Elm's equipment.
If they did not make an election to allocate their costs in
this way, they would have to allocate $240,000 ($480,000
× 50%) to each of them.
Joint return after filing separate returns. If you and
your spouse elect to amend your separate returns by filing
a joint return after the due date for filing your return, the
dollar limit on the joint return is the lesser of the following
amounts.
The dollar limit (after reduction for any cost of section
179 property over $2,030,000).
The total cost of section 179 property you and your
spouse elected to expense on your separate returns.
Example. The facts are the same as in the previous
example except that Jack elected to deduct $30,000 of
the cost of section 179 property on his separate return
and his wife elected to deduct $2,000. After the due date
of their returns, they file a joint return. Their dollar limit for
the section 179 deduction is $32,000. This is the lesser of
the following amounts.
$480,000—The dollar limit less the cost of section 179
property over $2,030,000.
$32,000—The total they elected to expense on their
separate returns.
Business Income Limit
The total cost you can deduct each year after you apply
the dollar limit is limited to the taxable income from the ac-
tive 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 manage-
ment or operations of the trade or business.
Any cost not deductible in one year under section 179
because of this limit can be carried to the next year. Spe-
cial rules apply to a deduction of qualified section 179 real
property that is placed in service by you in tax years be-
ginning before 2016 and disallowed because of the busi-
ness income limit. See Special rules for qualified section
179 real property under Carryover of disallowed deduc-
tion, later.
Taxable income. In general, figure taxable income for
this purpose by totaling the net income and losses from all
trades and businesses you actively conducted during the
year. Net income or loss from a trade or business includes
the following items.
Section 1231 gains (or losses).
Interest from working capital of your trade or business.
Wages, salaries, tips, or other pay earned as an em-
ployee.
For information about section 1231 gains and losses, see
chapter 3 in Pub. 544.
In addition, figure taxable income without regard to any
of the following.
The section 179 deduction.
The self-employment tax deduction.
Any net operating loss carryback or carryforward.
Any unreimbursed employee business expenses.
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Two different taxable income limits. In addition to the
business income limit for your section 179 deduction, you
may have a taxable income limit for some other deduction.
You may have to figure the limit for this other deduction
taking into account the section 179 deduction. If so, com-
plete the following steps.
Step Action
1 Figure taxable income without the section 179
deduction or the other deduction.
2 Figure a hypothetical section 179 deduction
using the taxable income figured in Step 1.
3 Subtract the hypothetical section 179
deduction figured in Step 2 from the taxable
income figured in Step 1.
4 Figure a hypothetical amount for the other
deduction using the amount figured in Step 3
as taxable income.
5 Subtract the hypothetical other deduction
figured in Step 4 from the taxable income
figured in Step 1.
6 Figure your actual section 179 deduction using
the taxable income figured in Step 5.
7 Subtract your actual section 179 deduction
figured in Step 6 from the taxable income
figured in Step 1.
8 Figure your actual other deduction using the
taxable income figured in Step 7.
Example. On February 1, 2017, the XYZ corporation
purchased and placed in service qualifying section 179
property that cost $510,000. It elects to expense the entire
$510,000 cost under section 179. In June, the corporation
gave a charitable contribution of $10,000. A corporation's
limit on charitable contributions is figured after subtracting
any section 179 deduction. The business income limit for
the section 179 deduction is figured after subtracting any
allowable charitable contributions. XYZ's taxable income
figured without the section 179 deduction or the deduction
for charitable contributions is $530,000. XYZ figures its
section 179 deduction and its deduction for charitable
contributions as follows.
Step 1– Taxable income figured without either deduc-
tion is $530,000.
Step 2– Using $530,000 as taxable income, XYZ's hy-
pothetical section 179 deduction is $510,000.
Step 3– $20,000 ($530,000 − $510,000).
Step 4– Using $20,000 (from Step 3) as taxable in-
come, XYZ's hypothetical charitable contribution (limi-
ted to 10% of taxable income) is $2,000.
Step 5– $528,000 ($530,000 − $2,000).
Step 6– Using $528,000 (from Step 5) as taxable in-
come, XYZ figures the actual section 179 deduction.
Because the taxable income is at least $510,000, XYZ
can take a $510,000 section 179 deduction.
Step 7– $20,000 ($530,000 − $510,000).
Step 8– Using $20,000 (from Step 7) as taxable in-
come, XYZ's actual charitable contribution (limited to
10% of taxable income) is $2,000.
Carryover of disallowed deduction. You can carry
over for an unlimited number of years, the cost of any
qualified section 179 real property that you placed in serv-
ice in tax years beginning after 2015, and that you elected
to expense, but were unable to deduct because of the
business income limitation. This disallowed deduction
amount is shown on line 13 of Form 4562. You use the
amount you carry over to determine your section 179 de-
duction 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.
If costs from more than one year are carried forward to
a subsequent year in which only part of the total carryover
can be deducted, you must deduct the costs being carried
forward from the earliest year first.
Special rules for qualified section 179 real prop-
erty. You can carry over to 2018 a 2017 deduction attrib-
utable to qualified section 179 real property that you
placed in service in tax years beginning after 2016 and
that you elected to expense but were unable to take be-
cause of the business income limitation. See Carryover of
disallowed deduction above. However, a 2015 deduction
(any such 2014 carryover amounts not deducted in 2015,
plus any 2014 disallowed amounts) attributable to quali-
fied section 179 real property that you elected to expense
but were unable to take because of the business income
limitation cannot be carried over. Instead, these amounts
are treated as property placed in service on the first day of
2015 for purposes of computing depreciation (including
the special depreciation allowance, if applicable). See
section 179(f) of the Internal Revenue Code, as in effect
before section 124(c)(2) of the PATH Act, for more infor-
mation. Also see Notice 2013-59, section 5 of Revenue
Procedure 2015-48, and sections 2 and 3 of Revenue
Procedure 2016-48. You can find Notice 2013-59 at
www.irs.gov/irb/2013-40_IRB/ar14.html, Revenue Proce-
dure 2015-48 at www.irs.gov/irb/2015-40_IRB/ar13.html,
and Revenue Procedure 2016-48 at www.irs.gov/irb/
2016-37_IRB/ar10.html. Also, see Election for certain
qualified section 179 real property, later, for information
on how to make this election.
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If there is a sale or other disposition of your prop-
erty (including a transfer at death) before you can
use the full amount of any outstanding carryover
of your disallowed section 179 deduction, neither you nor
the new owner can deduct any of the unused amount. In-
stead, you must add it back to the property's basis.
Partnerships and Partners
The section 179 deduction limits apply both to the partner-
ship and to each partner. The partnership determines its
section 179 deduction subject to the limits. It then allo-
cates the deduction among its partners.
Each partner adds the amount allocated from partner-
ships (shown on Schedule K-1 (Form 1065), Partner's
Share of Income, Deductions, Credits, etc.) to his or her
nonpartnership section 179 costs and then applies the
dollar limit to this total. To determine any reduction in the
dollar limit for costs over $2,030,000, the partner does not
include any of the cost of section 179 property placed in
service by the partnership. After the dollar limit (reduced
for any nonpartnership section 179 costs over
$2,030,000) is applied, any remaining cost of the partner-
ship and nonpartnership section 179 property is subject to
the business income limit.
Partnership's taxable income. For purposes of the
business income limit, figure the partnership's taxable in-
come by adding together the net income and losses from
all trades or businesses actively conducted by the part-
nership during the year. See the Instructions for Form
1065 for information on how to figure partnership net in-
come (or loss). However, figure taxable income without
regard to credits, tax-exempt income, the section 179 de-
duction, and guaranteed payments under section 707(c)
of the Internal Revenue Code.
Partner's share of partnership's taxable income. For
purposes of the business income limit, the taxable income
of a partner engaged in the active conduct of one or more
of a partnership's trades or businesses includes his or her
allocable share of taxable income derived from the part-
nership's active conduct of any trade or business.
Example. In 2017, Beech Partnership placed in serv-
ice section 179 property with a total cost of $2,055,000.
The partnership must reduce its dollar limit by $25,000
($2,055,000 − $2,030,000). Its maximum section 179 de-
duction is $485,000 ($510,000 − $25,000), and it elects to
expense that amount. The partnership's taxable income
from the active conduct of all its trades or businesses for
the year was $600,000, so it can deduct the full $485,000.
It allocates $40,000 of its section 179 deduction and
$50,000 of its taxable income to Dean, one of its partners.
In addition to being a partner in Beech Partnership,
Dean is also a partner in the Cedar Partnership, which al-
located to him a $30,000 section 179 deduction and
$35,000 of its taxable income from the active conduct of
its business. He also conducts a business as a sole pro-
prietor and, in 2017, placed in service in that business
TIP
qualifying section 179 property costing $55,000. He had a
net loss of $5,000 from that business for the year.
Dean does not have to include section 179 partnership
costs to figure any reduction in his dollar limit, so his total
section 179 costs for the year are not more than
$2,030,000 and his dollar limit is not reduced. His maxi-
mum section 179 deduction is $510,000. He elects to ex-
pense all of the $70,000 in section 179 deductions alloca-
ted from the partnerships ($40,000 from Beech
Partnership plus $30,000 from Cedar Partnership), plus
$55,000 of his sole proprietorship's section 179 costs, and
notes that information in his books and records. However,
his deduction is limited to his business taxable income of
$80,000 ($50,000 from Beech Partnership, plus $35,000
from Cedar Partnership minus $5,000 loss from his sole
proprietorship). He carries over $45,000 ($125,000 −
$80,000) of the elected section 179 costs to 2018. He al-
locates the carryover amount to the cost of section 179
property placed in service in his sole proprietorship, and
notes that allocation in his books and records.
Different tax years. For purposes of the business in-
come limit, if the partner's tax year and that of the partner-
ship differ, the partner's share of the partnership's taxable
income for a tax year is generally the partner's distributive
share for the partnership tax year that ends with or within
the partner's tax year.
Example. John and James Oak are equal partners in
Oak Partnership. Oak Partnership uses a tax year ending
January 31. John and James both use a tax year ending
December 31. For its tax year ending January 31, 2017,
Oak Partnership's taxable income from the active conduct
of its business is $80,000, of which $70,000 was earned
during 2016. John and James each include $40,000 (each
partner's entire share) of partnership taxable income in
computing their business income limit for the 2017 tax
year.
Adjustment of partner's basis in partnership. A part-
ner must reduce the basis of his or her partnership interest
by the total amount of section 179 expenses allocated
from the partnership even if the partner cannot currently
deduct the total amount. If the partner disposes of his or
her partnership interest, the partner's basis for determin-
ing gain or loss is increased by any outstanding carryover
of disallowed section 179 expenses allocated from the
partnership.
Adjustment of partnership's basis in section 179
property. The basis of a partnership's section 179 prop-
erty must be reduced by the section 179 deduction elec-
ted by the partnership. This reduction of basis must be
made even if a partner cannot deduct all or part of the
section 179 deduction allocated to that partner by the
partnership because of the limits.
S Corporations
Generally, the rules that apply to a partnership and its
partners also apply to an S corporation and its sharehold-
ers. The deduction limits apply to an S corporation and to
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each shareholder. The S corporation allocates its deduc-
tion to the shareholders who then take their section 179
deduction subject to the limits.
Figuring taxable income for an S corporation. To fig-
ure taxable income (or loss) from the active conduct by an
S corporation of any trade or business, you total the net
income and losses from all trades or businesses actively
conducted by the S corporation during the year.
To figure the net income (or loss) from a trade or busi-
ness actively conducted by an S corporation, you take into
account the items from that trade or business that are
passed through to the shareholders and used in determin-
ing each shareholder's tax liability. However, you do not
take into account any credits, tax-exempt income, the
section 179 deduction, and deductions for compensation
paid to shareholder-employees. For purposes of deter-
mining the total amount of S corporation items, treat de-
ductions and losses as negative income. In figuring the
taxable income of an S corporation, disregard any limits
on the amount of an S corporation item that must be taken
into account when figuring a shareholder's taxable in-
come.
Other Corporations
A corporation's taxable income from its active conduct of
any trade or business is its taxable income figured with
the following changes.
1. It is figured before deducting the section 179 deduc-
tion, any net operating loss deduction, and special de-
ductions (as reported on the corporation's income tax
return).
2. It is adjusted for items of income or deduction inclu-
ded in the amount figured in 1, above, not derived
from a trade or business actively conducted by the
corporation during the tax year.
How Do You Elect the
Deduction?
Terms you may need to know
(see Glossary):
Listed property
Placed in service
You elect to take the section 179 deduction by completing
Part I of Form 4562.
If you elect the deduction for listed property (de-
scribed in chapter 5), complete Part V of Form
4562 before completing Part I.
CAUTION
!
For property placed in service in 2017, file Form 4562
with either of the following.
Your original 2017 tax return, whether or not you file it
timely.
An amended return for 2017 filed within the time pre-
scribed by law. An election made on an amended re-
turn must specify the item of section 179 property to
which the election applies and the part of the cost of
each such item to be taken into account. The amen-
ded return also must include any resulting adjust-
ments to taxable income.
You must keep records that show the specific
identification of each piece of qualifying section
179 property. These records must show how you
acquired the property, the person you acquired it from,
and when you placed it in service.
Election for certain qualified section 179 real prop-
erty. You can elect to expense certain qualified real
property that you placed in service as section 179 prop-
erty for tax years beginning in 2017. If you elect to treat
this property as section 179 property, you must elect the
application of the special rules for qualified real property
described in section 179(f) of the Internal Revenue Code.
To make the election, attach a statement indicating you
are “electing the application of section 179(f) of the Inter-
nal Revenue Code” with either of the following.
Your original 2017 tax return, whether or not you file it
timely.
An amended return for 2017 filed within the time pre-
scribed by law. The amended return must also include
any adjustments to taxable income.
The statement should indicate your election to expense
certain qualified real property under section 179(f) on your
return. It must specify one or more of the three types of
qualified property (described under Qualified real prop-
erty) to which the election applies, the cost of each such
type, and the portion of the cost of each such property to
be taken into account. Also, report this on line 6 of Form
4562.
Revoking an election. An election (or any specification
made in the election) to take a section 179 deduction for
2017 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 also must
include any resulting adjustments to taxable income.
Once made, the revocation is irrevocable.
When Must You Recapture the
Deduction?
Terms you may need to know
(see Glossary):
Disposition
RECORDS
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Exchange
Recapture
Recovery period
Section 1245 property
You may have to recapture the section 179 deduction if, in
any year during the property's recovery period, the per-
centage of business use drops to 50% or less. In the year
the business use drops to 50% or less, you include the re-
capture amount as ordinary income in Part IV of Form
4797. You also increase the basis of the property by the
recapture amount. Recovery periods for property are dis-
cussed under Which Recovery Period Applies in chap-
ter 4.
If you sell, exchange, or otherwise dispose of the
property, do not figure the recapture amount un-
der the rules explained in this discussion. Instead,
use the rules for recapturing depreciation explained in
chapter 3 of Pub. 544 under Section 1245 Property. For
qualified real property (described earlier), see Notice
2013-59 for determining the portion of the gain that is at-
tributable to section 1245 property upon the sale or other
disposition of qualified real property. You can find Notice
2013-59 at www.irs.gov/irb/2013-40_IRB/ar14.html.
If the property is listed property (described in
chapter 5), do not figure the recapture amount un-
der the rules explained in this discussion when
the percentage of business use drops to 50% or less. In-
stead, use the rules for recapturing excess depreciation in
chapter 5 under What Is the Business-Use Requirement.
Figuring the recapture amount. To figure the amount
to recapture, take the following steps.
1. Figure the depreciation that would have been allowa-
ble on the section 179 deduction you claimed. Begin
with the year you placed the property in service and
include the year of recapture.
2. Subtract the depreciation figured in (1) from the sec-
tion 179 deduction you claimed. The result is the
amount you must recapture.
Example. In January 2015, Paul Lamb, a calendar
year taxpayer, bought and placed in service section 179
property costing $10,000. The property is not listed prop-
erty. The property is 3-year property. He elected a $5,000
section 179 deduction for the property and also elected
not to claim a special depreciation allowance. He used the
property only for business in 2015 and 2016. In 2017, he
used the property 40% for business and 60% for personal
use. He figures his recapture amount as follows.
Section 179 deduction claimed (2015) ........ $5,000.00
Minus: Allowable depreciation using Table A-1
(instead of section 179 deduction):
2015 .........................$1,666.50
2016 ......................... 2,222.50
CAUTION
!
CAUTION
!
2017 ($740.50 × 40% (business)) .... 296.20 4,185.20
2017 — Recapture amount ............... $ 814.80
Paul must include $814.80 in income for 2017.
If any qualified zone property placed in service
during the year ceases to be used in an empower-
ment zone by an enterprise zone business in a
later year, the benefit of the increased section 179 deduc-
tion must be reported as other income on your return.
3.
Claiming the Special
Depreciation Allowance
Introduction
You can take a special depreciation allowance to recover
part of the cost of qualified property (defined next), placed
in service during the tax year. The allowance applies only
for the first year you place the property in service. For
qualified property placed in service in 2017, you may be
able to take an additional 50% or 100% special deprecia-
tion allowance, depending on the date you acquired the
qualified property. The allowance is an additional deduc-
tion you can take after any section 179 deduction and be-
fore you figure regular depreciation under MACRS for the
year you place the property in service.
This chapter explains what is qualified property. It also
includes rules regarding how to figure an allowance, how
to elect not to claim an allowance, and when you must re-
capture an allowance.
Corporations can elect to accelerate certain mini-
mum tax credits in lieu of claiming the special de-
preciation allowance for eligible qualified prop-
erty. See Election to Accelerate Certain Credits in Lieu of
the Special Depreciation Allowance, later.
See chapter 6 for information about getting publications
and forms.
What Is Qualified Property?
Terms you may need to know
(see Glossary):
Business/investment use
Improvement
Nonresidential real property
CAUTION
!
TIP
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Placed in service
Residential rental property
Structural components
Your property is qualified property if it is one of the follow-
ing.
Qualified reuse and recycling property.
Qualified second generation biofuel plant property.
Certain qualified property acquired before September
28, 2017.
Certain qualified property acquired after September
27, 2017.
Certain plants bearing fruits and nuts.
The following discussions provide information about
the types of qualified property listed above for which you
can take the special depreciation allowance.
Qualified Reuse and Recycling
Property
You can take a 50% special depreciation allowance for
qualified reuse and recycling property. Qualified reuse
and recycling property is any machinery or equipment (not
including buildings or real estate), along with any appurte-
nance, that is used exclusively to collect, distribute, or re-
cycle qualified reuse and recyclable materials (as defined
in section 168(m)(3)(B) of the Internal Revenue Code).
Qualified reuse and recycling property also includes soft-
ware necessary to operate such equipment. The property
must meet the following requirements.
The property must be depreciated under MACRS.
The property must have a useful life of at least 5
years.
The original use of the property must begin with you
after August 31, 2008.
You must have acquired the property by purchase (as
discussed under Property Acquired by Purchase in
chapter 2) after August 31, 2008, with no binding writ-
ten contract for the acquisition in effect before Sep-
tember 1, 2008.
The property must be placed in service for use in your
trade or business after August 31, 2008.
Excepted Property
Qualified reuse and recycling property does not include
any of the following.
Any rolling stock or other equipment used to transport
reuse or recyclable materials.
Property required to be depreciated using the Alterna-
tive Depreciation System (ADS). For other property
required to be depreciated using ADS, see Required
use of ADS under Which Depreciation System (GDS
or ADS) Applies in chapter 4.
Other bonus depreciation property to which section
168(k) of the Internal Revenue Code applies.
Property for which you elected not to claim any special
depreciation allowance (discussed later).
Property placed in service and disposed of in the
same tax year.
Property converted from business use to personal use
in the same tax year acquired. Property converted
from personal use to business use in the same or later
tax year may be qualified reuse and recycling prop-
erty.
Qualified Second Generation Biofuel
Plant Property
You can take a 50% special depreciation allowance for
qualified second generation biofuel plant property (as de-
fined in section 40(b)(6)(E) of the Internal Revenue Code).
The property must meet the following requirements.
1. The property is used in the United States solely to
produce second generation biofuel.
2. The original use of the property must begin with you
after December 20, 2006.
3. You must have acquired the property by purchase (as
discussed under Property Acquired by Purchase in
chapter 2) after December 20, 2006, with no binding
written contract for acquisition in effect before De-
cember 21, 2006.
4. The property must be placed in service for use in your
trade or business or for the production of income be-
fore January 1, 2018.
Special Rules
Sale-leaseback. If you sold qualified second generation
biofuel plant property you placed in service after October
3, 2008, and leased it back within 3 months after you origi-
nally placed it in service, the property is treated as origi-
nally placed in service no earlier than the date it is used by
you under the leaseback.
The property will not qualify for the special allowance if
the lessee or a related person to the lessee or lessor had
a written binding contract in effect for the acquisition of the
property before December 21, 2006.
Syndicated leasing transactions. If qualified second
generation biofuel plant property is originally placed in
service by a lessor after October 3, 2008, the property is
sold within 3 months of the date it was placed in service,
and the user of the property does not change, then the
property is treated as originally placed in service by the
taxpayer no earlier than the date of the last sale.
Multiple units of property subject to the same lease will
be treated as originally placed in service no earlier than
the date of sale if the property is sold within 3 months after
the final unit is placed in service and the period between
the times the first and last units are placed in service does
not exceed 12 months.
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Excepted Property
Qualified second generation biofuel plant property does
not include any of the following.
Property placed in service and disposed of in the
same tax year.
Property converted from business use to personal use
in the same tax year it is acquired. Property converted
from personal use to business use in the same or later
tax year may be qualified second generation biofuel
plant property.
Property required to be depreciated using the Alterna-
tive Depreciation System (ADS). For other property
required to be depreciated using ADS, see Required
use of ADS under Which Depreciation System (GDS
or ADS) Applies in chapter 1.
Property any portion of which is financed with the pro-
ceeds of any obligation the interest on which is ex-
empt from tax under section 103 of the Internal Reve-
nue Code.
Property for which you elected not to claim any special
depreciation allowance (discussed later).
Property for which a deduction was taken under sec-
tion 179C for certain qualified refinery property.
Other bonus depreciation property to which section
168(k) of the Internal Revenue Code applies.
Certain Qualified Property Acquired
Before September 28, 2017
You can take a 50% special depreciation deduction allow-
ance for certain qualified property acquired before Sep-
tember 28, 2017, and placed in service before January 1,
2018. Certain qualified property acquired before Septem-
ber 28, 2017, and placed in service in 2018, is eligible for
a 40% special depreciation allowance. Your property is
qualified property if it meets the following requirements.
1. It is one of the following types of property.
a. Tangible property depreciated under MACRS with
a recovery period of 20 years or less.
b. Water utility property depreciated under MACRS.
c. Computer software that is readily available for pur-
chase by the general public, is subject to a nonex-
clusive license, and has not been substantially
modified. (The cost of some computer software is
treated as part of the cost of hardware and is de-
preciated under MACRS.)
d. Qualified improvement property depreciated un-
der MACRS (defined under Qualified improve-
ment property, later).
2. The property must also be placed in service before
January 1, 2020 (or before January 1, 2021, for cer-
tain property with a long production period and for
certain aircraft). See Long Production Period Property
and Noncommercial Aircraft, later.
3. The original use of the property must begin with you.
4. It is not excepted property (explained later in Excep-
ted property).
Qualified improvement property. Generally, this is any
improvement to an interior part of a building that is nonres-
idential real property. The improvement is placed in serv-
ice after the date the building is first placed in service and
is section 1250 property. See chapter 3 in Pub. 544, Sales
and Other Dispositions of Assets, for the definition of sec-
tion 1250 property.
However, a qualified improvement does not include
any improvement for which the expenditure is attributable
to any of the following.
The enlargement of the building.
Any elevator or escalator.
The internal structural framework of the building.
Long Production Period Property
To be qualified property, long production period property
must meet the following requirements.
It must meet the requirements in (1)-(4).
The property has a recovery period of at least 10
years or is transportation property. Transportation
property is tangible personal property used in the
trade or business of transporting persons or property.
The property is subject to section 263A of the Internal
Revenue Code.
The property has an estimated production period ex-
ceeding 1 year and an estimated production cost ex-
ceeding $1,000,000.
You must have acquired the property, or acquired the
property pursuant to a written contract entered into,
before January 1, 2020.
Noncommercial Aircraft
To be qualified property, noncommercial aircraft must
meet the following requirements.
It must meet the requirements in (2)-(4).
The aircraft must not be tangible personal property
used in the trade or business of transporting persons
or property (except for agricultural or firefighting pur-
poses).
The aircraft must be purchased (as discussed under
Property Acquired by Purchase in chapter 2) by a pur-
chaser who at the time of the contract for purchase,
makes a nonrefundable deposit of the lesser of 10%
of the cost or $100,000.
The aircraft must have an estimated production period
exceeding four months and a cost exceeding
$200,000.
You must have acquired the aircraft, or acquired the
aircraft pursuant to a written contract entered into,
before January 1, 2020.
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Special Rules
Sale-leaseback. If you sold qualified property you placed
in service and leased it back within 3 months after you
originally placed in service, the property is treated as origi-
nally placed in service no earlier than the date it is used by
you under the leaseback.
Syndicated leasing transactions. If qualified property
is originally placed in service by a lessor, the property is
sold within 3 months of the date it was placed in service,
and the user of the property does not change, then the
property is treated as originally placed in service by the
taxpayer no earlier than the date of the last sale.
Multiple units of property subject to the same lease will
be treated as originally placed in service no earlier than
the date of the last sale if the property is sold within 3
months after the final unit is placed in service and the pe-
riod between the time the first and last units are placed in
service does not exceed 12 months.
Excepted Property
Qualified property does not include any of the following.
Property placed in service and disposed of in the
same tax year.
Property converted from business use to personal use
in the same tax year acquired. Property converted
from personal use to business use in the same or later
tax year may be qualified property.
Property required to be depreciated under the Alterna-
tive Depreciation System (ADS). This includes listed
property used 50% or less in a qualified business use.
For other property required to be depreciated using
ADS, see Required use of ADS under Which Depreci-
ation System (GDS or ADS) Applies in chapter 4.
Qualified restaurant property (as defined in section
168(e)(7) of the Internal Revenue Code) that is not
qualified improvement property.
Property for which you elected not to claim any special
depreciation allowance (discussed later).
Property for which you elected to accelerate certain
credits in lieu of the special depreciation allowance
(discussed later).
Certain Qualified Property Acquired
After September 27, 2017
You can take a 100% special depreciation allowance for
property acquired and placed in service after September
27, 2017, and before January 1, 2023 (or before January
1, 2024, for certain property with a long production period
and for certain aircraft). Your property is qualified property
if it meets the following.
Tangible property depreciated under MACRS with a
recovery period of 20 years or less (including qualified
leasehold improvement property, qualified restaurant
property that is also qualified improvement property,
and qualified retail improvement property acquired af-
ter September 27, 2017, and placed in service before
January 1, 2018).
Computer software defined in and depreciated under
section 167(f)(1).
Qualified improvement property defined in section
168(k)(3), depreciated under MACRS, and acquired
after September 27, 2017, and placed in service be-
fore January 1, 2018.
Qualified film, television, and live theatrical produc-
tions, as defined in sections 181(d) and (e).
Qualified property must also be placed in service be-
fore January 1, 2027 (or before January 1, 2028, for cer-
tain property with a long production period and for certain
aircraft) and can be either new property or certain used
property.
Note. For the first tax year ending after September 27,
2017, you may elect to apply a 50% special depreciation
allowance instead of the 100% special depreciation allow-
ance for the qualified property listed above. To make the
election, attach a statement to your timely filed return (in-
cluding extensions) indicating you are electing to claim a
50% special depreciation allowance for all qualified prop-
erty. Once made the election cannot be revoked without
IRS consent.
The election must be made separately by each person
owning qualified property (for example, by the partner-
ship, by the S corporation, or for each member of a con-
solidated group by the common parent of the group).
Certain Plants Bearing Fruits
and Nuts
You can elect to claim 50% special depreciation allow-
ance for the adjusted basis of certain specified plants (de-
fined later) bearing fruits and nuts planted or grafted be-
fore September 28, 2017, in the ordinary course of your
farming business (as defined in section 263A(e)(4)).
For certain specified plants bearing fruits and nuts
planted or grafted after September 27, 2017, and before
January 1, 2023, you can elect to claim 100% of the ad-
justed basis as a special depreciation allowance. For the
tax year ending after September 27, 2017, you may elect
to apply a 50% special depreciation allowance, instead of
the 100% special depreciation allowance. See Note
above for how to make the election.
A specified plant is:
Any tree or vine that bears fruits or nuts, and
Any other plant that will have more than one yield of
fruits or nuts and generally has a pre-productive pe-
riod of more than 2 years from planting or grafting to
the time it begins bearing fruits or nuts.
Any property planted or grafted outside the United
States does not qualify as a specified plant.
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If you elect to claim the special depreciation allowance
for any specified plant, the special depreciation allowance
applies only for the tax year in which the plant is planted or
grafted. The plant will not be treated as qualified property
eligible for the special depreciation allowance in the sub-
sequent tax year in which it is placed in service.
To make the election, attach a statement to your timely
filed return (including extensions) for the tax year in which
you plant or graft the specified plant(s) indicating you are
electing to apply section 168(k)(5) and identifying the
specified plant(s) for which you are making the election.
The election once made cannot be revoked without IRS
consent.
See section 168(k)(5) of the Internal Revenue Code.
Election To Accelerate Certain
Credits in Lieu of the Special
Depreciation Allowance
A corporation can elect to claim unused minimum tax
credits in lieu of claiming the special depreciation allow-
ance for qualified property (as defined in section 168(k)(2)
of the Internal Revenue Code) placed in service during the
tax year.
If you make an election to accelerate these credits in
lieu of claiming the special depreciation allowance for eli-
gible property, you must not take the 50% or 100% spe-
cial depreciation allowance for the property and must de-
preciate the basis in the property under MACRS using the
straight line method. See Which Depreciation Method Ap-
plies in chapter 4.
Once made, the election cannot be revoked without
IRS consent.
For more information, see section 168(k)(4) of the Inter-
nal Revenue Code.
Additional guidance. For additional guidance on the
election to accelerate the minimum tax credit in lieu of
claiming the special depreciation allowance, see Form
8827, Credit for Prior Year Minimum Tax — Corporations,
and the related instructions.
How Much Can You Deduct?
Terms you may need to know
(see Glossary):
Adjusted basis
Basis
Placed in service
Figure the special depreciation allowance by multiplying
the depreciable basis of qualified reuse and recycling
property, certain qualified property acquired before Sep-
tember 28, 2017, certain qualified property acquired after
September 27, 2017, and certain plants bearing fruits and
nuts by the applicable percentage.
For qualified property other than listed property, enter
the special allowance on Form 4562, Part II, line 14. For
qualified property that is listed property, enter the special
allowance on Form 4562, Part V, line 25.
If you place qualified property in service in a short
tax year, you can take the full amount of a special
depreciation allowance.
Depreciable basis. This is the property's cost or other
basis multiplied by the percentage of business/investment
use, reduced by the total amount of any credits and de-
ductions allocable to the property.
The following are examples of some credits and deduc-
tions that reduce depreciable basis.
Any section 179 deduction.
Any deduction for removal of barriers to the disabled
and the elderly.
Any disabled access credit, enhanced oil recovery
credit, and credit for employer-provided childcare fa-
cilities and services.
Basis adjustment to investment credit property under
section 50(c) of the Internal Revenue Code.
Any section 181 deduction.
For additional credits and deductions that affect basis,
see section 1016 of the Internal Revenue Code.
For information about how to determine the cost or
other basis of property, see What Is the Basis of Your De-
preciable Property in chapter 1. For a discussion of busi-
ness/investment use, see Partial business or investment
use under Property Used in Your Business or Income-Pro-
ducing Activity in chapter 1.
Depreciating the remaining cost. After you figure your
special depreciation allowance for your qualified property,
you can use the remaining cost to figure your regular
MACRS depreciation deduction (discussed in chapter 4).
Therefore, you must reduce the depreciable basis of the
property by the special depreciation allowance before fig-
uring your regular MACRS depreciation deduction.
Example. On July 1, 2017, Tom Brown bought and
placed in service in his business qualified property that
cost $450,000. He did not elect to claim a section 179 de-
duction. He deducts 50% of the cost ($225,000) as a spe-
cial depreciation allowance for 2017. He uses the remain-
ing $225,000 of cost to figure his regular MACRS
depreciation deduction for 2017 and later years.
Like-kind exchanges and involuntary conversions. If
you acquire qualified property in a like-kind exchange or
involuntary conversion, the carryover basis of the ac-
quired property is eligible for a special depreciation allow-
ance. After you figure your special allowance, you can use
the remaining carryover basis to figure your regular
MACRS depreciation deduction. In the year you claim the
TIP
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allowance (the year you place in service the property re-
ceived in the exchange or dispose of involuntarily conver-
ted property), you must reduce the carryover basis of the
property by the allowance before figuring your regular
MACRS depreciation deduction. See Figuring the Deduc-
tion for Property Acquired in a Nontaxable Exchange, in
chapter 4 under How Is the Depreciation Deduction Fig-
ured. The excess basis (the part of the acquired property's
basis that exceeds its carryover basis) is also eligible for a
special depreciation allowance.
How Can You Elect Not To
Claim an Allowance?
You can elect, for any class of property, not to deduct any
special depreciation allowances for all property in such
class placed in service during the tax year.
To make an election, attach a statement to your return
indicating what election you are making and the class of
property for which you are making the election.
The election must be made separately by each person
owning qualified property (for example, by the partner-
ships, by the S corporation, or for each member of a con-
solidated group by the common parent of the group).
When to make election. Generally, you must make the
election on a timely filed tax return (including extensions)
for the year in which you place the property in service.
However, if you timely filed your return for the year with-
out making the election, you can still make the election by
filing an amended return within 6 months of the due date
of the original return (not including extensions). Attach the
election statement to the amended return. On the amen-
ded return, write “Filed pursuant to section 301.9100-2.”
Revoking an election. Once you elect not to deduct a
special depreciation allowance for a class of property, you
cannot revoke the election without IRS consent. A request
to revoke the election is a request for a letter ruling.
If you elect not to have any special depreciation
allowance apply, the property placed in service
after 2015 will not be subject to an alternative
minimum tax adjustment for depreciation.
When Must You Recapture an
Allowance?
When you dispose of property for which you claimed a
special depreciation allowance, any gain on the disposi-
tion is generally recaptured (included in income) as ordi-
nary income up to the amount of the special depreciation
allowance previously allowed or allowable. See When Do
You Recapture MACRS Depreciation in chapter 4 for
more information.
CAUTION
!
Recapture of allowance deducted for qualified GO
Zone property. If, in any year after the year you claim the
special depreciation allowance for qualified GO Zone
property (including specified GO Zone extension prop-
erty), the property ceases to be used in the GO Zone, you
may have to recapture as ordinary income the excess
benefit you received from claiming the special deprecia-
tion allowance. For additional guidance, see Notice
2008-25 on page 484 of Internal Revenue Bulletin 2008-9
available at www.irs.gov/irb/2008-09_IRB/index.html.
Qualified cellulosic biomass ethanol plant property,
qualified cellulosic biofuel plant property, and quali-
fied second generation biofuel plant property. If, in
any year after the year you claim the special depreciation
allowance for any qualified cellulosic biomass ethanol
plant property, qualified cellulosic biofuel plant property,
or qualified second generation biofuel plant property, the
property ceases to be qualified cellulosic biomass ethanol
plant property, qualified cellulosic biofuel plant property,
or qualified second generation biofuel plant property, you
may have to recapture as ordinary income the excess
benefit you received from claiming the special deprecia-
tion allowance.
Recapture of allowance for qualified Recovery Assis-
tance property. If, in any year after the year you claim
the special depreciation allowance for qualified Recovery
Assistance property, the property ceases to be used in the
Kansas disaster area, you may have to recapture as ordi-
nary income the excess benefit you received from claim-
ing the special depreciation allowance. For additional
guidance, see Notice 2008-67 on page 307 of Internal
Revenue Bulletin 2008-32, available at www.irs.gov/irb/
2008-32_IRB/index.html.
Recapture of allowance for qualified disaster assis-
tance property. If, in any year after the year you claim
the special depreciation allowance for qualified disaster
assistance property, the property ceases to be used in the
applicable disaster area, you may have to recapture as or-
dinary income the excess benefit you received from claim-
ing the special depreciation allowance.
4.
Figuring Depreciation
Under MACRS
Introduction
The Modified Accelerated Cost Recovery System
(MACRS) is used to recover the basis of most business
and investment property placed in service after 1986.
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MACRS consists of two depreciation systems, the Gen-
eral Depreciation System (GDS) and the Alternative De-
preciation System (ADS). Generally, these systems pro-
vide different methods and recovery periods to use in
figuring depreciation deductions.
To be sure you can use MACRS to figure depreci-
ation for your property, see What Method Can
You Use To Depreciate Your Property in chap-
ter 1.
This chapter explains how to determine which MACRS
depreciation system applies to your property. It also dis-
cusses 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
Farmer's Tax Guide
Travel, Entertainment, Gift, and Car
Expenses
Sales and Other Dispositions of Assets
Basis of Assets
Business Use of Your Home (Including Use by
Daycare Providers)
Form (and Instructions)
Employee Business Expenses
Unreimbursed Employee Business
Expenses
Depreciation and Amortization
See chapter 6 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
CAUTION
!
225
463
544
551
587
2106
2106-EZ
4562
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 de-
preciation method and recovery period you use. You gen-
erally 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 2017, 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 depreci-
ation using ADS. If you placed your property in service be-
fore 2017 and are required to file Form 4562, report de-
preciation using either GDS or ADS on line 17 in Part III.
Required use of ADS. You must use ADS for the follow-
ing property.
Listed property used 50% or less in a qualified busi-
ness use. See chapter 5 for information on listed prop-
erty.
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 any special deprecia-
tion 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 prop-
erty 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 Form 4562, Part
III, line 20.
CAUTION
!
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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 1245 property
Section 1250 property
The following is a list of the nine property classifications
under GDS and examples of the types of property inclu-
ded in each class. These property classes are also listed
under column (a) in section B, Part III, of Form 4562. For
detailed information on property classes, see Appendix B,
Table of Class Lives and Recovery Periods, in this publi-
cation.
1. 3-year property.
a. Tractor units for over-the-road use.
b. Any race horse over 2 years old when placed in
service. (All race horses placed in service after
December 31, 2008, and before January 1, 2018,
are deemed to be 3-year property, regardless of
age.)
c. Any other horse (other than a race horse) over 12
years old when placed in service.
d. Qualified rent-to-own property (defined later).
2. 5-year property.
a. Automobiles, taxis, buses, and trucks.
b. Computers and peripheral equipment.
c. Office machinery (such as typewriters, calculators,
and copiers).
d. Any property used in research and experimenta-
tion.
e. Breeding cattle and dairy cattle.
f. Appliances, carpets, furniture, etc., used in a resi-
dential rental real estate activity.
g. Certain geothermal, solar, and wind energy prop-
erty.
h. Any machinery equipment (other than any grain
bin, cotton ginning asset, fence, or other land im-
provement) used in a farming business and
placed in service after December 31, 2017, in tax
years ending after December 31, 2017. The origi-
nal use of the property must begin with you after
December 31, 2017.
3. 7-year property.
a. Office furniture and fixtures (such as desks, files,
and safes).
b. Agricultural machinery and equipment.
c. Railroad track.
d. Any property that does not have a class life and
has not been designated by law as being in any
other class.
e. Certain motorsports entertainment complex prop-
erty (defined later) place in service before January
1, 2018.
f. Any natural gas gathering line placed in service af-
ter April 11, 2005. See Natural gas gathering line
and electric transmission property, later.
4. 10-year property.
a. Vessels, barges, tugs, and similar water transpor-
tation equipment.
b. Any single purpose agricultural or horticultural
structure.
c. Any tree or vine bearing fruits or nuts.
d. Qualified small electric meter and qualified smart
electric grid system (defined later) placed in serv-
ice on or after October 3, 2008.
5. 15-year property.
a. Certain improvements made directly to land or
added to it (such as shrubbery, fences, roads,
sidewalks, and bridges).
b. Any retail motor fuels outlet (defined later), such
as a convenience store.
c. Any municipal wastewater treatment plant.
d. Any qualified leasehold improvement property
(defined later) placed in service before January 1,
2018.
e. Any qualified restaurant property (defined later)
placed in service before January 1, 2018.
f. Initial clearing and grading land improvements for
gas utility property.
g. Electric transmission property (that is section 1245
property) used in the transmission at 69 or more
kilovolts of electricity placed in service after April
11, 2005. See Natural gas gathering line and elec-
tric transmission property, later.
h. Any natural gas distribution line placed in service
after April 11, 2005, and before January 1, 2011.
i. Any qualified retail improvement property placed
in service before January 1, 2018.
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j.
Any telephone distribution plant and comparable
equipment used for 2-way exchange of voice and
data communications.
6. 20-year property.
a. Farm buildings (other than single purpose agricul-
tural or horticultural structures).
b. Municipal sewers not classified as 25-year prop-
erty.
c. Initial clearing and grading land improvements for
electric utility transmission and distribution plants.
7. 25-year property. This class is water utility property,
which is either of the following.
a. 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.
b. Municipal sewers other than property placed in
service under a binding contract in effect at all
times since June 9, 1996.
8. 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 accommo-
dations 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.
9. Nonresidential real property. This is section 1250
property, such as an office building, store, or ware-
house, that is neither residential rental property nor
property with a class life of less than 27.5 years.
Qualified rent-to-own property. Qualified rent-to-own
property is property held by a rent-to-own dealer for pur-
poses of being subject to a rent-to-own contract. It is tan-
gible personal property generally used in the home for
personal use. It includes computers and peripheral equip-
ment, televisions, videocassette recorders, stereos, cam-
corders, appliances, furniture, washing machines and dry-
ers, 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 repre-
sent a significant portion of your leasing property, you
must prove that this property is qualified rent-to-own prop-
erty.
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 (defined
below) 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) pay-
ments that can be either level or decreasing. If the
payments are decreasing, no payment can be less
than 40% 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 pay-
ments required under the contract to acquire legal ti-
tle.
Provides that the customer has no right to sell, sub-
lease, mortgage, pawn, pledge, or otherwise dispose
of the property until all contract payments have been
made.
Motorsports entertainment complex. This is a racing
track facility permanently situated on land that hosts one
or more racing events for automobiles, trucks, or motorcy-
cles during the 36-month period after the first day of the
month in which the facility is placed in service. The events
must be open to the public for the price of admission.
Qualified smart electric grid system. A qualified smart
electric grid system means any smart grid property used
as part of a system for electric distribution grid communi-
cations, monitoring, and management placed in service
after October 3, 2008, by a taxpayer who is a supplier of
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electrical energy or a provider of electrical energy serv-
ices. Smart grid property includes electronics and related
equipment that is capable of:
Sensing, collecting, and monitoring data of or from all
portions of a utility's electric distribution grid,
Providing real-time, two-way communications to moni-
tor or to manage the grid, and
Providing real-time analysis of an event prediction
based on collected data that can be used to provide
electric distribution system reliability, quality, and per-
formance.
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 devo-
ted to petroleum marketing sales.
A retail motor fuels outlet does not include any facility rela-
ted to petroleum and natural gas trunk pipelines.
Qualified leasehold improvement property. Gener-
ally, this is any improvement to an interior part of a build-
ing, placed in service before January 1, 2018, that is non-
residential real property, if all of the following requirements
are met.
The improvement is made under or according to a
lease by the lessee (or any sublessee) or the lessor of
that part of the building.
That part of the building is to be occupied exclusively
by the lessee (or any sublessee) of that part.
The improvement is placed in service more than 3
years after the date the building was first placed in
service by any person.
The improvement is section 1250 property. See chap-
ter 3 in Pub. 544, Sales and Other Dispositions of As-
sets, for the definition of section 1250 property.
However, a qualified leasehold improvement does not
include any improvement for which the expenditure is at-
tributable to any of the following.
The enlargement of the building.
Any elevator or escalator.
Any structural component benefiting a common area.
The internal structural framework of the building.
Generally, a binding commitment to enter into a lease
is treated as a lease and the parties to the commitment
are treated as the lessor and lessee. However, a lease
between related persons is not treated as a lease.
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 origi-
nal lessor by reason of the lessor's death or in any of the
following types of transactions.
1. A transaction to which section 381(a) applies.
2. 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 inter-
est in the trade or business.
3. A like-kind exchange, involuntary conversion, or reac-
quisition of real property to the extent that the basis in
the property represents the carryover basis.
4. 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. A complete liquidation of a subsidiary.
b. A transfer to a corporation controlled by the trans-
feror.
c. 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 a building, or
an improvement to a building, placed in service after De-
cember 31, 2008, and before January 1, 2018. Also, more
than 50% of the building's square footage must be devo-
ted to preparation of meals and seating for on-premises
consumption of prepared meals.
Qualified smart electric meter. A qualified smart elec-
tric meter is any time-based meter and related communi-
cation equipment which is placed in service by a supplier
of electric energy or a provider of electric energy services
and which is capable of being used by you as part of a
system that:
Measures and records electricity usage data on a
time-differentiated basis in at least 24 separate time
segments per day.
Provides for the exchange of information between the
supplier or provider and the customer's smart electric
meter in support of time-based rates or other forms of
demand response.
Provides data to the supplier or provider so that the
supplier or provider can provide energy usage infor-
mation to customers electronically.
Provides all commercial and residential customers of
such supplier or provider with net metering. Net me-
tering means allowing a customer a credit, if any, as
complies with applicable federal and state laws and
regulations for providing electricity to the supplier or
provider.
Natural gas gathering line and electric transmission
property. Any natural gas gathering line placed in
service after April 11, 2005, is treated as 7-year property,
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and electric transmission property (that is section 1245
property) used in the transmission at 69 or more kilovolts
of electricity and any natural gas distribution line placed in
service after April 11, 2005, are treated as 15-year prop-
erty, if the following requirements are met.
The original use of the property must have begun with
you after April 11, 2005. Original use means the first
use to which the property is put, whether or not by
you. Therefore, property used by any person before
April 12, 2005, is not original use. Original use in-
cludes additional capital expenditures you incurred to
recondition or rebuild your property. However, original
use does not include the cost of reconditioned or re-
built property you acquired. Property containing used
parts will not be treated as reconditioned or rebuilt if
the cost of the used parts is not more than 20% of the
total cost of the property.
The property must not be placed in service under a
binding contract in effect before April 12, 2005.
The property must not be self-constructed property
(property you manufacture, construct, or produce for
your own use), if you began the manufacture, con-
struction, or production of the property before April 12,
2005. Property that is manufactured, constructed, or
produced for your use by another person under a writ-
ten binding contract entered into by you or a related
party before the manufacture, construction, or produc-
tion of the property is considered to be manufactured,
constructed, or produced by you.
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 availa-
ble for a specific use. It is therefore not necessarily the
date it is first used. If you converted property held for per-
sonal use to use in a trade or business or for the produc-
tion of income, treat the property as being placed in serv-
ice 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 prop-
erty'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-Produc-
ing Activity in chapter 1. Reduce that amount by any cred-
its and deductions allocable to the property. The following
are examples of some credits and deductions that reduce
basis.
Any deduction for section 179 property.
Any deduction under section 179B of the Internal Rev-
enue Code for capital costs to comply with Environ-
mental Protection Agency sulfur regulations.
Any deduction under section 179C of the Internal Rev-
enue Code for certain qualified refinery property
placed in service after August 8, 2005, and before
January 1, 2014.
Any deduction under section 179D of the Internal Rev-
enue Code for certain energy efficient commercial
building property placed in service after December 31,
2005, and before January 1, 2018.
Any deduction under section 179E of the Internal Rev-
enue Code for qualified advanced mine safety equip-
ment property placed in service after December 20,
2006, and before January 1, 2018.
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 fa-
cilities and services.
Any special depreciation allowance.
Basis adjustment for investment credit property under
section 50(c) of the Internal Revenue Code.
For additional credits and deductions that affect basis,
see section 1016 of the Internal Revenue Code.
Enter the basis for depreciation under column (c) in
Part III of Form 4562. For information about how to deter-
mine the cost or other basis of property, see What Is the
Basis of Your Depreciable Property in chapter 1.
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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 deter-
mined based on the depreciation system (GDS or ADS)
used.
Recovery Periods Under GDS
Under GDS, property that is not qualified Indian reserva-
tion property is depreciated over one of the following re-
covery 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 Re-
covery Periods. Residential rental property and nonresi-
dential real property are defined earlier under Which De-
preciation System (GDS or ADS) Applies.
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 your home is a personal-use sin-
gle family residence and 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).
However, if your home is an apartment in an apartment
building that you own and the building is residential rental
property as defined earlier under Which Depreciation Sys-
tem (GDS or ADS) Applies, depreciate the part used as
an office as residential rental property over 27.5 years.
See Pub. 587 for a discussion of the tests you must meet
to claim expenses, including depreciation, for the busi-
ness use of your home.
Home changed to rental use. If you begin to rent a
home that was your personal home before 1987, you de-
preciate 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
2018 are shorter than those listed earlier. The following ta-
ble 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.
Use this chart to find the correct percentage table to
use for qualified Indian reservation property.
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IF your recovery period is: THEN use the following table in
Appendix A:
2 years A-21
3 years A-1, A-2, A-3, A-4, or A-5
4 years A-22
6 years A-23
9 years A-14, A-15, A-16, A-17, or A-18
12 years A-14, A-15, A-16, A-17, or A-18
22 years A-24
Qualified property. Property eligible for the shorter re-
covery periods are 3-, 5-, 7-, 10-, 15-, and 20-year prop-
erty 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 In-
dian reservation.
The following property is not qualified property.
1. Property used or located outside an Indian reserva-
tion on a regular basis, other than qualified infrastruc-
ture property.
2. Property acquired directly or indirectly from a related
person.
3. Property placed in service for purposes of conducting
or housing class I, II, or III gaming activities. These ac-
tivities are defined in section 4 of the Indian Regula-
tory Act (25 U.S.C. 2703).
4. Any property you must depreciate under ADS. Deter-
mine 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).
Note. You can make an election out of the shorter re-
covery period(s) above for qualified Indian reservation
property in a class of property that is placed in service in a
tax year beginning after December 31, 2015.
To make this election, attach a statement to your timely
filed return (including extensions) for the tax year in which
you place the property in service indicating the class of
property for which you are making the election and that,
for such class, you are electing not to apply section 168(j).
Once made, this election is irrevocable.
If you make this election, the property placed in
service in a tax year beginning after December
31, 2015, will be subject to an alternative mini-
mum tax adjustment for depreciation.
Qualified infrastructure property. Item (1) above
does not apply to qualified infrastructure property located
CAUTION
!
outside the reservation that is used to connect with quali-
fied infrastructure property within the reservation. Quali-
fied 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 persons. For purposes of item (2) above, see
Related persons in the discussion on property owned or
used in 1986 under What Method Can You Use To Depre-
ciate 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 Fi-
nancing 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 reserva-
tions in Oklahoma. For a definition of the term “former In-
dian reservations in Oklahoma,” see Notice 98-45 in Inter-
nal Revenue Bulletin 1998-35.
Recovery Periods Under ADS
The recovery periods for most property generally are lon-
ger under ADS than they are under GDS. The following ta-
ble 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
Natural gas gathering lines ............ 14 years
Single purpose agricultural and
horticultural structures .............. 15 years
Any tree or vine bearing fruits or nuts .... 20 years
Initial clearing and grading land
improvements for gas utility property .. 20 years
Initial clearing and grading land
improvements for electric utility
transmission and distribution plants ... 25 years
Electric transmission property used in the
transmission at 69 or more kilovolts of
electricity ........................ 30 years
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Natural gas distribution lines ........... 35 years
Any qualified leasehold improvement
property ......................... 39 years
Any qualified restaurant property ....... 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, qualified leasehold improvement property, quali-
fied restaurant 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% 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 Repairs and Improvements in chap-
ter 1 for a definition of improvements. Its property class
and recovery period are the same as those that would ap-
ply 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 fol-
lowing 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.
If the improvement you make is qualified lease-
hold improvement property, qualified restaurant
property, or qualified retail improvement property,
the GDS recovery period is 15 years (39 years under
ADS).
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 addi-
tion. Under GDS, the property class for the addition is res-
idential 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.
CAUTION
!
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” already shown 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 depre-
ciable bases of MACRS property you placed in service
during the last 3 months of the tax year (excluding nonres-
idential real property, residential rental property, any rail-
road grading or tunnel bore, property placed in service
and disposed of in the same year, and property that is be-
ing depreciated under a method other than MACRS) 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 112 months of depreciation is al-
lowed 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.
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For purposes of determining whether the
mid-quarter convention applies, the depreciable
basis of property you placed in service during the
tax year reflects the reduction in basis for amounts ex-
pensed under section 179 and the part of the basis of
property attributable to personal use. However, it does not
reflect any reduction in basis for any special 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 serv-
ice 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 re-
covery period.
The 150% declining balance method over a GDS re-
covery 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 cer-
tain property classes. If you made this election, continue
to use the same method and recovery period for that prop-
erty.
CAUTION
!
CAUTION
!
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.
Depreciation Methods for Farm
Property
If you place personal property in service in a farming busi-
ness after 1988, and before 2018, you generally must de-
preciate it under GDS using the 150% declining balance
method unless you are a farmer who 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. You can depreciate real property
using the straight line method under either GDS or ADS.
Note. For 3-, 5-, 7-, or 10-year property used in a farm-
ing business and placed in service after December 31,
2017, in tax years ending after December 31, 2017, the
150% declining balance method is no longer required.
However, the 150% declining balance method will con-
tinue to apply to any 15- or 20-year property used in a
farming business to which the straight line method does
not apply or to property for which you elect the use of the
150% declining balance method.
fruits or nut trees and vines. Depreciate trees and
vines bearing fruits 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 ap-
ply 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 serv-
ice. However, if you timely filed your return for the year
without making the election, you still can make the elec-
tion 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 serv-
ice during the year of the election. However, you can
make the election on a property-by-property basis for non-
residential real and residential rental property.
150% election. Instead of using the 200% declining bal-
ance method over the GDS recovery period for nonfarm
CAUTION
!
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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 recov-
ery period, you can elect to use the straight line method
over the GDS recovery period. Make the election by en-
tering “S/L” under column (f) in Part III of Form 4562.
Election of ADS. As explained earlier under Which De-
preciation 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 pe-
riods are listed in Appendix B, or see the table under Re-
covery 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 bal-
ance method 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
• Farm 3-, 5-, 7-, and 10-year property placed in
service after December 31, 2017, in tax years
ending after December 31, 2017
• 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, qualified
restaurant property, and qualified retail
improvement 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 deduction1
GDS using SL • Nonresidential real property
• Qualified leasehold improvement property
• Qualified restaurant property
• Qualified retail improvement property
• Residential rental property
• Trees or vines bearing fruits or nuts
• Water utility property
• All 3-, 5-, 7-, 10-, 15-, and 20-year property2
• Property for which you elected section 168(k)
(4)
• Qualified improvement property (as defined in
section 168(e)(6)) placed in service after
December 31, 2017
• 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.
• 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 property3
• Any property for which you elect to use this
method4
• Provides for equal yearly deductions
(except for the first and last years)
1The MACRS percentage tables in Appendix A have the switch to the straight line method built into their rates.
2See section 168(b)(5) of the Internal Revenue Code.
3See section 168(g)(6) of the Internal Revenue Code.
4See section 168(g)(7) of the Internal Revenue Code.
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How Is the Depreciation
Deduction Figured?
Terms you may need to know
(see Glossary):
Adjusted basis
Amortization
Basis
Business/investment use
Convention
Declining balance method
Disposition
Exchange
Nonresidential real property
Placed in service
Property class
Recovery period
Straight line method
Unadjusted basis
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 pro-
vided by the IRS, or you can figure it yourself without us-
ing 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 ta-
bles.
1. You must apply the rates in the percentage tables to
your property's unadjusted basis.
2. 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.
3. 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.
4. You must stop using the tables if you adjust the basis
of the property for any reason other than—
a. Depreciation allowed or allowable, or
b. 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 vehi-
cle deduction or credit. If you increase the basis of your
property because of the recapture of part or all of a deduc-
tion for clean-fuel vehicles or the credit for clean-fuel vehi-
cle refueling property placed in service before January 1,
2006, 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 your-
self using the property's adjusted basis at the end of the
year. See Figuring the Deduction Without Using the Ta-
bles, later.
Basis adjustment due to casualty loss. If you reduce
the basis of your property because of a casualty, you can-
not 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 De-
duction Without Using the Tables, later.
Example. On October 26, 2016, Sandra Elm, a calen-
dar 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 af-
ter the section 179 deduction and special depreciation al-
lowance was $7,500 ($15,000 − $7,500). She figured her
MACRS depreciation deduction using the percentage ta-
bles. For 2016, her MACRS depreciation deduction was
$268.
In July 2017, 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 2017, before figuring her 2017 depreciation, is
$4,232. She figures that amount by subtracting the 2016
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 2017 without using the per-
centage tables.
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Figuring the Unadjusted Basis of
Your Property
You must apply the table rates to your property's unadjus-
ted 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 origi-
nal basis by any MACRS depreciation taken in earlier
years. However, you do reduce your original basis by
other amounts, including the following.
Any amortization taken on the property.
Any section 179 deduction claimed.
Any special depreciation allowance taken on the prop-
erty.
For business property you purchase during the year,
the unadjusted basis is its cost minus these and other ap-
plicable adjustments. If you trade property, your unadjus-
ted basis in the property received is the cash paid plus the
adjusted basis of the property traded minus these adjust-
ments.
MACRS Worksheet
You can use this worksheet to help you figure your depre-
ciation deduction using the percentage tables. Use a sep-
arate 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 Auto-
mobiles in chapter 5.
MACRS Worksheet
Keep for Your Records
Part I
1. MACRS system (GDS or
ADS) ...........................
2. Property class ..................
3. Date placed in service ...........
4. Recovery period ................
5. Method and convention ..........
CAUTION
!
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 ........................ $
11. Subtract line 10 from line 9. This is your
tentative basis for depreciation .......... $
12. Multiply line 11 by .50 if the 50% special
depreciation allowance applies. This is
your special depreciation allowance.
Enter -0- if this is not the year you placed
the property in service, the property is not
qualified 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 ta-
bles and the MACRS Worksheet.
Example. You bought office furniture (7-year property)
for $10,000 and placed it in service on August 11, 2017.
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 the property is not qualified
property for purposes of claiming a special depreciation
allowance so your property's unadjusted basis is its cost,
$10,000. You use GDS and the half-year convention to
figure your depreciation. You refer to the MACRS Percent-
age Table Guide in Appendix A and find that you should
use Table A-1. 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 Keep for Your Records
Part I
1. MACRS system (GDS or ADS) .................................. GDS
2. Property class ................................................. 7-year
3. Date placed in service .......................................... 8/11/17
4. Recovery period ............................................... 7-year
5. Method and convention ......................................... 200%DB/Half-Year
6. Depreciation rate (from tables) .................................. .1429
Part II
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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 ......................... -0-
11. Subtract line 10 from line 9. This is your tentative basis for depreciation ........... $10,000
12. Multiply line 11 by .50 if the 50% special depreciation allowance applies. This is
your special depreciation allowance. Enter -0- if this is not the year you placed the
property in service, the property is not qualified 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 fol-
lows.
Year Basis Percentage Deduction
2018 .......... $10,000 24.49% $2,449
2019 .......... 10,000 17.49 1,749
2020 .......... 10,000 12.49 1,249
2021 .......... 10,000 8.93 893
2022 .......... 10,000 8.92 892
2023 .......... 10,000 8.93 893
2024 .......... 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 that 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 percen-
tages 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 prop-
erty) 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 none of these
items is qualified property for purposes of claiming a spe-
cial depreciation allowance.
You placed property in service during the last 3 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. There-
fore, 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 un-
der 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 serv-
ice in the third quarter, so you use Table A-4. Finally, be-
cause the computer is 5-year property placed in service in
the fourth quarter, you use Table A-6. 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
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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 deprecia-
tion 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 de-
termined for the full year.
Mid-quarter convention used. For property for which
you used the mid-quarter convention, figure your depreci-
ation deduction for the year of the disposition by multiply-
ing a full year of depreciation by the percentage listed be-
low 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, 2014, you placed in serv-
ice an item of 5-year property costing $10,000. You did
not claim a section 179 deduction and the property does
not qualify for a special depreciation allowance. Your un-
adjusted 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 2014 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 2014, 2015, and 2016, 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, 2017. To determine your depreciation deduction
for 2017, 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 2017.
Mid-month convention used. If you dispose of residen-
tial rental or nonresidential real property, figure your de-
preciation deduction for the year of the disposition by mul-
tiplying a full year of depreciation by a fraction. The
numerator of the fraction is the number of months (includ-
ing partial months) in the year that the property is consid-
ered in service. The denominator is 12.
Example. On July 2, 2015, 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, 2017. You file your tax
return based on the calendar year.
A full year of depreciation for 2017 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 212
months of use in 2017. Treat the month of disposition as
one-half month of use. Multiply $3,636 by the fraction, 2.5
over 12, to get your 2017 depreciation deduction of
$757.50.
Figuring the Deduction Without Using
the Tables
Instead of using the rates in the percentage tables to fig-
ure your depreciation deduction, you can figure it yourself.
Before making the computation each year, you must re-
duce your adjusted basis in the property by the deprecia-
tion claimed the previous year.
Figuring MACRS deductions without using the ta-
bles 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 ex-
plained later.
You figure depreciation for the year you place property
in service as follows.
1. Multiply your adjusted basis in the property by the de-
clining balance rate.
2. Apply the applicable convention.
You figure depreciation for all other years (before the
year you switch to the straight line method) as follows.
1. Reduce your adjusted basis in the property by the de-
preciation allowed or allowable in earlier years.
2. Multiply this new adjusted basis by the same declin-
ing 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 in-
formation 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 illus-
trated in Example 1, later, under Examples.
CAUTION
!
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Declining balance rate. You figure your declining bal-
ance rate by dividing the specified declining balance per-
centage (150% or 200% changed to a decimal) by the
number of years in the property's recovery period. For ex-
ample, 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.
1. Multiply your adjusted basis in the property by the
straight line rate.
2. 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.
1. Reduce your adjusted basis in the property by the de-
preciation allowed or allowable in earlier years (under
any method).
2. Determine the depreciation rate for the year.
3. Multiply the adjusted basis figured in (1) by the depre-
ciation rate figured in (2).
If you dispose of property before the end of its recovery
period, see Using the Applicable Convention, later, for in-
formation on how to figure depreciation for the year you
dispose of it.
Straight line rate. You determine the straight line depre-
ciation rate for any tax year by dividing the number 1 by
the years remaining in the recovery period at the begin-
ning of that year. When figuring the number of years re-
maining, you must take into account the convention used
in the year you placed the property in service. If the num-
ber 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 deprecia-
tion deduction for the year you place your property in serv-
ice 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 prop-
erty you depreciate under the straight line method. See
Straight line rate in the previous discussion. Use the appli-
cable convention as explained in the following discus-
sions.