| Pub. 946, How To Depreciate Property |
2004 Tax Year |
Chapter 4 - Figuring Depreciation Under MACRS
This is archived information that pertains only to the 2004 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property
placed in service after
1986. MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System
(ADS). Generally,
these systems provide different methods and recovery periods to use in figuring depreciation deductions.
To be sure you can use MACRS to figure depreciation for your property, see Can You Use MACRS To Depreciate Your Property
in chapter 1.
This chapter explains how to determine which MACRS depreciation system applies to your property. It also discusses other information
you need to
know before you can figure depreciation under MACRS. This information includes the property's recovery class, placed-in-service
date, and basis, as
well as the applicable recovery period, convention, and depreciation method. It explains how to use this information to figure
your depreciation
deduction and how to use a general asset account to depreciate a group of properties. Finally, it explains when and how to
recapture MACRS
depreciation.
Useful Items - You may want to see:
Publication
-
225
Farmer's Tax Guide
-
463
Travel, Entertainment, Gift, and Car
Expenses
-
544
Sales and Other Dispositions of Assets
-
551
Basis of Assets
-
587
Business Use of Your Home (Including Use by Daycare Providers)
Form (and Instructions)
-
2106
Employee Business Expenses
-
2106-EZ
Unreimbursed Employee Business Expenses
-
4562
Depreciation and Amortization
See chapter 7 for information about getting publications and forms.
Which Depreciation System (GDS or ADS) Applies?
Terms you may need to know (see Glossary):
| Listed property |
| Nonresidential real property |
| Placed in service |
| Property class |
| Recovery period |
| Residential rental property |
| Tangible property |
| Tax exempt |
Your use of either the General Depreciation System (GDS) or the Alternative Depreciation System (ADS) to depreciate property
under MACRS determines
what depreciation method and recovery period you use. You generally must use GDS unless you are specifically required by law
to use ADS or you elect
to use ADS.
If you placed your property in service in 2004, complete Part III of Form 4562 to report depreciation using MACRS. Complete
section B of Part III
to report depreciation using GDS, and complete section C of Part III to report depreciation using ADS. If you placed your
property in service before
2004 and are required to file Form 4562 (as explained in chapter 1 under Do You Have To File Form 4562), report depreciation using either
GDS or ADS on line 17 in Part III.
Required use of ADS.
You must use ADS for the following property.
-
Listed property used 50% or less in a qualified business use. (See chapter 5 for information on listed property.)
-
Any tangible property used predominantly outside the United States during the year.
-
Any tax-exempt use property.
-
Any tax-exempt bond-financed property.
-
All property used predominantly in a farming business and placed in service in any tax year during which an election not to
apply the
uniform capitalization rules to certain farming costs is in effect.
-
Any property imported from a foreign country for which an Executive Order is in effect because the country maintains trade
restrictions or
engages in other discriminatory acts.
If you are required to use ADS to depreciate your property, you cannot claim a special depreciation allowance or special Liberty
Zone depreciation
allowance (discussed in chapter 3) for the property.
Electing ADS.
Although your property may qualify for GDS, you can elect to use ADS. The election generally must cover all property
in the same property class
that you placed in service during the year. However, the election for residential rental property and nonresidential real
property can be made on a
property-by-property basis. Once you make this election, you can never revoke it.
You make the election by completing line 20 in Part III of Form 4562.
Which Property Class Applies Under GDS?
Terms you may need to know (see Glossary):
| Class life |
| Nonresidential real property |
| Placed in service |
| Property class |
| Recovery period |
| Residential rental property |
| Section 1250 property |
|
The following is a list of the nine property classifications under GDS and examples of the types of property included in each
class. These property
classes are also listed under column (a) in section B, Part III, of Form 4562.
-
3-year property.
-
Tractor units for over-the-road use.
-
Any race horse over 2 years old when placed in service.
-
Any other horse (other than a race horse) over 12 years old when placed in service.
-
Qualified rent-to-own property (defined later).
-
5-year property.
-
Automobiles, taxis, buses, and trucks.
-
Computers and peripheral equipment.
-
Office machinery (such as typewriters, calculators, and copiers).
-
Any property used in research and experimentation.
-
Breeding cattle and dairy cattle.
-
Appliances, carpets, furniture, etc., used in a residential rental real estate activity.
-
Any qualified Liberty Zone leasehold improvement property. See Qualified Liberty Zone leasehold improvement property under
Excepted Property in chapter 3.
You can elect not to treat this property as 5-year property. If you make this election, the property will be depreciable under
the rules for
nonresidential real property if placed in service before October 23, 2004, and under the rules for qualified leasehold improvement
property if placed
in service after October 22, 2004. To make the election, attach a statement to your return indicating that you are making
this election under section
1400L(c)(5). The election applies to all qualified Liberty Zone leasehold improvement property placed in service during the
year. Rules similar to the
rules for electing out of the special depreciation allowance apply.
-
Gasoline pump canopies that are not permanent structures. (Any supporting concrete footings are permanent structures and are
land
improvements classified as 15-year property.)
-
7-year property.
-
Office furniture and fixtures (such as desks, files, and safes).
-
Agricultural machinery and equipment.
-
Any property that does not have a class life and has not been designated by law as being in any other class.
-
Certain motorsports entertainment complex property placed in service after October 22, 2004, and before January 1, 2008.
-
10-year property.
-
Vessels, barges, tugs, and similar water transportation equipment.
-
Any single purpose agricultural or horticultural structure.
-
Any tree or vine bearing fruits or nuts.
-
15-year property.
-
Certain improvements made directly to land or added to it (such as shrubbery, fences, roads, and bridges).
-
Any retail motor fuels outlet (defined later), such as a convenience store.
-
Any municipal wastewater treatment plant.
-
Any qualified leasehold improvement property (defined later) placed in service after October 22, 2004, and before January
1,
2006.
-
Any qualified restaurant property (defined later) placed in service after October 22, 2004, and before January 1, 2006.
-
Initial clearing and grading land improvements for gas utility property placed in service after October 22, 2004.
-
20-year property.
-
Farm buildings (other than single purpose agricultural or horticultural structures).
-
Municipal sewers not classified as 25-year property.
-
Initial clearing and grading land improvements for electric utility transmission and distribution plants placed in service
after October 22,
2004.
-
25-year property. This class is water utility property, which is either of the following.
-
Property that is an integral part of the gathering, treatment, or commercial distribution of water, and that, without regard
to this
provision, would be 20-year property.
-
Municipal sewers placed in service after June 12, 1996, other than property placed in service under a binding contract in
effect at all
times since June 9, 1996.
-
Residential rental property.
This is any building or structure, such as a rental home (including a mobile home), if 80% or more of its gross
rental income for the tax year is from dwelling units. A dwelling unit is a house or apartment used to provide living accommodations
in a building or
structure. It does not include a unit in a hotel, motel, or other establishment where more than half the units are used on
a transient basis. If you
occupy any part of the building or structure for personal use, its gross rental income includes the fair rental value of the
part you occupy.
-
Nonresidential real property.
This is section 1250 property, such as an office building, store, or warehouse, that is neither
residential rental property nor property with a class life of less than 27.5 years.
If your property is not listed above, you can determine its property class from the Table of Class Lives and Recovery Periods in
Appendix B. The property class is generally the same as the GDS recovery period indicated in the table.
Qualified rent-to-own property.
Qualified rent-to-own property is property held by a rent-to-own dealer for purposes of being subject to a rent-to-own
contract. It is tangible
personal property generally used in the home for personal use. It includes computers and peripheral equipment, televisions,
videocassette recorders,
stereos, camcorders, appliances, furniture, washing machines and dryers, refrigerators, and other similar consumer durable
property. Consumer durable
property does not include real property, aircraft, boats, motor vehicles, or trailers.
If some of the property you rent to others under a rent-to-own agreement is of a type that may be used by the renters
for either personal or
business purposes, you still can treat this property as qualified property as long as it does not represent a significant
portion of your leasing
property. However, if this dual-use property does represent a significant portion of your leasing property, you must prove
that this property is
qualified rent-to-own property.
Rent-to-own dealer.
You are a rent-to-own dealer if you meet all the following requirements.
-
You regularly enter into rent-to-own contracts in the ordinary course of your business for the use of consumer property.
-
A substantial portion of these contracts end with the customer returning the property before making all the payments required
to transfer
ownership.
-
The property is tangible personal property of a type generally used within the home for personal use.
Rent-to-own contract.
This is any lease for the use of consumer property between a rent-to-own dealer and a customer who is an individual
which—
-
Is titled “Rent-to-Own Agreement,” “Lease Agreement with Ownership Option,” or other similar language.
-
Provides a beginning date and a maximum period of time, not to exceed 156 weeks or 36 months from the beginning date, for
which the contract
can be in effect (including renewals or options to extend).
-
Provides for regular periodic (weekly or monthly) payments that can be either level or decreasing. If the payments are decreasing,
no
payment can be less than 40 percent of the largest payment.
-
Provides for total payments that generally exceed the normal retail price of the property plus interest.
-
Provides for total payments that do not exceed $10,000 for each item of property.
-
Provides that the customer has no legal obligation to make all payments outlined in the contract and that, at the end of each
weekly or
monthly payment period, the customer can either continue to use the property by making the next payment or return the property
in good working order
with no further obligations and no entitlement to a return of any prior payments.
-
Provides that legal title to the property remains with the rent-to-own dealer until the customer makes either all the required
payments or
the early purchase payments required under the contract to acquire legal title.
-
Provides that the customer has no right to sell, sublease, mortgage, pawn, pledge, or otherwise dispose of the property until
all contract
payments have been made.
Retail motor fuels outlet.
Real property is a retail motor fuels outlet if it is used to a substantial extent in the retail marketing of petroleum
or petroleum products
(whether or not it is also used to sell food or other convenience items) and meets any one of the following three tests.
-
It is not larger than 1,400 square feet.
-
50% or more of the gross revenues generated from the property are derived from petroleum sales.
-
50% or more of the floor space in the property is devoted to petroleum marketing sales.
A retail motor fuels outlet does not include any facility related to petroleum and natural gas trunk pipelines.
Qualified leasehold improvement property.
Generally, this is any improvement to an interior part of a building that is nonresidential real property, provided
all of the requirements
discussed in chapter 3 under Qualified leasehold improvement property are met.
In addition, an improvement made by the lessor does not qualify as qualified leasehold improvement property to any
subsequent owner unless it is
acquired from the original lessor for one of the following reasons.
-
Death of the lessor,
-
A transaction to which section 381(a) applies,
-
A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business
as qualified
leasehold improvement property and the taxpayer retains a substantial interest in the trade or business,
-
The property is acquired in a like-kind exchange, involuntary conversion, or reacquisition of real property to the extent
that the basis in
the property represents the carryover basis, or
-
Property that is acquired in certain nonrecognition transactions to the extent that your basis in the property is determined
by reference to
the transferor's or distributor's basis in the property. Examples include the following.
-
A complete liquidation of a subsidiary.
-
A transfer to a corporation controlled by the transferor.
-
An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization.
Qualified restaurant property.
Qualified restaurant property is any section 1250 property that is an improvement to a building and meets the following
requirements.
-
The improvement is placed in service more than 3 years after the date the building was first placed in service, and
-
More than 50% of the building's square footage is devoted to preparation of meals and seating for on-premise consumption of
prepared
meals.
What Is the Placed-in-Service Date?
Terms you may need to know (see Glossary):
You begin to claim depreciation when your property is placed in service for either use in a trade or business or the production
of income. The
placed-in-service date for your property is the date the property is ready and available for a specific use. It is therefore
not necessarily the date
it is first used. If you converted property held for personal use to use in a trade or business or for the production of income,
treat the property as
being placed in service on the conversion date. See Placed in Service under When Does Depreciation Begin and End in chapter 1
for examples illustrating when property is placed in service.
What Is the Basis for Depreciation?
Terms you may need to know (see Glossary):
The basis for depreciation of MACRS property is the property's cost or other basis multiplied by the percentage of business/investment
use. (For a
discussion of business/investment use, see Partial business or investment use under Property Used in Your Business or Income-Producing
Activity in chapter 1.) Reduce that amount by the following items.
-
Any deduction for section 179 property.
-
Any deduction for removal of barriers to the disabled and the elderly.
-
Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services.
-
Any special depreciation allowance or Liberty Zone depreciation allowance.
-
Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code.
Enter the basis for depreciation under column (c) in Part III of Form 4562. For information about how to determine the cost
or other basis of
property, see What Is the Basis of Your Depreciable Property in chapter 1.
Which Recovery Period Applies?
Terms you may need to know (see Glossary):
| Active conduct of a trade or business |
| Basis |
| Improvement |
| Listed property |
| Nonresidential real property |
| Placed in service |
| Property class |
| Recovery period |
| Residential rental property |
| Section 1245 property |
|
The recovery period of property is the number of years over which you recover its cost or other basis. It is determined based
on the depreciation
system (GDS or ADS) used.
Recovery Periods Under GDS
Under GDS, property that is not qualified Indian reservation property is depreciated over one of the following recovery periods.
|
Property Class |
Recovery Period |
|
3-year property |
|
3 years |
1 |
|
|
5-year property |
|
5 years |
|
|
|
7-year property |
|
7 years |
|
|
|
10-year property |
|
10 years |
|
|
|
15-year property |
|
15 years |
2 |
|
|
20-year property |
|
20 years |
|
|
|
25-year property |
|
25 years |
3 |
|
|
Residential rental property |
|
27.5 years |
|
|
|
Nonresidential real property |
|
39 years |
4 |
|
| 15 years for qualified rent-to-own property placed in service before August 6, 1997. |
| 239 years for property that is a retail motor fuels outlet placed in service before August 20, 1996 (31.5 years if placed in
service before
May 13, 1993), unless you elected to depreciate it over 15 years. |
| 320 years for property placed in service before June 13, 1996, or under a binding contract in effect before June 10, 1996. |
| 431.5 years for property placed in service before May 13, 1993 (or before January 1, 1994, if the purchase or construction
of the property
is under a binding contract in effect before May 13, 1993, or if construction began before May 13, 1993). |
The GDS recovery periods for property not listed above can be found in Appendix B, Table of Class Lives and Recovery Periods.
Residential rental property and nonresidential real property are defined earlier under Which Property Class Applies Under GDS.
Enter the appropriate recovery period on Form 4562 under column (d) in section B of Part III, unless already shown (for 25-year
property,
residential rental property, and nonresidential real property).
Office in the home.
If you begin to use part of your home as an office, depreciate that part of your home as nonresidential real property
over 39 years (31.5 years if
you began using it for business before May 13, 1993). See Publication 587 for a discussion of the tests you must meet to claim
expenses, including
depreciation, for the business use of your home.
Home changed to rental use.
If you begin to rent a home that was your personal home before 1987, you depreciate it as residential rental property
over 27.5 years.
Indian Reservation Property
The recovery periods for qualified property you placed in service on an Indian reservation after 1993 and before 2006 are
shorter than those listed
earlier. The following table shows these shorter recovery periods.
|
Property Class |
Recovery
Period |
|
3-year property |
2 years |
|
5-year property |
3 years |
|
7-year property |
4 years |
|
10-year property |
6 years |
|
15-year property |
9 years |
|
20-year property |
12 years |
|
Nonresidential real property |
22 years |
Nonresidential real property is defined earlier under Which Property Class Applies Under GDS.
Qualified property.
Property eligible for the shorter recovery periods are 3-, 5-, 7-, 10-, 15-, and 20-year property and nonresidential
real property. You must use
this property predominantly in the active conduct of a trade or business within an Indian reservation. The rental of real
property that is located on
an Indian reservation is treated as the active conduct of a trade or business within an Indian reservation.
The following property is not qualified property.
-
Property used or located outside an Indian reservation on a regular basis, other than qualified infrastructure property.
-
Property acquired directly or indirectly from a related person.
-
Property placed in service for purposes of conducting or housing class I, II, or III gaming activities. (These activities
are defined in
section 4 of the Indian Regulatory Act (25 U.S.C. 2703).)
-
Any property you must depreciate under ADS. Determine whether property is qualified without regard to the election to use
ADS and after
applying the special rules for listed property not used predominantly for qualified business use (discussed in chapter 5).
Qualified infrastructure property.
Item (1) above does not apply to qualified infrastructure property located outside the reservation that is used to
connect with qualified
infrastructure property within the reservation. Qualified infrastructure property is property that meets all the following
rules.
-
It is qualified property, as defined earlier, except that it is outside the reservation.
-
It benefits the tribal infrastructure.
-
It is available to the general public.
-
It is placed in service in connection with the active conduct of a trade or business within a reservation.
Infrastructure property includes, but is not limited to, roads, power lines, water systems, railroad spurs, and communications
facilities.
Related person.
For purposes of item (2) above, see Related persons in the discussion on property owned or used in 1986 under Can You Use MACRS To
Depreciate Your Property in chapter 1 for a description of related persons.
Indian reservation.
The term Indian reservation means a reservation as defined in section 3(d) of the Indian Financing Act of 1974 (25
U.S.C. 1452(d)) or section 4(10)
of the Indian Child Welfare Act of 1978 (25 U.S.C. 1903(10)). Section 3(d) of the Indian Financing Act of 1974 defines reservation
to include former
Indian reservations in Oklahoma. For a definition of the term “ former Indian reservations in Oklahoma”, see Notice 98-45 in Internal Revenue
Bulletin 1998-35.
Recovery Periods Under ADS
The recovery periods for most property generally are longer under ADS than they are under GDS. The following table shows some
of the ADS recovery
periods.
|
Property |
Recovery
Period |
|
Rent-to-own property |
4 years |
|
Automobiles and light duty trucks |
5 years |
|
Computers and peripheral equipment |
5 years |
|
High technology telephone station equipment installed on customer premises |
5 years |
|
High technology medical equipment |
5 years |
|
Personal property with no class life |
12 years |
Single purpose agricultural and horticultural
structures |
15 years |
|
Any tree or vine bearing fruit or nuts |
20 years |
Initial clearing and grading land
improvements for gas utility property
placed in service after October 22, 2004 |
20 years |
Initial clearing and grading land
improvements for electric utility
transmission and distribution plants
placed in service after October 22, 2004 |
25 years |
Any qualified leasehold improvement
property placed in service after October 22, 2004 |
39 years |
Any qualified restaurant property placed
in service after October 22, 2004 |
39 years |
|
Nonresidential real property |
40 years |
|
Residential rental property |
40 years |
|
Section 1245 real property not listed in Appendix B |
40 years |
|
Railroad grading and tunnel bore |
50 years |
The ADS recovery periods for property not listed above can be found in the tables in Appendix B. Rent-to-own property, residential
rental property,
and nonresidential real property are defined earlier under Which Property Class Applies Under GDS.
Tax-exempt use property subject to a lease.
The ADS recovery period for any property leased under a lease agreement to a tax-exempt organization, governmental
unit, or foreign person or
entity (other than a partnership) cannot be less than 125 percent of the lease term.
Additions and Improvements
An addition or improvement you make to depreciable property is treated as separate depreciable property. (See How Do You Treat
Improvements in chapter 1.) Its property class and recovery period are the same as those that would apply to the original property if
you had
placed it in service at the same time you placed the addition or improvement in service. The recovery period begins on the
later of the following
dates.
Example.
You own a rental home that you have been renting out since 1981. If you put an addition on the home and place the addition
in service this year,
you would use MACRS to figure your depreciation deduction for the addition. Under GDS, the property class for the addition
is residential rental
property and its recovery period is 27.5 years because the home to which the addition is made would be residential rental
property if you had placed
it in service this year.
Which Convention Applies?
Terms you may need to know (see Glossary):
| Basis |
| Convention |
| Disposition |
| Nonresidential real property |
| Placed in service |
| Recovery period |
| Residential rental property |
Under MACRS, averaging conventions establish when the recovery period begins and ends. The convention you use determines the
number of months for
which you can claim depreciation in the year you place property in service and in the year you dispose of the property.
The mid-month convention.
Use this convention for nonresidential real property, residential rental property, and any railroad grading or tunnel
bore.
Under this convention, you treat all property placed in service or disposed of during a month as placed in service
or disposed of at the midpoint
of the month. This means that a one-half month of depreciation is allowed for the month the property is placed in service
or disposed of.
Your use of the mid-month convention is indicated by the “ MM” under column (e) in Part III of Form 4562.
The mid-quarter convention.
Use this convention if the mid-month convention does not apply and the total depreciable bases of MACRS property you
placed in service during the
last three months of the tax year (excluding nonresidential real property, residential rental property, any railroad grading
or tunnel bore, and
property placed in service and disposed of in the same year) are more than 40% of the total depreciable bases of all MACRS
property you placed in
service during the entire year.
Under this convention, you treat all property placed in service or disposed of during any quarter of the tax year
as placed in service or disposed
of at the midpoint of that quarter. This means that 1½ months of depreciation is allowed for the quarter the property is placed
in
service or disposed of.
If you use this convention, enter “ MQ” under column (e) in Part III of Form 4562.
For purposes of determining whether the mid-quarter convention applies, the depreciable basis of property you placed in service
during the tax year
does not reflect any reduction in basis for the special depreciation allowance or the special Liberty Zone depreciation allowance.
The half-year convention.
Use this convention if neither the mid-quarter convention nor the mid-month convention applies.
Under this convention, you treat all property placed in service or disposed of during a tax year as placed in service
or disposed of at the
midpoint of the year. This means that a one-half year of depreciation is allowed for the year the property is placed in service
or disposed of.
If you use this convention, enter “ HY” under column (e) in Part III of Form 4562.
Which Depreciation Method Applies?
Terms you may need to know (see Glossary):
| Declining balance method |
| Listed property |
| Nonresidential real property |
| Placed in service |
| Property class |
| Recovery period |
| Residential rental property |
| Straight line method |
| Tax exempt |
MACRS provides three depreciation methods under GDS and one depreciation method under ADS.
-
The 200% declining balance method over a GDS recovery period.
-
The 150% declining balance method over a GDS recovery period.
-
The straight line method over a GDS recovery period.
-
The straight line method over an ADS recovery period.
For property placed in service before 1999, you could have elected the 150% declining balance method using the ADS recovery
periods for certain
property classes. If you made this election, continue to use the same method and recovery period for that property.
Table 4-1 lists the types of property you can depreciate under each method. It also gives a brief explanation of the method, including
any benefits that may apply.
Qualified leasehold improvement and qualified restaurant property.
For qualified leasehold improvement property and qualified restaurant property placed in service after October 22,
2004, and before January 1,
2006, you must use the straight line method over the GDS or ADS recovery period. You must also use the half-year convention
unless the mid-quarter
convention applies.
Depreciation Methods for Farm Property
If you place personal property in service in a farming business after 1988, you generally must depreciate it under GDS using
the 150% declining
balance method unless you must depreciate the property under ADS using the straight line method or you elect to depreciate
the property under GDS or
ADS using the straight line method. (See ADS required for some farmers, later, and Farm property under Electing a Different
Method, later.) You can depreciate real property using the straight line method under either GDS or ADS.
Farming business.
A farming business is any trade or business involving cultivating land or raising or harvesting any agricultural or
horticultural commodity. A
farming business includes the following.
-
Operating a nursery or sod farm.
-
Raising or harvesting crops.
-
Raising or harvesting trees bearing fruit, nuts, or other crops.
-
Raising ornamental trees. An evergreen tree is not an ornamental tree if it is more than 6 years old when it is severed from
its
roots.
-
Raising, shearing, feeding, caring for, training, and managing animals.
Processing activities.
In general, a farming business includes processing activities that are normally part of the growing, raising, or harvesting
of agricultural
products. However, a farming business generally does not include the processing of commodities or products beyond those activities
that are normally
part of the growing, raising, or harvesting of such products.
Fruit or nut trees and vines.
Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a recovery period of
10 years.
ADS required for some farmers.
If you elect not to apply the uniform capitalization rules to any plant produced in your farming business, you must
use ADS. You must use ADS for
all property you place in service in any year the election is in effect. See the regulations under section 263A of the Internal
Revenue Code for
information on the uniform capitalization rules that apply to farm property.
Electing a Different Method
As shown in Table 4-1, you can elect a different method for depreciation for certain types of property. You must make the election by
the due date of the return (including extensions) for the year you placed the property in service. However, if you timely
filed your return for the
year without making the election, you still can make the election by filing an amended return within 6 months of the due date
of the return (excluding
extensions). Attach the election to the amended return and write “Filed pursuant to section 301.9100-2” on the election statement. File the
amended return at the same address you filed the original return. Once you make the election, you cannot change it.
If you elect to use a different method for one item in a property class, you must apply the same method to all property in
that class placed in
service in the year of the election. However, you can make the election on a property-by-property basis for nonresidential
real and residential rental
property.
150% election.
Instead of using the 200% declining balance method over the GDS recovery period for nonfarm property in the 3-, 5-,
7-, and 10-year property
classes, you can elect to use the 150% declining balance method. Make the election by entering “ 150 DB” under column (f) in Part III of Form
4562.
Straight line election.
Instead of using either the 200% or 150% declining balance methods over the GDS recovery period, you can elect to
use the straight line method over
the GDS recovery period. Make the election by entering
“ S/L” under column (f) in Part III of Form 4562.
Election of ADS.
As explained earlier under Which Depreciation System (GDS or ADS) Applies, you can elect to use ADS even though your property may come
under GDS. ADS uses the straight line method of depreciation over fixed ADS recovery periods. Most ADS recovery periods are
listed in Appendix B, or
see the table under Recovery Periods Under ADS, earlier.
Make the election by completing line 20 in Part III of Form 4562.
Farm property.
Instead of using the 150% declining balance rate over a GDS recovery period for property you use in a farming business
(other than real property),
you can elect to depreciate it using either of the following methods.
Table 4-1. Depreciation Methods
| Note. The declining balance method is abbreviated as DB and the straight line method is abbreviated as
SL.
|
| Method |
Type of Property |
Benefit |
|
GDS using 200% DB |
• Nonfarm 3-, 5-, 7-, and 10-year property |
• Provides a greater deduction during the earlier recovery years
• Changes to SL when that method provides an equal or greater deduction |
|
GDS using 150% DB |
• All farm property (except real property)
• All 15- and 20-year property (except qualified leasehold improvement property and qualified restaurant property)
• Nonfarm 3-, 5-, 7-, and 10-year property |
• Provides a greater deduction during the earlier recovery years
• Changes to SL when that method provides an equal or greater deduction
1 |
|
GDS using SL |
• Nonresidential real property
• Qualified leasehold improvement property placed in service after October 22, 2004
• Qualified restaurant property placed in service after October 22, 2004
• Residential rental property
• Trees or vines bearing fruit or nuts
• Water utility property
• All 3-, 5-, 7-, 10-, 15-, and 20-year property
2 |
• Provides for equal yearly deductions (except for the first and last
years) |
|
ADS using SL |
• Listed property used 50% or less for business
• Property used predominantly outside the U.S.
• Qualified leasehold improvement property placed in service after October 22, 2004
• Qualified restaurant property placed in service after October 22, 2004
• Tax-exempt property
• Tax-exempt bond-financed property
• Farm property used when an election not to apply the uniform capitalization rules is in effect
• Imported property
3
• Any property for which you elect to use this method
2 |
• Provides for equal yearly deductions |
| 1The MACRS percentage tables in Appendix A have the switch to the straight line method built into their rates |
| 2Elective method |
| 3See section 168(g)(6) of the Internal Revenue Code |
How Is the Depreciation Deduction Figured?
Terms you may need to know (see Glossary):
| Adjusted basis |
| Amortization |
| Basis |
| Business/investment use |
| Clean-fuel vehicle |
| Clean-fuel vehicle refueling property |
| Convention |
| Declining balance method |
| Disposition |
| Exchange |
| Nonresidential real property |
| Placed in service |
| Property class |
| Recovery period |
| Straight line method |
To figure your depreciation deduction under MACRS, you first determine the depreciation system, property class, placed-in-service
date, basis
amount, recovery period, convention, and depreciation method that applies to your property. Then, you are ready to figure
your depreciation deduction.
You can figure it using a percentage table provided by the IRS, or you can figure it yourself without using the table.
Using the MACRS Percentage Tables
To help you figure your deduction under MACRS, the IRS has established percentage tables that incorporate the applicable convention
and
depreciation method. These percentage tables are in Appendix A near the end of this publication.
Which table to use.
Appendix A contains the MACRS Percentage Table Guide, which is designed to help you locate the correct percentage table to use for
depreciating your property. The percentage tables immediately follow the guide.
Rules Covering the Use of the Tables
The following rules cover the use of the percentage tables.
-
You must apply the rates in the percentage tables to your property's unadjusted basis.
-
You cannot use the percentage tables for a short tax year. See Figuring the Deduction for a Short Tax Year, later, for
information on the short tax year rules.
-
Once you start using the percentage tables for any item of property, you generally must continue to use them for the entire
recovery period
of the property.
-
You must stop using the tables if you adjust the basis of the property for any reason other than—
-
Depreciation allowed or allowable, or
-
An addition or improvement to that property that is depreciated as a separate item of property.
Basis adjustments other than those made due to the items listed in (4) include an increase in basis for the recapture of a
clean-fuel deduction
or credit and a reduction in basis for a casualty loss.
Basis adjustment due to recapture of clean-fuel vehicle deduction or credit.
If you increase the basis of your property because of the recapture of part or all of a deduction for clean-fuel vehicles
or the credit for
clean-fuel vehicle refueling property, you cannot continue to use the percentage tables. For the year of the adjustment and
the remaining recovery
period, you must figure the depreciation deduction yourself using the property's adjusted basis at the end of the year. See
Figuring the
Deduction Without Using the Tables, later.
Basis adjustment due to casualty loss.
If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables.
For the year of the adjustment
and the remaining recovery period, you must figure the depreciation yourself using the property's adjusted basis at the end
of the year. See
Figuring the Deduction Without Using the Tables, later.
Example.
On October 26, 2003, Sandra Elm, a calendar year taxpayer, bought and placed in service in her business a new item of 7-year
property. It cost
$39,000 and she elected a section 179 deduction of $24,000. She also took a special depreciation allowance of $7,500 [50%
of $15,000 ($39,000 -
$24,000)]. Her unadjusted basis after the section 179 deduction and special depreciation allowance was $7,500 ($15,000 - $7,500).
She figured
her MACRS depreciation deduction using the percentage tables. For 2003, her MACRS depreciation deduction was $268.
In July 2004, the property was vandalized and Sandra had a deductible casualty loss of $3,000. She must adjust the property's
basis for the
casualty loss, so she can no longer use the percentage tables. Her adjusted basis at the end of 2004, before figuring her
2004 depreciation, is
$4,232. She figures that amount by subtracting the 2003 MACRS depreciation of $268 and the casualty loss of $3,000 from the
unadjusted basis of
$7,500. She must now figure her depreciation for 2004 without using the percentage tables.
Figuring the Unadjusted Basis of Your Property
You must apply the table rates to your property's unadjusted basis each year of the recovery period. Unadjusted basis is the
same basis amount you
would use to figure gain on a sale, but you figure it without reducing your original basis by any MACRS depreciation taken
in earlier years. However,
you do reduce your original basis by the following amounts.
-
Any amortization taken on the property.
-
Any section 179 deduction claimed.
-
Any special depreciation allowance (or Liberty Zone depreciation allowance) taken on the property.
-
Any deduction claimed for a clean-fuel vehicle or clean-fuel vehicle refueling property.
-
Any electric vehicle credit.
The clean-fuel vehicle and clean-fuel vehicle refueling property deductions and the electric vehicle credit are discussed
in chapter 12 of
Publication 535.
For business property you purchase during the year, the unadjusted basis is its cost minus these adjustments. If you trade
property, your
unadjusted basis in the property received is the cash paid plus the adjusted basis of the property traded minus these adjustments.
You can use this worksheet to help you figure your depreciation deduction using the percentage tables. (Use a separate worksheet
for each item of
property.) Then, use the information from this worksheet to prepare Form 4562.
Do not use this worksheet for automobiles. Use the Depreciation Worksheet for Passenger Automobiles in chapter 5.
MACRS Worksheet
| Part I |
|
|
1. |
MACRS system (GDS or ADS) |
|
|
2. |
Property class |
|
|
3. |
Date placed in service |
|
|
4. |
Recovery period |
|
|
5. |
Method and convention |
|
|
6. |
Depreciation rate (from tables) |
|
| Part II |
|
|
7. |
Cost or other basis* |
$ |
|
|
|
8. |
Business/investment use |
|
% |
|
|
9. |
Multiply line 7 by line 8 |
|
$ |
|
10. |
Total claimed for section 179 deduction and other items, including deduction for clean-fuel
vehicle refueling property |
|
$ |
|
11. |
Subtract line 10 from line 9. This is your tentative basis for depreciation |
|
$ |
|
12. |
Multiply line 11 by .30 if the 30% special depreciation allowance (or Liberty Zone depreciation allowance)
applies. Multiply line 11 by .50 if the 50% special depreciation allowance applies. This is your special depreciation allowance
(or Liberty Zone
depreciation allowance). Enter -0- if this is not the year you placed the property in service, the property is not qualified
property (or Liberty Zone
property), or you elected not to claim a special allowance |
|
$ |
|
13. |
Subtract line 12 from line 11. This is your basis for depreciation |
|
|
|
14. |
Depreciation rate (from line 6) |
|
|
|
15. |
Multiply line 13 by line 14. This is your MACRS depreciation deduction |
|
$ |
|
*If real estate, do not include cost (basis) of land. |
The following example shows how to figure your MACRS depreciation deduction using the percentage tables and the MACRS worksheet.
Example.
You bought office furniture (7-year property) for $10,000 and placed it in service on August 11, 2004. You use the furniture
only for business.
This is the only property you placed in service this year. You did not elect a section 179 deduction and elected not to claim
a special depreciation
allowance. You use GDS and the half-year convention to figure your depreciation. You refer to the MACRS Percentage Table Guide in Appendix
A and find that you should use Table A-1. You did not elect a section 179 deduction and elected not to claim a special depreciation
allowance, so your
property's unadjusted basis is its cost, $10,000. Multiply your property's unadjusted basis each year by the percentage for
7-year property given in
Table A-1. You figure your depreciation deduction using the MACRS worksheet as follows.
MACRS Worksheet
| Part I |
|
1. |
MACRS system (GDS or ADS) |
GDS |
|
2. |
Property class |
7-year |
|
3. |
Date placed in service |
8/11/04 |
|
4. |
Recovery period |
7-Year |
|
5. |
Method and convention |
200%DB/Half-Year |
|
6. |
Depreciation rate (from tables) |
.1429 |
| Part II |
|
7. |
Cost or other basis* |
$10,000 |
|
|
|
8. |
Business/investment use |
100 |
% |
|
|
9. |
Multiply line 7 by line 8 |
|
$10,000 |
|
10. |
Total claimed for section 179 deduction and other items, including deduction for clean-fuel
vehicle refueling property |
|
-0- |
|
11. |
Subtract line 10 from line 9. This is your tentative basis for depreciation |
|
$10,000 |
|
12. |
Multiply line 11 by .30 if the 30% special depreciation allowance (or Liberty Zone depreciation allowance)
applies. Multiply line 11 by .50 if the 50% special depreciation allowance applies. This is your special depreciation allowance
(or Liberty Zone
depreciation allowance). Enter -0- if this is not the year you placed the property in service, the property is not qualified
property (or Liberty Zone
property), or you elected not to claim a special allowance |
|
$-0- |
|
13. |
Subtract line 12 from line 11. This is your basis for depreciation |
|
$10,000 |
|
14. |
Depreciation rate (from line 6) |
|
.1429 |
|
15. |
Multiply line 13 by line 14. This is your MACRS depreciation deduction |
|
$1,429 |
| *If real estate, do not include cost (basis) of
land. |
If there are no adjustments to the basis of the property other than depreciation, your depreciation deduction for each subsequent
year of the
recovery period will be as follows.
|
Year |
|
Basis |
Percentage |
Deduction |
|
2005 |
$ |
10,000 |
24.49% |
|
$2,449 |
|
|
2006 |
|
10,000 |
17.49 |
|
1,749 |
|
|
2007 |
|
10,000 |
12.49 |
|
1,249 |
|
|
2008 |
|
10,000 |
8.93 |
|
893 |
|
|
2009 |
|
10,000 |
8.92 |
|
892 |
|
|
2010 |
|
10,000 |
8.93 |
|
893 |
|
|
2011 |
|
10,000 |
4.46 |
|
446 |
|
The following examples are provided to show you how to use the percentage tables. In both examples, assume the following.
-
You use the property only for business.
-
You use the calendar year as your tax year.
-
You use GDS for all the properties.
Example 1.
You bought a building and land for $120,000 and placed it in service on March 8. The sales contract showed the building cost
$100,000 and the land
cost $20,000. It is nonresidential real property. The building's unadjusted basis is its original cost, $100,000.
You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-7a. March is the third month of your
tax year, so multiply the building's unadjusted basis, $100,000, by the percentages for the third month in Table A-7a. Your
depreciation deduction for
each of the first 3 years is as follows:
|
Year |
|
Basis |
Percentage |
Deduction |
|
1st |
$ |
100,000 |
2.033% |
|
$2,033 |
|
|
2nd |
|
100,000 |
2.564 |
|
2,564 |
|
|
3rd |
|
100,000 |
2.564 |
|
2,564 |
|
Example 2.
During the year, you bought a machine (7-year property) for $4,000, office furniture (7-year property) for $1,000, and a computer
(5-year property)
for $5,000. You placed the machine in service in January, the furniture in September, and the computer in October. You do
not elect a section 179
deduction and elect not to claim a special depreciation allowance for these items.
You placed property in service during the last three months of the year, so you must first determine if you have to use the
mid-quarter convention.
The total bases of all property you placed in service during the year is $10,000. The $5,000 basis of the computer, which
you placed in service during
the last 3 months (the fourth quarter) of your tax year, is more than 40% of the total bases of all property ($10,000) you
placed in service during
the year. Therefore, you must use the mid-quarter convention for all three items.
You refer to the MACRS Percentage Table Guide in Appendix A to determine which table you should use under the mid-quarter convention.
The machine is 7-year property placed in service in the first quarter, so you use Table A-2. The furniture is 7-year property
placed in service in the
third quarter, so you use Table A-4. Finally, because the computer is 5-year property placed in service in the fourth quarter,
you use Table A-5.
Knowing what table to use for each property, you figure the depreciation for the first 2 years as follows.
| Year |
Property |
Basis |
Percentage |
Deduction |
|
1st |
Machine |
$4,000 |
25.00 |
$1,000 |
|
|
2nd |
Machine |
4,000 |
21.43 |
857 |
|
|
1st |
Furniture |
1,000 |
10.71 |
107 |
|
|
2nd |
Furniture |
1,000 |
25.51 |
255 |
|
|
1st |
Computer |
5,000 |
5.00 |
250 |
|
|
2nd |
Computer |
5,000 |
38.00 |
1,900 |
|
Sale or Other Disposition Before the Recovery Period Ends
If you sell or otherwise dispose of your property before the end of its recovery period, your depreciation deduction for the
year of the
disposition will be only part of the depreciation amount for the full year. You have disposed of your property if you have
permanently withdrawn it
from use in your business or income-producing activity because of its sale, exchange, retirement, abandonment, involuntary
conversion, or destruction.
After you figure the full-year depreciation amount, figure the deductible part using the convention that applies to the property.
Half-year convention used.
For property for which you used a half-year convention, the depreciation deduction for the year of the disposition
is half the depreciation
determined for the full year.
Mid-quarter convention used.
For property for which you used the mid-quarter convention, figure your depreciation deduction for the year of the
disposition by multiplying a
full year of depreciation by the percentage listed below for the quarter in which you disposed of the property.
|
Quarter |
Percentage |
|
First |
12.5% |
|
Second |
37.5 |
|
Third |
62.5 |
|
Fourth |
87.5 |
Example.
On December 2, 2001, you placed an item of 5-year property in service in your business. The property cost $10,000 and you
did not claim a section
179 deduction and the property does not qualify for the special depreciation allowance. Your unadjusted basis for the property
was $10,000. You used
the mid-quarter convention because this was the only item of business property you placed in service in 2001 and it was placed
in service during the
last 3 months of your tax year. Your property is in the 5-year property class, so you used Table A-5 to figure your depreciation
deduction. Your
deductions for 2001, 2002, and 2003 were $500 (5% of $10,000), $3,800 (38% of $10,000), and $2,280 (22.80% of $10,000). You
disposed of the property
on April 6, 2004. To determine your depreciation deduction for 2004, first figure the deduction for the full year. This is
$1,368 (13.68% of $10,000).
April is in the second quarter of the year, so you multiply $1,368 by 37.5% to get your depreciation deduction of $513 for
2004.
Mid-month convention used.
If you dispose of residential rental or nonresidential real property, figure your depreciation deduction for the year
of the disposition by
multiplying a full year of depreciation by a fraction. The numerator of the fraction is the number of months (including partial
months) in the year
that the property is considered in service. The denominator is 12.
Example.
On July 2, 2002, you purchased and placed in service residential rental property. The property cost $100,000, not including
the cost of land. You
used Table A-6 to figure your MACRS depreciation for this property. You sold the property on March 2, 2004. You file your
tax return based on the
calendar year.
A full year of depreciation for 2004 is $3,636. This is $100,000 multiplied by .03636 (the percentage for the seventh month
of the third recovery
year) from Table A-6. You then apply the mid-month convention for the 2½ months of use in 2004. (Treat the month of disposition
as
one-half month of use.) Multiply $3,636 by 2.5 and divide by 12 to get your 2004 depreciation deduction of $757.50.
Figuring the Deduction Without Using the Tables
Instead of using the rates in the percentage tables to figure your depreciation deduction, you can figure it yourself. Before
making the
computation each year, you must reduce your adjusted basis in the property by the depreciation claimed the previous year.
Figuring MACRS deductions without using the tables generally will result in a slightly different amount than using the tables.
When using a declining balance method, you apply the same depreciation rate each year to the adjusted basis of your property.
You must use the
applicable convention for the first tax year and you must switch to the straight line method beginning in the first year for
which it will give an
equal or greater deduction. The straight line method is explained later.
You figure depreciation for the year you place property in service as follows.
-
Multiply your adjusted basis in the property by the declining balance rate.
-
Apply the applicable convention.
You figure depreciation for all other years (before the year you switch to the straight line method) as follows.
-
Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years.
-
Multiply this new adjusted basis by the same declining balance rate used in earlier years.
If you dispose of property before the end of its recovery period, see Using the Applicable Convention, later, for information on how to
figure depreciation for the year you dispose of it.
Figuring depreciation under the declining balance method and switching to the straight line method is illustrated in Example 1, later,
under Examples.
Declining balance rate.
You figure your declining balance rate by dividing the specified declining balance percentage (150% or 200% changed
to a decimal) by the number of
years in the property's recovery period. For example, for 3-year property depreciated using the 200% declining balance method,
divide 2.00 (200%) by 3
to get 0.6667, or a 66.67% declining balance rate. For 15-year property depreciated using the 150% declining balance method,
divide 1.50 (150%) by 15
to get 0.10, or a 10% declining balance rate.
The following table shows the declining balance rate for each property class and the first year for which the straight
line method gives an equal
or greater deduction.
| Property Class |
Method |
Declining Balance Rate |
Year |
|
3-year |
200% DB |
66.667% |
3rd |
|
5-year |
200% DB |
40.0 |
4th |
|
7-year |
200% DB |
28.571 |
5th |
|
10-year |
200% DB |
20.0 |
7th |
|
15-year |
150% DB |
10.0 |
7th |
|
20-year |
150% DB |
7.5 |
9th |
When using the straight line method, you apply a different depreciation rate each year to the adjusted basis of your property.
You must use the
applicable convention in the year you place the property in service and the year you dispose of the property.
You figure depreciation for the year you place property in service as follows.
-
Multiply your adjusted basis in the property by the straight line rate.
-
Apply the applicable convention.
You figure depreciation for all other years (including the year you switch from the declining balance method to the straight
line method) as
follows.
-
Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years (under any method).
-
Determine the depreciation rate for the year.
-
Multiply the adjusted basis figured in (1) by the depreciation rate figured in (2).
If you dispose of property before the end of its recovery period, see Using the Applicable Convention, later, for information on how to
figure depreciation for the year you dispose of it.
Straight line rate.
You determine the straight line depreciation rate for any tax year by dividing the number 1 by the years remaining
in the recovery period at the
beginning of that year. When figuring the number of years remaining, you must take into account the convention used in the
year you placed the
property in service. If the number of years remaining is less than 1, the depreciation rate for that tax year is 1.0 (100%).
Using the Applicable Convention
The applicable convention (discussed earlier under Which Convention Applies) affects how you figure your depreciation deduction for the
year you place your property in service and for the year you dispose of it. It determines how much of the recovery period
remains at the beginning of
each year, so it also affects the depreciation rate for property you depreciate under the straight line method. See Straight line rate in
the previous discussion. Use the applicable convention as explained in the following discussions.
Half-year convention.
If this convention applies, you deduct a half-year of depreciation for the first year and the last year that you depreciate
the property. You
deduct a full year of depreciation for any other year during the recovery period.
Figure your depreciation deduction for the year you place the property in service by dividing the depreciation for
a full year by 2. If you dispose
of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition
the same way. If you hold
the property for the entire recovery period, your depreciation deduction for the year that includes the final 6 months of
the recovery period is the
amount of your unrecovered basis in the property.
Mid-quarter convention.
If this convention applies, the depreciation you can deduct for the first year you depreciate the property depends
on the quarter in which you
place the property in service.
A quarter of a full 12-month tax year is a period of three months. The first quarter in a year begins on the first
day of the tax year. The second
quarter begins on the first day of the fourth month of the tax year. The third quarter begins on the first day of the seventh
month of the tax year.
The fourth quarter begins on the first day of the tenth month of the tax year. A calendar year is divided into the following
quarters.
|
Quarter |
Months |
|
First |
January, February, March |
|
Second |
April, May, June |
|
Third |
July, August, September |
|
Fourth |
October, November, December |
Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation
for a full year by the percentage
listed below for the quarter you place the property in service.
|
