| Publication 946 |
2008 Tax Year |
3.
Claiming the Special Depreciation Allowance
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 2007, you can take
an additional 50% (or 30%, if applicable) special allowance. The allowance is an additional deduction you can take after any
section 179 deduction and
before 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 recapture an allowance.
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 |
| Placed in service |
| Residential rental property |
| Structural components |
Your property is qualified property if it is one of the following.
-
Qualified Liberty Zone property.
-
Qualified Gulf Opportunity Zone (GO Zone) property.
-
Qualified cellulosic biomass ethanol plant property acquired by purchase after December 20, 2006.
The following discussions provide information about the types of qualified property listed above for which you can take the
special depreciation
allowance.
Qualified Liberty Zone Property
You can take a special depreciation allowance for qualified Liberty Zone property that is nonresidential real or residential
rental property
(defined next).
Nonresidential real property and residential rental property.
This property is qualified Liberty Zone property only to the extent it rehabilitates real property damaged, or replaces
real property destroyed or
condemned, as a result of the events of September 11, 2001. Property is treated as replacing destroyed or condemned property
if, as part of an
integrated plan, such property replaces real property included in a continuous area that includes real property destroyed
or condemned.
For these purposes, real property is considered destroyed (or condemned) only if an entire building or structure was
destroyed (or condemned) as a
result of the attacks. Otherwise, the property is considered damaged real property. For example, if certain structural components
of a building (such
as walls, floors, and plumbing fixtures) were damaged or destroyed as a result of the attacks, but the building is not destroyed
(or condemned), then
only costs related to replacing the damaged or destroyed structural components qualify for the special Liberty Zone depreciation
allowance
This property must also meet all of the tests that are discussed under Other Tests To Be Met below.
To be qualified Liberty Zone property, the property must also meet all of the following tests.
Acquisition date test.
You must have acquired the property by purchase (as discussed under Property Acquired by Purchase in chapter 2) after September 10,
2001, and there must not have been a binding written contract for the acquisition in effect before September 11, 2001.
Property you manufacture, construct, or produce for your own use meets this test if you began the manufacture, construction,
or production of the
property after September 10, 2001. Property that is manufactured, constructed, or produced for your use by another person
under a written binding
contract entered into before the manufacture, construction, or production of the property, is considered to be manufactured,
constructed, or produced
by you.
Placed in service date test.
The property must be placed in service for use in your trade or business before January 1, 2010.
Sale-leaseback.
If you sold qualified Liberty Zone property you placed in service after September 10, 2001, and leased it back within
3 months after you originally
placed it in service, the property is treated as originally 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 September 11, 2001.
Syndicated leasing transactions.
If qualified Liberty Zone property is originally placed in service by a lessor after September 10, 2001, 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.
For special rules explaining when property involved in certain other transactions is treated as originally placed
in service, see section
1.168(k)-1(b)(5) of the Regulations.
Substantial use test.
Substantially all (80 percent or more) of the use of the property must be in the Liberty Zone and in the active conduct
of your trade or business
in the Liberty Zone.
If the property is held for the production of income, the property does not satisfy this substantial use test and does not
qualify for the special
depreciation allowance.
Original use test.
The original use of the property in the Liberty Zone must have begun with you after
September 10, 2001.
Used property can be qualified Liberty Zone property if it has not previously been used within the Liberty Zone. Also,
additional capital
expenditures you incurred after September 10, 2001, to recondition or rebuild your property meet the original use test if
the original use of the
property in the Liberty Zone began with you. However, the cost of reconditioned or rebuilt property you acquired does not
meet this test. Property
containing used parts will not be treated as reconditioned or rebuilt if the cost of the used parts is not more than 20 percent
of the total cost of
the property.
If you sold property you placed in service after September 10, 2001, and you leased it back within 3 months after
you originally placed the
property in service, the lessor is considered to be the original user of the property.
For special rules identifying the original user of property involved in certain other transactions and the original
user of fractional interests in
property, see section 1.168(k)-1(b)(3) of the regulations.
Qualified Liberty Zone 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 Liberty Zone property.
-
Property that also qualified for the special depreciation allowance.
-
Property required to be depreciated using the Alternative 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 Depreciation
System (GDS or ADS) Applies, in chapter 4.
-
Qualified Liberty Zone leasehold improvement property, defined in chapter 4.
-
Property for which you elected not to claim any special depreciation allowance (discussed later).
Qualified Gulf Opportunity Zone Property
You can take a special depreciation allowance for qualified Gulf Opportunity Zone (GO Zone) property. The property must meet
the following
requirements.
-
It is one of the following types of property.
-
Property depreciated under the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less.
See Which
Method Can You Use To Depreciate Your Property in
chapter 1.
-
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.
-
Any municipal sewer.
-
Computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and
has not been
substantially modified. The cost of some computer software is treated as part of the cost of hardware and is depreciated under
MACRS.
-
Qualified leasehold improvement property, defined below.
-
Certain nonresidential real property and residential rental property.
-
It is property that meets certain tests, explained under Other Tests To Be Met on this page.
-
It is not excepted property, explained under Excepted Property on page 27.
Qualified leasehold improvement property.
Generally, this is any improvement to an interior part of a building that is nonresidential real property, if all
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 chapter 3 in Publication 544, Sales and Other Dispositions of Assets, for the
definition of
section 1250 property.
However, a qualified leasehold 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.
-
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.
Related persons.
For this purpose, the following are related persons.
-
Members of an affiliated group.
-
An individual and a member of his or her family, including only a spouse, child, parent, brother, sister, half-brother, half-sister,
ancestor, and lineal descendant.
-
A corporation and an individual who directly or indirectly owns 80% or more of the value of the outstanding stock of that
corporation.
-
Two corporations that are members of the same controlled group.
-
A trust fiduciary and a corporation if 80% or more of the value of the outstanding stock is directly or indirectly owned by
or for the trust
or grantor of the trust.
-
The grantor and fiduciary, and the fiduciary and beneficiary, of any trust.
-
The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person
is the grantor of
both trusts.
-
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 indirectly controls the organization.
-
Two S corporations, and an S corporation and a regular corporation, if the same persons own 80% or more of the value of the
outstanding
stock of each corporation.
-
A corporation and a partnership if the same persons own both of the following.
-
80% or more of the value of the outstanding stock of the corporation.
-
80% or more of the capital or profits interest in the partnership.
-
The executor and beneficiary of any estate.
To be qualified GO Zone property, the property must also meet all of the following tests.
Acquisition date test.
You must have acquired the property by purchase (as discussed under Property Acquired by Purchase in chapter 2) after August 27, 2005,
with no binding written contract for the acquisition in effect before August 28, 2005.
Property you manufacture, construct, or produce for your own use meets this test if you began the manufacture, construction,
or production of the
property after August 27, 2005, and before January 1, 2008. Property that is manufactured, constructed, or produced for your
use by another person
under a written binding contract entered into before the manufacture, construction, or production of the property, is considered
to be manufactured,
constructed, or produced by you.
Placed in service date test.
The property must be placed in service for use in your trade or business before January 1, 2008 (January 1, 2009,
in the case of qualifying
nonresidential real property and residential rental property).
Extension of placed in service date.
The December 31, 2008, deadline for meeting the placed-in-service date test for qualifying nonresidential real property
and residential rental
property located in specified portions of the GO Zone is extended to December 31, 2010. Specified portions of the GO Zone
are those counties or
parishes in the GO Zone that are identified by the IRS as having more than 60 percent of the occupied housing units damaged
by the hurricanes
occurring during 2005. For guidance identifying the affected counties and parishes eligible for the extension of the placed
in service date, see
Notice 2007-36 on page 1000 of Internal Revenue Bulletin 2007-17, available at
www.irs.gov/pub/irs-irbs/irb07-17.pdf.
Sale-leaseback.
If you sold qualified GO Zone property you placed in service after August 27, 2005, and leased it back within 3 months
after you originally placed
it in service, the property is treated as originally 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 August 28, 2005.
Syndicated leasing transactions.
If qualified GO Zone property is originally placed in service by a lessor after August 27, 2005, 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.
Substantial use test.
Substantially all (80 percent or more during each tax year) of the use of the property must be in the GO Zone and
in the active conduct of your
trade or business in the GO Zone.
If the property is held for the production of income, the property does not satisfy this substantial use test and does not
qualify for the special
depreciation allowance.
Original use test.
The original use of the property in the GO Zone must have begun with you after August 27, 2005.
Used property can be qualified GO Zone property if it has not previously been used within the GO Zone. Also, additional
capital expenditures you
incurred after August 27, 2005, to recondition or rebuild your property meet the original use test if the original use of
the property in the GO Zone
began with you. For further guidance on the original use requirement for the GO Zone additional first year depreciation deduction,
see Notice 2007-36
on page 1000 of Internal Revenue Bulletin 2007-17.
If you sold property you placed in service after August 27, 2005, and you leased it back within 3 months after you
originally placed the property
in service, the lessor is considered to be the original user of the property.
If you acquire new property for personal use and then use the property in your trade or business or for the production
of income, you are
considered to be the original user.
For special rules identifying the original user of property involved in certain other transactions and the original
user of fractional interests
in property, see Regulations section 1.168(k)-1(b)(3).
Qualified GO Zone property does not include any of the following.
-
Property required to be depreciated using the Alternative 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 Depreciation
System (GDS or ADS) Applies, in chapter 4.
-
Property any portion of which is financed with the proceeds of a tax-exempt obligation under section 103 of the Internal Revenue
Code.
-
Any qualified revitalization building (described below) for which you have elected to claim a commercial revitalization deduction
for
qualified revitalization expenditures.
-
Any property used in connection with any private or commercial golf course, country club, massage parlor, hot tub facility,
suntan facility,
or any store, the principal business of which is the sale of alcoholic beverages for consumption off premises.
-
Any gambling or animal racing property (defined below).
-
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 it is acquired. Property converted from personal
use to business
use in the same or later tax year may be qualified GO Zone property.
Qualified revitalization building.
This is a commercial building and its structural components that you placed in service in a renewal community. If
the building is new, the original
use of the building must begin with you. If the building is not new, you must substantially rehabilitate the building and
then place it in service.
For more information, including definitions of substantially rehabilitated building and qualified revitalization expenditure,
see Publication 954, Tax
Incentives for Distressed Communities.
Gambling or animal racing property.
Gambling or animal racing property includes the following personal and real property.
-
Any equipment, furniture, software, or other property used directly in connection with gambling, the racing of animals, or
the on-site
viewing of such racing.
-
Any real property determined by square footage (other than any portion that is less than 100 square feet) that is dedicated
to gambling, the
racing of animals, or the on-site viewing of such racing.
Additional guidance.
For additional guidance with respect to the 50-percent additional first-year depreciation deduction for qualified
GO Zone property, see Notice
2006-77 on page 590 of Internal Revenue Bulletin 2006-40, available at
www.irs.gov/pub/irs-irbs/irb06-40.pdf and Notice 2007-36 on page
1000 of Internal Revenue Bulletin 2007-17, available at
www.irs.gov/pub/irs-irbs/irb07-17.pdf.
Qualified Cellulosic Biomass Ethanol Plant Property
You can take a special depreciation allowance for qualified cellulosic biomass ethanol plant property. Cellulosic biomass
ethanol means ethanol
produced by hydrolysis of any lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis.
Examples include bagasse
(from sugar cane), corn stalks, and switchgrass. The property must meet the following requirements.
-
The property is used in the United States solely to produce cellulosic biomass ethanol.
-
The original use of the property must begin with you after December 20, 2006.
-
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 the acquisition in effect before December 21, 2006.
-
The property must be placed in service for use in your trade or business or for the production of income before January 1,
2013.
Self-constructed property.
Property you manufacture, construct, or produce for your own use meets this test if you began the manufacture, construction,
or production of the
property after December 20, 2006. Property that is manufactured, constructed, or produced for your use by another person under
a written binding
contract entered into before the manufacture, construction, or production of the property, is considered to be manufactured,
constructed, or produced
by you.
Sale-leaseback.
If you sold qualified cellulosic biomass ethanol plant property you placed in service after December 20, 2006, and
leased it back within 3 months
after you originally placed it in service, the property is treated as originally 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 cellulosic biomass ethanol plant property is originally placed in service by a lessor after December
20, 2006, 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.
Qualified cellulosic biomass ethanol 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 cellulosic biomass ethanol plant property.
-
Property required to be depreciated using the Alternative 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.
-
Property financed with the proceeds of any obligation the interest on which is exempt from tax under section 103 of the Internal
Revenue
Code.
-
Property for which you elected not to claim any special depreciation allowance (discussed later).
-
Property for which a deduction was taken under section 179C for certain qualified refinery property.
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 the qualified property by 50% (or 30% if
applicable). For
qualified Liberty Zone property, multiply the depreciable basis by 30%. For qualified GO Zone property and qualified cellulosic
biomass ethanol plant
property, multiply the depreciable basis by 50%.
For qualified property other than listed property, enter the special allowance on line 14 in Part II of Form 4562. For qualified
property that is
listed property, enter the special allowance on line 25 in Part V of Form 4562.
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
deductions allocable to the property.
The following are examples of some credits and deductions 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 facilities and services.
-
Basis adjustment to 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.
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. 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.
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 allowance
before figuring
your regular MACRS depreciation deduction.
Example 1.
On November 1, 2007, Tom Brown bought and placed in service in his business qualified GO Zone property that cost $305,000.
He did not elect to
claim a section 179 deduction. He deducts 50% of the cost ($152,500) as a special depreciation allowance for 2007. He uses
the remaining $152,500 of
cost to figure his regular MACRS depreciation deduction for 2007 and later years.
Example 2.
The facts are the same as in Example 1, except that Tom elects to deduct $225,000 ($125,000 + the increased dollar limit of
$100,000 for qualified
GO Zone property) of the property's cost as a section 179 deduction. He uses the remaining $80,000 of cost to figure his special
depreciation
allowance of $40,000 ($80,000 × 50%). He uses the remaining $40,000 of cost to figure his regular MACRS depreciation deduction
for 2007 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 acquired
property is eligible for a
special depreciation allowance. 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 allowance (the year you place in service the property received in the exchange
or dispose of
involuntarily converted property), you must reduce the carryover basis of the property by the allowance before figuring your
regular MACRS
depreciation deduction. See Figuring the Deduction for Property Acquired in a Nontaxable Exchange, in chapter 4, under How Is the
Depreciation Deduction Figured. 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 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.
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 without 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 amended
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. See Changing Your Accounting Method in chapter 1.
If you elect not to have any special allowance apply, the property may 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 disposition is generally
recaptured (included
in income) as ordinary 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.
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, 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 depreciation
allowance. For additional
guidance, see Notice 2008-25 on page 484 of Internal Revenue Bulletin 2008-9.
Qualified cellulosic biomass ethanol plant property.
If, in any year after the year you claim the special depreciation allowance for any qualified cellulosic biomass ethanol
plant property, the
property ceases to be qualified cellulosic biomass ethanol plant property, you may have to recapture as ordinary income the
excess benefit you
received from claiming the special depreciation allowance.
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